Why I only refer clients to lenders I trust!

I won’t be pasting the entirety of Jay Vorhees of JVM Lending’s blog about this here. I’ll just hit the major points. But this is a perfect example of why I only refer clients to lenders I trust. Read on:

Last week, a borrower came to us to discuss her refinancing because she had lost trust with the lender she was working with (America’s largest non-bank lender). She was trying to refinance the house she lived in but it was owned by her Dad and she was not on the title, so a refinancing was impossible.

In any case, she was trying to refinance the house she lived in but it was owned by her Dad and she was not on title.  So a refi was impossible – something the other loan officer failed to comprehend – and it had to be structured as a purchase.

Further complicating things was a “gift of equity” down payment, the need for “cash out” for improvements, and the need to avoid capital gains taxes for the seller – all issues that the other loan officer had zero understanding of.

In any case, one of our Mortgage Analysts quickly figured out how to structure the loan and then re-locked the same borrower with the same lender via our correspondent relationship but at a 1/2 percent lower rate. 

I share this story not to make JVM the hero but to once again warn buyers away from the big call center mortgage companies. The call centers stuff bodies into cubicles to do nothing but sell.

Those “bodies” often do not have the skill to close transactions when there is even a small amount of complexity, and…their rates are way higher to boot.  

That’s Jay’s horror story about call centers. It does a great job of explaining why I prefer to refer specific lenders I know who will always get the job done. It creates a smoother process for everyone that way. Most banks or Quickens of the world don’t fully underwrite upfront; it requires a lot of paperwork initially, but it creates a very smooth process to closing. This way the buyers are aware of any potential issues before you ever write an offer. They also don’t tell you that once you are in contract, you are handed off to loan processor who you have never spoken with and many loan agents are on to the next approval and are no longer in the immediate loop. Communication often falls apart at this point. Your loan officer may be local, but the processor could be in a different state.

I currently have a new home buyer who is shopping three different lenders looking for the best rate. With two of them, I expect possible delays and a questionable overall experience for my buyers. One is fantastic, but a first-time home-buyer doesn’t understand those nuances far outweigh an eighth of a point difference in an interest rate. Hopefully whoever they choose will do right by them and it will be smooth sailing.

I just closed on a house (blog to come on Thursday). When we first met, they were talking to one of the largest non-bank lenders. I recommended they speak to JVM and just compare the experience and decide who they would like to work with. They closed with JVM and when I handed them the keys, they remarked at how smooth the overall process was for them and when compared to their friends who recently purchased and had a loan with one of the big banks, they said their lending experience was horrible.

The Fed lost control over interest rates – so now what?

My friend Jay Vorhees of JVM Lending had a great blog recently about The Fed and interest rates. Here is the article below, with my two cents included:

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Rates are at an eight-month low right now – about 1/2 percent lower than they were at their peak in October. I should add though that they still remain about 1/2 percent higher than they were last year at this time. So, did the Fed finally achieve its stated goal of pushing up rates?

Not in the way anybody expected.

According to former Senate Banking Committee Chairman Phil Gramm, the Fed now has less control over interest rates than at any other time in its 105-year history. I won’t go into all the details, but it has to do with its massive bond holdings (almost $4 trillion) and the excess reserves in the banking system. You can read more about it here.

The Fed can influence rates in the short term with its actual policies and statements, but the markets now seem to have much more say in the matter than the Fed. We are watching this currently, as the Fed’s short-term rate increases are not resulting in long-term rate increases like we have seen in the past.

What this means is a repeat of what I have been saying repeatedly over the last several years – nobody really has any idea of what will happen with rates (or anything else for that matter – remember Mr. Trump’s election?). A slowing world economy could continue to bring rates down, or a resurgence in bank lending (according to the article referenced above) could spark an inflationary spiral that will send rates through the roof.

Suffice it to say that we will see a lot more volatility in both the stock and bond markets for a long time to come. What is really scary though is what will happen when everyone figures out that there is no way that the world can ever pay back the $250 trillion in worldwide debt that has built up over the last ten years. When that happens, today’s environment will seem like very calm sailing.

Bond Market

Lastly – despite the uncertainty, many pundits are now predicting low (and even declining) rates throughout 2019.

Great stuff from Jay, right? So, here are  my thoughts: The Fed came up with four rate hikes last year, and now the mortgage rates are lower than expected as stock market sways are leading people to bonds. What that means for the real estate market, especially locally is that more buyers maybe taking advantage of getting in now.  I am starting to see the market pick back up, but this year it didn’t happen on January 3rd, didn’t really see it until the weekend after January 7th when the kids returned to school from their holiday break.  January has been interesting the last few years, as buyers have been out, but sellers want to wait until March and they often loose that burst of lots of buyers and no inventory.   At any rate, nobody has a crystal ball and I believe we will be on a wild ride as the stock market will have more volatility (as it is suppose to).

5 reasons why this winter is the best time to buy

Jay Vorhees at JVM Lending put together an interesting blog post recently, and I want to share that with you below. Essentially, he finds five reasons why this current winter season is the best time to take advantage of the real estate market and buy a house! Enjoy:

Most of our agent-readers well know why winter can be a great time to buy from a real estate perspective. I am nonetheless repeating a few of the obvious reasons while also illuminating a few less-obvious mortgage-related reasons.

Image result for real estate agent in snow

1. Rates Hit Six Week Low! While rates have been climbing for most of the year, they hit a six week low last week in response to the oil glut and signs of a softer economy. Given that the Fed will likely continue to push rates up next year, this brief rate-reduction gives buyers a short-term opportunity to lock in a relatively low rate.

2. Lender Incentives. 
Many lenders are offering extra incentives to borrowers right now simply to maximize loan volume during a slower time of the year. This includes JVM of course, as we are offering a $500 closing cost credit to any buyer who gets into contract from now until January 31st. This does not apply to borrowers who are already in contract and locked.

3. Motivated Sellers. If someone is willing to go to the trouble to sell their home during the holidays/winter, they are usually more motivated to sell and willing to negotiate.

4. Fewer Buyers/Less Competition. There are fewer buyers and a lot less competition for homes. Many buyers pull out of the market in the winter b/c they don’t want to take the time to house-hunt during the holiday season or they don’t want to buy in the middle of the school year (if they have kids).

5. Seeing Properties at Their Worst. 
My neighbor has drop-dead gorgeous crape myrtle and Japanese maple trees all over his yard. In the spring and summer, his yard is an oasis of color. In the winter, however, his yard looks like a war zone. Buyers get to see homes at their worst in the winter, avoiding unpleasant surprises and knowing that their dream home will only look that much better, come spring.

The internet conveniently has numerous articles backing up my points above, in case any readers don’t want to take my word for it. Here are two: The Best Time of the Year to Buy Property from Financial Samurai; and Mortgage Rates Pull Back from Freddie Mac’s website.   

Why borrowers should consider a 30-year mortgage

Jay Vorhees at JVM Lending has written an excellent blog about borrowers and their understanding of liquidity, and why borrowers should consider the lower 30-year mortgage payment. Besides the flexibility it offers, it allows a sort of cushion for any borrowers who may find themselves in personal trouble, and is also usually a good long-term investment. Read on below to get the full picture, with two cents from me – can you say liquidity:

 Borrowers often underestimate the importance of liquidity. Especially when times are good. When rates are relatively low (under 8%), we always recommend using financing (obtaining a mortgage) to buy real estate, even if borrowers have ample cash. Similarly, we usually advise borrowers who want lower 15-year rates to take a 30-year mortgage. Even though borrowers can afford the higher 15-year mortgage payment, the lower 30-year mortgage payment offers them more flexibility. There are several reasons why borrowers should value liquidity more:

1. Job Loss, Major Illness, Injury, Legal Troubles, Recessions. People often forget how quickly fortunes can turn (especially those of us in sales), and how important cash is when income dries up. This is particularly the case when the economy turns and financial instruments and hard assets drop in value and become difficult to sell.  An abundance of cash during unexpected hard times often means the difference between bankruptcy and muddling through.

2. Ability to Buy Distressed Assets. When the economy turns and asset prices tank, there are often tremendous bargains to be had for anyone with even a little cash. After the mortgage meltdown, for example, one of our clients purchased eight rental properties for around $100,000 each. He was out of pocket less than $250,000 for all of those purchases, and all of the properties cash-flowed from the start. In addition, they are all worth close to $300,000 now. I watched many other clients do the same thing in the stock market after both the dotcom crash and the 2008 meltdown.

3. Investment Returns Exceed After Tax Cost of Mortgage. This does not apply to everyone of course, but many borrowers can often invest money that they do not put into their home and earn a return that exceeds the cost of their mortgage, especially after tax benefits are taken into account. Example: Borrowers A and B both have $250,000. “A” puts down 50% on a $500,000 house; “B” puts down 20% and invests the $150,000 he saves. In the long run, Borrower B will have a much higher net worth and more liquidity along the way if his investment yield exceeds his rate by 2% or more (not difficult over the long term).


Interesting, right?  I saw this first hand in the down turn, people with cash bought investment properties.  They are usually patient and don’t get caught up in all the hubbub.  Many can’t see past the downturn and believe it will never improve, however we are not building any new land and history shows us that what does down, goes back up.   Remember cash is king, so start saving and get a leg up on the next down turn.

Interest rates: is the latest increase a deal-breaker?

My friend Jay Vorhees at JVM Lending had a fun blog about the 1/4% rate increase recently. He compared it to be equivalent to just less than four lattes per month, to put it into context. You can see the highlights of that blog below, and then our fun take on it!

From Jay: There have been a lot of rumblings in the news lately about rate increases…mostly b/c rates have been increasing :).

The Fed recently announced an increase in the Fed Funds rate with more on the way, and rates have been increasing in general in response to positive economic reports, as most everyone knows. As a result, rates are now back at levels not seen since 2011. The good news is that rates remain very low by historical standards, as we remind everyone over and over (6% was a “gift” in 2006; 7% was awesome in the 1990s; and 9% was unimaginable in the 1980s).

The other good news? Rates affect payments much less than most people think. Here is the rule of thumb: for every 1/4% increase in rates, a mortgage payment increases by about $15 per $100,000. That’s less than four Starbucks Lattes per month. So, in a “Starbuckian economy,” a 1/4% increase in rates will increase the payment on a $500,000 loan by about 20 Lattes per month. That’s not too bad, especially when you consider that those lattes may be tax deductible too.

From Kristin: So, let’s compare a 6-pack of beer, an average cost of which is about $9, to the 1/4% rate increase. You could get almost two 6 packs for that increase. Or maybe a new shirt on sale at Old Navy. A decent bottle of wine at Trader Joe’s will run you about $15. Eating out at many restaurants in downtown Walnut Creek might cost about $15 per person before tip.

So, before you get too worried about the rate increase, consider that what you’re really losing is just a new shirt, or a couple of beers, or one lunch out with friends. Or, god forbid, a handful of lifeblood, I mean lattes, before work! All said, this increase won’t have too much of an effect on your life.

Of course, it’s not all sunshine and rainbows. According to this article, mortgage rates are fast approaching 5 percent, which is a fresh blow to the housing market.

Borrowers beware of Google: JVM Lending

Jay Vorhees at JVM Lending wrote another great blog about Google, and how it can be both a friend and enemy. I have my own story about Google, but I’ll get to that at the end. First, read Jay’s take on why borrowers should beware of Google:

Image result for google

One of the reasons loan officers and borrowers were able to get away with so much fraud prior to the mortgage meltdown was the lack of public records and information in general. That is no longer the case, and borrowers need to be extra careful nowadays because underwriters Google everything – borrowers, employers, self-employed businesses, and even renters.

We recently had a transaction questioned because the borrowers rented out their $500,000 departing residence to a person who already owned a $1.5 million home. The underwriter Googled the name on the rental contract and rightfully wanted to know why the renter would want to downsize into a rental that was much smaller and in a vastly inferior neighborhood.

We had another situation where the borrower was subject to numerous criminal allegations that will likely prevent him from garnering business for his consulting firm (killing the deal), and this too came up with a Google check because it was all over the news.

Underwriters also Google employers to make sure they exist, no longer exist (if the application says a business with losses is closed down), or that public records match what is stated on the loan application. We have had borrowers, for example, claim to not have ownership interest in a business to avoid providing corporate tax returns, but the internet made it clear that they were owners.

Sometimes borrowers try to fool us, and sometimes they are just not careful enough when filling out their loan applications. Either way, they need to be ultra-careful these days because there really is no getting away with anything. In addition, once an underwriter thinks the borrower might be trying to mislead, she will not want to approve the loan under any circumstances because of the risk.

Kristin’s take: This is a great blog. My own Google story is about sellers who Googled the buyer, and some criminal allegations showed up. We only had one buyer, so we accepted the offer, but we figured out from the internet that he wasn’t the most stand-up individual. Sure enough, we had problems closing. They were contingent on the sale of their condo, and that also did not go smoothly, between the two, we were delayed a month.   In this situation I had no control over the other parties or the process.  In the middle of all this, our buyer went out and bought a vehicle, which changed his debt-to-income ration and had to be paid off with some of the proceeds in addition to a tax lien. It dragged out the process and naturally, the sellers were very frustrated. That was just one of many issues that were not shared with me.   If my clients had another offer I believe after their Google search they would  have never accepted the buyer but they were prepared for a rocky road;  none of us knew how painful it was going to be.

Moral of the story? Always Google, and be prepared to be Googled.

Eliminating PMI (private mortgage insurance)

According to my friend Jay Vorhees at JVM Lending, there are three options for eliminating the private mortgage insurance (PMI) obligation associated with a conventional loan plan. We go over his three options below, with a little input from yours truly:

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Option #1: Refinancing

If your property appreciates to the point where we can garner a new appraisal to support a value high enough to reduce your loan-to-value (LTV) ratio to 80 percent or less, you can refinance into a new loan with no PMI. This assumes, of course, that rates remain favorable. Keep in mind that most appraisers will correlate to the purchase price for the first six months, making it wise to wait at least this long to start the refinance process.

Option #2: Paying down

You can eliminate PMI by paying your loan down if you notify your servicer with your request, have a good payment history, and are willing to prove to the servicer that your property has not depreciated with an appraisal in some cases. This can help you pay down your loan to an amount equal to 80 percent of the original purchase price.

Option #3: Proving home

If your loan is owned or backed by Fannie Mae or Freddie Mac, you can eliminate PMI by notifying your servicer with your request, as long as your loan has seasoned for two years with a good payment history. You’d also have to provide a current appraisal with high enough value to support a 75 percent LTV. If your loan is more than five years old, your LTV can be 80 percent. If you prove your home has appreciated to the point where the LTV is at 75 percent or less, you can eliminate PMI this way.

As rates increase, the option of refinancing becomes less feasible. There are currently loans called 80/10/10 or 80/15/5 where you take a HELOC (home equity line of credit). The buyer puts down 10 or 15 percent and the HELOC covers the balance and there is no PMI. The only issue is the HELOC has higher rates that tend to move with the market. They work well if one gets abonus or is expecting a pay increase and the HELOC can be paid off quickly. Always speak to your lender about the various options. I know from experience if you work with JVM, you are in good hands!

Why bank statements are so important!

Our friend Jay Vorhees at JVM Lending has shared another important blog recently: why bank statements are so important for borrowing and financing for a home. You’ll want to read on to see what Jay says, especially if you’re in the market for a new home. You’ll find a copy of the (slightly re-formatted) blog copied below:

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STRONG BORROWER DENIED FINANCING – WHY?

We once had a borrower who qualified for financing in every way (income, assets, credit, etc.) but she was denied financing. The reason?  She had five unexplainable overdraft charges on her bank statements that indicated she could not manage cash.

Every borrower has to provide bank statements for every account used for “cash to close” (down payment and closing costs). There are no exceptions because lenders have to ensure that down payment funds were not recently borrowed or obtained through illicit means.

“Borrowed” down payment funds are not considered “seasoned” and they create debt ratio issues b/c they need to be paid back. In any case, lenders are required to go through every bank statement with a fine-toothed comb to look for every irregularity. Irregularities include overdraft charges, unusually large deposits, and unexplained regular monthly deposits or withdrawals, among other things.

Unusually large deposits have to be paper-trailed and explained or they are assumed to be borrowed funds (and they can’t be used for a down payment/closing costs funds). And unexplained regular monthly deposits and withdrawals often indicate the existence of undisclosed side businesses, support payments or other liabilities.

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In any case, borrowers often get frustrated when we ask them to explain so many things that are buried in their bank statements. But, we have to ask because bank statements tell lenders so much more than meets the eye.

This is, in fact, often one of the most time-consuming aspects of the loan approval process.

**

On a related note, Jay discusses something at the footnote of this blog: rates have climbed recently after a stretch of stability. President Trump’s comments about the Fed raising rates too quickly were the primary cause, but, according to the Wall Street Journal, the Fed may now be more likely to raise rates than it was prior to the President’s comments. This is because it will want to prove its independence from political pressure. How ironic!

Is there a recession coming in 2020?

Is there a recession coming in 2020 or sooner? And if so, what does that mean for the real estate industry? Additionally, how do Chinese buyers affect California real estate? Jay Vorhees of JVM Lending (with a little help from The National Real Estate Post) has you covered:

The National Real Estate Post had a great video today with information I thought was well worth sharing. Marketing commentator Barry Habib discusses margin compression, the coming 2020 recession, why he is bullish on real estate even if a recession hits, and why Chinese buyers influence California real estate so much.

RECESSION IN 2020 – WHY?

Mr. Habib agrees with other prognosticators I have cited in previous blogs and illuminates two reasons why a recession is likely in 2020:

  1. Short-term rates are almost the same as long-term rates. I won’t explain the economics, but I will say we are at this stage in the interest rate cycle now; and
  2. Unemployment has likely bottomed out and will only increase at this point.

BULLISH ON REAL ESTATE EVEN IN RECESSION

Mr. Habib remains very bullish on real estate – even if a recession hits. He thinks a 10% correction is very unlikely for several reasons:

    1. It is different this time for reasons we have explained in previous blogs – tighter lending guidelines, more structural housing demand, etc.
    2. Rates come down during recessions and that props up real estate prices; and
    3. According to Mr. Habib, if you look at data from the last six recessions (other than the 2008 meltdown) you will see that real estate prices usually do not decrease significantly.

CA PRICES HURT BY CHINESE BUYERS PULLING OUT

15% of the money spent on real estate transactions in California is from China. But b/c China’s currency is now so much weaker than it was relative to the U.S. dollar, Chinese buyers are now sitting on the sidelines. This drop off in demand is already affecting prices, particularly on the high end. But, according to Mr. Habib, this too will end and Chinese demand will return.

I hope this helped you learn a little something about the impending recession, how it affects real estate, and why Chinese buyers may affect the market long-term!

Now, with a little input from us:

Comments from Bob Schwab – Inverted Yield Curve

Our in-house lender has remarked that one of the indicators a recession may be on the horizon is an inverted yield curve. I asked what that means, and here was his response (note any errors are mine via translation):

“The U.S. runs a deficit, and in order to pay on the deficit, they sell treasury notes and pay interest to the purchaser. Normally, the longer the you take the note, the higher the rate or return; [in the] shorter term, the lower the rate the government will pay you. When the short-term notes have a higher rate than the long-term is when we have an inverted yield curve. That margin has been steadily decreasing, and we have been about 30 points away from an inverted yield curve, and thus why the buzz of a correction is coursing through the media. I am seeing a different effect; in June we had a wave of listings come on the market, when it usually quiets a bit due to summer vacations. I believe sellers are thinking prices might have reached a peak and now is the time to get their home on the market, which means we now have more inventory and more for buyers to choose from. The outcome is price reductions, things sitting longer, etc., because buyers now are thinking they will have a wait-and-see strategy!”

Interest rates and purchasing power

According to Certified Mortgage Consultant Bob Schwab, interest rates you secure when buying a home not only greatly impacts your monthly housing costs, but also impacts your purchasing power. Check out his comments here:
According to Freddie Mac’s latest Primary Mortgage Market Survey, interest rates for a 30-year fixed rate mortgage are currently at 4.61%, which is still near record lows in comparison to recent history! The interest rate you secure when buying a home not only greatly impacts your monthly housing costs, but also impacts your purchasing power. Purchasing power, simply put, is the amount of home you can afford to buy for the budget you have available to spend. As rates increase, the price of the house you can afford to buy will decrease if you plan to stay within a certain monthly housing budget.
The chart below shows the impact that rising interest rates would have if you planned to purchase a home within the national median price range while keeping your principal and interest payments between $1,850-$1,900 a month. With each quarter of a percent increase in interest rate, the value of the home you can afford decreases by 2.5% (in this example, $10,000). Experts predict that mortgage rates will be closer to 5% by this time next year.
Jay Vorhees of JVM Lending has a take on higher rates and how they affect qualifying, too:
How Do Higher Rates Affect Qualifying? Potentially A Lot.
RATES ARE GOING UP, REST ASSURED
We’ve said that at least a hundred times over the years but this time it is a reality b/c the Fed is no longer buying bonds to push rates down, and b/c the Fed is very determined to push rates up in general. We saw a slight dip in rates recently largely b/c of economic turmoil in Italy, but rates are expected to climb another 1/2 percent this year alone.
HOW WILL RATE INCREASES AFFECT THE QUALIFICATIONS OF A PRE-APPROVED BORROWER?
Rule of thumb: A 1/2 percent increase in rate will increase a mortgage payment by about $30 for every $100,000 borrowed. Hence, if a buyer is looking at a $600,000 mortgage, her payment will increase by about $180 if rates go up 1/2 percent. In regard to qualifying, an increase in rate could easily shave off $25,000 to $50,000 from a buyer’s maximum.
For example, let’s say “Jeremy” the buyer is pre-approved for a maximum $750,000 purchase with 20% down at a rate of 4.75%. Let’s also assume Jeremy’s maximum payment (Principal, Interest, Taxes, Insurance) is $4,000 and his income is $8,900 per month, giving him a maximum debt ratio of just under 45% (all numbers are rounded). If rates increase 1/2 percent, Jeremy’s maximum qualification would drop to about $715,000 b/c that is the most Jeremy could buy in the higher rate environment without pushing his payment over his $4,000 limit.
In other words, if Jeremy’s rate increases from 4.75% to 5.25%, he will lose about $35,000 of purchasing power. What can poor Jeremy do?
A. Consider an Adjustable Rate Mortgage (ARM). Jeremy can knock as much as 1/2 percent off of his rate by considering a 7/1 ARM. Knowing that very few buyers ever keep their mortgages more than 7 years will help him rest easy with his ARM.
B. Buy now while the getting is good! If Jeremy is hellbent on a 30-year fixed rate loan, he should buy now to lock in today’s rates. BUT – we will still remind Jeremy that even if rates are in the mid-5’s, they are STILL a “gift” by historical standards.
C. Buy a $50 tent and a motorcycle, and skip the house thing. I did that in my early twenties, and it was really fun. Jeremy might want to do the same. But don’t worry, we won’t suggest it. Lastly – should Jeremy worry that higher rates might hurt home prices? According to this blog, no :).
Note:  for those living in a rabbit hole, last week the Feds raised interest rates and stated instead of one more rate hike, it will most likely be two more this year and then 3 more in 2019.