Huge Refis for Über-Luxury Homes; Even Billionaires Cash-Out Too

Huge Refis for Über-Luxruy Homes; Billionaires Cash-Out Too

Bajak and Associates

Data Source: CoreLogic, August 2018

Across America there are approximately 230 homes with very large mortgage balances, anywhere between $10 to $20 million dollars. According to Arthur Jobe at CoreLogic Insights, close to 75 percent of all those mortgages originated back in 2013 and out of those, 180 were refinances. In fact, those refinances were mostly originated in 2013 as well.

It is unlikely that these homes are in your neighborhood (or even ours), unless you live in California, since 55 percent of those super jumbo refinances come from that state, no surprise there. As for the rest, about seventeen percent you originate from Florida, and around 4 - 6 percent in states like Massachusetts, Connecticut, New York and Texas.

Data Source: CoreLogic, August 2018

No doubt, even billionaires love to save money, and this is the reason ARMs (adjustable rate mortgages) are very popular for these types of loans due to their initial lower rates. In fact, around 76 percent of borrowers who refinance these ARM loans choose to go with another ARM, and about 31 percent who refinance their fixed-rate mortgages switch to ARMs. Why? The answer is logical, most of these borrowers won't see their adjustable period take effect until the end of 2024.

Of course, getting a lower rate is all well and good, but it was not the only reason these borrowers decided to refinance, CoreLogic data reveals forty-seven percent got cash out. One other major reason is consolidation, which makes up about 21 percent of the refinances. Keep in mind also that the cash out amounts tend to be... well huge; these refinance loans average were $6.6 million, even bigger than the mortgages they replaced, and now that average leaped to $8.3 million in 2018.

If a borrower chooses a fixed-rate, it turns out they also most likely choose a 15-year term, and the data also shows that just three large banks monopolized around half of all those loans.

As the saying goes, if you have to ask, you can't afford it, but just to satisfy your curiosity, the Principal and Interest payment on a $20 million 15-year mortgage at 3.25 percent is only $140,534.

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Data Source: CoreLogic, August 2018

What Mortgage Rates Will Do Next Year

What Mortgage Rates Will Do Next Year,
(from people who usually get it wrong)

Bajak and Associates

Looking back at the events that have derailed mortgage rates’ return to ‘normalcy’ over the past few years is unsettling

Rates for home loans have spent the past decade or so doing anything but what’s expected of them. Every year, it seems, the general consensus is that in the coming months, financial conditions will finally get back to “normal,” taking mortgage rates with them. And every year something has brought that “normalization” to a screeching halt.

In 2015, for example, shock-and-awe bond-buying by the European Central Bank helped push bond yields into negative territory in Europe and behind. In early 2016, markets were rocked so badly by concerns about earnings that there were fears of another recession – and then rocked again by the upset Brexit vote.

2017, which started off with concerns about surging bond yields under a pro-growth, anti-tax president, instead saw many months of a “Trump slump” when tax reform took a while to materialize.

Mortgage rates in 2018 may be the closest thing to “normal” we’ve seen in a long time. With two more weeks in the year as of this publication, we’re likely to see a full-year average of 4.54% for the 30-year fixed-rate mortgage. That will be the highest since 2010.

And for 2019? Given all the variables in both financial markets and housing, forecasting mortgage rates is for the “intrepid,” in the words of Mark Zandi, chief economist for Moody’s Analytics, and a long-time housing watcher. And those are just the known unknowns. Who can guess the curve balls lying in wait in financial markets, earnings, economic data, housing markets, and beyond?

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By Andrea Riquier, MarketWatch

Mortgage Rates Lowest in a Month!

Mortgage Rates Lowest in a Month!

Bajak and Associates

Lowest Mortgage Rates in a Month! Nov. 16, 2018

Mortgage rates hit their lowest levels of THE month yesterday, and the lowest levels in A month today.  It's a bit of a technicality, really.  As of yesterday, there were a few days in mid-to-late October that saw lower rates.  Today's drop means we'd need to go back to early October to see anything lower. 

What's the significance of being at the lowest levels in a month?  None, really.  It's just really fun to be able to say such things in an environment where such things haven't been easily said for quite some time!  Perhaps more relevant and more tangible is the fact that we can say rates are nearly an eighth of a percentage point lower on the week, and that's a decent move regardless of the environment.

Next week brings the Thanksgiving holiday, which tends to make mortgage lenders set rates more conservatively (secondary mortgage market is much less active than normal, starting on Wednesday afternoon).  As such, gains of this size are certainly worth considering from a lock/float standpoint.  In terms of tactical improvements amidst the broader trend toward higher rates, this is about as good as we've seen.


Loan Originator Perspective

Bonds enjoyed a green week, posting gains (minimal or not) all 5 days.  Treasury yields are nearing early October lows, but the improvements aren't fully reflected on my rate sheets yet.  I'll float new applications till Monday, for clients with a modicum of risk tolerance.  -Ted Rood, Senior Originator


Ongoing Lock/Float Considerations 

Rates continue coping with several big-picture headwinds, including: the Fed's rate hike outlook (and general policy tightening), the increased amount of Treasury issuance to pay for the tax bill (higher bond issuance = higher rates), and the possibility that fiscal stimulus results in higher growth/inflation (which certainly seems to be the case so far in 2018).

While rates were able to recover and stay sideways in the summer months, September and October have seen a surge up to the highest levels in more than 7 years. 

Upward pressure can continue as long as economic growth and inflation continue running near long-term highs.  Stay defensive (i.e. generally more lock-biased).  It will take a big change in economic fundamentals or geopolitical risk for the big picture to change.  Such things tend to not happen as quickly as we'd like.

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Source: Matthew Graham, Mortgage News Daily

Mortgage Rates Rise Sharply

Mortgage Rates Rise Sharply to 7-Year Highs

Bajak and Associates

Freddie Mac Projected 30 Year Fixed Rate Back in Feb. 2018

Mortgage rates had a bad week and an especially bad day following a much stronger-than-expected jobs report.  The Employment Situation (the most important piece of labor market data and arguably the most important economic report as far as interest rates are concerned) showed the highest pace of wage growth since before the recession and a surprisingly robust addition of new jobs in October. Strong jobs data is the nemesis of low interest rates and today was no exception.

Mortgage rates were already operating fairly close to long-term highs, but today's move easily took them to new highs.  The average lender is now quoting conventional 30-year fixed rates of 5% for relatively ideal scenarios.  Those without a big down payment or without perfect credit/income can expect to see even higher rates.  Most lenders ended up recalling the morning's initial rate sheets and reissuing higher rates at least once today. 

There's really no silver lining apart from the fact that the higher rates go, and the quicker they get there, the closer we get to the point that the economy slows down as a result.  When that happens, rates will begin to fall before just about anything else.  Unfortunately, the expected time frame for such things is incredibly wide (not the sort of thing you hope for if you need to buy/refi).  And yes... it's also unfortunate that our one source of solace at the moment involves an economic downturn, but if you want low interest rates, that tends to come with the territory.

Loan Originator Perspective

October's NFP jobs report beat market expectations today, and bonds sold off as a result. Treasury yields are near early October's multi-year high, and MBS are following their lead. There's little/no motivation for rates to drop, and plenty for them to rise.  Lock early, ideally as soon as you have the opportunity. -Ted Rood, Senior Originator

Vast majority of clients continue to favor locking in once within 30 days of funding.  I do not believe floaters have enough to gain to justify the risk as higher rates continue to be the trend. -Victor Burek, Churchill Mortgage

Lock/Float Considerations 

Rates continue coping with several big-picture headwinds, including: the Fed's rate hike outlook (and general policy tightening), the increased amount of Treasury issuance to pay for the tax bill (higher bond issuance = higher rates), and the possibility that fiscal stimulus results in higher growth/inflation (which certainly seems to be the case so far in 2018).

While rates were able to recover and stay sideways in the summer months, September and October have seen a surge up to the highest levels in more than 7 years. 


Upward pressure can continue as long as economic growth and inflation continue running near long-term highs.  Stay defensive (i.e. generally more lock-biased).  It will take a big change in economic fundamentals or geopolitical risk for the big picture to change. Such things tend to not happen as quickly as we'd like.

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Source: Matthew Graham, Mortgage News Daily

FICO Scores Hit Record High

FICO Scores Hit Record High

Bajak and Associates

Lesson learned?  Whether they saw their credit decimated by the housing crisis and the Great Recession or merely watched loan standards tightened beyond their ability to qualify, Americans seem to have taken to heart the importance of their credit scores.  The result, FICO says, is that consumer credit scores have reached a new high, an average of 704 points.

How Credit History Impacts Your Credit

Kenneth Harney, in an article for the Washington Post's Writers' Group, quotes FICO Vice President of Scores and Analytics Ethan Dornhelm that Americans are "making more judicious use of credit." This means higher scores on the FICO model that weights them not only in terms of on-time payments but on the length of the credit history, the amount and type of credit a consumer has available, and how much of that available credit is being used.

The 704 point average score, on scale that runs from 300 to 850, is a substantial improvement from the average of 686 in 2009.  Harney points out that a lot of the improvement, 5 points, has been added in the last two years, one of the fastest two-year runups in FICO history.

A score of 704 is considered good, meaning a consumer is a fairly safe bet for performing on a loan as agreed, and usually gets that borrower a fairly good interest rates and other terms.  The best deals are usually reserved for those with scores of 750 or better. However, while FICO scores for most categories of borrowers are rising, Harney points out that the averages for people taking out mortgages are sliding, down from 745 in the years after the crash to about 733.  This, of course, is not a reflection on borrowers but rather an indication that mortgage lenders are relaxing their standards, accepting slightly lower scores in their underwriting.

There are variations in average scores by age. Persons 18 to 29, a range that includes some Millennials and most adults of Generation Z, have an average score of 659.  They will typically have not only credit histories but thinner credit files, many any negative report will weigh more heavily on the score. The average score for people ages 40 to 49 is 690, and for those 60 and older, it's 747.

There are a lot of factors that help account for the overall higher scores.  First, fewer people have truly awful ones.   Those with scores under 500 now constitute 4.2 percent of the total, down from 7.3 percent in 2009 and the share with scores from 500 to 549 has dropped from 8.7 percent to 6.8 percent.

On the other end of the spectrum, 22 percent of those with a FICO number are considered "super-scorers," with a score over 800.  Forty-two percent have scores between 750 and 850.

Some help may have come from a change in reporting by the three major credit bureaus that we noted a few weeks ago. So-called collection reports, defaulted accounts that are sold to a third-party, have been handled differently since the first of this year.  They must be associated with a contract or agreement to pay and marked as paid when they are.  Medical accounts have to be at least 180 days past due before being reported and all collection accounts must have sufficient information to link them to that consumer.  The number of credit files with collection accounts were reported by the Federal Reserve as dropping from 12 percent last year to 9 percent at present.

Dornhelm says that lessons from the housing crisis are clearly affecting scores and consumer behavior.  He thinks more Americans have access to and better understand their credit scores and how to manage them, including managing the amount of their debt.


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Source: Jann Swanson, Mortgage News Daily

Fannie and Freddie End Funding of Single-Family Rentals

Fannie and Freddie End Funding of Single-Family Rentals

Bajak and Associates

The Federal Housing Finance Agency (FHFA) has pulled the plug on pilot programs run by both Fannie Mae and Freddie Mac (the GSEs) to finance institutional investment in single-family home rentals.  The programs began in February 2017 with a $1 billion loan from Fannie Mae to the Blackstone Group. The loan was originated by Wells Fargo with a Fannie Mae guarantee and secured by some of the 48,000 single-family homes Blackstone's Invitation Homes subsidiary had purchased during the recession, often from portfolios of lender-owned real estate, and turned into rentals.

At the time, the Urban Institute wrote that the transaction "marks the first time a government-sponsored enterprise has facilitated financing for a large institutional operator of single-family rental properties," and Fannie Mae pronounced the transaction the first in a pilot program.

In ending the program FHFA said, "In the last two years, both Enterprises have participated in the single-family rental market on a larger scale than previously through pilots designed to 'test and learn' more about the market and best practices.  In June 2017 FHFA convened a Single-Family Rental Workshop to solicit feedback, identify market challenges and opportunities, and gain perspective on the overall market.  It also conducted an impact analysis and reached out to a wide array of industry stakeholders.    

When the pilot began it provoked immediate blowback, especially from the National Association of Realtors® (NAR).  NAR's president at the time, William E. Brown, wrote a letter to FHFA director Mel Watt which said in part, "Rather than focusing on allowing well-qualified Americans to build wealth through affordable mortgage options, Fannie Mae is actively financing large institutions to compete with them. These investors do not expand the affordable housing stock. Rather, in this limited market they drive up the price of rents and remove affordable inventory from the hands of American homeowners."

The National Community Stabilization Trust (NCST) also denounced the program saying it would lower borrowing costs to the institutions, allowing them to buy up more housing stock. NCST president Robert Grossinger said, "I am perplexed to see Fannie Mae place a taxpayer guarantee behind the same private interests whose risky practices led to the millions of foreclosed homes they are now buying up. These investors so far have had no trouble financing the purchase of tens of thousands of homes without government support."

With this week's announcement FHFA appears to agree with Grossinger.  Watt said, "What we learned as a result of the pilots is that the larger single-family rental investor market continues to perform successfully without the liquidity provided by the Enterprises."

This will mark the end, FHFA said of the GSE's participation in the single-family rental market except through their previously existing investor programs. The GSEs are not precluded however from proposing changes to their existing programs to meet the needs of the single-family rental market. They are also free to develop proposals calculated to utilize single-family rentals as a pathway to homeownership.

Not surprisingly NAR applauded FHFA's decision. NAR president, Elizabeth Mendenhall, issued a statement that said in part, "With inventory shortages facing housing markets across the country, the National Association of Realtors® has long advocated for the Federal Housing Finance Agency to end its expansion into the single-family rental market and return its focus to promoting a liquid and efficient housing market, as Congress intended. By financing the purchase of thousands of single-family homes for institutional investors to use as rentals, Fannie Mae and Freddie Mac compounded on inventory shortages and affordability concerns, which are holding back prospective homebuyers across the country.

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Article Source: Jann Swanson, Mortgage News Daily

Garage Conversion Restrictions Eased In California

Garage Conversion Restrictions Eased In California!

Bajak and Associates

Real Estate Garage Conversion

Amid a profound housing shortage that’s driving up rents and property values statewide, California officials and real estate experts are looking to an often overlooked form of housing as a potential solution: the in-law unit.

Thousands of Angelenos already live in back houses and granny flats (officially called “accessory dwelling units”). This year has seen a substantial increase in these garage conversion units, due to California’s new Senate Bill 1069.  The bill, enacted in 2017, was designed to increase housing supply by easing restrictions on garage conversion units.  The bill also presents an opportunity for homeowners to increase their home value by adding liveable space to their home without dealing with the previously stringent permitting process.

Prior to the enactment of SB 1069, a garage conversion, particularly in Los Angeles, was time consuming and expensive.  Among other things, in order to convert a garage to living space, many cities required the addition of replacement parking spaces, large pathways from the garage conversion to the street, a sprinkler system for the new unit, and fees and charges to connect local water and sewer systems even for existing structures.  In fact, the permitting system in Los Angeles prior to SB 1069 was so complex that in 2016, the Los Angeles Superior Court had put a hold on garage conversion permits due to a conflict between state law and local rules.

SB 1069 encourages garage conversion units by eliminating many of these requirements and simplifying the permitting process.  Now, so long as a property is within 1.5 miles of a public transit system, a permit can more easily be obtained for a garage conversion of up to 1,200 square feet that starts within 5 feet of the property line.  This streamlined procedure has significantly increased the popularity of garage conversions, and has provided a new avenue for homeowners to add an easy source of rental income and low-cost housing opportunity for renters. These small residences could help solve California’s housing shortage, and is certainly a step in the right direction.

If you would like to explore how we can help you and your family finance your garage conversion project in the Los Angeles real estate market, give us a call today at 1-800-217-1152 for a FREE consultation or send us an email at BajakTeam@Gmail.com

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