Cash-Out Refinance

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Most people refinance for one of three reasons:

  1. Reduce their interest rate
  2. Reduce their monthly payment
  3. Convert some of their equity into cash

Recently, however, equity has built up in millions of homeowners’ properties thanks to three years of rising home values. This has lead to an incread many owners are also using equity to pay off their mortgages early.

An analysis by Black Knight Financial Services[1] found that chronically low interest rates motivate millions of homeowners to take advantage of rate declines by refinancing again soon after their last refinances.

Falling rates create “serial refinancers”

The number of owners who refinanced again after refinancing under two years ago jumped by 800 percent from Q1 2014 to Q1 2015. These “serial refinancings” dropped by nearly 65 percent when rates rose toward the end of last year, yet they still accounted for two-thirds of rate/term refinances in Q4 2015.

Although interest rates have been on a roller coaster over the last year,  rate and term refinances from borrowers who’ve held their mortgage for less than six years have remained steady. Term reductions remain popular among borrowers taking advantage of low rates. Not surprisingly, they are more popular among aged loans, as borrowers do not want to restart the clock on their mortgage, the report said. Black Knight found that some 37 percent of rate/term refinances in Q4 2015 included a term reduction.

“These two trends are linked, as term reductions are more popular among loans of a greater age, as those borrowers are understandably more hesitant to restart the clock on their mortgages,” the study found.

The data showed that serial refinance extracted $68 billion in equity via cash-out refinance transactions in 2015—the most since 2009 and a 53 percent increase over 2014. Cash-out refinance borrowers continue to represent a relatively low risk profile for lenders; the average post-cash-out LTV is 67 percent, with an average credit score of just under 750.

What this means for you—shorter terms may not pay for refinancing

However, serial refinancers may end up losers in the long run. If they reduce the term of their loan too much, they may end up end up not saving enough on lower interest rates over the course of the loan to pay for the cost of refinacing.

Greg McBride, senior financial analyst for Bankrate.com, says a general rule of thumb is that it is worth it to refinance if the homeowner can make back their investment within three years or less. “If your time horizon is not long enough, you are not going to be able to recoup the cost of refinancing,” he says.

As term reduction refinances grow in popularity, the active mortgage sector shifts as well. Five percent of all active mortgages had 20-year original terms (highest share in over ten years); 16 percent are 15-year original term; and 2.5 percent are 10- year original term (down slightly from last year), according to Black Knight.

[1] http://www.bkfs.com/CorporateInformation/NewsRoom/Pages/20160404.aspx

Source: totalmortgage.com

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Whether you’re aware of it or not, flooding does happen in all 50 states. Some cases are more extreme than others, but it still pays to be aware of the flood plains in your area before you buy. Depending on where your new home falls on the map, your lender may require you to buy flood insurance in addition to your homeowner’s insurance.

Before you jump right into your new insurance, here’s a quick primer on some of the basics.

What kind of policy do you want and what do you want it to cover?

In general, most flood insurance policies have 3 main portions or components. As a homeowner, you need to decide how much money you want to put towards coverage for the building itself, the contents of your home, and all the replacement costs for everything.

What exactly is covered?

While list of specifics covered is very broad, flood insurance policies generally insure the physical damage done to your home as well as your personal belongings inside the home. This list includes but is not limited to, the building itself, electrical and plumbing systems, household appliances, furniture, valuable items, clothing and more.

What is NOT covered?

Even though flood insurance policies want to help you out as a homeowner and cover you as best as they can, there are certain specifications that are not covered by the insurance. This would include any damage done outside of your home (fences, shrubbery, patios, swimming pools etc.) In addition to this, vehicles parked outside of your house would also not be covered.

What is your risk?

Do you live in a moderate-to low-risk area? Even if your lender doesn’t require it, you may want to get flood insurance. According to Bankrate, around 1 in 4 flood claims is for a property that doesn’t sit in a flood plain.

Most people in moderate-to low-risk areas are likely qualified for preferred rate coverage. Meanwhile the high risk area homeowners are only offered a standard rated policy. Talk to your agent to determine which flood insurance policy will provide you with optimal coverage.

Flood insurance rates

As mentioned above, for homeowners living in a high risk flooding area, flood insurance will most likely be required. The rates involved in the different types of coverage mainly only depend on the quality of your home, the form of architecture, and of course, your area’s flood risk level. Depending on your community, it is a good idea to see if they offer a flood insurance discount. Especially if you’re in those high risk areas! Rates can vary significantly, but as a homeowner, it is best to be safe than sorry.

While flood insurance does have its limitations, it is just like any other policy. As a homeowner it is best to have it in case of an emergency. Make sure to talk to your agent to find out what plan is best for your home. There are plenty of preferred risk policies and community discounts offered. So do yourself a favor and cover yourself before it’s too late!

Source: totalmortgage.com

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As a rule of thumb, real estate agents tell their buyers that they should be prepared to pay as much as 5 percent of the home’s purchase price in closing costs at settlement. For a home priced at $200,000, closing costs would amount to about $10,000.

That’s a lot of money, but is it accurate?

The true price of closing costs

According to the latest annual survey of closing costs by Bankrate, that figure seems high. Lenders’ fees, which include origination and underwriting fees as well as out of pocket expenses like credit checks, averaged $1,058 on a $200,000 home, an increase of only 1.6 percent over 2015. Third party costs in the survey included appraisals and surveys and averaged $1,070 for a total of $2128.

Unfortunately, Bankrate left costs out of the survey that vary a lot from place to places such as taxes, property insurance, association fees, interest and other prepaid items. These can be among the most expensive. Title costs, for example, can cost about $1,500 on a $250,000 home, but that cost can vary by hundreds of dollars based on the state and the title provider.

At close, buyers will also be required to compensate sellers for pre-paid expenses like property taxes and HOA fees that they have already paid at the time of settlement. These can be sizable and vary from jurisdiction from jurisdiction.

How you can measure your closing costs

Until recently, getting an accurate total of closing costs more than a few days before closing was virtually impossible. New federal disclosure forms that took effect in October 2015 called “know before you owe” help consumers estimate their closing costs at the time they apply for their mortgage, The new forms are designed to make it easier for consumer to save money by shopping around for closing services.

Within three days of receiving an application, lenders now are required to send borrowers binding estimates of the costs they will charge, and estimates of the third party cost that appraisers and other service providers will charge. Consumers can get more than one set of estimates and compare the dollar totals for lender-charged fees and 3rd-party fees. They can also choose their own third-party providers except for appraisers.

By doing a little homework and legwork, borrowers can save thousands of dollars on their closings costs.

Source: totalmortgage.com

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Washington, DC
CNN
 — 

Fees on mortgages backed by Freddie Mac and Fannie Mae are set to change next month, in a plan designed to make homeownership more affordable for more people. Broadly, the fees will go down for many with lower credit scores and will increase for many with higher credit scores.

But that doesn’t mean people with lower credit scores will pay less than those with higher credit scores. The changes mean that people with higher credit scores will still pay less based on lower risk to the lenders, but having a lower credit score will now come with less of a penalty.

There are many variables that go into the cost of a home loan, including what kind of property you are buying, how much money you’re putting down and how high or low your credit score is.

These variables help lenders — and government-backed Freddie and Fannie, which buy the vast majority of loans from lenders — price loans for risk. After starting with the basic, or par, rate, additional price adjustments are added in order to account for how risky the loan is for lenders to make.

Pricing hits like this are called a loan level price adjustment, or LLPA, and have been around for a while and are occasionally updated. The price adjustments allow Freddie and Fannie to keep from being undercapitalized and over-exposed to risk. Fannie and Freddie, which guarantee roughly half of the country’s mortgages, do not directly issue mortgages to borrowers, but instead buy mortgages from lenders and repackage them for investors.

Changes to existing fee structure

Last year the Federal Housing Finance Agency, which oversees Freddie and Fannie, increased the fees on loans for which there is less reason for government support, including some high balance loans, vacation homes and investment properties.

In October, the FHFA announced it would eliminate upfront fees for certain borrowers and affordable mortgage products, who tend to be borrowers with limited wealth or income, while putting in place increases to other fees, specifically for most cash-out refinance loans.

Then, in January, the FHFA announced additional updates to the fee structure for single-family homes that made permanent the eliminated fees and spelled out how other fees would be increased.

“These changes to upfront fees will strengthen the safety and soundness of the enterprises by enhancing their ability to improve their capital position over time,” Sandra L. Thompson, director of FHFA said at the time. “By locking in the upfront fee eliminations announced last October, FHFA is taking another step to ensure that the enterprises advance their mission of facilitating equitable and sustainable access to homeownership.”

How the fee change works

For those with lower credit scores, the fee changes will reduce the penalty for having a low score. For those with higher credit scores, more price tiers have been put in place, which in some cases may increases fees.

For example, a buyer who made a 20% down payment with a credit score of 640 would see their fee drop 0.75% from 3% to 2.25% with the updates. Another buyer, also making a 20% down payment, who has a credit score of 740, would see their fee climb by 0.375%, from 0.5% to 0.875%.

The fee will still cost the home buyer with the lower credit score more.

A buyer with a 640 credit score and an 80% loan-to-value ratio will have a fee of 2.25%, while a buyer with a 740 score will have a fee of 0.875%. The difference in assessed fees is about $4,000 more for a buyer with a 640 credit score than for a buyer with a 740 credit score, based on a $300,000 mortgage.

The table outlining the fees based on loan to value ratio and credit score have been posted by Freddie Mac and Fannie Mae.

Some critics say well-qualified buyers are already struggling to enter the housing market.

“Between the lack of supply, interest rates more than doubling in the past year and pricing in most of the country remaining relatively flat, the barrier to entry has never been more difficult to pursue the American Dream,” said Pierre Debbas, managing partner at Romer Debbas, a real estate law firm.

“The intent of providing access to credit to lower-income borrowers with lower credit scores and down payments is an important initiative to help expand the demographic that can acquire a house and theoretically build wealth,” he said. “However, doing so at the expense of other consumers who are already struggling to enter the market is a mistake.”

But that criticism is misplaced, said Jim Parrott, a nonresident fellow at the Urban Institute and owner of Parrott Ryan Advisors, who added that it is “conflating two separate, largely unrelated moves on pricing for the government-sponsored enterprises.​​”

In a blog post, Parrott explains that the increase in fees for vacation homes and high-value loans allows Freddie and Fannie to reduce fees for some other buyers.

He also points out that the suggestion that fees are lower for those who make a smaller down payment misses a critical point. Any loan with less than a 20% down payment must have private mortgage insurance.

“So those who put down less than 20% pose less risk to the GSEs and should pay less in fees to the GSEs,” Parrott wrote.

Source: cnn.com

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Eight times every year, the Federal Reserve’s Federal Open Market Committee (FOMC) meets to discuss and possibly alter their position on monetary policy.

There are several different courses of action they could take, the most common being quantitative easing, buying and selling government securities, and raising or lowering the federal funds rate.

Most recently, the fed’s tool of choice has been adjusting the federal funds rate.

What is the federal funds rate?

The federal funds rate is the rate at which depository institutions (banks and credit unions) charge each other for overnight deposits.

Why would they need to lend each other money? All banks are required to have a certain amount of funds in their reserves (usually 10%), and sometimes customers withdraw enough money from the bank that the bank’s reserves are below the requirement. They now have two options: to borrow money from the fed or from another bank. The federal funds rate determines how much interest a bank will have to pay for that loan.

Click here for today’s mortgage rates.

How the federal funds rate affects the economy

The federal funds rate is an important base rate that has trickle down effects on the entire economy. After all, if the federal funds rate goes up and banks have to pay more for overnight loans, then it goes to reason that they are going to have to make up the higher cost by raising their own rates. Conversely, if the federal funds rate is lowered, banks can pass lower interest rates on to their borrowers.

With the benchmark federal funds rate lowered, rates on credit cards and business loans also decline, encouraging lending for both businesses and consumers. Businesses are able invest in infrastructure and hire more employees, while consumers make more payments on credit knowing that they don’t get charged as much on the interest.

This results in more financial transactions, ultimately contributing to economic growth of the nation at large. That’s why when the Fed wants to promote economic growth they lower the federal funds rate, and when they think the economy can handle it, they raise the federal funds rate.

Mortgage rates and the Federal Reserve

Understanding mortgage rates can be tricky. The way the situation with the Fed raising and lowering rates is portrayed in the news leads many people to believe that the Fed controls mortgage rates. This is not true—the Fed does not directly set mortgage rates at all. However, that’s not to say that it has no influence over mortgage rates.

Fedspeak

At the Federal Reserve, the forward guidance “fedspeak” that officials offer up to the markets is one of the most powerful tools they have. It’s actually a little bit of the opposite of that old saying that “Actions speak louder than words.”

Generally, when a fed official comes out and gives even the slightest hint that they are in favor of rising rates, investors move away from “safe” government bonds and into riskier assets like stocks. That’s good for the economy, but it causes mortgage rates to rise.

As we’ve seen several times this year, the fed can create a buzz about raising the fed funds rate (which can drive up mortgage rates), but then retreat back from that position and not raise rates (causing rates to fall back down).

It’s this cat and mouse game of talking and not delivering that has landed the Fed in hot water, with some critics claiming the Fed has a credibility problem. Regardless of whether or not you agree with them, it’s undeniable that what the Fed says can influence markets.

Click here for today’s mortgage rates.

How mortgage rates are actually set

If the Federal Reserve doesn’t set mortgage rates, who does?

Good question.

Just as is the case with many other aspects of the economy, market forces are to thank (or blame). Most of the action takes place on the secondary market, where mortgage-backed-securities (MBS) are bought and sold.

These mortgage bonds have prices and yields that move up and down just like stocks and bonds do. If the economy is performing well, investors expect higher yields, and vice versa when the economy is under-performing. So in a way, mortgage rates are a reflection of how well the economy is doing. Specifically, the three major drivers of mortgage rates are:

  • Stock prices
  • The labor market
  • Inflation

As stated, when stock prices are going up, so are mortgage rates. That’s because mortgage-backed-securities are traded as bonds, and conventional wisdom says that when investors are moving money into stocks, they’re taking money out of bonds.

With a decrease in demand for bonds, prices drop and yields rise–pushing rates higher. In the event that investors flood back into bonds, the opposite will happen, causing mortgage rates to drop.

It’s not a perfect relationship, but it’s generally how the market behaves. The relationship between bonds and mortgage rates is best illustrated by the yield on the U.S. 10-year treasury note, which is the best market indicator of where mortgage rates are going.

On any given day, looking at the 10-year yield will give you a fairly accurate picture of where mortgage rates are headed. If the yield is rising, mortgage rates most likely are too, and vice versa.

With the labor market, it’s all about how high unemployment is. The Bureau of Labor Statistics (BLS) releases a monthly employment situation report that is the most-watched report on the matter. If the U.S. economy added fewer jobs than expected and the unemployment rate rises, that’s bad news for the stock market, which as we now know pushes mortgage rates lower.

Most people understand inflation as a rise in the cost of living. That’s true, but what’s really happening is the devaluing of the dollar. As the value of the dollar declines, the purchasing power of the dollar diminishes, causing prices to rise.

Mortgage-backed-securities, like every other bond, are denominated in U.S. dollars. Since investors don’t want to own assets that are losing their value over time, they move away from MBS in times of high inflation. With a decrease in demand for MBS, the yields rise, driving mortgage rates higher.

Bottom line

When you’re trying to understand mortgage rates, remember: the Federal Reserve and the federal funds rate do not control mortgage rates. There are several other economic factors at play that anyone trying to track and predict where mortgage rates are going should pay attention to.

That being said, the Federal Reserve does play a major role by influencing how the economy functions, and it’s always important to keep an ear out for what they’re saying.

1. chart via wikipedia

Carter Wessman

Carter Wessman is originally from the charming town of Norfolk, Massachusetts. When he isn’t busy writing about mortgage related topics, you can find him playing table tennis, or jamming on his bass guitar.

Source: totalmortgage.com

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The latest revamp of loan fees at government-sponsored enterprises Fannie Mae and Freddie Mac drew its share of critics, leading their regulator to ask whether it should rethink the capital framework driving them — and it looks like the answer, in some cases, is yes.

To be sure, many critics, including Republican legislators who’ve sought to roll back the latest pricing change, have balked at the idea of overturning loan-level risk-based pricing in response. But not everyone has, and comment letters released recently confirm there are mixed opinions.

Specifically, some affordable housing advocates are reprising past calls for a return to an alternative used prior to the Great Recession: a flat guarantee fee based on portfolio-based cross-subsidization rather than the current loan-level tradeoffs.

“We do not support risk-based pricing at the loan level by the enterprises,” said David Dworkin, president and CEO of the National Housing Conference, expounding on the view in his group’s letter to Fannie and Freddie’s regulator.

“That’s different from private mortgage insurance, which involves risk-based pricing. We have no objection to risk-based pricing at the portfolio level,” Dworkin clarified. “We’re not against risk-based pricing, we’re against individual consumers paying for their own risk.”

The most recent pricing changes were well intended, but the GSEs shouldn’t “pick winners and losers” among borrowers if it involves charging those with less income higher fees, potentially driving to the neighboring government-backed market and increasing taxpayer risk, he said.

And while by one measure used by the GSEs, the Enterprise Regulatory Capital Framework, they are undercapitalized, the NHC said more realistic measures like stress tests suggest there’s room to reduce capital enough to have a lower (but not excessively reduced) flat g-fee.

The letter references a recent stress test measure that shows that the largest loss the GSEs would take in a “severely adverse” scenario (with allowances for deferred tax assets) included is $8.4 billion. It contrasts it with the 2021 ERCF goal of roughly $319 billion in adjusted capital.

“Even if the losses from a future crisis with five times the impact of the 2008 financial crisis were to occur, costing the enterprises a total of $42.25 billion, under the ERCF they would be required to hold $276.75 billion in unnecessary capital,” the letter said.

The ERCF goals are based more on what capital enterprises might need if they were released from their government conservatorship, and measured more by private market standards, whereas the stress tests aim to model likely risk on the enterprises in current form.

Dworkin called the ECRF number “extremely excessive.

“They’re comparing them to a bank capital, but mortgages are a very small piece of what banks do and capital requirements for banks are really driven by much bigger investments that have much higher risk than mortgages,” said Dworkin.

Dworkin also opposes a separate regulatory proposal that would increase risk weightings for some mortgages that have higher loan-to-value ratios and are held in bank portfolios. 

Following the Great Recession, the GSEs downsized their portfolios and shifted their focus to securitizations. Because of this, and rules that now hold lenders responsible for the borrower’s ability to repay, Dworkin thinks the previous flat g-fee model wouldn’t have the risks seen in ’08.

But other respondents to the FHFA’s request for input disagree.

“The cross-subsidization model, with full flat-pricing, does not work and was one factor in the failure of Fannie Mae and Freddie Mac in 2008,” Ed DeMarco, president of the Housing Policy Council and a previous acting director of the FHFA, said in a letter to the agency.

“It creates market distortions, encourages inappropriate risk-taking, and misleads consumers by removing beneficial pricing signals,” he added.

DeMarco upheld the current capital framework at the enterprises but, like Dworkin, was critical of the proposed changes to bank standards.

While a kerfuffle has arisen over some of the most recent revisions to pricing at the GSEs, most notably a proposed debt-to-income-based differentiator that they eventually dropped, DeMarco indicated some types of loans are appropriate to apply a premium too, subsidizing others.

“Loans that are neither central to Fannie Mae and Freddie Mac’s public mission and that are capable of obtaining private sector financing may be suitable for higher targeted returns,” he said.

Cash-out refinance, investment property, high balance and second home loans fall into this category, he said. 

(Other groups, notably the National Association of Mortgage Brokers, have opposed the cash-out refi price hikes. The Community Home Lenders of America initially showed some resistance to the fees for high balance loans, but were later said it was mollified by an adjustment to the threshold for them that helped middle-income borrowers.)

While price changes can be disruptive to the industry, the HPC indicated that there is a need for regular updates to them, which should be made with adequate consideration for the operational burden involved.

“FHFA should reconsider the upfront fees every one-to-three years, depending on changing economic conditions, any changes to ERCF, and the results in the annual g-fee study,” DeMarco said. “Pricing realignments should always reflect the level of risk to the Enterprises and the capital required to support that risk.

“Further, adequate notice should be provided to the industry to execute pricing changes, with substantial transition time during periods of high production volume or adverse market conditions,” he added.

Other trade groups, while accepting of the need for changes in line with the current capital framework and thankful for adjustments the FHFA has made for their needs over time, also noted they can take an operational toll on mortgage companies and should be limited.

“Frequent pricing changes can pose a cost and resource burden on lenders, particularly with respect to necessary IT changes,” the Community Home Lenders of America said in its letter.

“CHLA would be comfortable if guarantee fees and LLPAs remained at the current levels for a

significant period of time — e.g. through the end of 2024,” the group added.

The Community Home Lenders of America also said that it continues to oppose non-risk-based upcharges for loans.

“CHLA continues to be extremely critical of the Congressional action at the end of 2021 to renew the non-risk related 10 basis point Fannie/Freddie guarantee fee hike — with the proceeds of such fee collections being used solely to pay for non-housing federal expenditures,” the group said.

Source: nationalmortgagenews.com

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During the fourth quarter, U.S. homeowners cashed out a dismal $17.5 billion in home equity via the refinancing of prime first-lien mortgages, according to mortgage financier Freddie Mac.

That’s down from a revised $28 billion in the third quarter and $38 billion in the second quarter, well below year-ago levels.

The share of cash-out refinance loans, those resulting in new loan amounts at least five percent higher than the paid off loans, fell to 62 percent during the quarter, down from 76 percent in the third quarter.

This isn’t necessarily a bad thing however, as it signifies a more realistic approach to homeownership (not the ATM machine approach).

That said, 14 percent of refinancing borrowers brought in money when they refinanced to reduce their loan balance, the highest cash-in share since the fourth quarter of 2004.

“When interest rates fall sharply we tend to see more borrowers go for a simple rate-and-term refi that lowers their payment or lets them keep their payment about the same but shorten the maturity of their mortgage obligation” noted Frank Nothaft, Freddie Mac chief economist, in a release.

“At the same time many borrowers who are attracted by lower mortgage rates take the opportunity to pay in additional money either to remove the need for mortgage insurance or to get to a lower loan-to-value ratio so they can qualify for the best rate.”

It’s unclear how many brought money in by choice and by necessity…

For all of 2008, roughly $115 billion in home equity was cashed out, just under half the amount extracted a year earlier.

Speaking regionally, cash out refinancing was most common in the South, while cash in refinancing was greatest in the Midwest.

The data in Freddie’s survey comes from properties on which the company funded at least two successive loans.

(photo: berbercarpet)

Source: thetruthaboutmortgage.com