As home loans get harder to obtain, the number of renters increases, and so will rent

Come October 2011, buyers’ purchasing power is will reduce even further:

• The FNMA (Fannie Mae) loan limit will be reduced from $729,000 to $625,500, pushing more buyers into jumbo loans for which there are fewer lenders and consolidators.

• Jumbo loans require 6-12 months of reserves, which is more than FNMA requires.

• Interest rates will likely rise, making qualifying for a loan even harder.

• Mortgage insurance for FHA loans will increase by 30% in April 2011.

• Credit scores are on the decline.

• As home equity has vanished, buyers who want bigger homes will not have the equity from the sale of their current home to put toward the new purchase, which will likely require a 30% down payment.

What does this means?  More people staying in their homes, more people unable to qualify for a loan, more people renting instead of buying.  This is all true before we get to the conversation of the recurring suggestions in Congress that the mortgage interest deduction should be reduced or eliminated.  There are times when it’s good to be a landlord. This is one of them.  And, yes, we do investment property loans, too.  Give us a call.

The following statements are not true

The mortgage business is a highly commoditized, highly competitive place.  I have no illusions about that.  I did however get lulled back into an illusion that every mortgage salesperson has the same level of advice, expertise, and service that Scott and I do.  That illusion has been blown, once again.  There’s nothing better than a respectable competitor to learn from.  There’s nothing worse than dealing with a “peer” that you’d be afraid to be seen eating lunch with.

I would never hire the person on the other end of the phone based on personality, but I’ll leave the personal out of this.  This poor sot probably has to deal with 20-50 calls like mine every day because he was well practiced, down to the verbal tics, in handling all my questions and objections.  However, I would never advise anyone to do business with him or his company because his sales tactics included the following paraphrased sentences, none of which was true:

     * You’re getting the best rate and preferred treatment because you were
        referred by your existing lender. (May grace befall upon the borrowers
        who are not preferred.)

     * You’re getting the best rate because we’re not a middleman and we go
        direct to Fannie Mae and Freddie Mac to get the best rate for you.

     * You’re getting the best rate because you qualify for special government
        programs, and we’re one of few companies that can offer these
        programs.

     * I can guarantee that we’re providing you the best rate.

     * I’ve closed over 1000 loans, and therefore I have the experience to tell
        you that this new loan is in your best decision you could make.

     * Why do you need to waste your time confirming with someone else who 
        doesn’t have experience in the business that I’m offering the best rate? 
        You’re a busy person.  Why don’t we just go ahead and wrap this up.

     * I’m a busy person. I was working on several other applications when
        you called.  I didn’t expect this call from you today.  I’m going to be
        busy tomorrow.  Can we set up a time when you’ll be around so I can be
        sure to reach you to follow up?

No sensitivity to the fact that my friend is sick.  Apparently not enough experience to notice the fact that my friend is in her upper-60s and might be receiving Social Security Income to quality.  And clearly not confident that he was offering the best deal because he was pushing for the commitment so hard it finally repulsed me.  It wasn’t even my loan, and I have pretty thick skin.

The lesson? If you have seniors in your life, make sure they get help with their financial affairs. The world moves very quickly, they often make decisions much more slowly, and they require more time to digest information and comprehend it.  Our culture wants speedy decisions, not quality ones.  The second lesson:  Don’t believe everything you hear from your own lender.

What does this mean and why do you care?

Warning:  Remember, this is a blog.  The goal here is to present the big picture on sometimes complicated subjects. By design, I oversimplify.

First, it will likely mean higher rates.  Mortgage-backed securities have bond-like quality.  They sell with a price (what they cost) and a yield (what they earn).  The law of supply and demand drives price and yield.  Sorry to haunt you with Economics 101. If prices are high, the yield goes down (which generally drives people to sell).  If prices are low, yield is high (driving people to buy).  If the Fed stops buying those securities and there is no other buyer, prices will drop to attract those buyers, yields will go up as a result, and those yields are directly correlated to mortgage interest rates, which means—you guessed it—that interest rates on mortgages have to go up as well.  Got it?

Second, understand that just a few years ago, the Fed owned no MBSs.  None.  By March, it will own $1.5 trillion.  Trillion with a T.  This means that $1.5T is now in the marketplace.  Too much money in the marketplace can mean greater inflation (too much money chasing the same amount of goods).  Now, so far, we haven’t seen greater inflation.  It’s the Fed’s job to keep that in check.  Someone also has to pay for these purchases, meaning that the American taxpayer is likely going to have to pony up money to cover it.  That may mean higher taxes—higher income taxes, higher capital gains taxes, and the list goes on.

We can’t predict the future, but we can do our best to anticipate what might be coming around the blind curves in the road.  This might be a good time to consider refinancing into that 30-year fixed-rate loan if you haven’t already.  This might be a good time to consider a loan modification.  This might be a good time to consider retirements and education funding plans that provide a tax-free component.