Month: November 2015

Washington, D.C. – The Federal Housing Finance Agency (FHFA) today announced that the maximum conforming loan limits for mortgages acquired by Fannie Mae and Freddie Mac in 2016 will remain at existing levels, except in 39 high-cost counties where they will increase. In most of the country, the loan limit will remain at $417,000 for one-unit properties.

The Housing and Economic Recovery Act of 2008 (HERA) established the baseline loan limit at $417,000 and mandated that, after a period of price declines, the baseline loan limit cannot rise again until home prices return to pre-decline levels. The $417,000 loan limit will stay the same for 2016 because FHFA has determined that the average U.S. home value in the third quarter of this year remained below its level in the third quarter of 2007.

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Mortgage rates move based on demand for mortgage-backed securities (MBS). What is a MBS? The securitization process is a bit complicated, but in general think about it like this:

• A borrower takes out a loan for a home.
• The lender can then package the loan together with other loans and sell this “pool” to an investor or government agency (think Fannie Mae).
• These loans are then “securitized” – similar to a bond – and sold on the bond market.
• Once here, MBS act like any bond: investors pay an up-front price to obtain the bond, and receive a “yield” on their investment over time.
• The “yield” is paid based on the interest that borrowers pay on their mortgage.
• [Note: there are many structures for MBS; we have simply given you an overview.]

When the economic environment is more “volatile,” investors tend to look for safer assets. The U.S. bond market offers some of the safest assets around.

High demand for MBS increase the price at which they are sold. When the price goes up, the “yield” drops, which in turn helps put downward pressure on mortgage rates.

So in other words, in times when investors want to buy “safety” or when the Federal Reserve guarantees billions in MBS purchase per month, mortgage rates drop.

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A good shorthand way to monitor mortgage rate pricing for the 30-year fixed rate is to watch the 10-year U.S. Treasury bond. When the 10-year bond yield jumps, expect mortgage rates to do the same.

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Construction spending rose a solid 0.6% in September, led by the residential construction monthly gain of 1.9%, with a year-on-year gain of 17.1%. New multi-family units are once again at the top of the residential component, up 4.9% in September for a 26.7% year-on-year gain. Single-family home construction rose 1.3% for a respectable year-on-year gain of 12.7%. Non-residential spending didn’t fare so well in September, down 0.7% with declines in most of its sub-components. However, the year-on-year rate is still in the positive at plus 14.9%.

October brought a $4 rise in consumers’ spending habits, as Americans reported spending an average of $92 per day in the month. This $92 average is similar to the October 2008 average of $91 per day, and the 2013-2014 averages of $88 per day, but is considerably higher than the 2009-2012 October averages, which ranged from $63-$72 per day. The past couple of years have yielded increased spending throughout the October and November months, and, depending on November’s spending figure, this year may be poised to follow suit.

There was a rise in the number of jobs created in October according to Gallup’s Job Creation Index, which averaged a level of 32 points for the 6^th month straight. Within the month of October, 43% of workers reported that their employer was hiring workers and expanding its workforce, and 11% reported that their employer was letting people go and reducing its workforce. 40% of workers surveyed described their workforce as “not changing” in size. It is a positive sign that job creation is holding at a high level, but some tend to wonder if it has the capacity to climb any higher.

On the flip side is the Job-Cut report for October, released by Challenger, which revealed that layoff announcements fell to 50,504 in the month from September’s 58,877. The number of announcements in October also came in significantly lower than the 3^rd-quarter monthly average of 68,586. The announcements mostly came out of the retail and energy sectors, the latter being hurt by continued low oil prices. According the Challenger, an estimated 25% of the layoff announcements in October were tied to oil prices.

The percentage of adults participating in the workforce, also measured by Gallup, came in at 67.7% in for October, up very slightly from September’s 67.5%, and from the 66.6% participation measured in October 2014. Gallup’s measure of US unemployment yielded a rate of 5.6% for October, down from 6.3% in September, for the lowest rate since tracking began in 2010. Also inching downward was the underemployment rate for the month, down 0.3% from September to 13.8%, which is also a record low. While unemployment fell in October, the rate of “involuntary part-time” (adults who are working part time but desire full-time work) rose 0.4 points in the month to 8.2%.

Payroll and services reports for October suggest that an upcoming rate hike is even more probably. Non-farm payrolls rose 271,000 in the month, for the strongest gain since December of last year. Among the payroll improvements was a 78,000 rise in professional & business services, a 51,000 rise in trade & transportation, a 44,000 rise in retail trade, and a 31,000 rise in construction, a reflection of strong numbers in construction spending. The unemployment rate decreased by 1-tenth to 5.0% for its lowest rate since April 2008, and brings another positive to the US economy.

Mortgage Rates

Mortgage Rates rose across the board in the past week, with an increase of approximately 1/8 percentage-points for most loan program options. The exception is the 30-year Jumbo, which still increased, but only by a small margin of 0.6 basis points. The largest increase was seen in both the FHA 203k and USDA programs, rising 12.9 basis points in the week. Following closely behind was the 30-year fixed conventional rate, up 12.6 basis points to 3.875% (3.915% APR). This is still about 1/4 percentage points lower than the year-ago rate of 4.125% (4.140% APR), and keeps the 30-year fixed rate blow the 4.00% threshold. [Visit our Mortgage Rates page for more in-depth weekly rate updates.]

Chief economist Sean Becketti responded to the rise in mortgage rates on behalf of Freddie Mac, stating,

“Treasury yields climbed nearly 20 basis points over the past week, capturing the market movement following last week’s FOMC meeting. In response, the 30-year mortgage rate experienced its largest increase since June… Recent commentary suggests interest rates may rise in the near future. Janet Yellen referred to a December rate hike as a ‘live possibility’ if incoming information supports it. The October jobs report to be released this Friday will be one crucial factor influencing the FOMC’s decision.”

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After the real estate bubble popped and the economy fell into recession, many homeowners decided against leaving their homes and “trading up” or investing in new property, and instead focused on improving what they already had.

As new home construction has declined over the past 5 to 7 years, residential additions and alterations have increased – and some of the work done hasn’t been permitted. What does this mean for current buyers and sellers? Will lenders accept non-permitted additions and alterations?

The broad answer is “yes”: lenders will accept properties with non-permitted additions and alterations, but there isn’t a single set of rules to follow for obtaining financing for such properties. What works for one loan, might not work for another.

Monica Chudgar, an appraiser and realtor, gives an example. “I appraised a home that converted the garage to a second unit with a full bathroom and kitchen. The lender didn’t want the stove in there, so the owners removed the stove and took a picture. After that, the loan went through fine.”

The most important consideration that lenders take for non-permitted additions is the quality, or “workmanship”, of the completed project.

“There are liability and insurance issues,” said Daniel Podesto, co-owner of Central Coast Lending. “When a lender agrees that the property is in acceptable condition, they can be held responsible to some degree.”

Lenders want to make sure that they are financing a safe, fully-functioning property. This is where “workmanship” comes into play.

“The concern is about the quality of the improvement,” said Podesto. “Was the project done by a person without experience? Or was the improvement completed the right way by somebody with skill?”

Appraisers pay close attention to alterations that involve plumbing and electricity, and make note of any issue that could suggest faulty work. Non-permitted plumbing is often a bigger red flag than other renovations such as electricity, said Podesto. To ensure the quality of the work, the appraiser will look for water damage, leaks, and dry rot on surfaces...

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