What Corcoran Agents Need to Know About Financing (October 2014)
Rates declined to 16 month lows last week and a 30 year fixed jumbo loan for $1MM was available at 3.75% (APR 3.912 ). Why are rates trending down? It’s all about the disappointing pace of economic growth. Europe is a basket case, importing less from the US, still struggling to recover from the financial crisis, and at risk of another recession. US retail sales data was weaker than expected and reduced hopes that consumers will be able to carry the economy. Headlines about the spread of the Ebola virus added to the volatility in the markets with wild swings in both stock prices and mortgage rates. The good news is that slower economic growth means lower inflation and lower interest rates.
HOT TOPIC FINANCING QUESTIONS
Q. I recently heard that Ben Bernanke, the former Fed head, got turned down for a mortgage. How is that possible when he’s giving speeches at $200,000 a pop?
A. Here’s hoping that high-profile cases like Bernanke’s will help regulators see that many of the new mortgage rules over-corrected the problem; they often leave out common sense and have deprived whole segments of the population of the ability to get financing. Not a week goes by that we don’t see the Bernanke scenario re-enacted with rich denizens of the tri-state area being told “NO!”. We call them “RPP’s—Rich People Problems”. A recent sampling would include– the owner of a $6MM condo who wanted a relatively small loan of $2MM, had liquid assets of two million dollars but was rejected because his recent bonus gave him a debt-to-income ratio that was slightly higher than 43%. Or, the client with $12MM in the bank whose sloppy credit history means that he has to continue paying a higher rate. If he is able to make a higher payment then surely he is able to make a lower one, no? Or, the client who, like Bernanke, left a large organization to go to work for himself, had a large cash cushion and perfect credit, but no guaranteed stream of income. The answer is NO! The banks are still very nervous and fear they could have to buy the loan back. Sadly, an ”A plus” in credit does not let you get away with a “B” in assets or income. All three legs of the stool—income, assets and credit need to be rated “A”.
Q. My exclusive wasn’t renewed because the seller decided she no longer wants to move. Then I heard her bank turned her down when she tried to lower her monthly mortgage payment because they didn’t believe she is staying put. How is that possible?
A. It used to be that banks believed what you wrote down on their application form. If you said you were buying a primary residence, for example, they gave you a primary residence rate and never bothered to check if you were renting the place out. That’s ancient history. These days lenders don’t believe what you say unless you have extensive backup documentation to support it. The appraisal that was ordered would have shown that your client’s apartment was recently on the market and the lender’s fear is that the new loan will be treated like a bridge loan and paid off after a few months. If she were paying the higher rates and points that come with bridge loans that would not be a problem. But given that most lenders in NY have relatively low fees to refinance, no longer have prepayment penalties, and make their money with loans paid back over the long-term, lenders have no way of ensuring that your client won’t change her mind again, sell the apartment and pay off her loan early. There are lenders that will accommodate your seller but they may require that she not only wait six months before applying, but also provide a strong letter of explanation as to why she’s no longer moving.
CLOSE MORE DEALS WITH THE LATEST FINANCING TOOL
How is the industry moving to a place where they can start saying YES more often? It has taken a long time, primarily because the final industry regulations were only issued this past January. After 1/10/14 many mortgage industry minds went to work to figure out reasonable work-arounds to government regulations while ensuring the loans would still be saleable on the secondary market. The good news is that there is currently a ton of new mortgage product in development, some of it launching in the first quarter of 2015. A sample would include– 90% to $2MM with no PMI insurance, better priced interest-only loan options, debt-to-income ratios greater than 43%, and loosened underwriting guidelines that would allow borrowers switching firms to be credited for previous bonus income. Stay tuned.