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The Return of Mortgage Insurance

November 2, 2015 By Rick Jarvis

MI. PMI. MIP.

Each of these acronyms refer in some part to the concept of Mortgage Insurance. For the last several years, we stopped using these cryptic terms as we dug ourselves out from under the biggest financial mess the US had experienced in decades.  But now, they are beginning to be whispered once again.  And I believe it is a good thing.

Mortgage Insurance – A Brief Definition

What is mortgage insurance you ask?

Mortgage Insurance
Mortgage Insurance covers losses from foreclosure.

Mortgage insurance, in its simplest form, is the insurance you buy when you get a mortgage where you put down less than 20%. In effect, you are buying an insurance policy on yourself against getting foreclosed upon.

Banks figure that if you put less than 20% down on the purchase of a home, the both the likelihood of foreclosure and the amount of potential loss from the foreclosure increases.  A person who puts 20% of their own cash into the purchase of a home is less likely to accept foreclosure when times get tough.  Likewise, if the borrower loses their job and/or market values shift, someone who owes $200,000 on a home worth $250,000 (20% down) is in far better position to sell their home than someone who owes $225,000 (10% down) or even $242,500 (5% down).  It is hard to disagree with their logic.

What Does MI Actually Insure?

Now what does the MI company insure?  They insure the difference between what the home is sold for and what is owed to the bank (once again, extremely simple definition) when a home is foreclosed upon. If a bank owes $200,000 and the home is sold in foreclosure for $180,000, the MI company would step in and pay the difference of $20,000 to the bank.

Effectively, the MI company is insuring the riskiest portion of the home’s value (the top 20%) and is hyper-sensitive to value shifts. When the market is accelerating rapidly, the MI companies are holding little, if any, risk.  But when markets begin to fall, the risk profile in their insurance portfolio begins to increase rapidly and … well, you get the story.Effectively, the MI company is insuring the riskiest portion of the home’s value (the top 20%) and is hyper-sensitive to value shifts. When the market is accelerating rapidly, the MI companies are holding little, if any, risk.  But when markets begin to fall, the risk profile in their insurance portfolio begins to increase rapidly and … well, you get the story.

Holding the Bag

In 2006, when the market was appreciating at its fastest rate, mortgage insurance companies were everywhere. At any given time, there were 15-20 companies in the MI market offering products to insure the riskiest portion of the home values.  When values were rising quickly, MI looked like a great bet because (in theory) the difference between the value and debt was getting bigger, almost on a daily basis.  I don’t think anyone foresaw a 30% adjustment in values in 36 months … but, unfortunately for many, that is exactly what happened.

And do you know who was responsible for covering the losses?  Well, anyone who had made a bet that values would not fall, that’s who.  And one of the biggest groups who had made that exact bet in spades was the Mortgage Insuance industry. The losses were staggering.

Needless to say, by the time we reached the bottom in 2011/12, you could count the MI companies on less than one hand.

All Insurance is About Quantifying Risk

In theory, what would make a company decide that insuring home values is a good bet?  Well one, that values are likely to rise and rise consistently for some time and two, that the big reasons that foreclosures occur (poor underwriting standards, a weak economy, large number of job losses and the inability to sell a home at or near its market value) are not likely for the foreseeable future.

In retrospect, their actions during 2006-12 seem counter-intuitive. Why would any company, much less 20 of them, want to insure values at the top of the market where a fall was far more likely?  And then why would they stop insuring values when they were at their lowest? Good question, but it is exactly what happened.

Regardless, the good news is that they are back. Hopefully they have learned from the recent past and are applying those lessons as we move forward. So we can assume that the reason they are coming back to the market is either they learned nothing from 2008-2012 or that the market has a positive outlook and the likelihood of catastrophe is well into the future.

I choose believe it is the latter.

 

Pre-Qualification or Pre-Approval?

January 27, 2015 By Rick Jarvis

What is this “Lender Letter”?

If you are going to need a mortgage loan to purchase your new home, one of the first questions you will face from your Realtor is “have you been pre-approved (or pre-qualified) for a new loan with a mortgage lender?”   What is the difference? Believe it or not, many mortgage bankers exchange the phrases like they are synonymous, but there are subtle and, in some cases, very important differences. Most home buyers will be asked for a “Lender Letter” to present to the seller and their agent upon submission of your initial offer to purchase agreement. The letter is usually based on information gathered or exchanged related to either a pre-approval or pre-qualification process.

So what is the difference? Here is how I would describe each:
prequal letter_opt

  • Pre-Qualification is a loan officer’s opinion based on verbally supplied information related to a potential borrower’s income, assets, and credit profile relative to a currently available loan product guideline.
  • Pre-Approval is a fully underwritten mortgage loan in which income and asset documentation is provided as well as a credit reviewed and validated by a mortgage loan underwriter who issues a commitment to lend subject to maximum terms associated with interest rates, monthly payments, cash to close, and loan amount, all subject to a ratified purchase agreement and an acceptable property appraisal (whew…that is a lot of stuff!).

So, one is maybe a 15 minute call, and the other is more like a 20 day process.


Chris Owens with Southern Trust Mortgage has a full range of second home and investment property loan products.
Here are links to the other articles in this series about Lender Letters:
  • Pre-Qualification or Pre-Approval?
  • Why is the Lender Letter Needed?
  • The Importance of Being Earnest
  • Standing Apart From the Crowd
  • Easy Goes It
  • Are You ‘Lead’ing Me On?
  • OOPS…Didn’t See That One Coming

Is the 7/23 Dead? Nah…It’s Just Resting

October 14, 2014 By Rick Jarvis

From 1995-2006, I was a 7/23 addict.

The ‘7/23’ was a loan product with a fixed rate for 7 years which became an adjustable rate product at the end of the 7th year. With the fluidity of the market, people were moving constantly and building equity quickly mattered greatly.

The Hybrids (7/23, 5/1, 7/1, 3/1…and others)

From a lender’s (and Realtor’s) perspective, the 7/23 was the best product ever dreamed up as it offered the best of both worlds – a lower rate and fixed payment.  Effectively, a 7/23 offered the stability of a fixed rate product at rates roughly 2 points below the 30 year mortgage for the first 7 years, at which point it would become a 1 year ARM (adjustable rate mortgage.)  The 7/23 was especially popular with those who knew their first purchase was likely to be a 10 year or less hold and/or move up buyers.  If you were not going to be in the home for 30 years, why pay for the privilege of a rate for 30 years, right?

The 7/23, and with it, a host of other hybrid products which blended fixed periods of varying lengths and less frequent adjustments (than the standard 1 year adjustable products) made a lot of sense.

And then 2008 happened…

The Crash and The Fed’s Impact

When the market crashed in 2008 and the Fed began to buy down the rates, the low pricing on fixed rate products made adjustable products largely obsolete.  Why take the risk of rate adjustment when you can lock a 4% rate for 30 years?  It made no sense to do anything than lock for as long as possible.  Adjustable rate products got placed on the shelf along with the McMansion and the Humvee and we have sort of forgotten about them.

Until now…

The New Mortgage Market

We are coming to the end of an era, folks, and it is the end of the 4% 30 year fixed mortgage.  Janet Yellen (the Fed Chief) has more or less announced the Fed’s stance is about to change and with it, the last of the 30 year fixed rate mortgages will be originated in the early spring of 2015 (probably.)  We will look back in 20 years with our real estate grand kids on our collective real estate knees and tell them the story of the 4% 30 year fixed mortgage products and how they used to rule the lending world.  Our kids will gasp with amazement at the idea that mortgages used to be 3.875% 1+0.  We will also tell them about $70/SF for housing…and pagers…and flip phones…but I digress.

As the Fed begins ease the Quantitative Easing (see what I did there??) which has kept rates so low for so long, we will begin to see rates spread back out more than the 3/4 rate point they are currently.  The market does not really drive pricing (the Fed does) and when they (the Fed) decide lift their foot off of the brake and let the market go back to driving the long bond, then we will see rates rise, especially the further out the commitment (i.e. 30  years).  As rates rise, adjustable and hybrid products will become more and move in vogue.

So What Do We Do?

What does all of this mean?

It means this – decision making is returning to lending.  Right now only real decision a borrower needs to make it when to lock (watch this  VIDEO on ‘Rate Protection’ some lenders offer, kinda cool).  Soon, borrowers will need to understand all of the mortgage products available to them as the difference between the long term and short term rates will increase the complexity of the decision.

Take a look at the rate sheet from 1995 and tell me, what would you have done in January (and let me help, the difference between the 30 year and the 1 year ARM is $454/mo)?

 

HSH_S_National_Monthly_Mortgage_Statistics_-_1995
Rates can move quickly and good lenders understand market forces

 

Good question, eh?

In 10 years, you would have payed over $50,000 in additional interest if you chose FIXED over ARM.  That number decreases dramatically if your payment adjusts up but what if it adjusts down?  Will it go up…or down…and when??  What will happen??  HELP!!!  The bottom line is you need a true pro to help you decide.

Lenders and Guidance

I think the key in all of this is to be presented with facts, options and guidance.  With the prevalence of online sources quoting rates without any knowledge of the market, the customer is the loser.  Quoting a rate is not providing information, despite what the online lending portals want you to believe.  I cannot tell you the number of times a client has had a miserable experience when they tried to use a ‘lender’ with an 800 number and a 5 digit extension whose hours are obviously not east coast.  It NEVER (repeat, N-E-V-E-R) works out.

What are the characteristics of a good lender?

  • A robust and talented crew (often called the ‘Secondary Market Group’) paying attention to Wall Street, The Fed, Congress, Oil, Employment, Housing, weather and about every other input to the market which can drive rates.  They keep the originator up to date when the market swings (and I cannot overstate the importance of their information and the benefit our clients)
  • A direct line to their underwriting department so that they can promise a date by which your application is reviewed and approved
  • A direct line to their processing department so you can see where the loans are and when you can expect paperwork delivered
  • A talented, ethical and diligent group of loan officers who make sure their company can deliver as promised and to meet the timeline you need

Oh, and by the way, they should have some awfully low rates, too.  The best ones always do.

The lenders we work with have all of these talents and skills for sure.  It is why we recommend our clients work with them.

Does yours?

OOPS…Didn’t See That One Coming

February 8, 2014 By Rick Jarvis

OOPS…Didn’t See That One Coming

Here is a list of common “trips” which can make Pre-Qualifications a little risky:

  • Unreimbursed expenses, most notably (but not limited to) car mileage (“my accountant said it was a good idea”)
  • Self employed with multiple businesses (no matter how “passive” the business is)
  • Losses from secondary businesses (the part-time AmWay rep co-borrower)
  • Recent unsourced or non-employment deposits (the loan brother Bob finally paid back after several years which you are using for down payment)
  • Income structure changes (“my company turned me from a W2 employee to a 1099 employee after 5 years even though I am doing the same job for them”)
  • Gaps in employment (“it was only 60 days”)
  • Joint credit obligations (“I thought my ex-husband was paying that account”)

Oops Graphic_optGood loan officers will ask the right questions and determine which process is best for you, but since in many cases, you have no idea of the skill or experience of the person you may be talking to about Pre-Qualification or Pre-Approval, my desire to arm you with the information to know which one is best for your success. When in doubt…never be afraid to ask your loan officer and go over your situation. Also, always be up front and honest about your circumstances. Gone are the days where lenders will not find out about any financial skeletons. Your loan officer is working to help navigate you thru the right process and the ultimately the right mortgage. Full disclosure is critical to his or her ability to provide that service. Rule number 1 for any great loan officer…always put your borrowers in the best possible position to succeed with their purchase transaction and ultimately in homeownership!


Chris Owens with Southern Trust Mortgage has a full range of second home and investment property loan products.
Here are links to the other articles in this series about Lender Letters:
  • Pre-Qualification or Pre-Approval?
  • Why is the Lender Letter Needed?
  • The Importance of Being Earnest
  • Standing Apart From the Crowd
  • Easy Goes It
  • Are You ‘Lead’ing Me On?
  • OOPS…Didn’t See That One Coming

Are You ‘Lead’ing Me On?

February 8, 2014 By Rick Jarvis

Are You ‘Lead’ing Me On?

A typical lender letter is basically just a Pre-Qualification letter. The content of the letter generally is based on information provided by a loan candidate and specific language that the information has not been supported or verified and the letter does not indicate a commitment or intent to lend. In many real estate transactions, this type of letter is fine. If your profile is stable employment, solid credit history, and your source for down payment and closing costs is easily identifiable…this is probably the right letter and process for you. Agents will typically be more willing to work with Pre-Qualification letters issued by known reputable lenders and loan officers. Unknown lenders or loan officers may result in some scrutiny, but depends on the specific agents and circumstances.

Lead Graphic_optTypically lenders do not want to fill a pipeline full of active loans without real property addresses or fully ratified purchase agreements. It would force them to devote valuable human resources to borrowers who may or may not ultimately purchase a home or even use that lender for actual mortgage transaction once a purchase agreement is executed. It would raise lending costs due to the increased resources and slow the process down for “live” loan applications. Instead, they will tag you as “lead” or some other similar category, do all of the necessary ratio calculations, produce the Pre-Qualification letter and move on to the next call or email while you are completing your home search and /or negotiating your transaction.


Chris Owens with Southern Trust Mortgage has a full range of second home and investment property loan products.
Here are links to the other articles in this series about Lender Letters:
  • Pre-Qualification or Pre-Approval?
  • Why is the Lender Letter Needed?
  • The Importance of Being Earnest
  • Standing Apart From the Crowd
  • Easy Goes It
  • Are You ‘Lead’ing Me On?
  • OOPS…Didn’t See That One Coming

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How Do I Schedule a Showing?

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kendall@richmondrelocation.net

804.305.2344


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