I was just watching one of the financial shows on television and listening to a wealthy investor and one of the co-hosts talking I wanted to scream, but waking my wife wouldn't help. Each one considers the other one an expert in the field of finance as well as themself and yet I didn't hear one word of truth out of either during the period I was able to stomach the show. They, of course, were talking about the sub-prime meltdown and about a large mortgage company that had gone under that I knew wasn't a sub-prime lender. They failed to mention that. And quite possibly because they didn't know, or worse, didn't know the difference between sub-prime, Alt A and prime lending.
Out of the wealthy investors mouth came " you can't give people with good credit loans at 6.5% and people with bad credit loans at 2%". I couldn't agree more, but it didn't happen. The co-host in a very quiet and respect full voice said "I guess there will be sub-prime loans again within a couple of years" and the wealthy investor concurred. I also agree but for a different reason. We have sub-prime loans now, so I can't see why we wouldn't have them in several years as well. The sad part of this little episode is that thousands of people were probably listening and getting the incorrect information. Wrong information doesn't help anyone at any time, so why not find out the truth before disseminating information.
I could spend days and columns talking about the collapse of the mortgage market as we have known it but it wouldn't be useful to those who might read my column. Instead I would like to inform the readers about what is going on in the mortgage market today so they can make the appropriate moves.
Conforming loans, which are called that because they conform to the rules of Fannie Mae and Freddie Mac, are doing fine. They are paying at least a little attention to the 10 year treasury note which has been, up to now, the benchmark for all of our mortgage rates. They are still higher than they would be in normal times, but within tolerable limits.
Conforming fixed rates, 10 years, 15 years, 20 years and 30 years are all within a narrow range at the bottom of the 6% range to the middle 6% range, generally without points. They could move lower as the 10 year treasury note continues its slide. Conforming loans have a current maximum of $417,000 for single family residences, $533,850 for duplexes, $645,300 for tri-plexes and $801,950 for four plexes. These limits are 50% higher in Alaska,Hawaii, Guam and the US Virgin Islands.
Sub-prime loans are very much available but at higher rates as investors have stayed away from purchasing these securitized mortgage pools and lenders have raised the rates higher to try to entice the investors to buy the securitized loan pools. Loan limits have topped out at 90% to 95% loan to value and stated loans have disappeared. Borrowers can still get a loan with a credit score at 500 but the rates for these people are in the double digits. There isn't any demand at this time for the sub-prime bonds and until it starts re-appearing, the rates will stay high.
Portfolio loans, funded with the banks own money, are still fairly reasonable but have been moving up a bit in the last several weeks. They are generally 5 and 7 year arms, which are 30 year loans that are fixed for 5 to 7 years before becoming variables. They are in the low to middle 6% range, for the most part if you wish to pay a point or in the middle 6% range to the high 6% range without points. They generally offer interest only options, low margins when they become variables and are mostly without prepayment penalties. Loan limits run as high as $2 million or more.
Jumbo loans, whether they are Alt A or Prime, are disconnected rate wise from the normal interest rate market. Generally they run 1/4% to 1/2% higher than conforming rates and are currently 1% to 1.5% higher as the lenders know that investors are very nervous about the risk and are requiring much higher returns. Rates are in the 7% to 8% range and probably won't start down until some of the remedies are in place.
As I have stated before the two best solutions to the problem are raising the lending limits of Fannie Mae and Freddie Mac to the high cost states limits which are 50% higher. If there isn't an appetite to do this nationwide it should happen in a number of states on either coast. The Federal Reserve will most likely be cutting short term rates in September which will give some confidence to the market. I am suggesting to all jumbo borrowers up to $750,000 to consider taking a conforming loan at its maximum and adding a fixed second to make up the difference needed to reach the loan size you need. This should keep your blended rate in the middle six percent to high six percent rate and out of the 7% jumbo range.
Last, but not least, those looking to buy homes have a unique opportunity to squeeze the profit out of a new home while the outlook is negative, the weather is awful and the classical buying season is over. Even though you want to wait to see when the bottom is reached you can't know until it starts back up. In housing it is even harder to be a bottom fisherman as purchases are made, but not closed for 30 to 90 days and thus not reported in a timely fashion. You could easily be a quarter of a year behind by the time you see what is happening. A year or two ago you would have drooled at these prices. Don't find yourself two years down the road and wondering what happened.
These are unusual times that take a bit more work on everyones part to ensure that the desired results. Put in the time and the rewards are there. And stop listening to the experts on the financial stations because just maybe ..... they aren't! Oh, you don't have to put 20% down to buy a house.