Bulls & Blogs

The possibility of better flood insurance

Regulations, Residential Mortgage Comments Off

Jun 062016

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Congress is diddling with flood insurance again, and if you’re in a flood zone, you may want to pay attention. The House passed a bill about a month ago that would authorize state insurance commissioners to approve flood insurance policies that would be accepted for conventional and government mortgage loans. This means you would have a private insurance alternative to the National Flood Insurance Program (NFIP), which for many is currently the only game in town.

Obviously, the idea is that more competition will lead to more consumer choice. Consumers will be able to shop for an insurance product that meets their particular needs rather than be stuck with the current one-size-fits-all government product.

One interesting twist in the bill is that it would allow homeowners who switch to private insurance to switch back to the NFIP if they aren’t satisfied. Their NFIP insurance rate wouldn’t change as long as they don’t allow coverage to lapse.

The Senate is considering a similar bill that has bipartisan support, so it’s quite possible private flood insurance will become a reality this year.

Rate update: Are we going to break the range this week?

Interest Rates, Residential Mortgage Comments Off

May 312016

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Mortgage rates remained on the range again last week, but that may be about to change, at least temporarily. Fed governors spooked markets a couple weeks ago by suggesting that a Jun rate hike was in the cards, but it didn’t take long for an anxious calm to resume.

The Fed meets Jun 14th and 15th, and a rate hike is possible, but I don’t think it’s likely. The Fed has been watching and reacting this year to economic events overseas, and we’ve got a big one coming up. Great Britain votes on 6/23 whether it will remain in the European Union. The “remain” side is winning in polls, but by a slim margin. Some economists are predicting economic turmoil if the “leave” side wins. I suspect the chances of that will keep the Fed on hold in Jun.

However, that doesn’t mean markets will take a nap until then. This week is a jobs report week. Remember that last month’s report was disappointing, and markets have that baked into their current mood. Given the anxiousness, I think a strong report could result is a quick rate spike.

But remember the Fed doesn’t control mortgage rates directly. In fact, it controls very short-term rates. So, even if we see a spike, I think it will be short-lived unless we see additional stronger economic data. So far this year, housing is about the only area of strength.

Rate update: Will inflation spoil the mortgage party?

Interest Rates, Residential Mortgage Comments Off

May 172016

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Mortgage rates stayed on the range last week, and chances are they won’t stray too far this week. The most important economic data is the consumer price index, which was released today. The headline number spiked, and if you’ve filled up recently, you probably know why. Gas prices are rising again. But markets generally are smart enough to look past the volatile components of the index, like gas and food. The core rate rose in line with expectations. While the core rate is just over the Fed’s stated inflation goal at 2.1%, it’s been stable for the last few months.

Maybe the more important event this week is the release of the minutes from the Fed’s Apr meeting. Markets seem convinced that in private the Fed has been conjuring up ways to raise interest rates. Based on recent comments from Fed governors, I suppose it’s possible, but Fed head Yellen’s comments the other day about negative interest rates make me think otherwise. My expectations are that nervousness about the minutes will cause some volatility, but rates will remain on the range a while longer.

Rate update: Rates riding the range

Interest Rates, Residential Mortgage Comments Off

May 102016

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Mortgage rates are at 3-year lows, so should you be locking your rate, or are rates going even lower? The answer is not as straight-forward as it would seem.

Rates have been riding a range all year. Currently, we’re at the lower end of that range, which suggests that locking your rate makes sense. However, unless you’re closing soon, it may make no difference. It’s certainly possible rates will bounce towards the other end of the range soon, but I think it’s also likely they’ll revisit their current lows.

This is what I’m watching. Bond markets seem to be mostly ignoring economic data. The jobs report last Fri was disappointingly low, and markets yawned. This week’s big report is retail sales on Fri. I doubt markets will care. Markets seem convinced the Fed is backtracking on its move to raise interest rates, and one justification for that would be a weakening economy. Thus, it doesn’t matter what the reports say. The Fed hitting the pause button must signify weakness. That suggests that rates probably won’t leave the range anytime soon.

The only economic data that I think still bears watching is inflation. Core price and wage inflation are still very low. However, should the slope increase for a couple of months, I think it would catch the Fed’s attention.

USDA to make its loans more affordable

Loan Programs, Owner-occupied, Residential Mortgage Comments Off

May 072016

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

The USDA recently announced that for fiscal year 2017 (which begins on Oct 1st) it’s dropping the fees it charges for its guaranteed rural housing loans. Currently, USDA charges an upfront guarantee fee of 2.75% of the loan amount and an annual fee, or monthly mortgage insurance (MI), of 0.5%. On Oct 1st, those rates drop to 1% and 0.35%. That really is a huge change.

So, how would that affect a potential homebuyer? Let’s say you’re trying to buy a $180k home. Remember the USDA program doesn’t require a down payment, and most folks roll the upfront guarantee fee into the loan, so we have a roughly $185k mortgage. Using today’s fees, the monthly principal, interest, and MI payment would be about $908.

Okay, what if the fees are at 2017 levels? The monthly payment drops to $869. Over the life of the 30-year loan, that $39/m adds up to more than $14k in savings.

I find the timing of the announcement interesting. Based on our experience, USDA has lost of lot of market share to FHA, which lowered its mortgage insurance rates last year. While I suspect the announcement will shut down use of the program for the summer, maybe it will build some anticipation for it again in the fall.

Rate update: Mortgage rate comfort zone

Interest Rates, Residential Mortgage Comments Off

May 032016

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Mortgage rates continue to hang out in their recent range, which is close to their all-time low. Day-to-day, week-to-week they move up a little, then down a little, but there seems to be no motivation to break the range.

Chances are good that won’t change soon. Our current low interest rates are a reflection of expectations for mediocre economic growth and very low inflation. Economic data over the last week reinforced those expectations.

But it’s the inflation expectations that really caught my eye. During the first quarter of the year, I grew concerned that two of the Fed’s favorite inflation measures, the personal consumption expenditures (PCE) index and wage growth were showing sign of life. Last week, both measures were below forecast, which should ease markets’ collective mind.

The big event this week is the jobs report on Fri; however, I’m not sure markets will really care unless it badly misses or beats expectations. At this point, I think it’s going to take a big, unexpected event to move rates out of their current comfort zone.

FHA makes it easier to qualify with student loans

Loan Guidelines, Residential Mortgage Comments Off

Apr 292016

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Last fall, FHA changed its loan guidelines to require lenders to include a homebuyer’s deferred student loans in the buyer’s debt calculation. The change made FHA consistent with other loan programs. If a creditor didn’t report a payment for a student loan, FHA instructed lenders to use 2% of the loan’s balance. Unfortunately, this was twice the percentage other loan programs required and made it more difficult for many first-time homebuyers to qualify.

Well, apparently FHA heard our complaints. For FHA loans registered on or after 6/30, FHA has changed the guideline to 1%, consistent with other programs. (I can’t explain why they didn’t make the change effective immediately.)

So, how does this change affect one’s ability to qualify? Consider a homebuyer who earns $4000/m. She has a $500/m car payment and $20k in student debt. She wants to buy a $200k home, which requires an estimated FHA mortgage payment of $1432.

Under the existing 2% guideline, the ratio of her debt to income would be 58%, and she would not qualify. However, under the new guideline, the ratio drops to 53%, and she could qualify.

Rate update: Languid market – Should you lock or float?

Interest Rates, Residential Mortgage Comments Off

Apr 192016

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Mortgage rates moved very little last week and remain near 3-year lows, and I don’t expect them to move much this week either. The only US economic data of consequence is housing-related, and I suspect it would have to be really scary to perk the interest of bond traders. It’s more likely traders will focus on stock and oil prices and market fundamentals.

Of more interest may be the European Central Bank meeting this week and Federal Reserve meeting next week. Neither is expected to announce any changes to current benchmark rates or programs. And that’s where things could get interesting if either drops a surprise. However, I think that’s very unlikely. The following week, the first week of May, is another jobs report week, which always is a potential market mover.

So, should you lock or float your rate? Locking certainly is a reasonable choice given our closeness to recent lows and given the inability of the market to move lower. However, floating is not an unreasonable strategy given the market’s lack of conviction to move rates higher. If you do choose to float, I suggest you choose your maximum pain point, the rate at which you’ll lock if the market moves against you.

One way to cash out an LLC-held rental property

Investment, Loan Guidelines, Residential Mortgage Comments Off

Apr 162016

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Yesterday, we discussed how Fannie Mae has rescinded a portion of its loan guidelines concerning investors’ ownership of properties in LLCs. Specifically, according to conversations with Fannie, the change means an investor must move a property into his or her name 6 months prior to being eligible to take cash out of the property.

However, Fannie left open one avenue for cashing out a property in an LLC. It’s called the Delayed Financing program. If an investor purchases a property using cash, and holds the property in an LLC, the investor may pull out up to 75% of the equity within the first 6 months of ownership as long as all the members of the LLC will be on the cash out loan.

Note the two important conditions: It must be a cash purchase, and the cash-out refinancing must close within 6 months of purchase.

I suspect Fannie may eventually realize how silly the conflicting guidelines are, but the inertia that must be overcome to correct them is pretty grand.

In the meantime, please don’t forget that neither Fannie nor Freddie allow you to close a loan with an LLC holding title to the property. You must close in your name. Many investors move properties to their LLCs after closing, but be aware that doing so could trigger the loan’s “Due on Sale” clause.

Fannie makes it harder to cash out rental properties

Investment, Loan Guidelines, Residential Mortgage Comments Off

Apr 152016

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Investors who choose to hold their properties through LLCs need to be aware of a recent change Fannie Mae made to its loan guidelines. The guideline in question was called Continuity of Obligation, and Fannie enacted it in response to the financial crisis to combat fraud. The guideline established a timeframe a party must have owned a home prior to being eligible for refinancing.

For investors, the guideline specifically identified a property held by the investor in an LLC as meeting the requirement as long as that same investor was refinancing the property in his or her own name.

Earlier this year, Fannie rescinded the guideline in whole. The problem for investors is that means Fannie also rescinded the specific carve out for LLCs. Based on recent conversations with Fannie, without the carve out, an investor must first move the property into his or her own name prior to refinancing.

This becomes a big deal if the investor is trying to cash out the equity in the property. Fannie Mae still has a 6-month “seasoning” requirement for cash out loans. Without the LLC carve out, the investor now must move the property into his or her name 6 months prior to being eligible to take cash out of the property using a Fannie loan.

There still is one option available to investors using LLCs, and we’ll look at that tomorrow.

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