Everyone is familiar with the term “paying points“, but do we really know what this is and the different effects it can have on a mortgage loan? Traditionally, this means paying 1 percent of the dollar of the loan amount in order to get a lower rate. This is commonly referred to as “buying down the rate“.

Here is an example. The Jones’ family purchases a home for $300,000 and puts 20% down. The loan balance is $240,000. The current rate on a 30 year fixed loan is 6.25%. Financing $240,000 for 30 years at a fixed rate of 6.25% makes a payment of $1,477 (principle and interest). Suppose the clients decide to “buy down the rate”. In this scenario, paying .00625 of the loan balance upfront ($1,500) will lower the interest rate by 1/8th of 1%. The payment is now $1,458, a decrease of $21. Quickly dividing the $1,500 by $21/month gives us a breakeven point of just under 6 years.

Translation: If you think you will stay in the house more than 6 years, it is worth paying points. This assumes you have the cash and are willing to spend it this way. Another option would be to pay 1.25% of the loan amount ($3,000) upfront to lower the rate by ¼%. This has the same payback period as the first option, but it requires twice the cash out of pocket as well as lowering your payment by twice the dollar amount on a monthly basis ($42).

The opposite of this is taking a slightly higher interest rate in order to pay your closing costs. In this scenario using the same $300,000 selling price, the client has just enough money to put 20 percent down but not the closing costs. (FYI, putting 20 percent down allows the client to avoid paying mortgage insurance. This insurance protects the lender in the case of foreclosure if the amount the lender receives from the sale of the property is less than the balance of the loan.) Anyhow, instead of 6.25% interest, the client elects to accept 6.5% interest.. In this scenario, this would allow the mortgage company to rebate roughly the amount of all of the closing costs and prepaid items to the seller as a credit on the settlement statement, thus saving precious “cash out of pocket”!

These are just a two examples of what can be done to save money or reduce the buyer’s cash investment when a home is purchased. Paying points can be a good way to reduce your monthly payments and for folks who have less cash to put into a transaction, getting the mortgage broker or the seller to pay closing costs can sometimes make the difference between making a deal or not. I recommend speaking with your mortgage professional in order to find out exactly what options are available and what makes the most sense for you.

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Patrick Randles is a guest contributor to Tucson REblog and gives an insider’s view on the mortgage industry. He is a Mortgage Loan Consultant with El Conquistador Mortgage in Tucson, Arizona. Patrick can be contacted by phone (520-850-7485) or email. Feel free to post any questions for Patrick!

The Arizona Daily Star published an article today detailing an effort started in 2005 by the Federal Emergency Management Agency (FEMA) that is just now coming to fruition. The bottom line is that many areas in the Southwest US (including Pima County) that are currently designated as “safe” in terms of flood protection may be re-designated as flood plains.

How are they deciding what is a flood plain?

“Marana Mayor Ed Honea received a letter July 20 from FEMA stating that the agency had done an overview of the area and determined that various structures within the town’s limits fall under the definition of a levee.

Brann said FEMA issued similar letters to all parts of the Southwest U.S. around the same time, starting a 90-day clock, by thee end of which each jurisdiction must supply FEMA with proof of which levees have provisionally accredited levee agreements.”

I’m curious to see just what a “provisionally accredited levee agreement” means but I assume that levees have to be periodically re-certified in terms of reliability and have some sort of federal stamp of approval. Here is a link to the FEMA page of the document in question.

Will it affect me?

The article states that homeowner’s who currently have home insurance in a low risk zone (Zone X) will be grandfathered in with their current rates once (and if) their home is re-designated to be in a flood plain when the new maps come out on September 20th. The people who will feel the crunch are the new homebuyer’s to the area with a federally backed mortgage; flood-insurance is required for all federally backed mortgages in a Zone A flood plain. (Learn about different flood plain designations)

For anyone who is in the San Lucas subdivision I would suggest checking into a Zone X policy; be aware that the premium will have to be paid up front for the entire year. I called up my insurance representative and he said that if homeowners haven’t purchased flood insurance and their home is then re-designated to be in flood-plain, not only will they have to purchase a Zone A flood insurance policy but their lender will also probably require them to pay for a surveyor out of pocket to come out to their property and draw up a survey map (could cost $500-$600). Check with your lender/insurance company to be sure.

(Am I in a flood zone? <- Click here to find out!)

EDIT: 5/14/2008

Since I’ve written this post there have been a few notable developments, namely the issuing of a stay order by FEMA until October 2008 to allow the Town of Marana time to conduct it’s own floodplain study to present to FEMA officials.

Here is a short excerpt from a the Town of Marana’s website:

The Town of Marana has selected a drainage consultant to perform this large scale drainage study to show the actual floodplain hazards in these areas. FEMA has given the Town until October 2008 to submit the study information to affect the final maps. The Town and its consultant are on schedule to make this submittal in late May or early June 2008. It is expected that much but not all of the areas will be shown to not be classified as a FEMA special flood hazard area (SFHA), which is an area that requires the purchase of flood insurance.

Until we hear about this issue a lot of Marana residents (including me for the time being) are feeling antsy. Having to pay flood insurance would certainly slow down the incredible expansion towards the NW side of town until that issue is resolve; I have no doubt the pending Fry’s at Tangerine/Lon Adams would be postponed (again) and the super complex being planned at I-10/Tangerine may be put in jeopardy too. Will keep you posted!

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We all know about the collapse of the sub-prime market and the tidal wave effect it has had on the mortgage industry as a whole. Here is a brief synopsis. Over the last few years, Wall Street investors had fallen in love with the returns on sub-prime (lower credit ratings) mortgages. They paid a premium for these loans in large quantities. The demand of this sort of product in turn induced the lenders to lower their underwriting standards and make more of these loans.

After these portfolios started to mature, the true rates of delinquencies and losses was recognized to be higher than predicted. Aside from having homeowners who were never financially qualified, buyers were put into risky loans such as option ARMs that they did not entirely understand. At this time, the investors started buying these loans at a discounted rate instead of a premium because of the increased risk associated with these securities. The lenders would package thousands of these loans for some period of time and all of a sudden they had to pay to get rid of the loans in order to replenish their credit lines.

It gets worse - Most lenders use what are called “Warehouse” lines of credit to make their loans. As Wall Street recognized the error or their ways, the banks and investment houses that had established these credit lines with the mortgage lenders started making “margin calls“. This is a demand to pay down the line of credit in a given time frame. A mortgage lender could have a $20 million line of credit with a bank. The bank could believe that the collateral is only worth $18.5 million and require a payment of $1.5 million in the next 14 working days. And then every other creditor will want their line paid down as well so as not to be the most exposed party to one portfolio. You can see where the combination of cash expenditures spelled doom for mortgage lenders. But, these lenders did this to themselves. Unfortunately, there are also a huge bunch of folks out there that can’t sell their homes because prices have dropped and they can’t refinance because the lenders are requiring better credit and more equity.

Where are we now?

Rates are still good for people with good credit. “Piggyback” loans (2nd mortgages) are going away. This means that people with little or no money down will most likely have to pay Private Mortgage Insurance (PMI) in order to get a loan. This protects the lender if the house is foreclosed upon and the amount from the sale of the home is less than the balance on the note.

What may be coming?

This is difficult to predict. I anticipate that home prices will continue to go down for the next 12-18 months. There will be a high delinquency and foreclosure rate. Mortgage lenders will have to rethink their business models in order to protect their cash positions and stay solvent and lastly I would anticipate more government regulation in the industry in regards to educating the customer and protecting them from risky loan products and unscrupulous lenders.

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Patrick Randles is a guest contributor to Tucson REblog and gives an insider’s view on the mortgage industry. He is a Mortgage Loan Consultant with El Conquistador Mortgage in Tucson, Arizona. Patrick can be contacted by phone (520-850-7485) or email. Feel free to post any questions for Patrick!

A headline from the Arizona Daily Star’s “Breaking News” section - “First Magnus Financial Corp. has filed for Chapter 11 bankruptcy, the company announced today.” The seemingly overnight meltdown of First Magnus last week was just the latest consequence of the loose lending practices by banks the past few years. Now, there are whispers of Countrywide Home Loans having financial issues and Capital One just closed their wholesale mortgage unit yesterday.

How did this happen, you ask? Here is the short and sweet of it: When banks began loosening their lending standards several years ago, allowing “no-doc” loans and option ARMs and Interest Only mortgages, everyone was happy. After evaluating a potential buyer’s ability to repay the loan, and if the lender’s criteria were met, the buyer was given a loan. The primary lender may then hold onto the loan itself in it’s portfolio, but more commonly they sold the loan on the “secondary market.” They then used the profits from the sale to continue lending money to other potential buyers.
The secondary market is simply a marketplace where investors can buy the loans. For example, Freddie Mac is a large investor in the secondary market. They buy up mortgages from primary mortgage lenders do a few things with them:

1. package those loans into securities, and
2. sell the securities to investors on Wall Street.

For the past few years this cycle has been a very fruitful one; with interest rates at historic lows and practically everyone qualifying for a loan, the housing market experienced an absolute explosion in growth. Investors were happily investing their money in the secondary market and primary mortgage lenders continued lending money. But then… home growth slowed. More houses came onto the market, whether by investors trying to quickly unload a home or actual homeowners deciding it was time to sell. New home builders were suddenly left with excess inventory. And what happens when inventory goes up? Prices go down!

Investors no longer had the rabid interest in the secondary market that they did when the housing industry was booming. Primary mortgage lenders suddenly found themselves holding millions, or billions of dollars worth of loans that they could no longer sell. Essentially, this is what happened to First Magnus. Whether through risky lending practices or decreased activity in the secondary market (maybe both), First Magnus is the latest casualty in the mortgage industry. Keep in mind, there are other factors involved in the lending industry causing these effects (take a look at Asset-Backed Commerical Paper (ABCP)).

Will I Be Affected?

I truly feel sorry for all of those employees left in the dust by First Magnus. Thankfully the blow has been softened somewhat by community assistance in the form of a job fair co-sponsored by Stewart Title, the National Association of Professional Mortgage Women Tucson Association, the Arizona Association of Mortgage Brokers and the Southern Arizona Mortgage Lenders Association. More information on that job fair here.

I’m curious, is anyone else seeing the same types of events with local lenders?

Technorati Tags: loose lending practices, Countrywide Home Loans, Freddie Mac, First Magnus, Stewart Title, First Magnus Bankruptcy, Tucson Mortgage, Tucson Real Estate

The Tucson Association of Realtors, (TAR), has not officially released has released the Tucson housing sales report for July 2007 (should come out in a couple of days) and here are the numbers for last month:

Sales Analysis

Average and Median Sales Price Decreases
Average and median sales price both decreased in July 2007. Average sales price fell slightly to $269,227- down 1.7% from July 2006 and down almost 10% from last month. Median sales price also decreased $11,200 from June 2007.

Active Listings Continue Declining
Active listings have been falling slowly since April 2007, reversing the increases we saw between January and April of this year. The number of active listings fell 3.1% from June 2007, to 8,614 active listings in July.

Pending Contracts Up Over July 2006
Pending contracts in July 2007, totaling 1,777, rose 63.18% when compared to last July’s total of 1,089. While down from last month, July still had the second largest amount of pending contracts for the year - which we should see translate into sales units next month.

Days on Market Holds Steady
Average time on market holds steady, with 64 days being the average time for July 2007, same as June 2007.

Compared to the Tucson housing statistics from June 2007, July figures are very similar. The Days on Market (DOM) remained steady at 64 days. Median sales price fell to $218,750 from $229,00 in June. The number of active listings hovered around the same level, down slightly from 8,665 in June to 8,614 in July.

As I wrote in my previous post (Tucson June 2007 Housing Report), median prices finally saw a noticeable dip in July, down $11,200 from June. I believe this can be attributed to a couple of things:

• a slower summer selling season (alliteration is fun!)
• buyer’s having more leverage in the market
• seller’s pricing their homes more realistically

More likely than not we will see a few more months (at least) of declining median prices as the Tucson real estate market slowly corrects itself to a more normal level. With the recent mortgage industry fiascoes the repercussions are already being felt in the market; just last week Coldwell Banker (company I work for) stopped offering their 100% piggyback loans to consumers because of all the recent defaults and foreclosures. Buyers with a down payment and decent credit aren’t really affected but the buyers who are trying to sidle into a home with little to no money down and with less than stellar credit will start finding it more difficult to secure financing as the rest of the year wears on.

So there you have it, Tucson real estate news for July 2007. If you have any questions or are in the market for a home in Tucson please feel free to contact me on my Tucson Real Estate website!

Technorati Tags: Tucson Association of Realtors, Days on Market, Tucson real estate news for July 2007, Tucson Real Estate, tucson real estate blog, tucson real estate news