Cashing out After an All Cash Purchase - Watch out!

Since I have heard several people mentioning this scenario, I thought I would share the current state of things in the lending world. First the scenario:

A buyer looking to purchase a home, for whatever reason (maybe it's a multiple-offers, or maybe they are trying to negotiate a better deal by closing faster with cash), they have decided to purchase the property with all cash. The thinking is that they would purchase first, and then right away take cash out from the property. This would be no different from getting a loan in the first place, other than taking a 2-step approach vs. 1 step.

What's the significance here? Well, according to IRS (please double check with your tax consultant), you can only deduct mortgage interest from your tax liability based on the acquisition indebtedness, unless the cash out is done within 90 days of the initial purchase. So, most people think the scenario described above would help them accomplish their goal of getting a good deal while not losing any tax benefits.

The problem here is that most lenders today have a 6-month seasoning requirement on cash-out transactions, meaning the owner would have to wait for 6 months before they can do the cash-out.

So, for those who are contemplating doing the above, be sure to check all fronts before jumping in.

The Real Effects of HVCC

The HVCC (Home Valuation Code of Conduct) law that became in effect on May 1 was designed to "protect" consumers by creating a process in which the appraisal reports are done based on unbiased opinions and without any influence from realtors and loan originators. Under this law, loan originators are no longer allowed to have any direct contact with appraisers during a real estate purchase transaction. The orders are processed through an independent 3rd party company.

With all its good intention, the real effects we have seen under this new process have been quite detrimental to consumers. The average cost for an appraisal has increased by about 40%. The average cost used to be around $375 for a property under $1mil value, an equivolent report today costs around $500. That's real cash taken from consumer's pocket.

For refinance borrowers, especially those whose equity in their house may have eroded to just around 20%, the new process has become an expensive exploration. In the past, we could at least call an appraiser to get a rough estimate of the approximate value without having to go through a full inspection (thus not incurring a cost to the consumers). Under the new law, because we can't have any direct contact with appraisers, the consumers will have to spend the $500 upfront to find out if refinance is a possibility.

There are many other holes in the new process that create new challenges during a transaction. I just hope that the regulators are listening to what people saying, and make some real senses out of this honorable idealistic quest.

Conforming Loan Limits for 1-4 units

I was just asked about the latest conforming loan limits for 1-4 units residential properties. I thought it would be helpful to post this for anyone else who may be looking for the same information. Here it is:

Units General High-Balance
Permanent Temporary (til end of 2009)
1 $417,000 $625,500 $729,750
2 $533,850 $800,775 $934,200
3 $645,300 $967,950 $1,129,250
4 $801,950 $1,202,925 $1,403,400

Rising Mortgage Rates Eroding Affordability

Mortgage rates have been rising for the last 2 weeks. Rates are more than 1% higher than their lowest level. For example, we had seen conforming loans as low as 4.375% for a 30-yr fixed. This past week, they had been hovering in the high 5% range.

How has this change impacted borrowers? Well, many refinance clients who were trying to time the "lowest" market or were hoping for even lower rates (aka below 4%) are now jittery. Did they miss the boat? Maybe. While we may see some improvements in the coming months, it is unlikely that we'll see the same low level of rates that we had seen earlier this year. According to the latest news from the Fed, it doesn't sound like they are ready to purchase additional mortgage-backed securities. With Fed's buying winding down and more investors coming into the market, they will sure demand higher returns than a mere 4% on a 30-yr securities.

What about the home buyers who have been sitting on the fence waiting for the price to drop more and rates to go down further? What has happened in the last 2 weeks in the mortgage market should be a good reminder of the corrolation between home price and mortgage rates. Here's the numerical comparison: 1% increase in rates is equivalent to around 15% change in purchase price. So, here's the question: Rates can go up by 1% in a matter of days, based on what we have seen. How likely are the home prices to go down by 15% in a matter of days? The reality is that the rapid rising rates are eroding the affordability of home ownership. So, for all those buyers out who need to buy a new home this year, remember to focus on the big picture. The long term financing costs outweigh the cost of the purchase many folds.

Can Mortgage Rates Stay Low?

The Fed's been at it again, offering words that sound encouraging at first blush, confirming that their buying program of Mortgage Backed Securities is in full swing and will continue as needed. Of course, the media will pick this up and offer their own interpretation, saying "Good news, the Fed's words on continuing their purchasing program mean that rates will continue to drop lower, and remain low into the summer..." But is this really what that means? Not so.

Here's the truth:
Yes, the Fed has been buying Mortgage Bonds, but if you look at what they are purchasing, they are buying a lot of FNMA 30-yr 5.5% and 5.0% Bonds...which won't have much of an impact on present interest rates. Why? First, see the Fed's purchases for yourself by hitting this link: Direct Link to View Fed Mortgage Bond Buying - http://www.newyorkfed.org/markets/mbs/index.html.

So why is the Fed buying these Bonds? Well if you think about it, it's very smart of the Fed...and maybe even a little sneaky...because 5.5% Bonds actually represent outstanding mortgages with rates of 6 - 6.50%, which are precisely the loans being refinanced at today's great interest rates.
Stay with me here...
With rates at present low levels, many of the mortgages in these FNMA 5.5% pools being bought up by the Fed will be refinanced and paid, thus giving the Fed a quick recoup on some of their investment. And this is likely a big reason why the Fed said they could continue this purchasing program beyond June, if necessary. Bottom line, the Fed buying these higher rate coupons will not necessarily help rates to move lower, as their actions do not impact the loans being originated at today's low rates. In other words, in order for the mortgage rates to go lower to a level where as the news said, "everyone gets 4% - no question asked", the Fed would need to be buying coupons with 3% - 3.5%. Hmm.....

Here's the most important part:
Sometimes I talk to clients who are in a situation where it makes sense to refinance right now, and save $250 per month for example. But when they hear the media throwing around teases of lower rates ahead, they decide to hold off on making the decision to save the $250 per month right now, in the hopes of gaining another $30 per month in additional savings with a lower rate than where we stand presently. Now clearly, rates could turn higher, and this window of opportunity could pass them by entirely.

The clincher is this:
Even if those clients ultimately are correct in timing the market, and eventually grab that lower rate and save another $30 per month - think of what they have lost by waiting. While they delayed, they lost the savings they could have gained by taking action sooner - or in the example used, $250 - for every single month they waited. So even if they got lucky and obtained the rate they were looking for, it could take years to make up what they lost by waiting.

Bottom line is rather than trying to time the market, it's more crucial to evaluate your scenario within the whole context of your overall financial well being.