Real estate Newsletter

When an Adjustable Rate Mortgage Makes Sense

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When an Adjustable-Rate Mortgage Makes Sense

Locking in a historically low fixed rate might feel safer. But borrowers can save big on ARMs right now.

By Janice Revell, contributor, Fortune, September 3, 2012

FORTUNE — During the housing meltdown, adjustable-rate mortgages were vilified as a hallmark of irresponsible borrowing. Recently, though, they’ve been making a comeback, especially among affluent borrowers. This summer, for instance, Facebook (FB) CEO Mark Zuckerberg reportedly financed his home using an ARM with a rate of just 1.05%. Most borrowers can’t snag a rate remotely close to that. But many would still do well to consider an ARM right now — even if conventional wisdom says otherwise.

An adjustable-rate mortgage offers an introductory period in which you pay a lower interest rate than with a fixed loan; after that, the rate can fluctuate up or down. With rates near historic lows, the safety of locking in a fixed rate appeals to many borrowers. But they’re paying a premium for that security: The spread between rates on 30-year fixed-rate mortgages and the most popular ARMs now stands at about one percentage point, more than double the difference just five years ago.

That means that homeowners who are planning to either move or pay off their mortgage over the next few years can save big with an ARM. Take, for example, a homebuyer who plans to pay down an $800,000 mortgage. Currently the rate on the fixed portion of a 5/1 ARM — which is guaranteed for the first five years and adjustable once a year thereafter — is around 3%. In a typical 5/1 ARM, the maximum increase during the sixth year is five percentage points above the initial rate. Alternatively, our hypothetical borrower could opt for a 30-year mortgage that locks in an annual rate of about 4%.
MORE: Mortgage applications up, mortgages not so much

Fortune asked Greg McBride, an analyst with mortgage tracker Bankrate.com, to run the numbers on both options. To be conservative, McBride assumed the worst-case scenario with the ARM — one in which the rate shoots up to the 8% maximum in year six. Here’s what would happen: For the first five years, our homebuyer’s monthly payments on the ARM would be $3,373 — or $446 less than what he’d pay under the 30-year fixed mortgage. Over that period he’d save a total of $39,000 in interest and would amass $12,000 more in equity. After the initial five years the monthly payments under the ARM would balloon to $5,490. But it’s not until the seventh year of the loan that the savings garnered by the lower ARM payments during the first five years would be wiped out entirely. (This doesn’t factor in the mortgage-interest tax deduction, which would be greater on the fixed-rate loan for the first few years but higher on the ARM thereafter.)

If after five years, however, the rate on the ARM increased at a more moderate pace of one percentage point a year, the initial savings wouldn’t be eclipsed by the fixed rate until the 10th year of the loan. The bottom line: Unless you definitely plan to stay in your mortgage over the long term, it might pay to adjust your thinking.

–A former compensation consultant, Janice Revell has been writing about personal finance since 2000.

Downsizing the Jumbo Loan

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Downsizing the Jumbo Loan

By Vickie Elmer in the New York Times

WITH interest rates still low, many homeowners have been saying goodbye to their “jumbo” mortgages and refinancing into conventional loans. They may need to write sizable checks at the closing, but in the end they are likely to reduce their monthly payments while improving their cash flow.

“It’s an opportunity not to be missed,” said Melissa Cohn, the chief executive of the Manhattan Mortgage Company, adding that her customers like the idea of locking in a lower rate.

Jumbo mortgages, also called nonconforming loans, exceed $625,500 in high-cost areas like New York. Unlike conforming mortgages, they do not meet specific guidelines of Fannie Mae and Freddie Mac, which repurchase loans and resell them to investors. Because lenders assume more risk, interest rates for nonconforming loans are higher than for conforming.

These days the spread between conventional and non-conventional is 0.5 percentage points, on average, according to data from HSH.com, though if the jumbo loan was taken out during the financial crisis of 2008, it could have been up to 1.8 percentage points more.

To refinance out of a jumbo loan, most borrowers will have to put in extra money — sometimes $100,000 or more — to decrease the balance to below $625,500, or $417,000 in other parts of the country. Some, though, may see this as a sound investment.

“A lot of homeowners are sitting on cash, concerned about the stock market,” said Bob Moulton, the president of the Americana Mortgage Group in Manhasset, N.Y. “They get 3.5 percent-plus by putting it into their home,” he added, referring to the prevailing rate nationwide on a 30-year fixed-rate loan.

“If you don’t have a need for the cash — if your cash position is O.K. — then that’s the right decision,” he added.

Mr. Moulton says he has had several customers eager to buy down their mortgage balances. “When people are to the cusp,” he said, referring to borrowers’ balances near the cutoff for conventional loans, “I always bring that to their attention.”

Cash-in refinancing has remained popular as homeowners work to cut their debt levels. Some 23 percent of homeowners refinancing in the second quarter decreased their mortgage balances, according to Freddie Mac; in the fourth quarter of last year it was 47 percent. The agency provides a guide for consumers on its Web site.

Sheila Walker Hartwell, the owner of Hartwell Planning, a financial planner based in Manhattan, says homeowners with a good financial foundation could greatly benefit by moving to a conventional mortgage from a jumbo. She provided one scenario in which a couple pays in $75,000 when they refinance a $700,000 mortgage, and save at least $5,900 a year on interest based on a 0.33 percentage point reduction in their interest rate. They would need to earn almost 7.5 percent a year on that money to net the same amount from savings or investments, she said.

But Ms. Hartwell cautioned that when homeowners pay into their mortgages to build up equity, “the money’s not liquid,” or readily available. She said that she would prefer that her clients develop a savings and spending plan and make sure that they have a “contingency fund” with at least six months’ and sometimes up to 12 months of living expenses. (The 12-month fund is worthwhile when the economy is uncertain or if your job or industry seems less than solid, she said.) It’s not a good idea to deplete those funds to pay down your mortgage, even if the funds are earning next to nothing, Ms. Hartwell said.

Especially, Mr. Moulton added, “if they anticipate big expenses — college expenses, home improvement — or have other debts at a higher interest rate. Then they don’t want to do this.”

Another drawback, Ms. Hartwell said: Unless the length of a loan is reduced, each time you refinance, the mortgage starts again at the beginning and initial payments are almost all interest.

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In Most of US, Buying Beats Renting After Only Three Years

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In Most of U.S., Buying Beats Renting After Only Three Years

In Many Cities in Florida, Arizona, Pennsylvania and Michigan, Owning Outweighs Renting After Only One Year, According to Zillow® Analysis

SEATTLE, Aug. 2, 2012 /PRNewswire/ — For most buyers who intend to live in a home for at least three years, buying is a better financial decision than renting, according to a new analysis by Zillow.

Zillow analyzed the “breakeven horizon” in more than 200 metros and 7,500 U.S. cities to determine how many years it would take before owning a home becomes more financially advantageous than renting the same home. In more than three-quarters (75 percent) of metros analyzed, a homeowner would break even after three years or less of owning a home.

All possible costs associated with buying and renting were incorporated into the analysis, including down payment, mortgage and rental payments, transaction costs, property taxes, utilities, maintenance costs, tax deductions and opportunity costs, while adjusting for inflation and forecasted home value and rental price appreciation[i].

In some metro areas where home values fell dramatically during the housing recession, homebuyers break even after less than two years of owning a home.

The Miami-Ft. Lauderdale metro is among the most favorable for buying, with homeowners breaking even after only 1.6 years of living in the home. However, in the San Jose metro, where home values are among the highest in the nation, a buyer must commit to living in their home for 8.3 years before they will break even.

However, within metros, there is often a sizeable variance from one community to the next. For example, in Mill Valley, Calif., just north of San Francisco, a homeowner can break even after 8.8 years, while in similarly-priced Menlo Park, south of the city, they must live in the home for 14.1 years.

“Across most of the country, historic levels of affordability make buying a home a better decision than ever, especially considering rents have risen more than 5 percent over the past year,” said Stan Humphries, Zillow Chief Economist. “This is the first analysis of metros and cities that presents the buy versus rent decision in an intuitive way, by telling consumers how long they must live in the home before buying breaks even with renting financially. It’s much more understandable, and therefore useful, than the abstract notion of a simple ratio of prices to rents. If we want consumers to act on market information, we have to align it with how they think about the issue and make it straight-forward to grasp.”

Metros where it takes more than five years to reach the breakeven point accounted for 7 percent of the 224 metros covered by the report. The metros with the longest breakeven horizons are San Jose, Calif. (8.3 years), Oak Harbor, Wash. (7.2 years), Santa Cruz, Calif. (7.1 years), San Luis Obispo, Calif. (6.3 years) and Salinas, Calif. (6.3 years). The metros with the shortest breakeven horizon are Memphis, Tenn., Miami-Ft. Lauderdale, Fla., Salisbury, Md., Red Bluff, Calif., Mobile, Ala., Tampa, Fla. and Fernley, Nev. (all tied at 1.6 years).

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Consumer Protection Bureau to Propose New Federal Mortgage Rules

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Consumer Protection Bureau to Propose New Federal Mortgage Rules

New federal mortgage rules to be proposed by the Consumer Financial Protection Bureau are designed to prevent a repeat of the foreclosure crisis.

By Jim Puzzanghera, Los Angeles Times, August 9, 2012, 9:00 p.m.

WASHINGTON — New federal rules would require banks to provide homeowners with better information about their mortgages to avoid costly surprises, such as sharp interest rate increases, and provide better service to help them avoid foreclosure.

The rules, to be proposed Friday by the Consumer Financial Protection Bureau, are designed to prevent a repeat of the foreclosure crisis. They track an outline released in April by the agency, which was created in 2010 in part to help protect borrowers.

The public will have two months to comment on rules, and the consumer bureau aims to make them final in January.

“From processing payments to evaluating struggling homeowners and helping them avoid foreclosures, the bottom line is to treat consumers fairly by preventing surprises and runarounds,” said Richard Cordray, the bureau’s director.

Some of the rules mirror requirements agreed to by large mortgage servicers, including Bank of America Corp., JPMorgan Chase & Co. and Wells Fargo & Co., as part of a $25-billion settlement with federal and state officials over foreclosure abuses.
The bureau’s proposed rules would apply to all mortgage servicers, with some exceptions for small companies, and focus on two areas: providing clear and timely information for homeowners about their loans and helping them avoid bureaucratic hassles.

Servicers would have to send homeowners a clear monthly statement with a breakdown of payment information and due dates; provide a warning 210 to 240 days before the first interest rate change on an adjustable-rate mortgage, along with an estimate of the new rate; give advance notice of plans to charge homeowners for property insurance if their policies lapse; and make a good-faith effort to contact borrowers who fall behind on their payments to tell them of ways to avoid foreclosure.

Foreclosure prevention is the focus of another set of proposed rules. They include acknowledging a request to fix errors or other complaints within five days, then conducting an investigation and providing those results in 30 to 45 days.

The rules also would require a prompt review of applications for loan modifications and direct access to mortgage servicers’ employees to better help borrowers.

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Home Sales Climb 2.3 in July

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Home Sales Climb 2.3% in July

NEW YORK (CNNMoney) — Americans seem to be stepping up their homebuying while they can still find bargains.

July home sales rose 2.3% from June, and 10.4% from a year earlier, to an annual rate of 4.47 million, according to a report from the National Association of Realtors.

The market has been bolstered by low home prices and mortgage rates, according to Lawrence Yun, NAR’s chief economist, but the inability of some potential buyers to obtain financing has cut into sales.

“The market is constrained by tight lending standards and shrinking inventory supplies, so housing could easily be much stronger without these frictions,” he said.

Given the country’s population growth and demographics, Yun said home sales are still below what he would consider normal, which would be between 5 million and 5.5 million.

Elizabeth Ptacek, a senior real estate analyst for KeyBank, said economic factors still limit home sales.

“Mortgages are available if people have good credit and enough cash for a down payment,” she said. “But with the [slow] job growth and consumer confidence still low, even if you can get a mortgage, you have to think twice about buying.”

July sales came in slightly below forecasts from a panel of industry experts surveyed by Briefing.com, which had predicted an annual sales rate of 4.57 million.

Related: Best Places to Live where homes are affordable.

Stuart Hoffman, chief economist for PNC Financial, said the psychology of the market has turned. With mortgage rates coming off of historic lows and home prices on the rise, homebuyers are more likely to think that prices will rise, making them more inclined to buy.

NAR reported a rise in the median home price of 9.6% in July, compared with a year earlier, to $187,300. Listing inventory has fallen to a 6.5 month supply, down 24% from a year earlier.

NAR President Moe Veissi stressed that pricing homes at the right level is key.

“Correctly priced homes are selling quickly these days,” he said. “Fully one-third of homes purchased in July were on the market for less than a month, and only 21% were on the market for six months or longer.”

Mortgage Delinquencies Rose in Second Quarter, Trade Group Says

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Mortgage Delinquencies Rose in Second Quarter, Trade Group Says

The Mortgage Bankers Assn. says home loans with at least one missed payment but not yet in foreclosure rose to 7.58% in the second quarter from 7.4% in the first quarter.

The nation’s slowly improving housing market hit another bump last quarter, with more borrowers missing payments amid continued high unemployment, a report from a trade group shows.

The Mortgage Bankers Assn., in a quarterly delinquency survey issued Thursday, said home loans with at least one missed payment but not yet in foreclosure increased in the second quarter to 7.58% of all mortgages. That’s up slightly from 7.4% in the first quarter.

A separate survey from foreclosure listing firm RealtyTrac Inc. said the number of homes going into foreclosure rose 6% in July compared with a year earlier, the third straight month of year-over-year increases.

That trend reflected the fact that last year many foreclosures were on hold as banks focused on cleaning up flawed processes for seizing homes after the “robo-signing” scandals.

The Mortgage Bankers Assn. survey said the quarter-to-quarter increase in delinquencies appeared to result instead from a fundamental change: The slowing of the economy’s recovery during the first half of the year.

Although in no way reversing the longer-term trend of declining delinquencies — the missed-payment rate was 8.44% a year earlier — the increase raised eyebrows at the lender group.

“It’s not the direction you would want to see,” Mortgage Bankers Assn. economist Michael Fratantoni said in an interview. The key determinant, he said, will be the job market, which has shown signs of improvement lately.

In a brighter sign, the percentage of loans in all stages of the foreclosure process, or at least 90 days past due, dropped to 7.31% in the second quarter from 7.44% in the first quarter and 7.85% a year earlier.

The slow decline in this “seriously delinquent” category shows that lenders are gradually working through the huge backlog of soured loans made during the housing boom, Fratantoni said.

Federal Housing Administration loans entering foreclosure were a notable exception. The percentage of loans in foreclosure soared to 4.23% in the second quarter to a record high. Foreclosure starts for FHA loans also increased to 1.53%, also a record high.

The increase was due to major lenders, particularly Bank of America Corp., starting up foreclosures on loans that had been delinquent but held up because of to the federal government’s investigations into faulty foreclosure practices, said Shaun Donovan, secretary of Housing and Urban Development, which oversees the FHA.

The report confirmed signs that California, once the poster child for collapsing housing markets, is generally in recovery mode.

Across the nation, 4.27% of all home loans were in the foreclosure process at the end of the second quarter, the home lenders group said. In California, 3.1% of residential mortgages were in foreclosure.

That compared with 13.7% in Florida, 7.7% in New Jersey and 6.5% in New York, all states in which foreclosures are processed through the courts, resulting in huge legal entanglements. Most foreclosures in California are processed more quickly without judicial reviews.

More struggling homeowners are finding it possible to sell their homes rather than see them taken away in foreclosures as the prices slowly increase.

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California Home Prices near 4-Year High

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California Home Prices near 4-Year High

August 20th, 2012, 1:00 am • • posted by MARILYN KALFUS, THE ORANGE COUNTY REGISTER

California home sale prices came close to a 4-year high in July, with the pace of sales year-over-year growing for the fourth month in a row, the California Association of Realtors says.

“It’s hard to generalize the state of California’s housing market because the markets are so diverse and are performing so differently,” LeFrancis Arnold, the association’s president, said.

“REO-dominated areas (of homes seized by banks) such as those in the Inland Empire and Central Valley are experiencing sales constraints due to an extreme shortage of available homes,” he said. “On the other hand, a robust economy in the San Francisco Bay area and a relatively larger inventory at higher price levels is helping to fuel sales and prices.”

The July median price was the highest since August 2008, when it was at $352,730. July also marked the 5th straight month that the state’s median home price saw both month-over-month and year-over-year gains

The report says:

  • The median price of an existing single-family home (or price at the midpoint of all sales) was $333,860 last month, up 4.2% from $320,540 in June and nearly 13% from the state’s July 2011 median of $296,160. During the housing crash, the state’s median price got as low as $245,230.
  • July sales rose to an annualized pace of 529,230 homes – that is, homes that would sell if transactions were to occur for a year at July’s sales pace. That’s an increase of 15.3 percent over the pace in July 2011 – 459,140 homes.
  • California’s housing inventory was pretty much flat in July, with the index of existing, single-family homes at 3.4 months compared to 3.5 months in June. However, July’s inventory was down from a revised 5.6-month supply in July 2011. The index indicates the number of months needed to sell the supply of homes on the market at the current sales rate. A seven-month “inventory” of homes for sale is considered normal.

In Orange County, prices slipped slightly, while sales had a dramatic increase. The association reported:

  • • The median house price was $551,160 in July, barely down from $551,510 the year before and down about 3% from June. The low since the housing crash was $442,170 in January 2009, CAR spokesperson Lotus Lou said in an interview.
  • House sales in O.C. were up 32.1% from year-ago levels.
  • The county’s “inventory” of homes for sale was at a 4-month supply, down a bit from 4.2 months in June and plunging from 7.5 months in July 2011

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CoreLogic June Home Price Index Rises 2.5 Percent

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CoreLogic June Home Price Index Rises 2.5 Percent—
Representing Fourth Consecutive Year-Over-Year Increase

CoreLogic® (NYSE: CLGX), a leading provider of information, analytics and business services, today released its June Home Price Index (HPI®) report. Home prices nationwide, including distressed sales, increased on a year-over-year basis by 2.5 percent in June 2012 compared to June 2011. On a month-over-month basis, including distressed sales, home prices increased by 1.3 percent in June 2012 compared to May 2012*. The June 2012 figures mark the fourth consecutive increase in home prices nationally on both a year-over-year and month-over-month basis.

Excluding distressed sales, home prices nationwide increased on a year-over-year basis by 3.2 percent in June 2012 compared to June 2011. On a month-over-month basis excluding distressed sales, home prices increased 2.0 percent in June 2012 compared to May 2012, the fifth consecutive month-over-month increase. Distressed sales include short sales and real estate owned (REO) transactions.

The CoreLogic Pending HPI indicates that July home prices, including distressed sales, will rise by at least 0.4 percent on a month-over-month basis from June 2012 and by 2.0 percent on a year-over-year basis from July 2011. Excluding distressed sales, July house prices are also poised to rise by 1.4 percent month-over-month from June 2012 and by 4.3 percent year-over-year from July 2011. The CoreLogic Pending HPI is a new and exclusive metric that provides the most current indication of trends in home prices. It is based on Multiple Listing Service (MLS) data that measure price changes in the most recent month.

“Home prices are responding positively to reductions in both visible and shadow inventory over the past year,” said Mark Fleming, chief economist for CoreLogic. “This trend is a bright spot because the decline in shadow inventory translates to fewer distressed sales, which helps sustain price appreciation.”
“At the halfway point, 2012 is increasingly looking like the year that the residential housing market may have turned the corner,” said Anand Nallathambi, president and CEO of CoreLogic. “While first-half gains have given way to second-half declines over the past three years, we see encouraging signs that modest price gains are supportable across the country in the second-half of 2012.”

Highlights as of June 2012:

  • Including distressed sales, the five states with the highest appreciation were: Arizona (+13.8 percent), Idaho (10.4 percent), South Dakota (+10.1 percent), Utah (+8.3 percent) and Wyoming (+7.7 percent).
  • Including distressed sales, the five states with the greatest depreciation were: Alabama (-4.8 percent), Connecticut (-4.0 percent), Illinois (-3.4 percent), Georgia (-2.9 percent) and Delaware (-2.8 percent).
  • Excluding distressed sales, the five states with the highest appreciation were: South Dakota (+10.2 percent), Utah (+9.1 percent), Montana (+8.7 percent), Arizona (+8.7 percent) and Wyoming (+6.9 percent).
  • Excluding distressed sales, the five states with the greatest depreciation were: Delaware (-3.6 percent), Alabama (-3.1 percent), Connecticut (-2.1 percent), New Jersey (-0.9 percent) and Kentucky (-0.4 percent).
  • Including distressed transactions, the peak-to-current change in the national HPI (from April 2006 to June 2012) was -28.8 percent. Excluding distressed transactions, the peak-to-current change in the HPI for the same period was -21.3 percent.
  • The five states with the largest peak-to-current declines including distressed transactions are Nevada (-57.1 percent), Florida (-45.3 percent), Arizona (-44.1 percent), California (-39.2 percent) and Michigan (-39.0 percent).
  • Of the top 100 Core Based Statistical Areas (CBSAs) measured by population, 27 are showing year-over-year declines in June, five fewer than in May.

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HARP Refinances Continue Surge in First Half of 2012

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HARP Refinances Continue Surge in First Half of 2012

One in Three Refinances Were Through HARP in June

Washington, D.C. –

The Federal Housing Finance Agency (FHFA) today released its June Refinance Report, which shows that one of every three refinances through Fannie Mae and Freddie Mac were made through the Home Affordable Refinance Program (HARP), the highest number since the inception of the program in April 2009. The continued increase in HARP volume is attributed to record-low mortgage rates and program enhancements announced last fall including removal of the loan-to-value (LTV) ceiling for borrowers who refinance into fixed-rate loans and the elimination or lowering of fees for certain borrowers.

Also in the report:

  • Through June 2012, Fannie Mae and Freddie Mac refinanced 422,969 loans through HARP, more than all HARP refinances – 400,024 – last year.
  • HARP refinances for loans with LTV greater than 125 percent surged in June to more than 40 percent of HARP volume as lenders began to sell Fannie Mae and Freddie Mac securities containing these loans June 1.
  • More than two-thirds of borrowers in states hard-hit by the housing downturn – Nevada, Arizona and Florida – refinanced through HARP in June, compared with 33 percent nationwide.
  • In Nevada, Arizona and Florida, underwater borrowers (with LTV greater than 105 percent) represented more than 80 percent of HARP volume in June.
  • Since 2009, Fannie Mae and Freddie Mac refinanced more than 2.2 million loans through their existing programs and more than 1.4 million loans through HARP.

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Index Spotlights 80 Improving Housing Markets in August

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Index Spotlights 80 Improving Housing Markets in August

August 6, 2012 – A total of 80 metropolitan statistical areas across 32 states and the District of Columbia were listed as improving housing markets on the National Association of Home Builders/First American Improving Markets Index (IMI) for August, released today. This included 75 markets that retained their places on the list along with five new ones, while nine areas fell from the list due primarily to slight movements in house prices.

The index identifies metropolitan areas that have shown improvement from their respective troughs in housing permits, employment and house prices for at least six consecutive months. The five metros that were added to the list this month include Miami and Palm Bay, Fla.; Hinesville, Ga.; Terre Haute, Ind.; and Lubbock, Texas.

“The list of improving housing markets in August includes metros across every region of the country, all of which have distinctly different characteristics in terms of their economic and employment bases as well as other factors,” noted Barry Rutenberg, chairman of the National Association of Home Builders (NAHB) and a home builder from Gainesville, Fla. “One thing that most markets have in common, however, is the tight lending environment for both builders and buyers that continues to drag on their positive momentum.”

“The fact that we continue to see a strong core of metros showing up on the improving list each month adds to the growing evidence that the emerging housing recovery has a solid foundation on which to build as housing returns to its traditional role of driving economic growth,” observed NAHB Chief Economist David Crowe.

“With nearly one quarter of all U.S. metros currently designated as improving housing markets, there is growing recognition among consumers that now is an opportune time to consider a home purchase,” added Kurt Pfotenhauer, vice chairman at First American Title Insurance Company.

The IMI is designed to track housing markets throughout the country that are showing signs of improving economic health. The index measures three sets of independent monthly data to get a mark on the top improving Metropolitan Statistical Areas. The three indicators that are analyzed are employment growth from the Bureau of Labor Statistics, house price appreciation from Freddie Mac and single-family housing permit growth from the U.S. Census Bureau.

NAHB uses the latest available data from these sources to generate a list of improving markets. A metropolitan area must see improvement in all three measures for at least six months following those measures’ respective troughs before being included on the improving markets list.

A complete list of all 80 metropolitan areas currently on the IMI, and separate breakouts of metros newly added to or dropped from the list in August, is available at nahb.org/imi.

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