Everyone I Know Is Trying to Refinance

There’s been a lot of talk (and worry) that the higher mortgage rates of late might derail the apparent housing market recovery.

After all, many believe the only reason things were improving was because of the ultra-low rates the Fed facilitated with the likes of QE3.

Without them, some argue, home prices would have to come back to more realistic levels. And optimism would probably also be somewhat deflated.

Unfortunately, such a scenario was not feasible, seeing that foreclosures were getting out of control, and lower prices would have meant so many more would have lost their homes, either involuntarily or by choice.

Higher Rates Are Motivational

Interestingly, I’ve seen a different reaction, albeit an early one. Many individuals I know who own homes are seeking to refinance their mortgages. Why they didn’t do it last year or even last month is beyond me, but we all know people procrastinate.

Many also grew complacent with the low rates, as it got to a point where one just assumed rates would keep on falling. I’m sure most people figured there was more downside in store, and if rates did happen to rise, they probably would do so slowly.

But now that mortgage rates have shot up in no time at all, it seems to have given many people a kick in the rear to finally go about getting that refinance, even if rates are significantly higher than they were just weeks ago.

One friend of mine seemed content locking in a rate of 4.5% on a 30-year fixed, even though he may have been able to snag a rate of around 3.75% last month.

He didn’t even seem that upset about missing the lower rates, and instead looked at the bigger picture. In the grand scheme of things, a 4.5% 30-year fixed mortgage is still a great deal.

Another pal of mine used the recent rise in rates as motivation to finally start calling around and inquiring about a refinance.

For him, there were home equity issues that made it difficult to refinance (he’s not eligible for HARP). So you can’t blame him for waiting for his home to appreciate a bit more, and alleviate some LTV concerns.

He too seemed happy enough to snag a rate at current levels. He’s even looking at a 15-year mortgage instead of his current 30-year as a way to take advantage of a lower rate and pay down his mortgage faster, without too much of a cost burden.

Possible Mortgage Rate Easing Ahead?

All said, it seems everyone is keeping things in perspective, despite the less attractive pricing of late.

And who knows, we may even see rates fall a bit over the next couple weeks, seeing that they increased so much so fast.

The market probably overreacted to the Fed news, so there’s definitely a chance things could improve in the near-term.

Additionally, the Fed owns a ton of the mortgage-backed securities out there, so they can control the price to some degree, even if everyone else wants to bail.

Whatever direction mortgage rates go in the next month or so, loan originators should stand to benefit from all the last-minute refinancers.

Banks and lenders will probably receive a flurry of refinance applications in coming weeks as more borrowers get off the fence and take advantage before it’s seemingly too late.

Unfortunately, borrowers might have to contend with sizable delays, so if you’re refinancing, get your ducks in a row to avoid any potential mishaps.

As far as home purchases go, the rate increase alone shouldn’t deter too many folks. It may disqualify some if their proposed payments rise too much, but I doubt it would completely dictate one’s decision to buy a home.

Remember, rates would have to rise to about 7% for the median priced home to fall out of reach for the average American family, so there’s still plenty of room.

Read more: Do higher mortgage rates lead to lower home prices?

About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for 15 years.

Source: thetruthaboutmortgage.com

Mortgage Jobs on the Line as Rates Rise

There’s been plenty of debate lately about the potential consequences of rising mortgage rates, with an outright housing recovery derailment topping the list of concerns.

However, most economists have been quick to downplay the risks of rising rates, which have shot up from near-record lows to two-year highs in a matter of months.

In fact, many of these pundits simply expect refinance activity to slow, while the housing market recovery continues on its merry way, in spite of decreased affordability.

Of course, the experts have made some concessions along the way; most recently, Fannie Mae’s Vice President of Applied Economic and Housing Research argued that higher mortgage rates should slow purchase volume and result in a larger adjustable-rate mortgage (ARM) share.

At the same time, Fannie’s researcher didn’t think higher interest rates would lower home prices, but rather only slow the speed of appreciation, which has been on a tear lately.

Then there’s Ara Hovnanian of K. Hovnanian Homes, who argues that higher mortgage rates will just lead to smaller home purchases, and at worst, the purchase of a townhouse if affordability takes a serious dive. Don’t worry, he’s got a smaller home design in the pipeline…

Here Come the Layoffs

All that debate aside, one thing is for certain. There will be fewer mortgage jobs going forward. I anticipated this in my 10 predictions for mortgage and housing in 2013.

It wasn’t hard – I knew mortgage origination forecasts were being slashed going into the year, with refinance volume expected to fall from $1.2 trillion last year to $785 billion in 2013, per the MBA.

Meanwhile, purchase-money mortgage volume was only slated to rise from $503 billion to $585 billion, probably not enough to add many new positions, or offset the fallout in the refinance department.

With volume predicted to be well off recent levels, it didn’t take a genius.

And seeing that rates have increased a lot more than projected, those numbers may turn out to be even worse. For the record, I was wrong about mortgage rates. I expected sideways movement for much of the year. I concede.

Anyway, the mortgage layoffs have already begun, with Wells Fargo announcing late last week that it was cutting 350 employees nationwide as a result of higher home loan rates.

Wells Fargo spokesperson Angie Kaipust said increased demand during the low interest rate environment enjoyed over the past few years meant it could “staff up,” but now that rates are a bit more realistic, headcount must align.

The San Francisco-based bank plans to cut jobs in a number of cities, including Des Moines and Minneapolis.

Then there’s Citi, which reportedly opened a sales facility in Danville, Illinois after demand for mortgage refinances surged. Sadly, the unit is being shuttered, and roughly 120 employees will be laid off.

These are but two examples. Many smaller shops are probably slashing their workforces as well, though such news won’t make the headlines.

2014 Mortgage Origination Forecasts Point to Even Fewer Jobs

The outlook isn’t exactly bright for 2014 either, according to the latest housing forecast from Fannie Mae, so expect more heads to roll as volume continues to dwindle.

Yesterday, the GSE noted that residential lenders are expected to originate just $1.07 trillion in loan volume in 2014, down from $1.65 trillion this year, and about half the $2.03 trillion seen in 2012.

The refinance share, which was 73% in 2012, is expected to fall to 62% this year, and to just 31% in 2014. Only the advent of HARP 3 could make a meaningful impact at this point, and it doesn’t seem likely now.

Fannie expects purchase activity to rise from $619 billion this year to $741 billion in 2014, while refinance activity is forecast to plummet from just over $1 trillion to $331 billion.

Clearly few loan officers will be needed to handle that sharp drop in demand.

Update: It’s starting to feel like 2007 all over again – I’m receiving tips again about branch closures and layoffs. The latest being, “Residential Finance of Columbus Ohio hacked 19 branches yesterday and a regional manager.”

About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for 15 years.

Source: thetruthaboutmortgage.com

Don’t Choose a Mortgage Lender for Their Sales Gimmick

Last updated on January 9th, 2018

As competition heats up, banks and lenders will likely ramp up efforts to get their hands on your mortgage, using all types of pitches and gimmicks to separate themselves from the crowd.

But mortgages aren’t cool or exciting, so any funky stuff they come up with to sell you a mortgage is probably just a load of baloney.

For example, you might be offered reduced closing costs, a relationship discount, or a stuffed animal. Okay, that last one may only be a half-truth if you bring your kid with you to sign the paperwork.

You may also be told that certain fees will be waived, or that they’ll lock your mortgage for free. Sadly, most of these “fees” don’t tend to exist in the real world, so you have to question whether you’re actually getting anything at all.

All the major players do it, including Wells Fargo, Capital One, Chase, Citi, Discover, Costco, etc.

The smaller guys probably don’t offer special discounts or fancy marketing, though that doesn’t mean they won’t throw some nonsense your way in a different form.

Look at the Big Picture

When shopping for a mortgage, it’s important to look at the interest rate and the fees you must pay to acquire that rate.

If you’re focused on $500 off closing costs, as opposed to your mortgage APR, you’re missing the point.

The same goes for a relationship discount. If you already do business with the bank that is offering to close your mortgage, and they agree to shave .125% (an eighth) off your mortgage rate, make sure it’s lower than competitors’ straight up rates.

Perhaps a good analogy to put this in perspective is the insurance industry, which is notorious for offering discounts for all types of silly stuff.

These days, the discounts are endless, and the marketing brains seem to be working around the clock to come up with more inane discounts to peddle to consumers.

But even if you receive 100 discounts, if your overall premium is still higher than what some no frills insurer is offering, the discounts mean squat.

It’s the same deal for mortgages – if some lender offers me a relationship discount, $1000 off my closing costs, or a stuffed pony for my niece, it won’t mean a thing if another lender is offering me a lower rate with fewer fees.

Get a Discount If We Screw Up

Perhaps the worst of the “discounts” are the ones that are only applied if the lender screws something up. Seriously?

Do you really want to go with a lender who will offer you money if they can’t get the job done on time?

That sounds like little consolation and a whole lot of stress, not to mention the fact that you’ll probably need to argue with them to get your credit.

So let’s get this straight – they fail to close your loan on time, and then offer you a credit, which will undoubtedly require you to send in even more paperwork and plead your case.

Good luck explaining that it was indeed the lender who was at fault, and not you or a third-party.

At the end of the day, you should do your best to avoid being sucked in by these marketing gimmicks, as enticing as they may sound.

Chances are the discounts are “priced in” somewhere else, whether it’s via a higher mortgage rate or added junk fees.

This is not to say that you should avoid the big banks in favor of a mom and pop broker shop, but you should take a hard look at a variety of offers to cut through the fluff.

Read more: Watch out for the adjustable-rate mortgage pitch.

About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for 15 years.

Source: thetruthaboutmortgage.com

125% Second Mortgages Are Back Again…

It feels like we’re getting dangerously close to repeating history in the worst way possible.

High-risk loan programs that seemed extinct were perhaps only endangered, as evidenced by a new product launch over at CashCall, an Orange County based company that offers both personal and mortgage loans.

Yep, they’re offering 125% second mortgages, and no, I’m not talking about HARP loans for those underwater on their mortgages.

This is a bona fide “no equity home loan,” a mortgage instrument popular during the housing boom that quickly disappeared once values began to take a dive.

How the 125% Second Mortgage Program Works

Essentially, those who wish to borrow more than their home is worth can apply for one of these loans if they meet certain conditions.

For example, if your home is only worth $200,000, but you want to borrow $250,000, this loan will allow just that.

This differs from a traditional cash-out refinance, which typically requires a homeowner to have some equity buffer, such as 20% or more.

These types of loans worked back in the day on the expectation that home prices would continue to rise over time, and eventually the homeowner wouldn’t be “underwater” any longer.

They failed because (as we all know) home prices eventually stopped going up, and homeowners with giant mortgage balances had already spent the cash elsewhere, and had no intention of paying it back once their property values were cut in half.

This particular 125% second mortgage is a 15-year fixed loan, and only requires a minimum FICO score of 660, which is pretty below average for this level of risk. It must also be an owner-occupied property.

The minimum loan amount is $25,000 and the max is $150,000. For attached condos, they actually limit the CLTV to 100%, seeing that condos are generally deemed higher risk.

Oh, and the max DTI ratio is 50%, though pricing is more favorable for those who keep it at or below 43%.

Speaking of pricing, rates range from as low as 7.49% to as high as 14.99%, depending upon the CLTV.

Here’s the rundown based on what I saw advertised today:

0-80% CLTV: 7.49%
80.01-90% CLTV: 9.49%
90.01-100% CLTV: 11.99%
100.01-125% CLTV: 14.99%

For the record, these mortgage rates are good for those with FICO scores of 700 and higher. I don’t want to know how high the rates are for those with lower scores.

There are also fees of 3% of the loan amount for DTI ratios at or below 43%, and fees of 5% for DTIs between 43.01% and 50%.

What the Heck Is CashCall Thinking?

One last thing I should mention is that this program is only available in California.

The Golden State has been looking good lately in terms of home price appreciation, and it will probably continue to enjoy higher prices as the recovery goes on.

Perhaps this is why CashCall is happy enough to offer extra-high CLTV loans in the state. After all, homes that sold for $500,000 two or three months ago might sell for $600,000 today. It’s out of control.

Additionally, I’m assuming the company relies mainly on refinance business, and because of the recent rise in rates, it lost a lot of business, just like any other shop relying on refinances to bring in the bacon.

So this appears to be a more aggressive move to offer something the competition doesn’t have, which could lead to an uptick in business to make up for that decline in refinancing apps.

Still, it reminds me of why the mortgage boom went bust, and it’s pretty scary that these types of products have returned just a couple years since the market bottomed.

Let’s hope home prices continue to rise…

(photo: Marcin Wichary)

About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for 15 years.

Source: thetruthaboutmortgage.com

Purchase Applications Grab Majority Share of Mortgage Market in July as Refinances Fade Away

Posted on August 22nd, 2013

There’s been a lot of fuss about the refinance market drying up lately, and we now know it’s not just noise.

Last month, purchase-money mortgages gobbled up the majority share of the overall mortgage market, according to the latest Origination Insight Report from Ellie Mae.

The company noted that purchases accounted for 53% of applications in July, up from 49% in June and 42% a year earlier.

During 2012, the purchase share averaged a paltry 38% as refinances took center stage, helped on by ridiculously low mortgage rates and the expansion of the successful HARP initiative.

The worst month for purchases in recent history occurred during January of this year, when they accounted for just 27% of the mortgage market.

Since then, they’ve steadily climbed higher into the traditional home buying season, while refinances have retreated amid higher rates.

Refinances Peaked in January with 73% Share

purchase share

What a difference half a year makes. Refinances snagged an astonishing 73% of the mortgage market in January, but since then have seen sequential declines just about every month.

The only bright spot for refis was HARP-related, with high loan-to-value loans (95%+) rising three percent from a month earlier.

However, market watchers expect the overall numbers to move in much the same direction for a while, with refinances eventually slipping to a sub-40% share in 2014.

Unfortunately, most homeowners have already taken advantage of the low rates, with only 55% of existing mortgages currently at above-market rates (not all stand to benefit from a refinance).

[When should you refinance a mortgage?]

Then there’s those who procrastinated and missed the boat, with many presumably considering adjustable-rate mortgages as an alternative.

That’s not just speculation – the ARM-share increased to 5.2% of closed loans in July, up from 4% in June and 2.1% back in January.

Meanwhile, the somewhat en vogue 15-year fixed is beginning to lose its luster, with only 15.5% of borrowers opting for a short-term fixed loan, down from 16.5% a month earlier and 16.9% at the start of the year.

This market shift is also obliterating the mortgage industry, with layoffs beginning to make the headlines seemingly every day.

The latest causalities come from top mortgage lender Wells Fargo, which announced another 2,323 job cuts nationwide, including 365 in Birmingham, 330 in offices around Orange County, CA, and another 292 in Phoenix.

These layoffs are on top of additional job cuts announced last month.

Many other banks have been slashing mortgage workforces as well, which is no surprise given the sharp drop-off in origination volume.

It’s so bad that it almost feels like 2007 all over again, with the bad news forcing me to work on my list of layoffs and closures much more these days.

Credit Is Easing in Mortgage Land

credit quality

Despite that, credit conditions seem to be easing for home loans. Last month, the average FICO score for a closed loan was 737, down from 742 a month earlier and 749 in January. The average FICO score for all of 2012 was a very high 748.

Additionally, only 75% of closed loans in July had FICO scores of 700 or higher, compared to 83% a year ago.

In other words, credit standards seem to be falling as mortgage lenders grapple with lower production numbers, whether that’s correlated or not.

For denied applications, the average FICO score was 702 last month, which probably wasn’t the sole reason the loan was declined.

Lastly, both LTVs and DTI ratios increased in July, signaling credit easing and/or a lower quality borrower. But it certainly helps now that both mortgage rates and home prices are much higher than they once were.

Of course, this shift also kind of reminds me of the previous crisis, though nowhere near that same level…yet.

Read more: A Lack of Qualified Buyers Could Hit the Real Estate Market

About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for 15 years.

Source: thetruthaboutmortgage.com

The LendingTree Mortgage Negotiator Makes Home Loan Shopping Anonymous

Last updated on January 13th, 2020

Everyone’s heard of the Priceline Negotiator, but what about LendingTree Mortgage Negotiator?

I hadn’t heard about it until last week, when a commercial popped up on my television pitching the new system. I love scrutinizing mortgage companies and their products because they’re often full of hot air.

When it comes down to it, mortgages just aren’t that exciting, and there aren’t many ways to differentiate them, other than via clever marketing tactics.

Still, it sounded interesting, so I decided to take a closer look. From what I remember, LendingTree basically asked for a borrower’s vital information, and then sent it off to a handful of lenders who proceeded to bombard the customer.

The idea was that they would fight for your business, though my guess is consumers didn’t want four banks calling them, let alone one. This was the classic model. Perhaps it’s still in use today, I’m not sure.

Anyway, this is probably why Zillow created its Mortgage Marketplace, which relies on borrower anonymity first and foremost.

How the LendingTree Mortgage Negotiator Works

current offer
  • First you enter in basic home loan details
  • Including loan amount, loan type, interest rate
  • And what the origination charges are
  • The form tells you where to look on your GFE to ensure you enter accurate information

It looks like LendingTree may have learned something from Zillow’s successful pricing model, seeing that their new tool allows borrowers to shop anonymously while using a Good Faith Estimate for accuracy.

To start, you indicate whether the transaction is a purchase or a refinance, and enter in your property and loan information. Pretty standard stuff for a mortgage lead…

However, what makes the form a little bit more robust is that it asks for your origination charges, and even tells you where to find them using your GFE.

In other words, you should have shopped elsewhere before using the Mortgage Negotiator, seeing that you’ll be using the tool to see how your offer(s) stacks up against LendingTree’s mortgage partners.

Once you fill in the loan type, loan amount, interest rate, and origination charges, your data will be analyzed and you’ll be presented with the “best offers” from the company’s lenders.

You’ll also be shown how your offer compares to the one associated with your GFE, with the interest rate, origination charges, and monthly payment all shown on a sliding scale.

As you can see from the screenshots below, when I entered a rate of 4.75% for a 30-year fixed and origination charges of $3,000, I was told both were higher than average, compared to what their lenders were offering.

Find Out If Your Mortgage Offer Is Good, Bad, or Ugly

how it compares

See how your interest rate compares to lenders in their network.

higher than average

Quickly determine if your origination charges and monthly payment are too high or just right.

To the right of these comparison boxes, I was shown a list of lenders with corresponding rates and fees.

Of course, these were listed as the “best offers,” and who knows if you actually qualify for the best offer. If your credit score isn’t top notch and your LTV is higher than 80%, the best offers may not be applicable.

So you’ll still have to negotiate with their lenders, assuming you bother contacting them after seeing their rates and fees.

Still, it might be a big improvement from the old system, which probably resulted in a lot of less-than-happy consumers.

I like this trend toward transparency and homeowner education. It’s nice to see companies explain to customers how to read their disclosures so they can accurately compare offers among different lenders.

By the way, their research indicates that only 51% of consumers comparison shop for mortgages, which appears to be up from 40% back in 2010.

Update: LendingTree reached out to me and resolved my credit score concern – borrowers with GFEs most likely had their credit pulled elsewhere, so information is probably entered accurately. The same goes for the LTV ratio being inputted correctly.  And the results that appear are in “real time.”

Read more: How many mortgage quotes should you get?

About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for 15 years.

Source: thetruthaboutmortgage.com

Homeowners with Year-Old Mortgages Are Refinancing Like Crazy

Posted on July 2nd, 2019

A new report from Black Knight revealed that prepayment activity (early payoff of a mortgage) has been surging thanks to the precipitous drop in mortgage rates.

It has more than doubled in just the past four months alone, and is now at its highest level since late 2016.

The biggest driver has been homeowners with very young mortgages, those from the 2018 vintage.

This cohort has seen a more than 300% increase over the past four months, which is no surprise given the current mortgage rate environment.

Mortgage Rates Are Down More Than 1% From November

prepay vintage

Per Freddie Mac, the popular 30-year fixed averaged 3.73% last week, down from a much higher 4.94% in November of last year.

For perspective, it averaged 4.55% during the week ended June 28th, 2018, so today’s borrowers are getting anywhere from a .75% to 1%+ rate discount depending on when they took out their mortgage.

Some consider a refinance beneficial with just a .25% improvement in rate, while others might be more conservative and say .50% or better is necessary.

Whatever your refinance rule of thumb, it’s clear plenty of recent homeowners can save a lot of money, especially since they’ve barely dented their outstanding loan balances.

With no fear of resetting the mortgage clock and starting all over, it’s no surprise these borrowers are refinancing in droves.

The 2018 group has been so busy refinancing that their vintage is roughly 50% higher than the next closest vintage, the 2014 group.

Back then, the 30-year fixed hovered between 4% and about 4.5%. So again, a .25% to .75% rate discount for those borrowers based on today’s lower interest rates.

Refinance Candidates Surge Past 8 Million

refi candidates

The drop in rates has also boosted the refinanceable population to 8.2 million homeowners, defined as those who would benefit and qualify for a mortgage refinance.

That’s 6.3 million more than were eligible in November 2018, including more than 35% of all borrowers who took out a home loan last year.

The 2018 vintage consists of roughly the same number of potential refinance candidates as the 2013-2017 vintages combined, which illustrates the importance of timing.

As noted in my recent post about refinance waiting periods, you don’t have to wait long to turn in your old loan for a new one.

And it’s clear these folks are not, with early estimates suggesting a 30% increase in refis from April to May, and May’s volume expected to be about three times greater than the 10-year low seen in November.

That doesn’t factor in the even lower rates since May, and with home sales also expected to rise, prepayments will likely climb higher in the coming months.

Prepayments by Loan Type

prepay loan type

Now let’s take a closer look at the type of loan being refinanced today.

Overall, the first lien single month mortality (SMM), a measure of prepayment speeds, was 1.23% in May, up 24% from a month earlier.

It’s also up 109% from four months earlier, and now sits well above its five-year average of 1.04%.

Home loans are prepaid for a number of reasons, either to improve the rate and/or term via a rate and term refinance, or to tap equity via a cash out refinance.

It’s also possible to sell a home and pay off the mortgage, to partially pay it back ahead of schedule via curtailment, or to land in default.

Most of the recent refinances were likely rate and term refis as the incentive today is to lower your monthly payment and save on interest.

This is further evidenced by the abundance of tappable equity, with homeowners currently sitting on some $6 trillion of it.

Anyway, the biggest increase in prepayment speeds was seen on government home loans, including FHA loans and VA loans.

Prepays on such loans were up about 2.5X (145%) from four months ago, while prepays on Fannie Mae and Freddie Mac loans were up just less than double (98%).

Meanwhile, portfolio loan prepays were up 131% from four months ago and legacy private label securities were up just 31%.

Unsurprisingly, prepays of adjustable-rate mortgages have also surged to their highest level since 2007 given the super low levels of 30-year fixed mortgage rates, and the weak fixed-to-ARM spread.

Regardless of what type of home loan you have, or when you took it out, now might be a great time to dust off your loan documents to see what your mortgage rate is relative to today’s heavily discounted rates.

About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for 15 years.

Source: thetruthaboutmortgage.com

The Cash Out Refi Share Is Above 80%, But There’s a Catch

Posted on November 27th, 2018

While it would appear that borrowers are using their homes as ATMs again, it’s a bit misleading.

Yes, the share of home mortgage refinances that resulted in cash out rose above 80% in the third quarter, per Freddie Mac data, but one must also consider overall loan volume.

Let’s start with the basics here. Of the refinances recorded in the third quarter, an overwhelming 81% resulted in a loan amount 5%+ higher.

That means the homeowner took on a larger loan amount in exchange for some sweet, sweet equity.

These were very common during the lead-up to the housing bubble, and partially why it bubbled to begin with, but became very rare post-crisis.

This is kind of a big deal because the cash out share was in the ~40% range as recently as 2017.

The Cash Out Share Bottomed in 2012

  • The cash out share hit 12% in the second quarter of 2012
  • The lowest since Freddie Mac began compiling records in 1994
  • This was the result of restrictive underwriting guidelines
  • Combined with sinking house values

However, the cash out share was a paltry 12% in the second quarter of 2012, and hovered below 20% for much of the time between 2010 and 2014.

Part of that had to do with the fact that homeowners didn’t have any equity to tap, what with home prices in the gutter and large outstanding mortgage balances ensuring there was nothing left to access.

Further exacerbating the issue was tight underwriting restrictions that limited cash out to very low loan-to-value ratios.

In other words, you basically needed to own your home free and clear or very close to it in order to get some cash out of the property.

Fast forward to 2018 and cash outs are king again, well, at least on paper. That 81% share is the highest since the third quarter of 2007, when the share was a staggering 87%.

It was actually slightly higher in the second and third quarter of 2006, at 89%. What made that even more remarkable was the volume seen at that time.

Not only were cash out refis all the rage, the loan amounts associated were massive thanks to questionable home appraisals and liberal underwriting standards, if you could even call them that.

Pretty much everyone and their mother was taking advantage of the 100% LTV cash out refinance, which when coupled with an option arm or other type of ARM, resulted in an unsustainable monthly payment once financing options dried up.

And as home prices tanked, so too did the incentive to keep the darn mortgage, which is why we experienced the worse housing downturn in decades.

But before we get too concerned about another home equity crisis, we need to consider the volume of these refis today.

Today’s Cash Out Volume Is a Drop in the Bucket

  • If we look beyond refinance share and at volume instead
  • It’s clear that cash out refis aren’t out of control again
  • Less than $15 billion was cashed out in the third quarter
  • It was as high as $84 billion in the second quarter of 2006

In the same report, Freddie lists the total home equity cashed out each quarter, in billions of dollars.

Sure, 81% is an overwhelming share, but it really only speaks to the fact that rate and term refinancing is all but gone, thanks to the recent increase in mortgage rates this past year and change.

Back to that volume – during the third quarter, an estimated $14.6 billion was cashed out. Sounds like a lot, but it’s not, at least relative to what we saw a decade ago.

In the second quarter of 2006, some $84 billion was cashed out of some very artificially inflated homes. That’s nearly six times the volume and doesn’t even factor in inflation over the past decade.

Basically, today’s cash out volume is a drop in the bucket compared to what we saw in the early 2000s.

In a three-year span between 2005 and 2007, more than $800 billion dollars was cashed out of U.S. properties nationwide. Where’d it all go? How much of it was actually paid back?

In 2005, volume was $262.7 billion, followed by $320.5 billion in 2006 and $239.7 billion in 2007.

Throw in 2004 and 2008 and you’re over a trillion dollars. Wow.

For more perspective, annual cash out volume for 2018 will likely be less than $70 billion. And it was only $69.6 billion last year.

Of course, we should certainly keep an eye on volume going forward to see if there’s another home equity party materializing.

Sure, homeowners like their low fixed mortgage rates an awful lot, but there’s a good chance they like cash even more. If and when the cash out volumes get closer to what we saw a decade ago, you can start to worry.

About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for 15 years.

Source: thetruthaboutmortgage.com

There Is No Mortgage Trick

Over the years, I’ve seen tons of ads and articles about a so-called “mortgage trick,” only to click on the associated hyperlink and see nothing regarding any tricks. Talk about disappointing.

For the record, I’m always interested to see what someone might have up their sleeve, which is why I continue to click year after year, hoping there really will be a trick one of these days.

Instead, I repeat the same mistake over and over again, expecting a different result, which some liken to insanity. I’m okay with that, I’ll swallow my pride.

You may have seen these same ads or articles claiming to save you thousands or more on your mortgage by “using this one trick,” only to be left disappointed or scratching your head. Did I miss something?

In fact, I got suckered into another one this morning, which revealed absolutely nothing new. Quelle surprise.

When it comes down to it, there’s no mortgage trick. A trick is defined as “a cunning or skillful act or scheme intended to deceive or outwit someone,” per Google.

Or one that mystifies the audience – think the quintessential magician pulling the rabbit out of the hat, or making a dove appear out of nowhere.

Do you really think mortgages are like magic, or anywhere close to it? And are they entertaining or even the least bit interesting?

Not really, even though I try to make them slightly more appealing on this blog. Whether I’m actually accomplishing is another question.

A mortgage is simply a loan on your home that requires regular payments for a set period of time, usually a long 30 years.

There’s no magic trick to change that unless you’ve got more money or can simply avoid a mortgage altogether and pay in cash.

So What Is the Mortgage Trick?

  • Those annoying mortgage trick advertisements and articles you come across
  • Are nothing more than a roundabout way to convince you to refinance your mortgage
  • Or to read yet another post about something you probably already knew existed like biweekly payments
  • There’s nothing magical, special, or groundbreaking about it

The supposed trick most of these ads tout is a simple rate and term refinance. And they’re offered at just about any bank, credit union, or lender you’ll come across.

You don’t have to ask around about them, or know someone on the inside to get one. They’re readily available as long as you qualify.

While a refinance could save you tons of money, even hundreds of thousands of dollars depending on the situation, it’s not a trick.

It’s just a conventional financial tool to reduce your mortgage rate or shorten your loan term so you’ll pay less interest. It can be a great move and one that changes your life, but it’s still not artifice or a clever ploy.

A refinance isn’t a scheme nor is it intended to deceive or outwit. It’s just an option you have as a homeowner to take advantage of the dynamic interest rate environment.

[The refinance rule of thumb.]

The other common “trick” I’ve come across has to do with biweekly mortgage payments. Again, not a trick, just another option to pay the mortgage a little bit faster while reducing your interest expense.

Why Call It a Mortgage Trick Then?

  • I suppose there is a trick, just not a mortgage one
  • And it’s getting you to click on their ad or read their article
  • By convincing you they’ve got some special method that they’ll let you in on
  • But ultimately there is no silver bullet to extinguish the mortgage

I guess it just sounds a lot more enticing to refer to it as a trick rather than a boring old refinance, like you are pulling one over on your bank or being let in on a secret. Take that “The Man!”

At the end of the day, if you want to own your home free and clear you need to pay your mortgage in full with real money. You can do this in a variety of different ways.

You can slowly pay back your home loan over 30 years and never refinance, even if interest rates fall dramatically. Or you can keep an eye on rates and refinance if and when it makes sense to do.

To avoid resetting the clock, you can also go with a shorter loan term when you refinance to stay on track and avoid taking your mortgage into retirement with you.

This could be quite wise, and as mentioned, save you tens if not hundreds of thousands of dollars. Trick, no? Smart financial move? Quite possibly.

At the end of the day, there is no silver bullet to your mortgage problem. Yes, you can pay off your mortgage a lot faster and for much less money, but it’s not magic, just common sense.

(photo: Steven Depolo)

About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for 15 years.

Source: thetruthaboutmortgage.com