Private Mortgage Insurance (PMI) is one of the most common yet most widely misunderstood concepts in mortgage lending today - at least from the borrower’s viewpoint. When many borrowers hear “mortgage insurance,” they tend to thing hey - that’s great!  I’ll be protected in case I can’t pay my mortgage!” However, this mortgage insurance is not in place to protect borrowers.  Rather, it’s put into place to protect lenders.

See, in situations where borrowers are unable to put down 20 percent or more for a home purchase, lenders tend to get a bit hesitant to lend - at least with out a hedge against their bet.  Experience has shown them that borrowers with less than 20 percent down tend to default on their loans more often.  So, lenders require those borrowers to pay a monthly fee to cover an insurance policy that in turn, protects  - or insures - them in case you can’t meet your financial obligations.

How Private Mortgage Insurance (PMI) Breaks Down Here’s How PMI Works

Say you’re getting an mortgage and are prepared to put 5 percent down on your home.  The lender requires any borrower putting down less than 20 percent to pay for an insurance policy that protects them in case the borrower becomes unable to pay on the loan.  In this scenario, you’ll likely pay a set fee per month as part of  your mortgage payment to cover this insurance.

Should you at any time default on your mortgage loan, the lender would benefit by receiving the 15 percent you did not pay as part of your down payment at closing.  Remember - 80 percent.  That’s the magic number lenders feel comfortable lending without requiring PMI.

Ending Your PMI Payments

The Homeowner’s Protection Act of 1998 requires lenders to automatically suspend PMI billing once you’ve attained 22 percent equity in your home.  However, once you have paid on your mortgage to a point where you have the required 20 percent accumulated, you can and should request that the PMI fees you pay each month be suspended.

Markets: The bond market has reversed itself the last two days and is headed higher once again.  It has broken through a couple of lines of resistance and is now trading at what my sources say is “an unsustainable level”.  More on that below.  Current levels on the FNMA bond correspond to 30-year fixed rates below 5%, though not very much below.  Still.

Analysis: What is the definition of “unsustainable”?  If you ask me, unsustainable means “you can’t keep doing this forever”.  These days, it seems to also mean “you can’t keep doing this for long enough to matter,” as when a football team grabs an early lead through fancy trick plays, but shortly runs out of those and cannot sustain the advantage.  It matters which we’re talking about, because the bond market certainly is in Unsustainable 1 territory, but not - again, just as clearly - in Unsustainable 2 territory.  We know this because we’ve been here before.

So we’re here, and we’re here long enough to matter, IF.  It is absolutely true that most lenders (and this is especially true with the new federal babysitting regulations) cannot react fast enough to help you take advantage of rates that will be abnormally low for only a few hours.  It is also true, however, that some lenders can, and the number that have that capability can be increased by your timely action.  DO NOT WAIT FOR RATES TO HIT YOUR TARGET ZONE BEFORE YOU START TALKING TO YOUR LENDER.  That’s not going to work, people.  For most, a couple of hours is just not enough time to get all the documents whizzed back and forth before a lock becomes possible, not with rates moving with this kind of volatility.

Since I already used the running analogy last time, let me use a hunting one here.  If you think you’re going to get the perfect shot on a deer by waiting for the deer to get in the right area, then going in after it, you’re crazy.  The way to make sure of a good shot is to get there first and wait.  Similarly, the way to make sure you get the rate you want - and 15-year rates are in the very low 4s right now, for instance, with 5-year ARMs in the mid 3% range - is to get your documentation together and go over it with your lender BEFORE you need to shoot.  That gives you the very best possible chance to get exactly what you want.

These days, a couple of extra days is a godsend.  Get moving now, and give yourself a break.

In today’s economy, many first-time home buyers find it challenging to make a hefty down payment towards a new home loan. Luckily, FHA financing is available for conforming loans (less than $417,000) with down payments as low as 3.5%.

Loans made by FHA (the Federal Housing Administration) haven’t always been applicable to every home on the market because of longstanding guidelines and restrictions. For example, if you wanted to sell your condo to a buyer ready to bring 3.5% down, that buyer couldn’t obtain an FHA loan if your condo bylaws gave the board the “right of first refusal.”

But now, FHA is making it easier to obtain approval for condos. They’re allowing lenders to determine project eligibility, review project documentation, and certify federal compliance for condo projects.

In accordance with the 2008 Housing and Economic Recovery Act (HERA), FHA is implementing a new approval process for condo projects to insure mortgages on individual units closed as of October 1, 2009.

Now, the right of first refusal is permitted - unless it violates discriminatory conduct under the Fair Housing Act. Eligible spheres include projects with 2 or more units carrying hazard, liability and flood insurance. For these projects, no more than 25% of the units can be used for commercial space – and no more than 10% of the units can be owned by more than one investor. Additionally, 50% of the units must be sold and owner-occupied. Projects listed as “Proposed / Under Construction,” “Existing Construction” or “Conversion” are also eligible.

Ineligible Projects include Condotels, Timeshares or Segmented Properties, Multi-Dwelling Units, and Commercial Properties.

So what does this mean for you?

As a buyer
Buying a home is a big investment - and saving for a down payment can be a tough proposition, especially when you include closing costs and tax escrows. FHA is making condo purchases with 3.5% down even easier. Look for FHA-approved buildings (or buildings with pending FHA approval) - and talk with your mortgage consultant to see if you qualify for a low-down payment loan through FHA.

As a seller
Your condo association or developer can work with a lender to get your building pre-approved for FHA loans. This allows for more flexible compensating financial factors for potential buyers (i.e. cash reserves, credit scores, etc.) and attracts more buyers, leads to more saleability, and greater home value appreciation.

Score one for the little guy: New York judge wipes out borrower’s mortgage debt when lender can’t produce the note.

Time to take a look at the second installment in the 7 things series.   If you recall, last time, we looked at the fact that, in a rapidly changing market like we are, 6 months ago is ancient history.    What someone paid 6 months ago…… Well, just read about that at 7 Things – Part 1.

So what’s Part 2 about?   Here’s what I wrote last time:

2. Don’t worry so much about what you paid for your house. Instead, look at the difference between what you can expect to sell your house for and what it’s going to cost you to buy the new one that you want. I expect you’ll find that those are much more important numbers (unless you end up without any equity, in which case you don’t sell).

There are a couple of things that I think still hold true and one big thing that I think doesn’t hold true any more.    First the things that hold true:

• If you are selling one home to buy another, the most important number is not what you paid for the existing home, the most important number is the difference between the two homes.   If the value of your home has fallen by $40,000 but you’re in a situation where you can buy a newer home with less maintenance and 1000 square foot bigger for a “net” difference of $20,000, then it might very well be a good deal.   
• If your family situation has changed (i.e. – We got married and are expecting our second set of twins in the last 2 years! – Yikes!) then what you paid for your house doesn’t matter.   I’ve got a client who is negotiating on a house where the seller has to sell within the next three weeks but they are “hung up” on what they paid for the house.   If you need to do something, don’t worry about what you paid for your house, just focus on what the financial and logistical aspects and make the move.    I’m working with a client who is relocating for a new job.   His new position is a nice enough “step up” from his current position that they sold their home for approximately 20% less than they paid for it and still be able to buy a new house.   He told me that while he didn’t want to sell his house for less, the overall picture of the move is “the right thing” for them at that point.

Now, the one big thing that has changed since last year.   Let me lay it out this way:

• On March 4, 2009, Bloomberg reported that More than 8.3 Million Home Owners were underwater. 
• On October 20, 2009, I was on a conference call where Dr. Nouriel Roubini said that if housing prices drop another 7 to 10% over the course of the next year, by the end of 2010, there will be 25 million home owners who are under water.   Oh and he said that it’s almost guaranteed that they will drop because of the imbalance between supply and demand.   There already is too much inventory, credit is still tightening, foreclosures are still climbing and jobs are still getting eliminated.   That means the inventory problems aren’t going to go away any time soon.

Let me make that perfectly clear.   There are approximately 51 million home owners in the United States who have mortgages on their homes.   By the end of 2010, almost half of them will owe more on their homes than what they are worth.

If you’re sitting in a coffee shop reading this on your laptop, look at the guy at the table next to you.   Now look at the guy on the other side.   1 out of the 2 of them owes more on his house than what it’s worth.    Ouch.

That means a number of things that are different than last time:

• There will be sustained upward pressure on foreclosures. 
• There will be marked lack of geographic mobility.   A lot of people who would consider and/or actually relocate to get a job/a better job won’t be able to because they can’t sell their house.   Or they’ll relocate, give the old house back to the bank (lots of credit ramifications – topic for some other time) and rent.
• Over the years, the “old rule of thumb” was that the average home owner would move every 7 years.   Now with almost 50% of the homeowning population “trapped” in their homes, we’re going to see people staying in their homes a LOT longer and we’re going to see a lot less move up buyers, a lot less move “over” buyers and a lot less downsize buyers.    That’s going to accentuate the inventory problems and keep downward pressure on house prices.
• That also means that there will be a lot less opportunities for builders, Realtors and lenders because of the decreasing mobility of the American population.

So, on the one hand, things are similar to what they were last year in that if you are going to make a move, what you paid for your house isn’t that important, it’s the difference that matters.   But, for more and more people, the changes in the market since last year mean that if they want to move, they have no good options.   They can stay put or they can do the short sale/foreclosure/rent for a long time option.

The market is different than it was in the summer of 2008.

P.S. Stay tuned for Part 3 – Is this the market for Do It Yourselfers?

The current $8,000 tax credit for first time home buyers is set to expire in approximately a month. Since then, there has been a rush for buyers to find a home and close before the December 1st, 2009 deadline.

In a related CNBC interview, several industry experts discuss whether extending the tax credit is a good idea and some details of some of the bills currently in Congress.

Read the rest of this entry »

I have found that few things in life separate the sheep from the goats men from the boys efficient from the not-so-efficient like the free market does.

Earlier this week, I received an email from the people at Zillow saying that they were making changes to their Zillow mortgage marketplace and were going to start to charge lenders for each contact with borrowers and my first thought was:

“Well, this oughtta be fun to watch”.

I think it might be the social scientist in me that casually enjoys watching people squirm whenever a perceived “big change” is announced - whether it is a global, national, corporate or maybe even just a marketplace change.

It has been my experience that whenever change occurs, there is almost always a group of people who thinks change is “fun” - no matter what it is - and finds a way to adapt to the change and continue on with life. It has also been my experience that there is also a group of people who resist change and can’t figure out why they never end up on the good end of the changes.

If you enjoy seeing both sides (and everything in between), be sure to follow the debate about the recent changes Zillow announced and how people are reacting to them.

What This Change Means For You: The Consumer

If you are a consumer, be sure to put Zillow on your Holiday greeting card list. They did you a big favor by making sure that lenders are valuing your contact - in fact… they are making your interest and qualifications a “market”.

If you are interested in a loan, have good credit, good income, good assets and want to buy a $500,000 house do you think you are more valuable to speak with than someone who has lousy credit, no money and wants to find out how to use the $8000 tax credit to buy a house?

Of course you are.

So now the lenders on the back end are going to be actually “bidding” for that interest and hoping that you contact them.  When you do contact them (hint: if I were you, I would contact one of the ones who has a stellar reputation), then they will be charged.

Just a hunch here, but I wouldn’t be surprised if Zillow doesn’t start out segmenting you as a customer and assigning a different value to you based on certain criteria, they will over time.  Which will only help the process.

I know, I know - it still remains to be seen just exactly how much money Zillow will be willing to pay lenders to talk with people who have lousy credit and no down payment (that was a joke) but one thing is almost certain:

Now that there is a price-tag that lenders are going to be paying each time you contact them - you as a consumer have an even higher chance of getting the best service from your loan officers working right here on Zillow.

Or, maybe I should say it like this: It seems to me that if a lender has to pay $100 for you to talk to him, you have a better chance of getting his/her full attention than if they didn’t have to pay anything for you to talk to them.

Or at least that is where I always try to put my mouth… where my money is.

Back in the day, marketing homes for sale involved a listing on the MLS, buying ad space in newspapers, displaying signs on site, and lighting scented candles for the open house. Now, there are countless avenues to gain exposure to buyers and sellers. Through social networks (which connect groups sharing common backgrounds and interests), you can reach a larger sphere of influence and extend your reach.

You’ll save time and trips by utilizing existing technology and groups. Here are a few of the basics — and their relevant ties to the real estate market:

Broadcast your home! When shopping for a home, you can see listing photos or even a virtual tour on an agent’s website. But now, realtors post videos of actual property walk-throughs on YouTube, giving buyers a direct, first-hand look at new construction developments that aren’t yet open to the public.

Twitter enables realtors to stay connected with clients. They “Tweet” (or “post”) short updates with home sale statistics, home improvement tips, and links to local events. And if you’re a buyer, Twitter is often the first place to hear about “Just Listed” properties or developer incentives.

Facebook enables realtors to post links to properties for sale or rent and to share ideas with clients and other industry professionals.

LinkedIn is a networking tool primarily used by professionals in the corporate world. As a buyer or seller, you can read real testimonials and find trusted referrals.

Zillow, as you know, offers a comprehensive list of homes for sale, both by agent and by owner, as well as neighborhood statistics and home sale trends. Zillow’s vast directory includes real estate professionals, useful articles, and frequent updates to help you stay tuned into the market.

Blogs give companies an immediate and direct opportunity to provide readers with breaking news, industry insight, and new media. Realtors discuss new developments and market trends. Financial experts blog about legislative changes, rates, new programs and other educational topics.

By combining traditional marketing methods with social networking, you can maximize your exposure for selling your property, connecting with real estate professionals, and finding real answers.

Here’s what I wrote about item #1 on the list last time:

6 months ago is ancient history. What your neighbor sold his house for 6 months ago doesn’t matter.   What the seller was asking for the house 6 months ago doesn’t matter.   What matters is what the market will support today.

So, how are things the same and how are they different?   A couple of things that need to be discussed:

How are things the same?

• What happened 6 months ago is still ancient history.   Since I wrote the first piece, Fannie, Freddie and FHA have tightened up their appraisal guidelines and they will no longer allow an appraiser to use a sale that is more than 90 days old unless they have no other comparables and can write a 5 page essay of why they need to use that one.
• I can’t tell you how many times over the last 12 months, I’ve heard people say, “3 years ago, the seller bought the house for $100,000 more than what I’m paying the bank for it.   I’m getting an awesome deal!”    My first response is, “Maybe.”   Maybe you are getting a deal.   But maybe the seller bought it at the peak of a bubble in the market and paid way too much and now things are just adjusting down to the market.    Maybe it’s not down to what the market will really absorb for the house and if you tried to sell it next year, you’d end up selling it for less than you paid for it.
• “They just dropped the price by $50,000!”   This is a great deal!    Maybe, but then again, I can put my house on the market for $650,000 and then offer to give you $100,000 off the asking price.   Is that a good deal for my house?  (Hint - my house is still WAY overpriced at $550,000 - but I’ll sell it to you for that.)

So what is different?   A couple of things are a bit different from last year:

• The First Time Home Buyer Tax Credit/Buyer Frenzy - If you are any where near the radio/newspaper/any mortgage lender or Realtor, you’re probably getting sick of hearing about the $8,000 first time buyer tax credit.   I’ve written about it before and I’m not going to discuss it here other than to discuss it’s impact on property values.  
• As the number of first time buyers has skyrocketed in virtually all areas (got to get that free money), it has stablized and in some areas has turned around the property values in the lower end of housing prices in many areas.  
• So that can actually show prices now being higher than what they were 6 months ago (for certain segments of the market - but certainly not all of them).  Does that mean that the market has turned around?   Do you rush to buy now because houses are going to be more expensive next year?
• Or is real estate going to follow the same route that automobiles did with the “Cash for Clunkers” program?   You know, the one where sales spiked during the first few weeks of the plan, then slowed down and after the program was over, they dropped quite dramatically?   If that happens to real estate, then how does that play into the plans of  first time home buyer?    If they can’t make it to the November 30 deadline (and time is almost up), do they buy now any way thinking prices are going up or wait because prices are going to come down?

In summary, 6 months ago is ancient history in real estate even today.   However the government’s initiatives that have been attempting to prop up the housing market and encourage first time home buyers have made the calculations and prognostications of what is and what might happen with housing prices much more challenging.

Next we’re going to look at the question of whether what you paid for your house matters or not and the negative equity situation.