Home Loans: A Call to ARMs?


Original Post Date: May 28, 2011

By: Annamaria Andriotis

One of the signature loans of the housing boom—the adjustable-rate mortgage—is looking more attractive than it has in years. For some buyers, it may be an even better deal than a fixed-rate mortgage.

ARMs typically offer buyers a lower rate for a set period of years, after which rates rise or drop each year, depending on prevailing interest rates. The loans lost favor during the financial crisis, when their rates weren’t much better than those for fixed-rate mortgages.

But now, as interest rates hover near historic lows, the “spread” between the rates on the most popular adjustable and fixed-rate loans is on pace to be the widest it has been in eight years, according to HSH Associates, which tracks mortgage rates.

For an ARM to make sense, a borrower has to be comfortable taking a gamble that interest rates won’t rise, or that he can sell the house before they do. It is a dicey bet now: Rates have been mostly on a downward slide for the past three years, mirroring the recent plunge in 10-year Treasury rates, and seem to be about as low as they are going to get. Many economists are predicting rates will rise in coming years.

That is why ARMs make sense mostly for borrowers who expect to be in a home for a short time. “If the household is truly intending to stay only for five years, they should take the five-year ARM,” says Stuart Gabriel, director of the Ziman Center for Real Estate at the University of California, Los Angeles.

The average rate on a so-called 5/1 ARM—which carries a fixed rate for five years, then adjusts every year thereafter—is currently 3.4%, nearly 0.4 percentage point lower than January’s rate, according to data compiled by HSH Associates. The average rate on a 30-year fixed-rate mortgage is 4.72%, just 0.22 point lower than in January.

That spread of 1.32 percentage points is big enough to save some buyers thousands of dollars in mortgage payments during the first five years of a mortgage. At current rates, a borrower with a $400,000 5/1 ARM will pay about $65,000 in interest over the first five years, while a borrower with a 30-year fixed-rate mortgage will pay around $91,000 in interest during that same period.

While ARMs are often cheaper than fixed-rate mortgages, this wide a spread—partly the result of low demand—is unusual, says Keith Gumbinger, vice president at HSH Associates; the historical average is 0.59 percentage point.

Here is how a 5/1 ARM works: After the first five years, rates typically adjust each year and can move either up or down. During the sixth year, the maximum amount they can increase by is 5 percentage points. Each year after that the rate can move by 2 percentage points, as long it doesn’t surpass the loan’s maximum lifetime cap, which is 5 percentage points above the initial fixed rate. That means the lifetime cap on a loan made today at 3.4% would be 8.4%.

During the housing boom, some buyers flocked to ARMs, hoping to sell their houses at a profit before rates reset. When prices started falling, the gambit stopped working. And after the monthly payments shot up, many borrowers found themselves facing higher-than-anticipated bills. The problem was especially acute with so-called option ARMs, which allowed borrowers to make a minimum payment that didn’t cover the interest due and led to a rising loan balance.

When the housing market crashed, ARMs—and the lenders and brokers who sold them—shouldered part of the blame. Last month, ARMs made up some 6.5% of the total mortgage market, according to the Mortgage Bankers Association, down from roughly 18% in April 2007.

The risk to borrowers is that the new payments after the fixed-rate period are suddenly unaffordable. While there isn’t a way to control for a job loss or other unforeseen loss of household income, it doesn’t seem likely that interest rates will spike so high in coming years that borrowers will end up paying the maximum, says Cameron Findlay, chief economist at LendingTree.com, an online marketplace that connects consumers to lenders. He expects the government will keep some sort of control over the rate environment as home values and employment recover.

ARMs are most suitable for buyers who are dead certain they are going to sell within the fixed term of the mortgage, and the recent housing market crash has offered plenty of reasons to cast doubt. While most experts expect the housing market to be quite different five years from now, it may be hard to take a risk predicated on being able to sell your house exactly when you want.

They also can make sense for some homeowners who plan to refinance, especially those who are a few years away from retirement and plan to sell their home then, Mr. Gumbinger says. They could recast their remaining loan into a 5/1 ARM with a lower fixed rate than their current mortgage, which in turn would lead to smaller monthly payments. The money they save could be put to work in a retirement account, he says.

ARM or no, most homeowners don’t stay put too long. On average, individuals who sold their homes in 2010 had owned them for eight years, according to the National Association of Realtors.

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New-Home Sales Rise

Original Post Date: May 24, 2011

By: Jeff Bater and Jeffrey Sparshott

New-home sales rose more than expected and the median price climbed in April, but the overall pace of sales remained weak for the battered U.S. sector.

Sales increased by 7.3% on a monthly basis to a seasonally adjusted annual rate of 323,000 in April, the Commerce Department said Tuesday.

Economists surveyed by Dow Jones Newswires had forecast sales would remain unchanged at an annual rate of 300,000.

Despite the unexpected increase, sales since a year ago are down sharply, having fallen 23.1% since April 2010, which is when a tax subsidy for first-time home buyers ended.

Sales rose 8.3% in March, revised down from a previously estimated 11.1% increase. The March jump followed a February plunge that was blamed on the weather as well as fundamental troubles in the housing sector.

Uncertainty over property prices has made homebuyers hesitant to purchase new houses. Lower selling prices weighed down PulteGroup Inc. in its first quarter, with the builder’s revenues tumbling by 21%.

Home construction in April fell sharply, the government reported last week. Builders face competition from previously owned homes, which cost less. A wave of foreclosures caused by the housing bust and the deep recession swamped the market with cheap property.

The median price for an existing home in the U.S. is $163,700, the latest data show. The median price for a new home, on the other hand, was $217,900 in April, Tuesday’s report said. A year earlier, the median price for a new home was $208,300. The increase was encouraging because prices have been sinking for a long time, making consumers reluctant to buy because of a belief prices might recede further.

Unsold homes on the market have kept down prices. Tuesday’s data showed April inventories were at a record low. But the time it would take to exhaust the supply of unsold homes on the market was 6.5 months in April, above the baseline of six months that economists consider healthy. The supply in March was 7.2 months and it had been much higher just last summer, hitting nine months.

The Commerce report said new-home sales in April rose in all four U.S. regions on a monthly basis. Sales increased by 7.7% in the Northeast, 15.1% in the West, 4.9% in the Midwest, and 4.3% in the South.

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New consumer bureau proposes simplified mortgage disclosure forms

Link: http://www.latimes.com/business/la-fi-mortgage-forms-20110519,0,335738.story

Original Post Date: May 18, 2011

By: Jim Puzzanghera

Reporting from Washington—

The blizzard of complex disclosure forms required in getting a mortgage soon could ease a bit as a new federal agency tries to streamline and simplify an important part of the process.

In its first major move, the Consumer Financial Protection Bureau released two prototypes of shorter and easier-to-understand disclosure forms that lenders must give home buyers when they apply for a mortgage.

The goal is to help consumers better comprehend the terms of the loans and compare them with mortgages available from other banks, Elizabeth Warren, the special White House and Treasury Department advisor helping to launch the consumer bureau, said Wednesday.

“With a clear, simple form, consumers can better answer two basic questions: Can I afford this mortgage, and can I get a better deal someplace else?” she said, stressing that the agency wants public feedback to help make the forms as understandable as possible. “That’s good for American families and good for the markets they depend on.”

The prototypes have simpler language and use highlighted terms, arrows and “yes or no” graphics to provide key details about a loan. Those include whether the mortgage terms can change, projected monthly payments for different years and a new piece of information — how much of the loan would be paid off in five years.

Seven banking executives saw the prototypes Tuesday and liked them, said Bob Davis, executive vice president of mortgage finance for the American Bankers Assn.

“Our bankers felt this type of proposal was an improvement and a simplification, and we’re happy to see it,” Davis said.

Some mortgage industry leaders have supported simplified disclosures but have warned about the costs of the changes and possible new legal liability.

The bureau said the prototypes would be merged into one two-page form after it solicits extensive public feedback through its website, consumerfinance.gov, and interviews with consumers and industry representatives in Los Angeles, Chicago and four other cities.

The new form would replace two slightly longer mortgage disclosures that many home buyers complain are duplicative and difficult to understand.

“They’re complicated and convoluted,” said Richard Green, director of the USC Lusk Center for Real Estate. “Simplifying them is a good thing, but it’s actually a very difficult thing to do because mortgages are just complicated.”

Created in great part because of regulatory failures leading up to the subprime mortgage meltdown, the consumer bureau is making simplified mortgage disclosures a priority as it prepares to start operations in July.

Changing the disclosure forms is the first of several ways the agency will become a key player in mortgage regulation. For instance, it also will set new standards for how companies service home loans.

“This isn’t just about giving consumers information in a clearer way,” said Travis Plunkett, legislative director for the Consumer Federation of America. “It’s about changing the way that lenders offer information to consumers to make sure they’re not being deceptive and they’re not low-balling financial risk.”

The financial reform law enacted last year created the consumer bureau and directed it to develop a “single, integrated disclosure for mortgage loan transactions” by July 2012.

Lenders are required to provide two forms to a consumer within three days after he or she applies for a mortgage. The forms outline the loan’s interest rate, initial monthly payment and other features.

One form is a two-page Truth-in-Lending-Act mortgage disclosure statement. The other is a three-page “good faith estimate” required by the Real Estate Settlement Procedures Act.

“They are intended to convey the basic facts about home loans to help consumers comparison-shop … but these forms have overlapping information and complicated terms that can be difficult to understand,” Warren said.

In a poll last fall by Consumer Reports magazine, 84% of respondents who had applied for a loan or credit card recently said they had some difficulty understanding the financial disclosures.

The consumer bureau released the forms as part of its “Know Before You Owe” project to get feedback from the public, consumer groups and the mortgage industry.

Over the next four months, the agency will conduct interviews about the forms with consumers and mortgage industry officials in six cities — Los Angeles, Chicago, Albuquerque, Baltimore, Birmingham, Ala., and Springfield, Mass.

After settling on a single prototype, the consumer bureau will start a formal federal rule-making procedure, which also requires public comment. Such comment is crucial because providing new information, such as how much of the mortgage would be paid off after five years, could backfire by overloading consumers, USC’s Green said.

“A lot of people when confronted with all those numbers just kind of panic,” he said. “I think testing is a really great idea. If you give people a form and ask them about it and they seem to know what’s going on, that’s a good sign.”

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Good-faith estimate disclosures ineffective in helping consumers shop for mortgages

Original Post Date: May 8, 2011

By: Kenneth R. Harney

Reporting from Washington—

What if the federal government spent years designing a tool to help consumers shop intelligently for mortgages — comparing lenders’ rates, terms and total settlement costs — but consumers ignored it or didn’t use it?

No need to speculate here; it appears to have already happened. A new survey of 1,000 U.S. consumers suggests that the good-faith estimate (GFE) disclosures that all home buyers and refinancers receive at loan application to facilitate shopping are not getting the job done.

Federally mandated good-faith estimates spell out the lender’s charges, all anticipated fees for title insurance, escrow and settlement services, plus other key costs. The most recent version of the GFE, released at the beginning of last year, contains space for consumers to take one lender’s estimates and get competing quotes from as many as three others. It also requires lenders to stand behind their estimates — guaranteeing that some of them won’t increase by even a penny at closing, and others won’t increase more than 10%.

But the survey found that the GFE may not be improving shopping as intended. After receiving the disclosure, 56% of buyers say they did no comparison shopping among other lenders. Another 12% used the form to contact just one additional lender, and 10% weren’t sure whether they actually used the GFE at all. Just 3% said they comparison-shopped rates and terms at four lenders or more.

The survey, conducted by market research firm TNS Global for mortgage lender ING Direct, also found that 53% of those buyers who looked at the GFE spent less than 30 minutes doing so. Twenty-six percent either never looked at it or don’t know whether they looked at it. Forty-nine percent of buyers said the GFE disclosure was too complicated, “a waste of time” or they weren’t sure. Just 37% rated it “useful.” The survey had a statistical margin of error of plus or minus 3.2%.

Arkadi Kuhlmann, chief executive of ING Direct, called the GFE potentially “one of the most crucial documents” a home buyer receives, yet the survey indicates that it is not effective. “If it’s too complicated and not being used to help homeowners find the right mortgage for them,” he said, “then [it’s] just a waste of three pieces of paper.”

Kuhlmann’s firm, which does most of its mortgage business online, directs its customers to an educational website it has created at http://www.ingdirect.com/clearorange that walks them through the GFE step by step, explaining the process in terms that are easy to understand.

Between 2003 and 2008, the Department of Housing and Urban Development proposed modifications to the GFE, but critics said the revised disclosure was too lengthy — three pages — and predicted that it would become just another part of the paper blitz that cascades over buyers and mortgage applicants.

Kurt Pfotenhauer, chief executive of the American Land Title Assn., said if the revised “GFE were a rocket, it would still be sitting on the launch pad. Not only has it failed to simplify consumer shopping, there is evidence that [it] is actually confusing shoppers.”

Phillip L. Schulman, a Washington lawyer who represents mortgage lenders and banks, said the survey results “are not surprising” because the disclosure looks complicated and “doesn’t tell buyers what they really want to know: How much they’re going to pay per month” from a given lender, with all expenses factored into a bottom-line number.

But Brian D. Montgomery, who was federal housing commissioner during the final years of drafting the revised GFE, said: “We believed that making shopping easier would be a benefit because there had been very little real shopping before. But obviously we didn’t have a magic wand” that would change consumers’ traditional behavior overnight.

Meanwhile, Congress has shifted responsibility for GFEs and other consumer mortgage disclosure issues to the new Consumer Financial Protection Bureau, which is scheduled to spring to life in July. The bureau has announced that streamlining the GFE and combining it with federal truth-in-lending disclosures will be a priority.

Still, given the glacial pace of federal rulemaking, the three-page GFE is likely to remain in use for many months — maybe a year or more — before any new streamlined version takes its place. So here’s a smart action plan for you as a consumer. If you seriously want to shop intelligently for a home loan, buck the popular trend: Read your GFE. And use it to compare costs — line item by line item — among multiple lenders.

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FHA and Fannie Mae offer loans for home energy improvements


Original Post Date: May 1, 2011

By: Kenneth R. Harney

Reporting from Washington—

If you’ve been looking for a way to pay for energy improvements to your house, two little-publicized new mortgage programs could provide the cash you need.

Both the Federal Housing Administration and mortgage investor Fannie Mae recently have launched options in the energy conservation arena. Here’s a quick overview, with some pros and cons:

The FHA’s PowerSaver program allows eligible owners to borrow up to $25,000 at fixed rates between 5% and 7% for as long as 20 years to finance high-efficiency windows and doors, heating and ventilating systems, solar panels, geothermal systems, insulation and duct sealing, among other retrofits.

Although PowerSaver is officially a pilot program, Shaun Donovan, secretary of Housing and Urban Development, estimates that 30,000 such loans will be closed in the next two years. It eventually could become a major national program for residential energy upgrades, with total loans extending into the millions, he said.

One important element in the program is energy audits. Although they won’t be mandatory, most participating lenders are expected to encourage owners to sign up for an energy efficiency analysis by a certified specialist. The audit should pinpoint where your house is leaky or otherwise inefficient in energy use, and should recommend the specific types of upgrades or additions that could help cut your bills and reduce greenhouse emissions.

The FHA will insure loans to cover the improvements up to the $25,000 maximum under the following guidelines:

•The house must be your principal residence, detached and single-family only. No rentals, no investor homes, no second homes.

•You’ll need to demonstrate that you are a solid credit risk. Minimum FICO credit scores of 660 are required, plus your total household monthly debt-to-income ratio cannot exceed 45%.

•Houses with negative equity will not qualify. You’ll need some level of equity in the property; there is no mandatory minimum stake, but the combined primary mortgage debt plus the PowerSaver second lien cannot exceed 100% of the appraised market value of the house. You could, for example, have a 10% equity position in a $200,000 home, and still qualify for up to $20,000 in a PowerSaver.

•Lenders are likely to take an extra hard look at all your income and asset documentation because, unlike other FHA-insured mortgages, PowerSaver will cover only 90% of the lender’s loss or insurance claim in the event of a default.

Eighteen lenders around the country have signed up so far to participate, including giant Quicken Loans — a Top 10 national mortgage originator — and local players such as California-based Sun West Mortgage, Seattle’s HomeStreet Bank, the Bank of Colorado, Stonegate Mortgage in the Midwest, Pennsylvania-based AFC First Financial Corp. and the University of Virginia Community Credit Union. A spokesman for Quicken Loans said the company hoped to offer PowerSaver in as many as 34 states during the pilot period.

Some pros and cons of PowerSaver: The biggest plus is its low fixed interest rate and long term — especially in comparison with most homeowners’ alternative options such as bank home equity loans and lines of credit, which typically cost more and may have less favorable payback terms.

The main potential drawbacks center on the program permitting total household mortgage debt loads of up to 100% of market value. Some borrowers could encounter payment problems if they experience even slight income declines. If property values in the area decrease, the loans could put owners into negative equity territory.

Fannie Mae’s “energy improvement” mortgage add-on program is significantly different from the FHA’s. Rather than a separate loan to finance the energy retrofits, Fannie folds the cost of the improvements — capped at up to 10% of the estimated market value of the home following the energy-efficiency enhancements — into the mortgage amount itself.

In effect, Fannie’s program, which is available through participating lenders nationwide, allows you to buy an existing house and improve its energy usage significantly with one mortgage at current market rates. Most single-family properties are eligible for the program, except for manufactured houses and cooperative units.

Be aware that Fannie requires an audit by a certified Home Energy Rating Systems expert upfront to justify the proposed modifications to the house as truly cost-efficient. The audit must be paid for by the borrower, but Fannie will credit an extra $250 through the lenders to partially defray this expense.

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Mortgage Rates Decline


Original Post Date: April 28, 2011

By: Nathan Becker

Mortgage rates declined in the latest week, with the average rate on 30-year fixed-rate mortgages edging lower, according to Freddie Mac’s weekly survey of mortgage rates.

“Mortgage rates followed Treasury bond yields lower this week amid weak local economic data reports on business conditions and house prices,” said Freddie Chief Economist Frank Nothaft. Mortgage rates generally track Treasury yields, which move inversely to Treasury prices.

Rates have slumped for months, setting record lows in the process, as yields on Treasurys slid amid economic uncertainty. But yields began to rise at the end of August. Mortgage rates generally track the yields, which move inversely to Treasury prices.

The 30-year fixed-rate mortgage averaged 4.78% for the week ended Thursday, down slightly from the prior week’s 4.8% average and 5.06% a year ago. Rates on 15-year fixed-rate mortgages were 3.97%, down from 4.02% in the previous week and 4.39% a year earlier.

Five-year Treasury-indexed hybrid adjustable-rate mortgages averaged 3.51%, down from the prior week’s 3.61% and 4% a year earlier. One-year Treasury-indexed ARMs were 3.15%, down from 3.16% and 4.25%, respectively.

To obtain the rates, the fixed-rate mortgages required payment of an average 0.7 point and the others required an average 0.6 point. A point is 1% of the mortgage amount, charged as prepaid interest.

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