Seattle Bubble

News & discussion about real estate & the housing bubble in the Seattle area.

Seattle Bubble - News & discussion about real estate & the housing bubble in the Seattle area.

Entries Tagged as 'Financing'

125% Refinance: Pricing You IN for a Decade or More

By The Tim on July 2nd, 2009 at 9:20 AM · 129 Comments

Astute readers have no doubt have learned by now of yesterday’s announcement by HUD Secretary Shaun Donovan that the federal government’s “Making Home Affordable” plan will now allow mortgages owned or guaranteed by Fannie Mae and Freddie Mac to be refinanced with loan-to-value ratios of up to 125%.

I won’t go into all the details of the announcement since you can find good coverage of the changes over at the P-I or Rain City Guide. Instead, I thought it would be interesting to see what the long-term financial picture might look like for someone who plans to take advantage of this program.

Let’s take a look at some hypothetical home borrowers who currently owe $400,000 in various mortgages with difficult terms or high rates, and whose home is presently worth $320,000. They jump on the new FHFA Home Affordable Refinance Program and refinance into a single 30-year fixed-rate loan at a 5.75% interest rate with a 125% loan-to-value ratio.

I hope that our hypothetical couple doesn’t want to move any time in the next 13 years, because under a relatively optimistic home value appreciation scenario that’s how long it will take before they will be able to sell without bringing money to the table:

125% Loan-to-Value Home Refinance

Note that the home sale proceeds line assumes paying 6% of the sale price to real estate agents, as well as an additional 2% to account for excise taxes and other costs of selling. You can also download the spreadsheet I used to create these charts and tweak the values yourself.

With the home value appreciation tweaked to a slightly less rosy scenario, it takes 17 years before our couple can break even selling their house:

125% Loan-to-Value Home Refinance

According to a 1993 study by the Census Bureau (pdf) only ~10% of home owners stayed in one house for over ten years. A 2001 study (pdf) by the NAR-funded Joint Center for Housing Studies put the median length of home ownership at 8.2 years. Refinancing one’s home into a 30-year loan for 125% of the house’s value will most likely lock the borrower into their present home for a period of time longer than 90% of people usually stay in their homes.

If the goal of this new 125% loan-to-value program is to financially imprison people in their current homes for a decade or more, then it looks like it could be a rousing success. However, I’m not sure how many currently struggling home borrowers would really consider that to be much of a “help.”

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The Consequences of a Market Full of Monthly Payment Buyers

By The Tim on June 12th, 2009 at 11:26 PM · 50 Comments

Here’s a brief quote from a post that appeared here in 2006 titled The Monthly Payment Buyer:

In my opinion, it’s no wonder that home prices have gotten so out of whack with true fundamentals, when the first question someone asks in the home buying process is not “Is this house worth $XXX,000?” but rather “Can I afford $X,000 per month (no matter what kind of financing it takes)?” Obviously a monthly payment must be affordable, but should that really be the sole determining factor in whether a house is worth buying?

With interest rates bouncing up in the last few weeks from their artificial lows in the 4s, it’s interesting to consider how this might affect the housing market.

Following is a chart that shows how the monthly payment (principal + interest only) on a $350,000 mortgage grows as interest rates rise:

Effect of Rising Interest Rates on Mortgage Payments

Since most people are still “monthly payment buyers” when it comes to buying real estate, perhaps more informative is the following chart, which shows how much mortgage a fixed $1,750 payment (principal + interest only) buys as interest rates rise:

Effect of Rising Interest Rates on Mortgage Size

A mere 1-point jump in interest rates from 4.5% to 5.5% drops the amount that can be afforded by over 10%. Another 1-point jump up to 6.5%—a rate considered great just a few years ago—knocks another 10% off.

If suddenly everyone in the buying pool can afford 10% less for a home, what effect do you suppose that might have on prices?

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Mortgage Market “Seized Up”

By The Tim on May 28th, 2009 at 12:02 PM · 58 Comments

There’s been a lot of chatter since yesterday afternoon about treasury rates, mortgage rates, the yield curve, and so forth—and for good reason. Here’s a good write-up from Mish’s Global Economic Trend Analysis on what’s going on: Mortgage Market Locks Up

Yesterday 10 year treasury yields went soaring and the mortgage market literally seized up. Mark Hanson at the Field Check Group has this report that I can share.

As Bad As You Can Imagine

With respect to yesterday’s episode in the mortgage market — yes, it is as bad as you can imagine. Yesterday, the mortgage market was so volatile that banks and mortgage bankers across the nation issued multiple midday price changes for the worse, leading many to ultimately shut down the ability to lock loans around 1pm PST. This is not uncommon over the past five months, but not that common either. Lenders that maintained the ability to lock loans had rates UP as much as 75bps in a single day.

A good friend in the center of all of the mortgage capital markets turmoil said to me yesterday “feels like they [the Fed] have lost the battle…pretty obvious from the start but kind of scary to live through it … today felt like LTCM with respect to liquidity”.

For a local insider’s perspective, check Rhonda Porter’s post over at Rain City Guide: Mortgage Rates on the Move Up Today…way up.

And finally, here’s a post that goes into some of the mess going on behind the scenes that has led to this interesting development: It Is Failing: ALL OF IT

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Government Loan Limits Lowered $60k for Seattle

By The Tim on November 10th, 2008 at 4:55 PM · 18 Comments

As astute market observers may recall, back in March (pre-complete-government-takeover) the conforming loan limit for Fannie Mae and Freddie Mac-backed loans was bumped from $417,000 to $567,500 for the Seattle area (King, Pierce, and Snohomish counties). At that time, the local press was touting the new limits at “a big dose of first aid” and the “shot in the arm” for the housing market, while here at Seattle Bubble we asked the question: Will Higher Government Loan Limits Boost Seattle’s Market?

Our conclusion was that the added lending restrictions attached to the “Temporary Jumbo Conforming” loans set the bar sufficiently high as to prevent the higher limits from having the (apparently intended) effect of preventing home prices from falling further. Given that the median price of homes in the Seattle area have fallen 6-8% in the intervening seven months, it would appear that this assessment was accurate. Of course, one could argue that perhaps without the higher conforming limit, prices would have dropped 10% or more in the same time, and there’s really no way to know whether that might be true.

If we assume that the Seattle area’s $567,500 temporary conforming limit did in fact somehow soften the blow, however slightly, then the latest news that this limit is being dropped to $506,000 is likely to be unwelcome. However, it should be noted that as far as I am aware, all the same restrictions are still in place including, but not limited to:

  • Fixed-rate loans are limited to 90% LTV/CLTV (loan to value/combined loan to value).
  • Minimum FICO for any loan is 660.
  • Minimum FICO for LTVs greater than 80% is 700.
  • No late mortgage payments in the preceding 12 months.
  • Full doc only.

While the $567,500 temporary limit was based on a calculation of 125% of the median home price (source), the new $506,000 limit is “set equal to 115 percent of local median house prices” (source). So the new loan limit translates to a drop in government-calculated median home price from $454,000 around March to $440,000 around October.

Interestingly, although the King County SFH median price was $440,000 in May, the Snohomish County SFH median has never breached $400,000, and Pierce County topped out below $300,000. This is explained in the announcement pdf:

In calculating loan limits, FHFA used median house price estimates calculated by the Federal Housing Administration (FHA) of the Department of Housing and Urban Development (HUD). Those values have been estimated in a manner consistent with requirements of the National Housing Act, which requires that median prices for all counties in metropolitan statistical areas (MSAs) be set equal to the median price for the highest-cost county.

So will the new, lower limit put even more of a damper on Seattle area home sales? Or was the effect of the higher limit so negligible that the reduction won’t really matter?

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Tens of Thousands of Subprime Loan Resets Coming to Seattle

By The Tim on August 25th, 2008 at 10:55 AM · 53 Comments

Interesting story from Kirsten Grind over at the Puget Sound Business Journal: Experts see more subprime-loan pain ahead

Another big wave of subprime mortgages will see interest rates reset to a much higher rate over the next six months in the Seattle area, an indication that the Puget Sound region might still be facing further economic trouble.

The large number of resets mean it’s possible that foreclosure rates could continue to rise across the state as homeowners struggle to make higher payments. Banks, already weighed down by bad loans, could face an even more hefty load of troubled mortgages on their books, according to experts.

The result could be a damper on some sectors of Washington’s economy — including the housing market — which has so far fared better than many states in recent months.

About 12,600 subprime loans are scheduled to reset in the Seattle-Tacoma-Bellevue area over the next six months, or about 52 percent of the subprime loans left to reset in the area…

In addition, a large chunk of Alt-A loans — known for little or no income documentation — will start resetting with the possibility of higher rates in about a year, a trend that mortgage experts are watching warily because less is known about their loan performance.

Reading the entire article, I can’t help but see an eerie similarity to what has already happened down in California. The “experts” quoted in the article claim that since home prices are only down 5-10% here, loan resets won’t be as big of a deal as they have been in the Golden State. But when most people put 0-3% down, it seems to me that a 5-10% drop in prices is more than enough to send those people into foreclosure.

I don’t think the Seattle-area will see as many foreclosures as San Diego or Sacramento, but I do think we’ll have our fair share, which will probably be more than any point in Seattle history.

(Kirsten Grind, Puget Sound Business Journal, 08.22.2008)

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Sagging Market Delays Another Condo Project

By The Tim on May 22nd, 2008 at 7:53 AM · 7 Comments

Is this the first sign that downtown Bellevue has reached its condo saturation point? Seattle Times: Bellevue condo project, European Tower, put on hold

The housing slowdown has claimed another local high-rise, high-end condo project.

The developer of 16-story European Tower, a downtown Bellevue project whose design features just one unit on each floor, said Wednesday that it won’t start construction until the market turns around.

Eugene Gershman, chief operating officer of Bellevue-based GIS International Group, attributed the delay to reticence among prospective buyers whose current homes are taking longer to sell.

He said buyers indicated that if construction started now, the tower might be finished sooner than they could close on their units.
…
Buyers have reserved six of the project’s 16 units, he said.

The article also mentions some of the other projects around the Seattle area that have recently been “postponed.”

European Tower’s delay is the latest in a string of postponements. The Insignia Towers project in Seattle’s Belltown neighborhood recently announced a delay, citing the market slowdown.

And earlier this year, work on the luxury 1 Hotel & Residences in downtown Seattle was postponed until at least late summer while developers redesign the project to make it more appealing to lenders.

Gershman said availability of financing was not a major reason for European Tower’s delay. But Dean Jones, of the Seattle marketing firm Realogics, said tight credit is taking its toll on a number of downtown Seattle and Bellevue condo projects.

“If they’re not under construction now, with a few exceptions, I would doubt we’ll see any break ground this year,” Jones said.

The question is, are enough projects holding off to keep the market from experiencing a severe oversupply in the next few years?

(Eric Pryne, Seattle Times, 05.22.2008)

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