Mortgage Rate Trends: Your Mortgage Questions Answered

As a homeowner looking to refinance, I followed banking news relentlessly in recent months and prepared for the worst. Banks, spooked by the subprime “meltdown” had tightened their standards; I wouldn’t get a loan. I could sell my house, but the market is down; maybe no one would buy it. There was a bail out for folks with ARMs like me, but I wouldn’t qualify.

I was two weeks away from a rate increase when I qualified for my new loan and wrapped my existing home equity line into it. After months of hearing nothing but gloom and doom, why was it so easy to qualify, negotiate good terms and walk away with a new, low fixed rate? Aren’t things as bad as industry analysts say they are?

“Not really,” says Philip E. Jawny, branch manager of Wells Fargo in Raleigh, “at least not here in the Raleigh area. But, it’s the perception people have, and perceptions are hard to change.”

 A Subprime Primer

What started it all? Michael Lassiter, Vice President and Branch Manager of Suntrust in North Raleigh, explains:

Lenders secure loans, then sell them as mortgage-backed securities to investors on Wall Street. Wall Street investors were looking for very high returns, so they encouraged high-risk loans, 100 percent financing and guidelines that often required no proof of income. 

“The programs were offered through loan officers on the street, who promoted the high-risk, high-yield plans,” says Jawny. For example, one of the programs was the pay-option ARM. It gave the consumer four  different options every month: interest-only, a payment based on a 30-year term with P&I, a payment based on a 15-year P&I, and a minimum payment based on income, debt and downpayment. The overall interest rate was 8.5 percent.

“The program was good for the savvy consumer who had cash in the bank, an investment portfolio and multiple properties,” Jawny said. “It provided liquidity and high tax write-offs. It was bad for individual homeowners because it allowed lenders to qualify them for $400,000 homes when they should have been buying $200,000 homes.”

In time, consumers began to miss payments, says Lassiter, who was formerly with American Home Mortgage. “At any given time, 20 to 25 companies had been bidding on our loans, but when mortgage holders began to default on their loans, investors saw them as too risky.” American Home Mortgage was down to only two groups of investors offering 95 cents on the dollar when it was forced into bankruptcy along with many other lenders.

The media made much of the event, but Lassiter simply terms it, “A big correction in the market.”

The Big Chill

President Bush's proposed five-year freeze on ARMs began to take shape about the same time foreclosures spiraled out of control and spooked lenders pulled out.

Millions of Americans hoped the plan would help them keep their homes. The plan was to cover homeowners whose adjustable-rate mortgages originated between Jan. 1, 2005 and July 31, 2007 with interest rates scheduled for a first increase of at least 10 percent between Jan. 1, 2008, and July 31, 2010. Only borrowers with credit scores of less than 600 and little or no equity in their homes or a history of late payments qualified.

In other words, it wouldn’t have helped the majority of consumers in trouble, Jawny said. “And, when banks saw defaults on the rise and began to experience financial distress themselves, they bailed out. It was a move designed to reassure investors. The only thing that will help consumers is to lower the interest rate.”

Nothing Could be Finer

Yet for all the panic across the country, local lenders agree they saw little of that here. Jawny credits the Southern way. Things never got out of hand here the way they did in other places.”

“In the Triangle, home prices are reasonable,” Jawny said. “We don’t overvalue our houses and appreciation is steady. The market is not glutted with new construction. Builders are not scrambling to cut prices to make sales. That is not the case in other parts of the country.”

In large part, the triangle owes its successful real estate market to local builders, says Jawny, who is also Triangle Sales & Marketing Council chair, working closely with area homebuilders’ associations. “The majority are family-owned companies that keep our economy going.  They’re not giving away these crazy Realtor incentives. They aren’t dropping their home prices and devaluing entire neighborhoods. They’re helping out with financing.”

Case in point: Schumacher Homes, a custom builder, will make the first year’s mortgage payments for its customers via its in-house lender, Triad Mortgage Group. The financing was prompted by the subprime meltdown and customers who need to sell a home before purchasing the next one, according to Steve Mason, Schumacher’s New Home Consultant in the Triangle area. “This enables them to do that without carrying two mortgages. They can close on their new home and they have a whole year to sell the old one. It’s awesome.” Mason should know. He took advantage of the program to build his own home.

Builders are getting creative, says Mershon Gurtner Moore, Assistant Vice President for mortgage loans at BB&T, adding that in addition to builders paying a year’s mortgage, she is seeing them buy down the interest rates for buyers. “A lot of buyers who don’t know how long they will be in that house like this option. I’ve done more of those in the past 90 days than in the past 20 years.”

Changes in the Wind

What else can we expect? “I wish my crystal ball wasn’t so foggy,” Moore says. “Everyone thinks rates are going to continue to go down. I hope so, it will continue to stimulate the market.”

Risk-based pricing, says Lassiter, has already been introduced into the market. “Credit scoring is more important than it’s ever been.” In the past, a homebuyer with documented income and a credit score of 650 got the same rate as someone with 750, he says. “Now if you fall below 680, your rates will be higher, as much as 1/4 or a 1/2 percent.”

“Banks are no longer going to be doing creative financing,” Jawny says. “No more 80/20 financing. The 80/20 is a way to manipulate the secondary market so that the consumer does not have to pay mortgage insurance. If you have a first at 80 and a second at 20 percent, you now have a loan at 100 percent.”

Refinances are up 35-45 percent so far this year, Jawny says. So consumers are still qualifying for loans even though banks are changing their lending practices. Your average, employed credit-worthy individual is not going to have a problem. Which is good news for buyers. 

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Refinancing for Better Terms

Should you refinance? It all depends on how much you owe, what your current interest rate is and how long you plan to stay in your home.

Know Your Loan

Lenders in the tri-county area say more than half of us do not know what we have, so when new mortgage programs are announced, we fail to take advantage. When interest rates are cut by fractions of a percent, we do not think it is worth it. And, we could be shaving hundreds of dollars off monthly payments or taking years off the lives of our loans.

Know Your lender

After you know what you have, share that information with a professional lender. Ask him or her to be on the lookout for a program or rate that could improve your particular circumstances. If you get a heads-up that something is coming down the pike, submit your loan application. You won’t have time to lock in the best rate if you wait until it’s posted to apply for a loan.

Know Your rate

What’s enough of a difference in interest rates, to refinance? The answer to this one may surprise you. It can be as little as 1/2 a point to 3/4 of a point. Even if you’ve refinanced only a couple of months ago, it might be worthwhile depending on the loan amount and how quickly you can recoup closing costs. This is where relationships are key. Often times, lenders on a second or third loan to the same customer will forgive or greatly reduce closing costs. So, ask not what you can do for your lender, ask what he can do for you.

Saving your home, money, & credit

If you have a rising mortgage rate that will soon render it impossible for you to make payments, don’t wait until you’re in foreclosure and your home is being sold on the courthouse steps. You don’t want this action on your credit report and there may still be a way to salvage your home, money and credit. Here are the first three things you should try:

1.   Work out a deal with the bank. The average foreclosure costs banks about $40,000, and they don’t need any more houses to sell right now. So, they are motivated to work with you. Will they accept interest-only payments? Will they extend the length of your mortgage to cover missed payments? The answer will always be “no” unless you ask.

2.   Sell the property. A sale allows you to get out from under an unbearable financial burden and start over. You may be able to walk away with some money and salvage your credit rating. This will allow you to buy another house or at least start rebuilding your credit.

3.   A short sale. Sell the home for less than the mortgage owed. The lender either absorbs the loss or requires you to pay it back in a lump sum or over time. You can avoid a foreclosure with a short sale if you can: prove inability to make payments, find a willing buyer and get your lender to approve the sale.
 

Jane Shealy is a freelance writer