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.

Image result for loan

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!

3 reasons to make smaller down payments

My friend Jay Vorhees at JVM Lending put together some thoughts on why you should make smaller down payments. I thought this was an interesting idea, so here is his blog reprinted, with my thoughts at the end! Read on:

We recently had a borrower with ample income and about $70,000 of liquid assets try to squeeze into a $600,000 home with 10% down. She wanted us to put as much down as possible to minimize her housing payment. We instead talked her into putting 3.5% down and using FHA financing for the three reasons discussed below.

Image result for down payment
  1. Pay off consumer debt: When buyers have a lot of consumer debt, we always encourage them to make smaller down payments and then use the remaining cash to pay off consumer debt. The monthly savings from paying off consumer debt almost always far exceed the potential savings from having a smaller mortgage. In addition, mortgage interest rates tend to be much lower than consumer debt interest rates and most mortgage interest is tax-deductible, while consumer debt is not.
  2. Save cash for the “unexpected”: Many buyers vastly underestimate the amount of cash they will need for unanticipated expenses once they buy a home, especially if they had been renting. These costs include moving costs, new furniture needs, new appliances, minor home improvements of all types (window treatments, floor coverings, etc.), higher utility bills, and higher yard and home maintenance costs.
  3. Take advantage of low rates: When rates are this low, it is much more affordable to put less down and to borrow more in any case.

These are good thoughts by Jay. However, a buyer is at a disadvantage if multiple offers are made. It is more likely, in that scenario, that you will lose out to someone with more money down and they may remove some or all of their contingencies. Each situation is unique and all options should be discussed so a buyer understands the pros and cons and can make an informed decision!

People staying in homes much longer – is this a problem?

My friend Jay Vorhees at JVM Lending recently posted a blog about how people staying in homes longer creates an inventory shortage. Here are his thoughts below.

“Fewer homes for sale is a big reason why even ultralow mortgage rates, record levels of home equity and a strong job market haven’t jump-started the sluggish housing market.”

Image result for house

The above quote is from this recent WSJ article – People Are Staying In Their Homes Longer – A Big Reason for Slower Sales.

According to the article, homeowners are now staying put for an average of 13 years, or 5 years longer than they stayed as recently as 2010. This, of course, puts a huge damper on inventory levels.

Below are several reasons why people remain in their homes longer now:

Baby Boomers are living longer and are much healthier

Because of this, baby boomer-homeowners are less likely to downsize as soon as they would have in years past.

Property tax exemptions

Many homeowners have special property tax exemptions that they cannot take with them when they move, so they stay put in order to preserve them.

Too expensive to move up

Many homeowners who bought years ago and now want to move up cannot afford to do so because there has been so much appreciation in the housing market.

Don’t want to give up low rate

This was not mentioned in the article and it is not as much of a factor now, but it was a significant factor last year when rates were much higher. Many homeowners with very low fixed rates (in the low 3% range) do not want to give them up. And moving when rates are higher forces them to give up their low rates.

Image result for house

Capital gains taxes

This is a much bigger factor than most people realize. The WSJ article uses a Danville, CA couple as an example. They bought their home in 1987 for $440,000 and it is now worth $1.8 million. If they sold, they would have to pay capital gains against almost $1 million of capital gains (after their exemption). If you are single or divorced and have the house then you only get $250k of capital gains write off vs. $500k.

This is an even bigger factor for investors. I recently blogged about my nephew renting a $2 million home for $4,250 per month in San Francisco. That works out to less than a 2.5% return against a $2 million asset. I realize that is over-simplified, as there is much more that goes into a full real estate investment analysis (appreciation, cash out of pocket, debt service, maintenance, depreciation, taxes, etc.) but there are millions of landlords across the country who are sitting on poorly performing properties solely to avoid capital gains taxes. We see this constantly when we are pre-app roving borrowers.

Kristin’s note: The state is trying very hard to figure out our housing shortage by focusing on ADUs – “additional dwelling units,” better known as in-law units. Consistent laws have been made across the state, but, come January, a few of the current laws will be changing to make it even easier for somebody to build an ADU in their backyard. For example, you used to have a parking garage space for the ADU unit and the owner had to occupy at least one of the living spaces. Stay tuned for a future blog about those upcoming changes.

What constitutes a “bedroom?”

Jay Vorhees of JVM Lending raises an important question in a recent blog: what constitutes a “bedroom” in a real estate context? I’ve always told my clients that if it has a closet, it’s a bedroom – but I learned there’s actually a lot more to it! Read on, from Jay:

Image result for bedroom

My wife Heejin spoke in front of a brokerage recently and an agent approached her afterward to complain about a transaction we closed over three years ago. The agent was still upset because the appraisal came in low. We researched the transaction and found out that the county records and the MLS had the bedroom count wrong.

The agent was adamant that the home was a 3-bedroom house, as per county records, but it was actually only a 2-bedroom home, necessitating the use of more similar and lower-priced 2-bedroom comps. The ostensible “third bedroom” was only 42 square feet – far too small to constitute an actual bedroom.

Superstar appraisal-blogger Ryan Lundquist, of course, addressed this issue in one of his excellent blogs – Four Requirements for a Room to Be a Bedroom. Here are a few simplified takeaways (I recommend reading Ryan’s entire blog for more detail):

Image result for bedroom
  1. Entrance/Exit: A bedroom needs to have a door to the main house and a window to the outside.
  2. Ceiling Height: At least 50% of the ceiling needs to be 7 feet high. Hence, a sloping attic ceiling is okay in most cases.
  3. Size: A bedroom needs to be at least 70 square feet, with no side being less than 7 feet. Hence, a 6 by 12-foot room is not a bedroom.
  4. Closets Not Required (Usually): Many agents and buyers mistakenly believe that a “bedroom” must have a closet, but if often depends on local real estate norms, per Ryan. The last point is my own, and not Ryan’s.

County records and MLS info are sometimes incorrect, too. My above story involving the upset agent is a great example. County records say the house has “three bedrooms,” when it definitely only has two.

This is also another reason why we need skilled human beings to appraise homes. AI/computers will believe county records every time, but that is a topic for another blog.

(Kristin’s Thoughts) Another thing to note: if you don’t pull the permits, the tax records won’t reflect the addition of a bedroom, but an appraiser may use it if it is functional as a bedroom.

Way too much concern over credit inquiries

Our friend Jay Vorhees at JVM Lending put forth a good blog recently about credit inquiries. As a member of USAA and Capitol One, I get free credit monitoring, which is a super helpful tool. Read on for more:

Image result for credit scores

Over 500 borrowers come to JVM every month seeking mortgages. And way too many of them are far too concerned about credit inquiries. It is our strongest borrowers who are often the most concerned, which is ironic because they are the least affected by credit inquiries, but also why they have high credit scores.

This is because credit inquiries only affect a strong borrower’s credit score by a few points at most. And even that impact disappears after a few months. It is true that “hard inquiries” remain on a credit report for a few years, but they stop impacting credit scores long before they drop off a credit report.

Further, the credit bureaus or scoring models treat multiple inquiries from different mortgage lenders over a 30-day period as a single inquiry. It is only when borrowers apply for a large number of credit cards or apply for a large amount of credit from different types of credit providers over a short period of time that the scoring models become concerned.

Image result for credit scores

A single inquiry from one mortgage provider will hardly impact a strong borrower’s credit at all. And even if it does, the impact will only be a few points and it will disappear in a few months.

For readers who would like to learn more, Credit Karma has a more detailed discussion about credit inquiries here. As an aside, I also recommend signing up for the Credit Karma App. It is a great way to keep tabs on your credit and credit score. Or, like me open a Capitol One Credit Card (as long as you don’t have too many credit cards already and then you will be able to keep tabs on your credit scores for FREE!

Two Notes:

  1. Your scores from these reports are usually a bit different than the way a lender will see your scores. I recently had a client work to build up his credit to 705, but when they ran his credit for a loan it was in the high $600s.
  2. My girlfriend just went in with her son on an investment property where he will be living in it and they have roommates who will be paying rent (my youngest is one of the renters). She called me to inquire about going FHA as her lender recommended. I was very surprised because she was putting more than 20% down. I told her she shouldn’t be going FHA. Come to find out her son had no credit and thus he had a very low credit score and a lender will always take the lowest of two credit scores. Make sure your kids start to establish credit by having a gas card or a credit card that they pay on time.


Home Sales Fall Despite Falling Rates?

Another great blog from Jay Vorhees at JVM Lending! He asks, with home sales falling despite the rates also falling, whether the end is finally here? “We can only hope,” he quips. Read on for more from Jay, and a bit of insight from yours truly at the end!

Tulip Mania

In the 1630s, the Dutch experienced one of the world’s first major financial bubbles – Tulip Mania. They were all convinced that the price of the exotic (at the time) tulip bulbs would increase forever, not taking into account how easy it was to reproduce them and how the ridiculously high prices were clearly not sustainable.

Everyone (even common laborers) was borrowing money to buy as many tulips as they could, trying to get in on the action. At one point, a single bulb cost as much as some of Amsterdam’s most expensive mansions at the time. Then, it all collapsed. There have been many bubbles since, including the 1929 stock market crash, the dotcom crash of the late 1990s, and most recently – the mortgage meltdown of 2008. All those bubbles were partially driven by easy credit, so every time the Fed lowers rates, I am terrified that it is fostering a new bubble.

Home sales fall in June – despite lower rates, higher wages, and lower unemployment

Image result for housing market slowdown

So, that is why I was actually marginally encouraged to see this recent headline and article in the WSJ: U.S. Home Sales Stumble (in June). “Home sales slumped in June as home prices for major West Coast cities decline for the first time since 2012, ending the spring selling season with a thud.”

This is amazing to me because rates were about 1% lower than where they were the previous June, and everyone thinks rates drive housing prices. But, they clearly don’t. Home sales fell in the face of rising wages and decreasing unemployment too, leaving economists perplexed, as those factors are also supposed to drive prices higher.

Sales are probably falling because borrowers are hitting their affordability limit, and because buyers are acting prudently (unlike prior to 2008). While fewer sales overall are never a good thing, it is a good thing to see a potential bubble start to deflate instead of popping – so YAY! (sort of)

I might add that a huge brokerage we work with in Texas is currently projecting a downturn in the near future, telling agents that they need to trim expenses by 20%. So, it is not just the West Coast experiencing a slowdown. And finally, despite the apparent slowdown, numerous agents we work with are still experiencing record years simply because of their relentless marketing. We too have almost tripled our purchase volume year over year by improving our value props and increasing our marketing efforts.

Takeaways from this blog: This slowdown might be averting another bubble-pop! The Fed can’t stimulate everything with low rates. They might call Japan and ask how their low-rate experiment has gone, as 20 years of near-zero rates have not revived Japan’s economy at all. No matter how soft markets get, the overall market remains huge and business can always be found with stellar value props and very aggressive marketing.

Kristin’s insight: Some houses still have multiple offers, usually ones that are updated, and are priced slightly below market or in a highly desired neighborhood. The rest are sitting longer on the market and may see a price reduction or two as buyers become much more discriminant.