Changing World of Mortgages

January 25, 2011 from Realty Times

Successfully Navigating The Changing World of Mortgages by PJ Wade

The world of mortgages is changing. To paraphrase the old Joni Mitchell song, most consumers will not know what they’ve got until it’s gone.

They won’t realize that by the time a mortgage is paid off, borrowers have paid two or three times the original amount borrowed—the mortgage principal—to buy real estate they originally bargained hard for to cut costs.
They won’t understand what they could have done to increase their real estate holdings and improve their profits until the legal and tax advantages that support investment and individual creativity disappear.
The real estate and banking sectors are set up to facilitate their deal making and profit taking with a measure of consumer protection added to keep things from becoming noticeably one sided. Too many buyers and sellers further stack the deck against themselves by not digging deeper than fads, marketing, and salesmanship. Most real estate buyers and sellers invest more time learning about their latest mobile device and its apps than exploring ownership and financial strategies for buying residential and recreational property.

Therefore, they may not miss what they did not understand, and would have appreciated, in the first place. Have you heard about a great government program or a tax advantage only when the media lament its end? How do you make sure you are taking advantage of all the options open to you to reduce the cost of the money you borrow to purchase real estate—your mortgage?

Real estate buyers and owners who want to achieve more for less should start this new year by learning what the latest round of mortgage resets mean to their specific real estate goals and opportunities. We always advocate going to the source, so dive into the detail announced by the Federal Ministry of Finance January 17, 2011: http://www.fin.gc.ca/n11/11-003-eng.asp

Here are a few perspectives to start you off.

Just remember, that what is relevant to you and your specific situation may not be on this list, hence the value of going to source:

Motives and motivation: The title, “The Harper Government Takes Prudent Action to Support the Long-Term Stability of Canada’s Housing Market,” has an election ring to it. Either the federal government is positive there won’t be more negatives ahead for housing, so it wants to appear to have created the soft landing, or it is bailing out before problems hit, so it can point fingers at others while patting itself on the back. What’s your opinion?

Reduce amortization: Cutting the maximum amortization period down 5 years to 30 years is not the across-the-board measure it has been presented as. This restriction applies only to new government-backed insured mortgages with loan-to-value ratios of more than 80 per cent. The 35-year amortization may be available for mortgages outside these restrictions for borrowers that lenders feel suit this repayment method. The amortization period is the number of years, at a specific payment amount, that it will take to pay the mortgage principal and interest to zero.

Buyers’ advantage: The longer the amortization period the smaller the monthly payment of principal and interest, and the greater the mortgage principal a buyer will qualify to borrow. Buyers could opt for the longest amortization possible—which used to be 40 years, then 35 and now 30—and then, down the road, decrease the amortization period on renewal to cut total interest costs.
Owners’ advantage: The shorter the amortization period, the lower the total amount of interest paid on a mortgage. The common 25-year period provides a hefty profit for lenders. Pop your original mortgage principal into a mortgage calculator, and see how much you have paid for this borrowed money in the first 10 years. Compare this with how much is left to pay on the mortgage. Shorten the amortization period as much as possible when you renew. Even one year can make a difference in the total interest paid.
Equity building: The government reports the latest restrictions will “allow Canadian families to build up equity in their homes more quickly, and help Canadians pay off their mortgages before they retire”. Home equity management is an ongoing topic in this column, but if these changes represent the government’s best shot at facilitating equity building, they need input from consumers on what would really aid in accumulating value and repaying mortgage debt.
Taking taxpayers off the hook for lenders: The government backs mortgages arranged to buy real estate, so if the borrower defaults and can’t make payments, the government (that’s taxpayers) cover losses for lenders (that’s largely the big banks). Those same lenders promote refinancing for a range of home improvement and lifestyle uses, the government is letting it be known that this lender-promoted debt should not be as risk-free for lenders as arranging the original mortgage. Lender reactions to the government taking taxpayers off the hook for mortgage default or lack of repayment may not be pleasant for homeowners.

Restricting access to equity: By lowering the maximum amount Canadians can borrow when refinancing their mortgages the government says it’s promoting savings. The drop from 90 per cent to 85 may not seem significant until you want that 5 per cent in your pocket. This change means the only way to access that 15 per cent is to sell. When so many want to stay in their own homes as they age, does this move seem in synch with consumers goals?
Withdrawing government insurance on lines of credit: Lenders who issue lines of credit secured by real estate, including home equity lines of credit, will no longer have government insurance to cover them against losses. The government believes its move will ensure that risks associated with consumer-debt products used to borrow funds unrelated to real estate purchases are managed by the financial institutions and not borne by taxpayers. Will lenders demand a premium for their additional risk?
Note: The adjustments to the mortgage insurance guarantee framework will come into force on March 18, 2011. The withdrawal of government insurance backing on lines of credit secured by homes will come into force on April 18, 2011.

Government intervention: The government’s paternalistic approach with this “for their own good” set of financial rewrites opens the door to many considerations. Do you want the government deciding what’s best for you and your real estate, or would you prefer to deal with lenders who set standards and criteria for lending on a case-by-case basis? What may not be prudent for one borrower may be calculated risk for another.
The Honourable Jim Flaherty, Minister of Finance, was said to make “prudent adjustments to the rules” to “support hard-working Canadian families saving through home ownership”. Does their definition of “saving” properly describe your intentions in owning real estate?

If you need help understanding finance and planning for your future, is the government your preferred source and resource? Maybe the wrong level of government and the wrong ministry are involved. Wouldn’t it be more practical to teach money management and real estate investment in public school, so we all become our own experts?


Copyright © 2011 Realty Times. All Rights Reserved.

Double-Dip on the Horizon?

January 17, 2011

Real Estate Outlook: Double-Dip on the Horizon? by Carla Hill

Is the housing market poised for a double dip in house values? Corelogic reports that as of November, home values were down 5 percent from the same time the year before.

CoreLogic Chief Economist Mark Fleming says, "We're continuing to see the influence of seasonal declines that typically depress home prices during the latter part of the year, but the fact that the rate of decline increased for November is indicative of the uphill battle we're facing with the housing recovery."

Steep declines were seen in multiple locales across the nation. Idaho saw home values fall 13.5 percent.

Zillow.com reports that the "decline in home values from the national peak in June 2006 officially surpassed the magnitude of declines experienced during the Great Depression, falling 26 percent from peak levels."

Also troublesome is the monthly pace at which homes values are now declining. In November the rate rose to 0.78 percent.

According to Zillow, "We're still seeing significant weakness in the lowest home value tier, particularly with the expiration of the Federal home buyer tax credits. ... Weakness in the bottom tier of homes naturally translate into the higher tiers as these homeowners become exposed to negative equity (and thus are removed from the demand equation altogether) or have less money to spend buying their next home."

Economists say that for at least the next 2 quarters we'll see larger factors -- such as unemployment -- producing more home value declines.

The New York Times reported last week that we could see new job growth thanks in part to the Federal Reserve's plan to buy up $600 billion worth of Treasury securities.

Janet L. Yellen, Fed vice chairwoman, noted, “It will not be a panacea, but I believe it will be effective in fostering maximum employment and price stability."

There are those, however, that criticize the Fed's move, saying it could instead create future financial imbalances.

Time will tell, but for now, most are hoping for the best.

The Mortgage Banker Association, the national association representing the real estate finance industry, is reporting in their latest findings that mortgage applications rose. The Refinance Index rose 4.9 in just one week. This is welcome news, as the unadjusted Purchase Index increased 41.9 percent compared with the previous week, but was still 10.5 percent lower than the same week one year ago.


Copyright © 2011 Realty Times. All Rights Reserved.

Mortgage Rates Down for Second Week

January 14, 2011

Mortgage Rates Down for Second Week

McLean, VA – Freddie Mac (OTC: FMCC) today released the results of its Primary Mortgage Market Survey® (PMMS®). The survey results showed lower mortgage rates for both long- and short-term rates, with the 30-year reaching a four-week low.

30-year fixed-rate mortgage (FRM) averaged 4.71 percent with an average 0.8 point for the week ending January 13, 2011, down from last week when it averaged 4.77 percent. Last year at this time, the 30-year FRM averaged 5.06 percent.

15-year FRM this week averaged 4.08 percent with an average 0.7 point, down from last week when it averaged 4.13 percent. A year ago at this time, the 15-year FRM averaged 4.45 percent.

5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 3.72 percent this week, with an average 0.7 point, down from last week when it averaged 3.75 percent. A year ago, the 5-year ARM averaged 4.32 percent.

1-year Treasury-indexed ARM averaged 3.23 percent this week with an average 0.6 point, down from last week when it averaged 3.24 percent. At this time last year, the 1-year ARM averaged 4.39 percent.

Frank Nothaft, vice president and chief economist of Freddie Mac, reports, "Bond yields drifted lower following the release of the December employment report , which was weaker than the market consensus forecast and implied that the labor market is still in a sluggish recovery. Fixed mortgage rates followed bond yields lower for a second consecutive week, bringing them to a four-week low."

"In its January 12th regional economic review, the Federal Reserve noted that activity in residential real estate and new home construction remained slow across all Districts over the last two months of 2010 due to concerns about the pace of economic recovery, especially in employment. In addition, the outlooks for residential real estate were mixed, with contacts in most Districts described as expecting continued weak conditions."


Copyright © 2011 Realty Times. All Rights Reserved.

Tips for Appraisals

January 13, 2011

Tips for Appraisals by Carla Hill


Appraisals allow for homeowners and buyers to establish what is fair market value of a property. In addition, an appraisal allows a lender to know how much they can safely lend.

According to The Appraisal Institute, a global membership association of professional real estate appraisers, "Appraisals are especially important because they are an objective and unbiased source of information. Unlike others involved in real estate transactions, the appraiser is an independent professional who performs a service for a fee rather than for a commission."

This process, however, can be trying and even frustrating. Recent declines in the housing markets have spawned scapegoats across the industry, including appraisers. And increased caution from lenders has slowed the buying process.

"Too many consumers in this struggling real estate market face problems with appraisals when attempting to buy or sell a home," said Appraisal Institute President Joseph C. Magdziarz, MAI, SRA. "But rather than passively endure delays in closing a sale, homeowners and buyers can take proactive steps to avoid pitfalls."

To reduce your stress during this time, consider these simple tips from the AI®.


Understand the role of appraisals. It is neither in your interest nor the interest of your lender for you to purchase a property that is over-priced for its value.

Make sure the lender hires a qualified appraiser (such as a designated SRA, SRPA or MAI member of the Appraisal Institute). The lowest priced appraiser does not necessarily equate with the most qualified. This is a time to get the numbers right.

Accompany the appraiser during the inspection of the property if possible. The more active of a participant you are in the process, the more you will understand it, and be able to catch any errors.

Request a copy of the appraisal report from the lender. Federal law requires that you receive a copy of the appraisal within 30 days.

Examine the appraisal report and ask questions. Be sure to examine the report for errors. According to "Appraising the Appraisal: The Art of Appraisal Review," 2nd edition, common errors in appraisals include: misuse of adjustments to comparables, disregarding special financing and concessions, or miscalculation of gross living area.

Appeal the appraisal if appropriate. Market conditions do change, especially in these economic times. If you feel that new information may change the appraisal, be sure to contact them!

Ask the lender to order a second appraisal by a qualified and designated appraiser.

File legitimate complaints with appropriate state board or professional appraisal organizations.
For more information on appraisals, you may wish to visit The Appraisal Institute's website at www.appraisalinstitute.org.

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Copyright © 2011 Realty Times. All Rights Reserved.

Pending Homes Sales Rise

January 4, 2011

Pending Homes Sales Rise by Carla Hill


While credit remains tight as we move forward into 2011, top economists expect that if the job market revives this year, and interest rates rise only moderately, the housing market could experience a boost.

Pending homes sales are already on the rise. The National Association of Realtors' Pending Home Sales Index reports that pending homes sales rose in November by 3.5 percent.

Lawrence Yun, NAR chief economist, said historically high housing affordability is boosting sales activity. "In addition to exceptional affordability conditions, steady improvements in the economy are helping bring buyers into the market," he said. "But further gains are needed to reach normal levels of sales activity."

Across the nation, we see regionally diverse markets, however. The Northeast saw pending home sales rise by 1.8 percent, but this figure is still 6.2 percent below November 2009. The West also saw a stunning 18.2 percent jump. This jump leaves it within 0.4 percent of year ago levels.

Both the Midwest and South saw declines, though, in pending sales. The Midwest declined 4.2 percent and is still 7.7 percent below year ago levels. The South fell only 1.8 percent.

"As we gradually work off the excess housing inventory, supply levels will eventually come more in-line with historic averages, and could allow home prices to rise modestly in the range of 2 to 3 percent in 2012," Yun said.

For now, the 30-year fixed rate mortgage remains in the low five percent range, which is near a historical low. The extension of Bush-era tax credits, as well as renewed hopes of job growth could very easily translate into more sales on the housing market horizon.

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Copyright © 2011 Realty Times. All Rights Reserved.