High Appraisal Fees, Oh My!

Jay Vorhees at JVM Lending wrote a blog recently about high appraisal fees and I wanted to share a specific portion of that with you:

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Appraisal fees have risen from as low as $250 in the early 1990s to over $1,200 now – for a standard appraisal. Lenders everywhere are raising their fees in order to get the increasingly more limited supply of appraisers to accept their appraisal orders. There is simply no choice if we want to attract skilled appraisers with fast enough turn-times to allow us to close on time.

We are warning borrowers up front, of course, but I am encouraging agents who read this blog to also warn their clients, as we are seeing some serious “sticker shock” right now when we disclose what we now have to pay to appraisers.

So, why are appraisal fees so high? Inflation is obviously a major reason, as $1 in 1990 is worth the same as $2.08 today, per this really cool inflation calculator. Appraisers also have higher fees for licensing, insurance, E&O coverage, vehicle costs, software, MLS access, continuing education, and more.

The main reason the fees are so high is that there is a shortage of appraisers. One of our best appraisers is in his 80s, and he just works because he likes to; he certainly does not have to. And that is the case for a large number of our other appraisers. They can command all the fees they want, and they have no reason to tolerate mistreatment.

Kristin’s perspective: In my recent experience, most transactions are closing late because of a delay in getting appraisers to the property. Even if the buyer removed all their contingencies and they have a loan, you still need the appraisal to close. The shortage of appraisers – and the rising costs because of that shortage – are very, very real. Don’t be surprised when your lender or agent mentions those costs!

The Big Question – Rates?

My friends at JVM Lending wrote an interesting blog recently, and I wanted to share a summary, plus my input on the topic: “why the Fed can probably never raise interest rates.” Read on:

The Fed Funds Rate is a rate that banks charge each other to borrow “reserves” overnight, which is currently at 0-0.25%. Paul Volcker was a Fed Chairman in the late 1970s and early 1980s who sent the U.S. into a massive recession by raising the Fed Funds Rate to 20%.

The result of Volcker’s actions were a horrible recession, a crashed economy, and 11% unemployment. To recover, it took enormous political will – the likes of which we are in short supply of nowadays (for many reasons).

Last week, the Fed talked about the possibility of raising rates almost two years from now. Stocks tanked and interest rates shot up. Markets reacted negatively because even the mere mention of higher rates down the road causes a reaction. Investors know that our economy can’t afford higher rates.

Here’s the thing: the Fed likely can’t afford to raise the rates. Our total federal debt is about $28 trillion and growing, while State and Municipal debt is approaching $4 trillion. The interest paid by the federal government for its debt this year will be just under $400 billion, with government debt rates around 2%.

So, if rates returned to even 1990s levels (6-8%), interest owed would triple or quadruple and quickly bankrupt the government. Even more concerning, potentially, is corporate debt. There is $11 trillion in corporate debt in the U.S. and many of those corporations could not begin to service their debt if rates went up. They depend entirely upon cheap capital and bailouts.

In terms of real estate, existing mortgages do not depend on low rates. They are long-term and fixed. However, housing itself represents a huge chunk (almost 18%) of the economy, and that sector is now dependent on super-low rates, too. Basically, the entire economy is addicted to low rates and the Fed knows it.

silver and gold round coins in box

Several pundits expect the Fed to find excuses as to why 2023 is not a good time to raise rates and kick the can down the road yet again. So, we will either see a continuation of a Japan-like situation for a very long time with continued low rates, slow growth, and massive government intervention…or inflation will set in and the Fed will lose control of rates, as investors simply demand higher yields.

Either way, I would not expect the Fed to actually raise rates itself in 2023.

KRISTIN’S TAKE: Nobody has a crystal ball, and if rates do start to edge up, it would take some time for them to get into the 5%+ range. We are also seeing a bit of a reprieve on the buying frenzy. More houses are having price reductions, not as many multiple offers, etc. I am just not sure if it is because everyone hit vacation mode, but if you’re a buyer who got priced out earlier this year, it might be time to start looking again.

Why I Refer JVM Lending

When a buyer client doesn’t have a lender, I refer to JVM Lending. I can give multiple lenders and a buyer can choose whoever they want. Oftentimes, there are reasons for that choice. For example, if a buyer has only been in the country for less than two years, most lenders can’t finance them and big banks will only allow a certain amount of money, provided they have a chunk of change in their bank.

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However, for most situations, I know JVM will perform if they give an approval. They are so diligent, have amazing systems in place, and are not dependent on just one loan officer responding. They don’t even have loan officer titles – the initial contact is with a Client Advisor.

There is nothing worse than having the loan blow up during the escrow process, especially in this market where buyers are removing all contingencies. I have been one of those agents who has called JVM to save the day, and they have saved it every time.

This recent blog by JVM shows how important it is to know if the lender is focused on refi’s, or primarily does purchase loans. It can make a world of difference. The only motive I have to refer JVM is that I know I will look good to my clients because everything will go so smoothly for them. Most buyers never recognize how smooth the process truly is, but they would appreciate it if they have ever experienced a bad lending experience and would never want to go through it again!

[JVM Lending Blog] 4% Rates by June?

The following blog is from my friend Jay Vorhees at JVM Lending. I’ve contributed some of my own insight at the very bottom. Enjoy!

I am always hesitant to predict rate-increases because they so often do not come about. But, because rates have increased over 1/2% over the last few months and because Barry Habib of MBS Highway predicted that increase with amazing accuracy, I listen when Habib predicts additional increases. And that is what he did in his recent commentary and in an interview with economist, David Rosenberg.

BAD NEWS = INFLATION

How Interest Rates Affect Property Value - The Paratto Team

Credit: The Paratto Team

Both Habib and Rosenberg believe inflation numbers will spike up over the next few months. They focus on Consumer Price Index (CPI) numbers, and point out that the CPI is a moving average of the last twelve months of inflation reports.

Hence, we won’t see inflation spike until April, May and June when the price increases we have seen in recent months start to get factored into the average. CPI numbers were in fact released today, showing a 1.7% increase over the last 12 months.

Habib and Rosenberg believe, however, that CPI numbers will be 1% to 2% higher by June, and that will no doubt spook the bond markets and push rates significantly higher. This is because no bond investor wants to be stuck with a 1.6% yield if inflation rates are at 3%.

GOOD NEWS = INFLATION IS SHORT-LIVED

Habib and Rosenberg also both believe that the inflation we will see will be short-lived. This is because they both think the price increases we are seeing now are primarily a result of supply chains being broken because of COVID.

They remind that the same vaccines and potential herd immunity that are freeing up spending and potentially spurring inflation are also the same vaccines that are also opening up supply chains.

They think the benefits of opened supply chains will outweigh upward pressures on prices brought on by increased spending, and we will see tamer inflation numbers later in the year. Rosenberg also points out that all of the government borrowing taking place now is also deflationary.

NO MELTDOWN; PRAGMATIC; ANYTHING COULD HAPPEN

30-year mortgage rates hit highest since July, refis cool | Fox Business

Credit: Fox Business

What I most enjoy about old salts like Mr. Rosenberg is how pragmatic and relaxed they are. The blogosphere is filled with “doom and gloomers” who insist “the end is near” because of our government’s unprecedented and massive monetary and fiscal intervention.

Rosenberg, however, believes those fears are overstated, pointing out how the Japanese central bank and government have been far more activist over the last twenty years without suffering any major consequences.

Rosenberg is finally quick to point out that there is still no certainty with any prediction in today’s volatile world, and he is particularly adamant about not trying to time predictions.

CONCLUSION

Rates will very likely continue to rise over the next few months b/c of inflation concerns. They could also fall again, but there is no guarantee.

Kristin’s two cents:

I also listened to a Barry Habib Zoom call in early February. One of the other things he noted is as debt increases, interest rates decline. What stood out is the current U.S. debt is around $28 trillion. If you decreased it by $1 million a day, it would take about 2,700 years to fully pay it off. The current administration is currently looking a more debt with their infrastructure bill. The good news is if rates go back down and you are just getting into a loan, you can always refinance down the road.

One last thought: The Wall Street Journal just reported that there are more real estate agents in the United States than houses on the market, but that will be a blog for another day!

Clarifying the Rate Quote

My friends at JVM Lending put together a list of misleading rate quote tricks that I think you should be aware of. Here, I offer my clarification based on their blog. You can see more from them on their website. Read on…

From JVM: We recently had a borrower come to us with a ridiculously low rate quote for a “no cost” loan from one of America’s largest mortgage banks. The borrower insisted it was legitimate and asked us to match it, so we asked to see the other lender’s Loan Estimate, or “LE.” And, sure enough, there were $9,000 of points buried in the loan.

The loan officer was offering a loan with “no out of pocket” costs, meaning that he had merely increased the borrower’s loan amount by enough to absorb ALL of the points and nonrecurring closing costs. The confused borrower, however, thought she was getting a “no cost” loan.

Yesterday, we had another borrower come to us with a ridiculously low rate quote for a 75% LTV cash out investment property loan; the loan officer had simply misquoted because he missed all of the “hits,” or rate-increases that are associated with such a loan. In any case, the above instances prompted me to write another blog about the tricks and/or mistakes lenders make when quoting rates. Here are a few rate quote tricks and mistakes:

“No Cost” vs. “No Out of Pocket”

This is a classic ploy and it is what happened in the above instance. A true “no cost” loan means that the lender covers or pays all of the nonrecurring closing costs or one-time fees (title, escrow, appraisal, under writing, etc.) on behalf of the borrower. With a “no out of pocket closing cost” loan, the lender still charges the borrower ALL of the standard closing costs (and points in many cases); the lender, however, increased the loan amount by enough to cover all of those costs so the borrower does not have to pay them “out of pocket” at close.

“No Cost” vs. “No Points/No Fees”

Many lenders quote “no points and no fees” loans, when it really only means no lender fees (“big banks” are notorious for this). Borrowers still have to pay for their appraisal fee, escrow fees, title insurance fees, notary fees, etc. These fees can easily add up to several thousand dollars, making “no fees” quotes very misleading.

Quoting Non-Existent Rates

Some lenders quote rates associated with very short-term lock periods (under 7 days for example) that WILL only be available once a loan is fully approved. So, if rates increase between the date the loan is submitted and the date the loan is approved, the borrower is out of luck. Similarly, many lenders also underquote rates during a borrower’s pre-approval stage, knowing they will not be held accountable to that rate because the borrower is usually weeks or even months away from going into contract – when the actual rate lock will be necessary and the loan officer can then say: “oooh – sorry dude, rates have gone way up…”

Quoting Without A Full Scenario (credit score, LTV, property type)

This is a painfully common trick, too. There are as many as 12 factors that affect every borrower’s individual interest rate, as set out in this blog. Some loan officers purposely misquote before knowing all of these factors in an effort to reel in borrowers, knowing that the actual interest will likely be higher once all of the factors are known. The loan officers simply hope they can convince the borrowers that the mistake was innocent and that the borrowers will not want to endure the time or cost (especially if they pay for an appraisal) that going to another lender might entail.

Manipulating Annual  Percentage Rates (APRs) and Closing Costs

In this blog called 5 Misleading Closing Cost Tricks Big Banks Play, I illuminate a lot of closing cost tricks lenders play.. These tricks include understating prepaid interest (which makes APRs artificially low), property taxes, and hazard insurance. Lenders also sometimes understate 3rd party fees and eliminate “owner’s title insurance” altogether.

What should borrowers do to avoid these tricks?

They should only use lenders with stellar online reputations and reviews; make sure they are getting quoted rates that can actually be locked, and go over their Loan Estimates with a fine-toothed comb.

 From Kristin: Give me a call, and I’ll refer you to a reputable lender…like JVM! It is also hard to compare lenders because of everything noted above. If you have a bad lender the whole transaction can go south, so what I look for in lenders are ones that provide a fully underwritten approval or a DU (desktop underwritten) and ones that I don’t have hiccups with, they consistently perform and finally ones that I know are honest about the rates they are quoting.

How low can rates go?

Jay Vorhees at JVM Lending recently shared a great blog, which I have posted in its entirety below. As usual, I’ve added my two cents to the topic at the end. Hope you enjoy!

One of the most interesting aspects of the COVID-19 crisis is its effect on interest rates. In “normal” times, mortgage rates correlate closely with the 10 Year Treasury Bond. In other words, when the 10 Year moves higher, so do mortgage rates and vice versa.

Also, “the spread,” or the difference between the 10 Year Yield and mortgage rates in normal times averages about 1.5%, meaning the average mortgage rate is usually about 1.5% higher than the 10 Year Yield. Since the COVID-19 crisis started, however, the “normal” correlation and spread have disappeared.

10 Year Treasury Yields have plummeted much farther and faster than mortgage rates. In addition, mortgage rates don’t always move in conjunction with the 10 Year, and the “spread” between the 10 Year and the average 30-year mortgage rate has jumped to over 2.6%!

Mortgage rates remain higher than expected for a few reasons that I have illuminated many times. One reason is that lenders could not handle the onslaught of refi volume if they lowered rates any more. But the important reason has to do with risk. Mortgages are much riskier now because of unemployment, forbearance, and liquidity concerns; higher mortgage rates simply reflect that risk.

HOW LOW WILL RATES GO?

If the market returns to “normal;” if the 10 Year remains as low as it is now (around 0.6%+); and if the “spread” between the 10 Year and mortgage rates drops back to the 1.5% range, we could see 30-year mortgage rates drop another 1%!

Yes, that means 30-year mortgage rates as low as 2%!

SHOULD BORROWERS WAIT TO REFINANCE?

Absolutely not, and this is why.

First and foremost, the above scenario requires a lot of major “ifs.” And in this extremely volatile economy, anything could happen to derail the downward rate spiral, including inflation, new regulations or government actions, less competition in the market, renewed liquidity crises, and/or a faster than expected economic rebound.

Additional reasons to refinance now rather than waiting include: (1) most refinances are “no cost” so borrowers can simply refinance again if rates fall further; (2) borrowers can save hundreds of dollars per month by refinancing now at no cost, so why defer the savings? And (3) refinancing is relatively painless now with all of the new technology in place, so refinancing again should not be a concern.

This has been our mantra for years and it bears repeating – borrowers who wait for pristine market conditions (with respect to both housing prices and interest rates) often get burned. And that is because in this world of extreme volatility, nobody really has a clue what will happen.

Kristin’s take: I have had many conversations with buyers who are wanting to “wait and see,” and many keep asking if prices have come down. Prices have not come down (with the exception of the luxury market) and we are currently seeing multiple offers or properties pending in 5 days, especially in the entry-level market. Of course, it depends on the home: is it updated? Is it priced at fair market value or lower? And so on. I believe the window to negotiate or get a great deal was within the first 6 weeks of our shelter-in-place because there was so much unknown. For those who had a higher level of risk tolerance or just needed to buy a home, I believe hindsight will show they got a deal (comparatively).

Qualifying for a loan after returning to work

Jay Vorhees at JVM Lending has shared another great blog, which I will share below. I did not include the last section, which is not applicable to my clientele, but you can read the entire thing in the link above. Look for my input at the bottom. As always, I welcome your feedback on this topic!

Many people are wondering how soon laid off and furloughed borrowers will qualify for mortgage financing once they return to work.

Loan Agreement Signature - Free image on Pixabay

Employment Gap Under Six Months

If the layoff or furlough lasts less than six months, lenders will be able to fund most loans as soon as borrowers return to work (for conforming, FHA, and VA loans). Some jumbo lenders, however, may require 30 days of job-seasoning before they will fund.

Employment Gap Over Six Months – Returning to Same Job/Industry

If a layoff lasts more than six months, things get more complicated. If borrowers return to the same job or a similar job in the same industry, they will be able to qualify for conforming (Fannie Mae/Freddie Mac) financing 30 days after they return to work, in most cases, with 30 days’ worth of paystubs. FHA and jumbo borrowers may require six months of job-seasoning, however.

New Job/New Industry

If laid off borrowers find new jobs in new industries, they will have to “season” their new jobs for six months in most cases (and up to two years in some cases) before they will qualify for any type of loan. The exception to this rule is for borrowers who recently graduated from college or any type of professional, training, or graduate program that relates to the borrower’s field in some way. Recent grads can usually qualify for financing as soon as 30 days after starting a new job.

Kristin’s Two Cents: Another topic that has come up is forbearance -a creditor’s temporary forgiveness of debt (i.e. to postpone your payment). Many think, “Hey, why not take advantage of not having to pay my mortgage for a few months?” even if they can, because there is no harm. Well, it will impair your credit (most will report it, you will be required to pay it back once the period is over – and with rates dropping, you won’t be able to refinance for one year after you have fully paid back the forbearance. Do you want to miss that opportunity? Click for more information about forbearance.

Fed Rate Cuts Don’t Mean Mortgage Rate Cuts!

NOTE: We will be moving to one post a week (on Wednesday’s) until further notice since we are under lockdown here in Contra Costa County and I can’t go out and explore!

My friend Jay Vorhees at JVM Lending has an interesting take on the latest interest rate cuts by the Fed. Even since he’s written this, the Fed has made yet another cut (because of the government’s response to coronavirus killing the stock market in addition to the Saudi’s dropping the barrel prices), so I’ll try my best to tie the two together at the bottom and make sense of all this:

We were asked a variance of this question over and over yesterday: “I heard that the Fed cut the rate by 1/2 percent; can I lower my mortgage rate by 1/2 percent?” We would respond by explaining that the “Fed Funds Rate” often does not correlate to mortgage rates for a variety of reasons. I touch on this often because the confusion surfaces every time the Fed cuts rates.

When the Fed makes a rate cut, it is to the short-term “Fed Funds Rate,” which does not always impact long-term mortgage rates in the way that most consumers might expect. I blogged about this as recently as August, but here is a brief summary of why mortgage rates not only don’t always correlate to Fed rate cuts, but often go up after the Fed cuts rates:

The “markets” anticipated the rate cut and already adjusted for it. Traders and investors analyze polls, data, and Fed comments to very effectively anticipate changes and the Fed Funds Rate and the markets often adjust long before the rate cuts take place. As a result, very little happens when the Fed Funds Rate is actually cut (or increased).

Short-term rates don’t always affect long-term rates. The Fed is only reducing the Fed Funds Rate, or the rate banks charge each other for overnight loans. This is a very short-term rate and short-term rates don’t always affect long-term (mortgage) rates.

Many factors influence long-term rates besides the Fed, and below are just a few. These factors include economic data; inflation signals; geopolitical crises; and the demand for mortgage bonds. SO WHAT DID RATES DO AFTER THE FED CUT RATES? Rates were about the same after the rate cut as they were the day before.


One day later – in a shocking and surprise weekend move, the Fed cut the Fed Funds Rate to 0% on Monday. See above as to why it might not move mortgage rates. But, the Fed also committed to $500 billion of treasury bond purchases and $200 billion of mortgage-backed security purchases.

This renewed “Quantitative Easing” did push rates down slightly but that didn’t last, as the market is all over the place yesterday and probably today and extremely volatile.

MORTGAGE RATES BARELY MOVE; CAPACITY ISSUES

Despite the massive Fed intervention, mortgage rates barely moved. The reason is capacity.

There are $11 trillion in outstanding mortgages – give or take. The industry is capable of funding about $2 to $3 trillion per year – at most.

When borrowers with $5 trillion worth of mortgages want to refinance over the course of a few months, the industry simply can’t handle the volume.

And – as a result, rates remain on the higher side and are still over 1/2 a percent higher than where they were 10 days ago. The Feds’ rate cut is actually getting a lot of criticism because it will do so little to stimulate economic activity (travel, major events, supply chain issues) offset by the coronavirus concerns. It also leaves the Fed nowhere to go if things get worse. We are in uncharted waters; welcome to the new normal. At the end of the day when this settles, rates will still be low and we may see a listing and buying spree due to the sheltering in place.

Stay safe and healthy my friends!

GTK when selling or buying a home!

JVM Lending always gives me great ideas to comment on for real estate. One of their recent blogs featured two reminders. These struck me as very important to write about if you are thinking about selling or buying a home. Here they are, verbatim:

Seller Rent Backs: Sellers can rent back a property for 59 days after purchase. Rent Backs are limited to 59 days because the owner-occupant-buyers are required to take possession within 60 days of close, or the property will not be considered “owner occupied” (and thus subject to inferior investment property financing rules).

In our current housing market with a shortage of homes for sale, this helps a seller put their house on the market, get an offer, and then find a place to buy. Most sellers need to sell and have the money in hand before they can buy the next home

Max Number of Financed Properties: Some jumbo lenders allow borrowers to have no more than FOUR financed properties. Fannie Mae limits the number to TEN if a buyer is purchasing a second home or an investment property. Fannie and some jumbo lenders allow for an unlimited number of financed properties if a buyer is purchasing an owner-occupied primary residence.

This is really a reminder for investors. It is always best to leverage a home with a loan versus paying cash, even if you plan on flipping it. Many investors pay cash for homes they will flip within a few months with hard money loans, which have a very high interest rate because of the above rule. And oftentimes the houses they are purchasing would not qualify for a regular loan. However, if you just own a lot of homes, this is good to know -or, as the title indicates, GTK!

No lender fees and lender credits = higher rates; no free lunches

We’re back with another Jay Vorhees classic from his JVM Lending blog! This time, we’re talking about lender fees and credits. Read on to get Jay’s perspective, and then look for my input at the bottom:

We recently had a Texas borrower almost leave us for a competitor that was offering “no lender fees, no appraisal fee, and a small credit for closing costs.” Fortunately, though, the borrower sent us the “Loan Estimate” from the competitor and we were able to see that the competitor was charging a higher rate.

Image result for lender fees

In response, we easily matched the credit (and then some) and the interest rate, without giving up anything, of course, because we make more money when we sell loans with higher rates. This simply illustrates something I blog about often – there are no free lunches.

A lot of lenders use reduced fees or closing-cost credits to attract buyers, but those reduced fees and credits invariably come with higher rates.

Builder Exception

The only exception to this rule has to do with some of the offerings from builder-owned mortgage companies. Because builders want to control the process so badly, because they want to make 100$ sure all buyers are 100% qualified, and because they want to ensure they close on time (to maintain cash flow, bonuses, etc.), they sometimes give away the farm with their financing packages.

There is, however, a builder caveat too, and this is something my appraiser-friends point out often. Builders sometimes also offer very competitive financing solely to entice buyers into paying above-market prices for their properties.

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Knowledge is power and the process can already be overwhelming, but the more you know and trust who you work with, the better off you will be!