The stability of the Long Island real estate market rests with the performance of mortgage backed securities. I have mentioned this key point in previous articles and I think a lot more people are paying attention.

This video below will go over in simple terms, mortgage backed securities and their relation to why mortgage rates are so low right now as well as why they will start rising in the near future.

I’ve mentioned before that homeowners looking to sell must pay close attention to what’s happening in the financial markets and the most important piece of financial information is looking closely at mortgage backed securities.

On Long Island, if the rates rise dramatically (as many economists believe), home values could drop dramatically. The more expensive it is to borrow money for a potential buyer, the less home they can afford. Thus, in order to sell your home, a buyer will only be able to afford so much.

For every 1% the mortgage rate rises, home values (in order to sell the home to a buyer) will need to drop 10%.

Please re-read the above statement. I think…no I know from experience, that most homeowners do not really pay attention to me when I say that because it sounds so unbelievable. But, not just on Long Island, but all across the country, if the money needed to borrow from a bank to buy a home goes up, especially given the countries financial challenges, the amount a buyer can afford goes down.

How? Because when buying a home, the most critical item to consider is the monthly payment. The difference between a 5% mortgage interest rate and 6% is not one percent, it’s over 16% higher. Meaning from 5% to 6%, the cost of the monthly mortgage is 16% higher. So if their mortgage interest at 5% is say $1,500, at 16%, the payment for interest would be $1,740. That’s a $240 increase. In this economy…in any economy, that’s a big difference.

The point of all this is for homeowners thinking of selling to realize that there are challenges ahead. If you want/need to sell your home, pricing it aggressively now and marketing it with the right real estate agent is imperative. Otherwise, come May/June of 2010, you could easily see your home’s value drop 10%….in literally 60 days.

(c) Copyright 2010 www.tommcgiveron.com
By Thomas McGiveron, Licensed Real Estate Salesperson
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So the question is, what is going to happen to mortgage rates in 2010? Well, have you ever heard the saying “It ain’t over til it’s over”? The Fed has told us repeatedly that their massive purchasing program of Mortgage Backed Securities is just about over - and this translates to home loan rates rising in the near future.

As you can see in the chart below, the amounts of Mortgage Backed Securities the Fed is purchasing are slowly dwindling, as the program is set to wrap up by March 31st, and are clearly trying to ration out the remaining portion. Last week, the Fed purchased $11 Billion in Mortgage Backed Securities, which leaves them with $66 Billion to spend out of their original $1.25 Trillion allotment. So about 95% of the total has already been spent and has purchased about 3 out of every 4 home loans during the past year. When such a large buyer leaves the market, it is very likely that prices will worsen.

This is very important because as the Fed has less money to last through the remaining months of the program, their ability to keep home loan rates low via their purchasing power will wane. And those who can take advantage of currently low home loan rates do not wait, as the clock on these historically low rates is ticking.

Chart: The Fed’s Purchase of MBS (By Month)

The purchasing of these MBS’s, is exactly what has kept mortgage interest rates low, as I’ve previously mentioned. Originally, I thought, as many did, that rates wouldn’t take a hit until after the complete execution of this program in March. However, the government slowing of these purchases will have an effect on the rates before March 31st!

These are historic times in real estate and I feel that many people who want to really buy, are going to miss out on an opportunity to have a 5% 30 year fixed interest rate…because they just kept waiting and waiting….and waiting.

Now is absolutely the time to buy. Prices are down over 35% in almost every area throughout Long Island. If you’ve been paying attention to certain homes on the market through your home search, you know that home is on the market now (it may not be there 3 months from now). And right now, you can obtain an historically low interest rate.

I had a closing the other day and my buyer client, with buying down his rate, got a 30 year fixed loan for 4.25%.

4.25% for 30 years. In 3 months, that will most likely be 6.25%…with buying down the rate…

The clock is ticking.

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For the Long Island real estate market, there are issues facing the market overall that you’re not hearing about in the media. I want to take a peak at the money issue.

Part of me really doesn’t want to write a series of articles about the realities because it just doesn’t look good for sellers. Another part of me says that I owe it to my communities here on Long Island to “keep it real”, otherwise I risk becoming just another real estate agent with head firmly implanted in sand.

One item we hear about is the “FHA” or Federal Housing Authority and the loans they back called “FHA loans”. Banks provide money to buyers at a greater amount (up to 96.5% Loan to Value or LTV). LTV is based on what the total appraised value is of a given home is and how much the buyer puts down and how much the bank lends.

So if a bank lends $80,000 on a home that costs $100,000, the LTV is 80%. The bank is lending 80% of the total money to a buyer to purchase a given home. This is referred to as a conventional loan.

On Long Island, due to the cost of homes in this area, many buyers put down less than 20% and thus require a FHA loan.

When a bank lends more than 80% to as much as 90% of the value of a given property, it’s risk factor increases because the equity position of the buyer (new owner) is very little.

Here on Long Island, the market is losing about 1% every month. So banks are lending money to buyers right now, in this local Long Island market, who are putting down 3.5%. The bank lending this money is providing money to a buyer who is buying a declining asset. For you who invest in banks, it would be wise if you reconsider your investment.

Now while this seems okay because real estate is a long-term investment overall, it still begs the question, why are banks lending 96.5% or over 90% of a value of a property during a time of 9.7% unemployment nationwide? Also, why are banks lending money to such a high risk investment?

The answer is because FHA loans are “guaranteed” by GSE’s or Government Sponsored Entities like FANNIE MAE up to 80% of the loan. So the exposure of the bank(s) lending on a given property is significantly reduced.

Now behind all this are mortgage insurance companies that provide the banks an insurance policy against default of a given asset or assets. What does this mean?

Anyone who’s bought a home has heard of “PMI” or “MIP”, primary mortgage insurance or mortgage insurance premium. Anytime a property is purchased with less than 20% equity position for the buyer (they put down 20%), the bank must have an insurance policy to back the investment, beyond the 80% loaned.

Well, read this article: Short On Capital, Mortgage Insurers Still Feel The Crunch in DSNews.

Now if you clicked the link for Fannie Mae, you noticed that as of today, it’s trading under $2.00. If you read the article in DSNews, which covers the Default Services field of real estate (foreclosures, short sales, etc.), it doesn’t take a genius to realize that we, as a real estate market both locally and nationally, are no where near out of this challenge.

Banks need money to invest. Part of the TARP funds from the government were made possible to avoid a complete breakdown of the real estate lending market in America. You do remember TARP? That’s the money the banks got and didn’t really need…and now not everyone knows where that money went (but that’s a political/governmental debate which I will leave out of this equation).

Now bringing things back down to us, read my last articles about the Long Island market:
August Update
Distressed Properties

Now for Part II in this series, I will be talking specifically about foreclosures and how bad things really are. Back in April, I broke down every zone of Long Island demonstrating exactly how the market has been hit in 12 months previous. I will be doing this again with an update. And I will also show, as much as I can from the information at hand, how many short sales (pre-foreclosures) there are all over Long Island. And here’s a small taste of what’s going on with foreclosures nationwide.

Sigh. When insurance companies don’t have the business they need to sustain, nor the money to back loans for real estate, what happens to the local Long Island market, that relies so heavily on FHA loans? Is the answer another bailout for the mortgage insurance industry?

I urge anyone reading my articles to leave a comment. Come back and continue checking in. It’s articles like this that make the difference between being informed and being misguided.

For buyers of today, I am not suggesting that now is not a good time to buy. Indeed it is. With prices approaching 35% less than peak and with interest rates so low, it’s an unbelievable time to buy. Just be clear on what you want and how much you’re spending.

To work with me as a seller or buyer, please call 631-831-9048 or email me.

(c) Copyright, 2009 www.tommcgiveron.com
By Thomas McGiveron, LSA

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Here are some more Frequently Asked Questions. Please note that the answers may change as the Senate bill changes:

If I bought a home and used the $7,500 home buyer tax credit, can I retroactively receive $15,000 credit if it becomes law? No.

Are there any income restrictions on the tax credit? The Senate version currently has no income limits. The current $7,500 tax credit phases out on buyers with incomes exceeding $75,000 for individuals and $150,000 for married couples.

When will the new tax credit go into effect? The Senate version would take effect when the bill is signed by the president into law, and it would last for one year.

Can I take the tax credit this year? Yes. The Senate proposal would allow buyers — even those who purchase in 2009 — to claim the credit on their 2008 taxes. The proposed tax credit is nonrefundable. What does that mean? You can only receive the credit to the extent that you owe federal income taxes. The Senate proposal would give home buyers two years to claim the credit, so buyers could claim a $7,500 credit in 2009 and a $7,500 credit in 2010. A family of four that makes less than $82,000, for example, could have a tax liability of less than $7,500 and they would not receive the full value of the credit.


Are there any repayment requirements on the tax credit? No. The Senate proposal does not require the credit to be paid back. The House proposal eliminates a 15-year repayment provision on the existing $7,500 tax credit.

If I am eligible for the current $7,500 credit, am I also eligible for the $15,000 credit? While the $15,000 credit has fewer restrictions than the existing credit, there is one big difference: because the credit is nonrefundable, if you have a low federal income tax liability, you could end up receiving more money with the current credit than the larger, proposed credit.

Are there any increased down payment requirements on the proposed tax credit? No. A separate measure has been introduced in the House that would expand the tax credit to $15,000 but would require a 5% down payment on mortgages. The Federal Housing Administration currently requires a minimum 3.5% down payment.

Can I use the tax credit to buy a second home? No.
How long do I have to live in my home after I purchase it with the tax credit? The Senate version requires buyers to pay back the credit if they sell the house less than two years after they buy it.

Tony Auffant
www.tonyauffant.com
Senior Mortgage Consultant
Continental Home Loans Inc.

Shopping Around for a Mortgage?

HERE’S THE INSIDE SCOOP ON HOW TO DO IT RIGHT!

First, make sure you are working with an experienced, professional loan officer. The largest financial transaction of your life is far too important to place into the hands of someone who is not capable of advising you properly and troubleshooting the issues that may arise along the way. But how can you tell?

Here are FOUR SIMPLE QUESTIONS YOUR LENDER ABSOLUTELY MUST BE ABLE TO ANSWER CORRECTLY. IF THEY DO NOT KNOW THE ANSWERS…RUN…DON’T WALK…RUN…TO A LENDER THAT DOES!

1. What are mortgage interest rates based on? (The only correct answer is Mortgage Backed Securities or Mortgage Bonds, Not the 10-year Treasury note. While the 10-year Treasury note sometimes trends in the same direction as Mortgage Bonds, it is not unusual to see them move in completely opposite directions. DO NOT work with a lender who has their eyes on the wrong indicators.)
2. What is the next Economic Report or event that could cause interest rate movement? (A professional lender will have this at their fingertips. For an up-to-date calendar of weekly economic reports and events that may cause rates to fluctuate, ask to be added to my e-mail distribution for my weekly newsletter.)
3. When Bernanke and the Fed “change rates”, what does this mean…and what impact does this have on mortgage interest rates? (The answer may surprise you. When the Fed makes a move, they can change a rate called the “Fed Funds Rate” or “Discount Rate”. These are both very short-term rates that impact credit cards, Home Equity credit lines, auto loans and the like. On the day the Fed move, Mortgage rates most often will actually move in the opposite direction as the Fed Change. This is due to the dynamics within the financial markets in response to inflation. For more information and explanation, just give us a call).
4. Do you have access to live, real time, mortgage bond quotes? (If a lender cannot explain how Mortgage Bonds and interest rates are moving in real time and warn you in advance of a costly intra-day price change, you are talking with someone who is still reading yesterday’s newspaper, and probably not a professional with whom to entrust your home mortgage financing. Would you work with a stockbroker who is only able to grab yesterday’s paper to tell you how a stock traded yesterday, but had no idea what the movement looks like at the present time and what market conditions could cause changes in the near future? No way!)

Be smart… Ask questions… Get answers!

More than likely, this is one of the largest and most important financial transactions you will ever make. You might do these only four or five times in your entire life… but we do this every single day. It’s your home and your future. It’s our profession and our passion. We’re ready to work for your best interest.

Tony Auffant
Senior Mortgage Planner
Continental Home Loans, Inc.

Closing Cost Assistance for First Time Homebuyers

The State of New York Mortgage Agency (SONYMA) provides safe, low interest fixed rate mortgages, closing cost assistance and other programs specifically designed to help low and moderate income families become homeowners. One of the biggest obstacles to owning a home is the amount of funds an applicant must have for down payment and closing costs.

To help applicants overcome this obstacle, SONYMA offers closing cost assistance, in combination with any currently available SONYMA program. One of the brightest features of the SONYMA product is a maximum assistance of closing costs equal to $5,000 or 3% of the SONYMA mortgage loan amount, whichever is higher. In addition…

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Recent economic events affecting the mortgage industry.

The Fed announced plans to create a market place for illiquid mortgage debt. This should do a lot of long-term good to help the housing and lending environment. As if that weren’t enough, the Securities and Exchange Commission also placed a temporary ban on the short selling of 799 different financially related stocks.

What prompted these dramatic actions? Very dramatic happenings earlier in the week.

After 158 years in existence, Lehman Brothers filed for bankruptcy last Monday due to overexposure of high risk loans in the mortgage arena. Then, the Fed gave insurance giant AIG an $85 Billion lifeline to keep it from going into bankruptcy, after initially stating it would not intervene. Then it was announced that Merrill Lynch is being acquired by Bank of America, which will save them from the same fate as Lehman Brothers, and now troubled bank Washington Mutual is looking for a buyer as well.

Also playing a role was the fact…

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WHY SELLERS SHOULD “SELL” AND BUYERS SHOULD “BUY” RIGHT NOW!

Lately many buyers are asking themselves is this the right time to buy? It seems a major contributor to this uncertainty and question is because buyers are wondering if they would be better off taking the gamble that home prices will continue to fall. Is this gamble a smart one? Should you wait and take that risk? The answer to both of these questions is “no”! While yes, it’s true that home prices are likely to continue to fall some, the more important factor that needs to be considered, and is also likely to occur, is that home mortgage rates will continue to climb. This is in large part due to the fight of growing inflation, increased foreclosures and the sub-prime mortgage mess. While the average mortgage rate for a conventional 30-year fixed rate is still relatively low compared to historic rates, aggressive buyers who wait around for rates to go lower have little time to react once rates start to climb.

But what about the seller? Should they wait to see if a buyer is willing to pay what they’re asking or even close to the asking price? Well, to answer that question, we have to consider several factors. 1- What is the motivation of the seller? Are they looking to purchase another home or even better yet, are they already in contract to purchase their next house? In a majority of cases, this seems to ring true for a large portion of sellers. If this is the case, it is far better for a seller to consider lowering the price of their house ”now”, or have a realistic price set in their minds that will attract buyers, than to wait for that “one “ buyer who is willing to pay top dollar…it’s not going to happen, not in this market!

Click Here To Read The Rest Of The Article

MARKET UPDATE—WHAT TODAY’S HEADLINES MEAN TO CONSUMERS AND OUR STRATEGIC PARTNERS

Date: July 14, 2008

TOPIC #1- FHA Risk-Based Pricing Rules go in effect today. Many people are unaware that the FHA is basically a governmental insurance company. They do not lend money. They insure approved lenders (like Continental) for losses resulting from foreclosures on loans underwritten to FHA guidelines. Until today, every borrower was charged the same insurance premiums, regardless of the risk factors they were deemed to have. Now, depending on the determining Credit Score and the Loan-To-Value of the loan, both the Up-Front and Monthly Mortgage Premiums can vary. The higher the perceived risk, the higher the premium is. Talk to your CHL Mortgage Planner for more specifics.

TOPIC #2- Goodbye IndyMac (and 90 undisclosed lenders being “watched” by OFHEO). Banks being taken over by the government is certainly unsettling; however, this is all part of the cleansing process the financial services industries are facing, as a result of years of poor lending practices. The trials and tribulations of Bear Sterns, Countrywide, IndyMac, large write-downs by Citibank, Merrill Lynch and others are all symptomatic of today’s hangover from the party they all enjoyed the first half of the decade.

Click Here To Read The Rest Of The Article

Many clients that we sit down with are of the belief that pre-paying their mortgage (either by additional principal payments, bi-weekly plans, etc.) is a sound financial approach; however, that “conventional wisdom” isn’t very wise. In reality, what the pre-payer is saying is this, “Here’s an extra $1000, Mr. Banker. Please don’t pay me any interest on this money, and if I need it back, I will pay you fees, borrow it on your terms and prove to you all over again that I qualify.” Money you give the bank is money you will never see again until you sell the home or go through the expense of a refinance.

We have already proven that Home Equity Has A Zero Percent Rate of Return. There is no logic to put your cash into an investment that has no rate of return; and further, it is an investment that is not liquid or safe. You are actually better off burying that $1000 in your backyard because at least, in that scenario, your cash is liquid and safe.

At the same time, handing your lender $1000 today that they weren’t expecting for 30 years is a windfall for THEM.

Click Here To Read The Rest Of Tony’s Article!

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REAL ESTATE MARKET UPDATES

• Short Sales Changes April 2010
• Long Island Real Estate Market: Mortgage Interest Rate Watch
• What Is Going To Happen To Mortgage Rates In 2010?
• How Many Homes Are In Foreclosure In Suffolk County?
• The State of The Long Island Real Estate Market: December 2009
• Loan Originators Disclosure of Closing Costs
• A Closer Look At The Impact Of Foreclosures In 2010
• Buyer Demand, Prices & Rebound
• The Future Of Mortgage Interest Rates
• For First-Time Buyers: The Process Of Buying A Home

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