Money Shuffling
December 23rd, 2011 (04:04 pm)Congress has now agreed to a 2-month extension of the payroll tax-cut, fixing the cut in Medicare expense payments to physicians, and another extension of unemployment benefits.
The current Social Security tax we pay on earnings is 4.2% of the first $110,100 (2012 amount) –reduced from the 6.2% charged previously.
The Medicare “fix” prevents a regulation from going into effect that reduced payments from the government Medicare program around 27% this year. These payment reductions have been “fixed” since 2003 through other legislation.
“Regular” Unemployment Insurance provides benefits for the first 26 weeks someone is out of work. “Emergency” benefits add 59 weeks, and “Extended” benefits add another 20 weeks for a total of 99 weeks. The Extended benefits would have expired 12/31/11 without this legislation.
The 33 Billion Dollar Question is: how is this paid for? It is paid for by a new mortgage “delivery fee”, tax, surcharge, or whatever you want to call it.
9 out of 10 mortgages in the U.S. are funded by 1 of 3 government agencies–Fannie Mae, Freddie Mac, and FHA. In order for banks to provide those mortgage loans going forward, this new fee will be collected from borrowers with higher closing and higher interest rates.
While Fannie Mae and Freddie Mac lose money continually, and FHA’s finances are questionnable from time to time, these extra mortgage fees will not be kept by those agencies. This doesn’t make sense that they wouldn’t keep the money they need badly, but officially the intent here is to steer potential borrowers toward mortgages provided by banks rather than toward those mortgages funded by the government. This seems like a good explanation, BUT this new fee is not nearly enough to make the agencies more viable and does not put them in the same league as what regular lenders charge. Again, it’s being used to pay for other government programs.
So for now the government will keep shuffling money around.
Another bailout
October 24th, 2011 (01:49 pm)In this article entitled “Regulator throws lifeline to underwater borrowers”, another plan to help the housing industry is unveiled. See http://www.reuters.com/article/2011/10/24/us-usa-housing-idUSTRE79K6JY20111024
The truth is, this is more of the same failed plan of the past with a couple more bells and whistles.
There is currently a refinance program available for certain borrowers that make it less expensive and often easier to refinance their mortgage. The new “plan” makes that current program even more lenient since many borrowers don’t currently qualify. Simply put, it has not solved the problem. This is obvious by the continued decline in home prices and glut of excess housing inventory, but on the surface this new plan should help more struggling borrowers.
Under the new plan the requirements of refinance will be that the borrower have a job or some source of income and that the last 6 mortgage payments were made on time. We don’t yet know whether the borrower will have to document the income or if there will even be any qualifying requirments of the income. There are two big difference this time though we do know of.
First, there will be no limit how far underwater the mortgage can be–it could be a mortgage of $300,000 on a house valued at $100,000. Great, right? The current program limits the mortgage to no more than 125% of the home value. The problem is, and I have seen this firsthand, it doesn’t matter how low the rate is on these properties. Nobody wants even a 0% loan on a home that’s worth $50,000 less than the mortgage! Many homes are in a much worse position, too. While it’s estimated that there are 11 million mortgages underwater, and this plan could only help up to 1 million of them, the past has shown that these government programs are not actually implemented according to plan because lenders are reluctant to do the loans. Banks just do not offer the refinance program the way (as leniently) as the government intended. And afterall, it will take the lenders getting on board to actually make the loans available to make any program work. Why haven’t banks been lending?
That’s where the 2nd big difference comes in. Lenders will no longer be required to “buy back”, or basically be responsible at all, for loans that go bad after the government buys them. This has been the sticking point in the past and the main reason for lenders’ reluctance to help people out. Until now just the people with good credit, enough income to afford payments, and (for the most part) some equity in the property can refinance. The result, then, is the government plan facilitating these loans is being paid for by taxpayers and redistributed to people who don’t truly need help.
This new plan provision will extend credit, from the federal government, to struggling borrowers who are underwater with no recourse on the lenders who make the new loans. This appears to be another bailout. Banks’ loans that are so far underwater and have little hope of being paid off are going to be paid off (refinanced) with new money from the federal govrenment while the lenders now have no vested interest in whether the new loans pay on time or not. Effectively, we’ve just bailed banks out of the underwater loans.
Oh yeah, and there’s profit on the new loans once closed, too!
No Cost Refi
May 18th, 2011 (03:11 pm)An online mortgage lender is advertising heavily lately using an old tactic that needs to be explained, so people are aware of what they’re really offering. The advertisement starts out with a question to the effect of “Do you know if mortgage rates are going up, or are they going to go down?” It then goes on to say that while we don’t know the future, this lender is offering to refinance your mortgage today and to cover “all or most” of the closing costs if rates go down in the event you refinance again in the next few years.
This is actually a good strategy from both the perspective of a borrower and the lender. It’s true that if refinancing actually makes sense at this time, we should go ahead and refinance with certain assumptions of how long we expect to be in the home, our risk tolerance, future income increases, growing family needs, future planned expenses, etc. This strategy would offer savings in the event that rates go back up, and even more savings if rates go down further. Sounds great, right?
The truth is that lenders can refinance most mortgages with little or no closing costs anyway. It’s very simple. It’s so simple, it’s hard to believe that more lenders do NOT promote it. Here is an example: John and Mary Borrower have a $150,000 loan, they can refinance today on a 30 Year Fixed Rate mortgage at 4.625% with about $1500 in closing costs. If their current $150,000 mortgage is at 5.25%, it will take them about 19 months to recover the closing costs they spend now to refinance with their new lower interest rate. Now John and Mary plan to be in their home for at least 10 more years and don’t want to take any risk their payment could go up, so this makes a lot of sense for them refinance right now.
There is often a fear though that we might refinance now, spend $1500, and then see rates go down further and want to refinance again. It’s true this could happen. It’s just as likely though that rates go up wiping out the chance at any further refinance savings.
John and Mary do have another option though: They could refinance RIGHT NOW WITH NO CLOSING COSTS. John and Mary actually have the option of refinancing at 4.875% with NO CLOSING COSTS at all. They would immediately save almost $47 per month with no up-front costs.
It’s not as big of savings per month, but then again, if rates do go down further, they have spent nothing now. The point of this example is that this option is available whether it’s the first or the fifth time we refinance, and the advertising lender doesn’t explain this. They have conveniently made it look like they are going to “take a loss” for repeat customers.
We also don’t know how competitive their rates and fees are on this first refinance they’re offering, but given they’ve opted to advertise on the radio and online while supposedly risking “taking a loss” on future mortgages, yeah, I too am not falling for this one.
That Didn’t Take Long
February 15th, 2011 (02:29 pm)Just months after FHA completely restructured their Mortgage Insurance fees, there will be another increase to the annual portion of the fees–which are paid monthly. Previously we saw the upfront fee reduced to 1.0% from 1.75% while the annual fee was increased from .55% to .90%, and now the annual fee will increase again to around 1.15%.
Here is an example of how it works with a $200,000 mortgage:
The upfront fee will remain $2000 (1%) which can be “financed”, or simply added to the loan balance. The annual fee will go up from $1800 per year to $2300 per year. The annual fee is paid monthly, so that makes the new monthly Mortgage Insurance fee $191.67 instead of $150.00.
This resulting increase in FHA fees could make conventional loans more competitive once these Mid-April FHA changes take effect. On the other hand, conventional loans secured by Fannie Mae and Freddie Mac will have their own fee increases about the same time. The main difference is that typically conventional loan fees are paid for through higher rates rather than higher Mortgage Insurance fees, so it will remain critical to carefully compare both the short- and long-term costs of all available options.
Rates Going Up?
December 7th, 2010 (05:44 pm)Mortgage rates have gone up over the last two weeks since just before Thanksgiving, and they might not be done on this run upwards. There was a lot of uncertainty surrounding the business climate coming out of the recent elections with looming tax increases set to take effect January 1, 2011. As of this writing though, there appears to be a compromise in place with congress and the white house that will extend the current tax rates on individuals and even cut social security (FICA) taxes as well.
This action has contributed to positive sentiments on Wall Street and will likely cause the stock market to sustain its gains through the end of the year. This of course doesn’t bode well for mortgage rates, but we’ve enjoyed a sustained period of sub-4.5% rates on mortgages that many people capitalized on. For those who hadn’t locked in their interest rate yet, the boat for refinancing may have sailed.
At the same time, banks in general have earned record profits during 2010, so they’re not inclined to be as aggressive in offering mortgages making it even more unlikely that we will see rates as low in the near future as we have seen over the last 4 months or so. Add to this the fact that conventional lenders Freddie Mac and Fannie Mae will increase the rate hike penalties for borrowers with less than excellent credit and less than 25% equity or down payment, and you begin to get the picture that the party is about over.
There is still opportunity though for many to consider refinancing if they haven’t done so and would still benefit from an interest rate below 5%. There is still a lot of debt out there that is NOT tax-deductible, that IS at a higher interest rate, and that CAN and SHOULD be consolidated with a new mortgage. It still boils down to comparing the cost of the debt over the expected time frame for having a new loan.
If someone doesn’t plan to be in a home (or their loan) for too many years, they would be smart to look at a NO CLOSING cost refinance. The decreased interest rate may not be as attractive as what they thought it was going to be a month ago, but it may still make sense. No closing costs? Why not lower the interest rate at least a little bit. If they are going to be in the home a longer period of time, dropping their interest rate even .5% may still be enough to offset closing costs. The key is to compare options and as always to consult a Mortgage Planner for the total cost of each.
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