That, economists say, is the inevitable outcome of the nation’s ballooning debt and the renewed prospect of inflation as the economy recovers from the depths of the recent recession.

The shift is sure to come as a shock to consumers whose spending habits were shaped by a historic 30-year decline in the cost of borrowing.

“Americans have assumed the roller coaster goes one way,” said Bill Gross, whose investment firm, Pimco, has taken part in a broad sell-off of government debt, which has pushed up interest rates. “It’s been a great thrill as rates descended, but now we face an extended climb.”

The impact of higher rates is likely to be felt first in the housing market, which has only recently begun to rebound from a deep slump. The rate for a 30-year fixed rate mortgage has risen half a point since December, hitting 5.31 last week, the highest level since last summer.

Along with the sell-off in bonds, the Federal Reserve has halted its emergency $1.25 trillion program to buy mortgage debt, placing even more upward pressure on rates.  The 30-year fixed rate before the Federal Reserve bailout plan was 6%.  When the government bailout plan went into effect, consumers saw interest rates fall to historical lows below 4%.  Experts believe the end of the bailout plan on March 31 will spark a rise in mortgage interest rates back to levels before the bailout plan went into effect.

Each increase of 1 percentage point in rates adds as much as 19 percent to the total cost of a home, according to Christopher J. Mayer, a professor of finance and economics at Columbia Business School.

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The Mortgage Bankers Association expects the rise to continue, with the 30-year mortgage rate going to 5.5 percent by late summer and as high as 6 percent by the end of the year.

“We’ve gotten spoiled by the idea that interest rates will stay in the low single-digits forever,” said Jim Caron, an interest rate strategist with Morgan Stanley. “We’ve also had a generation of consumers and investors get used to low rates.”

Free Report: 6 Things You Must Know Before You Buy

For young home buyers today considering 30-year mortgages with a rate of just over 5 percent, it might be hard to conceive of a time like October 1981, when mortgage rates peaked at 18.2 percent. That meant monthly payments of $1,523 then compared with $556 now for a $100,000 loan.

No one expects rates to return to anything resembling 1981 levels. Still, for much of Wall Street, the question is not whether rates will go up, but rather by how much.

Some firms, like Morgan Stanley, are predicting that rates could rise by a percentage point and a half by the end of the year. Others, like JPMorgan Chase are forecasting a more modest half-point jump.

But the consensus is clear, according to Terrence M. Belton, global head of fixed-income strategy for J. P. Morgan Securities. “Everyone knows that rates will eventually go higher,” he said.

Source: New York Times

The front end ratio is a measurement of just the total monthly house obligations. The acronym PITI is commonly used. It stands for Principle, Interest, Taxes and Insurance. The Principle and Interest represents the montly mortgage payment, Taxes are the property taxes broken down to monthly increments, and Hazard Insurance to insure the structure from fire, natural disasters, etc. Although not part of the PITI acronym, monthly mortgage insurance payments and Association dues/fees if applicable would also be included when calculating the total monthly house expenses. The total of all of these monthly house expenses divided by your monthly gross income will be your front end ratio.
For conforming loans, the front end ratio is typically 28%
For FHA loans, the front end ratio is 31%.
Example:
Principle and interest payments= $1500
Property Taxes= $250
Insurance= $250
Total housing expenses= $2000

Gross annual income= $85,000
Gross monthly income= $7083 ($85,000 / 12 months)

Front end DTI= $2000 / $7083 = 28%

The back end ratio adds all monthly recurring debt to the total house debt to arrive at the back end ratio.

Lenders including BankUnited, a unit of BankUnited Financial Corp., and Vertice, a wholesale lending unit of Wachovia Corp., have elected not to lend to some areas or properties because of declining prices. Countrywide Financial Corp., the nation’s largest mortgage lender, considered a similar move last week before reversing course, and other lenders have tightened underwriting guidelines for slumping markets so as to make financing nearly unattainable.

There are "lists circulating" from banks, says Peter Zalewski, a broker with Condo Vultures Realty LLC, and those lists are pushing down prices when news of the black-marked properties spreads.

Moreover, the blacklisting isn’t always obvious. "We don’t call it blacklisting," said an official at a large bank. "We just don’t write the loan."

The banks are acting to protect themselves in a steep downturn. But the drying up of loans threatens to create a self-perpetuating cycle.

"If mortgage credit dries up, then prices are going to fall more," says Morris Davis, a professor of real estate and urban land economics at the University of Wisconsin-Madison’s School of Business and a former economist at the Federal Reserve Board.

Countrywide sent shudders through the ranks of mortgage brokers when it sent brokers an email recently under the heading "Urgent Product Elimination." The message announced the company would stop approving its Fast and Easy and Alt-A mortgages for all high-rise condominiums nationwide, effective almost immediately.

Countrywide’s Fast and Easy loans don’t require verification of income, brokers said. Alt-A loans are generally provided to buyers with good credit who lack full documentation.

Countrywide reversed its policy a day later without explanation, but the episode demonstrated lenders’ reluctance to underwrite mortgages in the country’s most uncertain real-estate markets. Countrywide didn’t respond to multiple requests for comment.

Florida’s largest bank, BankUnited Financial Corp.’s BankUnited FSB, drew up a "nonpermissible condominium project list" that identified addresses of 191 condominium developments in Florida and Las Vegas for which the bank won’t provide financing. The list was reported by the South Florida Business Journal.

For more than half the properties listed in the memo, the bank cited "declining market value" as the reason it wouldn’t provide financing. Melissa Gracey, a spokeswoman for BankUnited, confirmed that the list is still in force and said the bank’s "very conservative" lending guidelines rule out mortgages for such properties.

In some cases, lenders have blacklisted not specific properties, but entire geographical areas.

In December, Wachovia’s Vertice unit stopped writing mortgages for all condominiums in South Florida, says Kasey Emmel, a company spokeswoman.

Wachovia’s main lending operation "continues to offer condo products in all markets, including Florida markets," says spokesman Don Vecchiarello.

Blacklisting isn’t redlining — the illegal practice of restricting lending on a socioeconomic basis — so it doesn’t run afoul of fair-lending laws, says Alexander Bono, a partner at Schnader Harrison Segal & Lewis, a law firm in Philadelphia. Banks are allowed "to identify a county when it’s based upon something other than socioeconomic conditions" and then change its stipulations for lending there, Mr. Bono says.

Even when banks haven’t officially ruled out entire markets, the stipulations they use before lending in such areas are becoming very stringent, and can leave mortgage credit all but off-limits.

"Companies won’t lend" money for purchases in developments that aren’t at least 60% filled, says Paul Miller, an analyst at Friedman Billings Ramsey & Co., a unit of FBR Capital Markets Corp. When vacancy rates in a development are higher than 40%, Mr. Miller says, "your condo fees go through the roof," since a development’s minimum maintenance costs remain static, regardless of the number of residents. And if condo fees remain high — as underwriting logic follows — then homeowners may have a harder time making mortgage payments.

"We’re very cognizant of the risks involved" with "condominium developments in particular," says Terry Francisco, a spokesman for Bank of America Corp.

Other larger lenders have also tightened standards for mortgages they write in declining regions.

In December, Fannie Mae, the nation’s government-sponsored mortgage-lending behemoth, issued an announcement titled "Maximum Financing in Declining Markets."

"When a property is located in an area identified as declining," the announcement says, the lender originating the loan must reduce the maximum amount it could otherwise lend to that buyer by 5%.

In healthy markets, New York’s J.P. Morgan Chase & Co. will currently lend borrowers a mortgage equal to as much as 90% of a property’s value. For borrowers in states that have declining markets, however, the bank reduces that maximum, says Tom Kelly, a spokesman for the bank. J.P. Morgan then reduces that level even further for borrowers in the worst declining markets, Mr. Kelly says, though he declined to provide specifics.

CitiMortgage, a wholesale lending operation of another large Wall Street bank, Citigroup Inc., maintains a list of "declining market areas" that red-flags dozens of counties in more than 10 states. Citi reduces the amount it will lend for properties in those counties "by at least 5%," the document says.

"We routinely review our credit parameters, including maximum loan-to-value ratios, in declining markets," says Mark Rogers, a CitiMortgage spokesman.

One silver lining: For "all-cash buyers," Mr. Zalewski says, the lists are "heaven sent."

Buyers who have cash "can use that to negotiate," he says: "If you don’t sell to us, who are you going to sell to?"

Source:

Dawn Wotapka and Marshall Eckblad
From The Wall Street Journal Online
March 06, 2008

Being in this situation myself, my goal was to invest this money so that when I was ready to buy my new home I would have enough money for a down payment that would make my monthly payment very small or if lucky have enough to pay for it in cash.

What was I thinking!  This would actually go against everything I believed in. For me leverage is key in getting ahead.  One example of this would be the “Tale of Two Brothers”.  

Only recently have I been introduced to a new way of mortgaging a home.  It’s called Mortgage 100 by Merrill Lynch.  Mortgage 100 is a 100% home financing program that allows you to pledge eligible securities instead of liquidating assets to make a cash down payment.

What’s great about this program is that you can keep yourself fully invested by leveraging eligible assets and holding them in a pledge account.  You can also continue to have the potential to earn dividends, interest and/or capital appreciation.  By keeping assets invested for long-term growth you can have the potential to increase your net worth.

Other perks of using this program is no mortgage insurance even at 100%, zero points to reduce your total out-of-pocket costs and no additional fees or higher interest rates.

If this type of financing does not fit your needs there is always the more traditional way.  Here is a link to a LENDER that I used a few times.  Great rates, great service, and the people are very easy to work with.

Good Luck!

Please! Before trying to pass new laws Washington should look at the “Elephant in the Room.” I am not taking away the fact that there are bad people in every industry… including politics. What I’m saying is start with the biggest problems and work down to the smaller issues.

Matthew 7:3-4
”Why do you look at the speck of sawdust in your brother’s eye and pay no attention to the plank in your own eye? How can you say to your brother, ‘Let me take the speck out of your eye,’ when all the time there is a plank in your own eye?

The speck is over valuation by appraisers.
The plank is lending practices and guidelines dictated by Wall Street Investment Banks.

Values spiraling upward had much less to do with appraisers over valuing property and more to do with lending guidelines and consumer sentiment. Just look at the types of loans originated.

- Prior to 2002 – Amortized, Fixed Rate, Verified Income – people could qualify
- 2003 Amortized, Fixed Rate, Stated Income – people had to fib on income to qualify
- 2004 ARMs, Stated Income – people had to fib on income and take a lower initial payment to qualify
- 2005 Neg Am & Interest Only ARMs, 100%, Stated Income – people had to outright lie about income and take low initial payments. Underwriting became about reasonableness of stated income… is it reasonable for the McDonalds fry guy to make $5,000/mo?
- 2006 Neg Am & Interest Only ARMs, 100%, No Income – The income lie became so ridiculous that lenders said don’t lie in fact don’t put any income.

The simple math behind the melt down is that Lenders/Wall Street designed loan programs that were easy to qualify for and had an affordable initial payment. This allowed more people to buy and more people to buy multiple properties. The availability of easy money and consumer sentiment of “get in before it is too late” caused high demand and less thought about affordability after the teaser payment. More demand leads to higher prices, higher prices leads to sentiment of “get in before its too late”, which leads to more demand. What Law Makers are proposing would is in Jesus words, removing the speck while ignoring the plank.

Of course the sad irony… Lenders/Wall Street Investors are getting bailed out by the Government!

Colin Wright.

FHA loans differ from conventional loans in the way the lender qualifies the borrower. For years, lenders have been using FICO scores as a main component in the decision making process for conventional loans. FHA loans use debt to income ratios over FICO scores to determine the borrowers eligibility for the loan. FHA loans enable a borrower with challenged credit to obtain a loan provided that the borrower’s debt ratios fall within FHA limits.

In order to prevent home buyers from getting into a home they cannot afford, FHA guidelines have been set in place requiring borrowers and/or their spouse to qualify according to set debt to income ratios. These ratios are used to calculate whether or not the potential borrower is in a financial position that would allow them to meet the demands that are often included in owning a home.

The two ratios are as follows:

1) Mortgage Payment Expense to Effective Income

Add up the total mortgage payment (principal and interest, property taxes, hazard insurance, mortgage insurance premium, homeowners’ dues, etc.). Then, take that amount and divide it by the gross monthly income. The maximum ratio to qualify is 29%.

example:

2) Total Fixed Payment Expense to Effective Income

Add up the total mortgage payment (principal and interest, property taxes, hazard insurance, mortgage insurance premium, homeowners’ dues, etc.) and all recurring monthly revolving and installment debt (car loans, personal loans, student loans, credit cards, etc.). Then, take that amount and divide it by the gross monthly income. The maximum ratio to qualify is 41%.

example:

Please note that the above indicators do not exclusively determine whether or not a candidate will qualify for an FHA loan. Other factors will be considered, including credit history as opposed to the FICO score and job stability.

Hope this helps shed some light on FHA loans as they become more and more popular. Until next time, happy house hunting.

Elliot Lau

HUD has released a document, 24 CFR Parts 203 and 3500 Real Estate Settlement Procedures Act (RESPA): Proposed Rule To Simplify and Improve the Process of Obtaining Mortgages and Reduce Consumer Settlement Costs; Proposed Rule.

HUD is looking for comments and/or suggestions before deciding to implement it.

The first thing one notices is that this proposal to simplify is 96 pages long. The current RESPA rules already cover what they are trying to “simplify”. Clear disclosure of costs and terms and disclosure of yield spread premiums are already required by the current regulations. HUD states “The mortgage industry has changed considerably since RESPA was enacted in 1974, and the regulations implementing RESPA’s original disclosure requirements are no longer adequate.”

Having been in the industry for over 20 years, I can tell you that the mortgage industry has not changed all that much. Loans still cost money, and it is either paid for by the borrower or by the lender in the form of a yield spread premium.

HUD thinks that their current RESPA rules do not facilitate shopping or competition to lower the costs of getting a loan. I say that, if properly prepared, the Good Faith Estimate (that is already required to be provided by the lender or mortgage broker within 3 days of taking the loan application) is an excellent tool to use in comparing loans. It is lenders and brokers that do not properly prepare this document that make it difficult to compare loan to loan. If the current regulations were enforced, a modification would not be necessary.

This proposal states:

HUD’s regulatory reform and enforcement efforts for RESPA remain guided by the following principles:

1. Borrowers should receive loan terms and settlement cost information early enough in the process to allow them to shop for the mortgage product and settlement services that best meet their needs;

2. Costs should be disclosed and should be as firm as possible to avoid surprise charges at settlement;

3. Many of the current problems arise from the complexity of the mortgage loan settlement process. The process can be improved with simplification of disclosures and better borrower information;

4. Increased shopping by borrowers will lead to greater pricing competition, so that market forces will lower prices and lessen the need for regulatory enforcement;

5. The key final terms of the loan a borrower receives should be disclosed to the borrower in an understandable way at closing; and

6. HUD will continue to vigorously enforce RESPA to protect borrowers and ensure that honest settlement service providers can compete for business on a level playing field.

Let me address these issues one by one:

1. Borrowers are already supposed to receive the loan terms and costs early in the process. As for shopping for settlement services, this is only allowed on a refinance. In a purchase transaction, it is always the seller’s choice of escrow and title service providers. In addition, most borrowers would not know where to start in seeking out alternate settlement services. Those that do are and should be allowed to specify their choice. Good brokers and lenders accommodate their customers’ desires.

2. Costs over which the lender/broker have control are generally quite firm, and should only change if there is a change in terms, i.e. buying down the rate by paying a discount fee that was not initially requested by the borrower.

3. The currently required disclosures are as user-friendly as they can be, given the admitted complexity of the process, with the exception of the Truth-In-Lending form. That is one document that confuses every borrower I have ever dealt with. A change to that would be welcome.

4. If this goes into effect, borrowers will have no greater ability to shop than they have right now. I have dealt with many serious “shoppers” in my career, and I have dealt with many people who are not interested into putting that much energy into the process. People will still be people and these changes will not improve that.

5. The key final terms of the loan a borrower receives at closing are clearly spelled out in the most basic document of the loan set, the Note. It spells out the amount borrowed, the interest rate, the payment amount, and when payments begin and end. If the loan is of an adjustable nature, the Note is called an Adjustable Rate Note. Those, too, clearly spell out the terms of the adjustments, when and how much. In addition, there is usually an Adjustable Rate disclosure that reiterates the terms.

6. HUD does not need any new regulations to be able to enforce the current regulations. If they simply enforce the rules that are already in place, that would serve to level the playing field. It is unscrupulous brokers that do not disclose their true fees until the closing table that take loans away from honest agents who do properly disclose. Unfortunately, but the time this is found out, most borrowers are so anxious to get the loan closed that they bite the bullet and sign anyway. If more borrowers walked away from the closing table and reported the offending brokers, HUD would have an easier time enforcing the existing rules. That is the key to leveling the playing field.

Mortgage Time
Mortgage Market News for the week ending March 28, 2008

Also Notable: March Consumer Confidence plunged to the lowest level in five years Fannie Mae and Freddie Mac must raise up to $20 billion in capital to further reduce restrictions Treasury Secretary Paulson supported greater Fed oversight for investment banks The Treasury announced that the Hope Now program assisted 167K struggling borrowers in January

On the positive note the 3% down payment can come as a gift from a family member.

Another change that happened this week is stated income and assets loans are being discontinued. The old guidelines allowed a borrower to go to 95% financing with 700 Fico Score or to 90% with 680 score. Starting this week the only way for a borrower to go with out income verification is by having reserves and putting down at least 10%.