Mortgage rates have slowly begun to rise just as the spring home-buying time nears. This could be perilous to the recovery in housing markets.

Mortgage finance company Freddie Mac said that the average rate on a 30-year home loan this week in the U.S. jumped to 5.21 percent, from 5.08 percent last week. It represents the highest rate for 30-year mortgages since Aug. 13, nearly eight months ago.

In early December, the rate stood at 4.71 percent, a historic low.

Mortgage applications are dropping, that is slowing down, thanks to several factors that are making borrowing for a home less attractive. First, mortgage interest rates moved up a bit in the past week, causing some to think that perhaps the great deals are over. Even refinancing demand dropped as people began re-evaluating their situations and the interest rates became less attractive.

Second, especially for purchases, the first time home buyer tax credit still has not been extended. Though there are rumors that a deal may get struck in congress we all just have to play the wait and see game. It’s fairly obvious that if you haven’t already started the paperwork by now, you probably won’t close in time for the deadline based on lender turn times and the various appraisals and inspections. Even just changing things so that paperwork initiated by the November 30 deadline would probably help home sales. If it does not get extended I would expect further slowdown for a period of time as inventory still need to get worked off.



Third, credit requirements continue to tighten as Banks try and shore up their balance sheets and have little appetite for risk. As credit tightens, fewer and fewer borrowers will be in a position to qualify. Less buyers = less sales or Lower demand = lower prices

The FHA streamline loan program has been popular with borrowers and lenders because it allows them to refinance a FHA loan without having to completely re-qualify for a new loan. For Lender's this meant a quick, easy and profitable transaction. For borrowers, this was a low documentation, no fuss, easy process. For example, it used to not require income verification, asset verification or credit scores.

Well that is about ready to change!! Recently, FHA announced that they were changing the guidelines for the FHA streamline program. While the official date of change is November 17th, expect Lenders to start modifying their program guidelines much sooner.

Highlights of the changes to the FHA streamline program include:

At the time of mortgage application, the person wanting to refinance with the FHA streamline program must have made at least 6 payments since they got their loan.
For people who have had their loan longer than 6 months but less than 12, they cannot have even one 30 day late payment in the preceding 12 months.
For people who have had their loan longer than 12 months, they can have a maximum of one 30 day late payment in the last 12 months and NONE in the last 3 months.
In order to see if the loan makes sense, a calculation called the Net Tangible Benefit calculation will be done by the Underwriter. The streamline must lower the TOTAL PITI ( Principal, Interest,Taxes,and Insurance) by at least 5% when going from a fixed rate to a fixed rate mortgage. If going from an ARM to a Fixed rate, then the interest rate cannot go up by more than 2%. When going from a Fixed rate to an ARM but the new ARM must be at least 2% less than the current rate. if reducing the Term of the mortgage then it must be fully qualified.
In order to be eligible, the property must be occupied by the borrower: investment properties are not eligible and second homes are not eligible.
All employment, income , and necessary assets now must be certified by the lender — or in other words, expect to provide proof of income and the ability to make the payments.

So once again we see lending getting tighter. Obviously the benefit here is better qualified borrowers but it is not going to help those that need the help the most.

Morgage Refinancing or Mortgage Refinancing, which one is it? I can’t tell you how many times I see it spelled “morgage”. Hello people, spell check? It's morTgage.

In any case, both will probably get you on the path to what you want, but which is better, FHA or Conventional? Actually neither is the best. That rest with VA who has the most liberal terms that allow a Veteran to take out up to 100% of the value of their home in cash. Yes, the good old greenback.

As for the other two, Conventional will be more restrictive as you will not get mortgage insurance thus you will be limited to 80% max but more likely a lot of lenders will only go to 75% loan to value and you need a decent credit score not to get walloped on the rate. Below 700 and the adjustments start to get steep for a cash out mortgage refinancing.


This leave FHA, which is somewhere in between VA and Conventional for mortgage refinancing. FHA will lend up to 85% for a cash out refinance. You will have to pay the upfront mortgage insurance as well as the monthly MIP but at least you can get it done. A 620 credit score will get you a good rate as well.

So whether you want a morgage refinance or a mortgage refinance really just amounts to crossing your t.

This was such a common sales pitch to many subprime borrowers, "This is just a band aid loan". "We'll just refinance you in a couple of years once your credit clears up." The problem is that there is no way to refinance most of these folks.

Now the problem has hit the jumbo market as well. Since Jumbo mortgage were not sold to Freddie Mac or Fannie Mae there is hardy a market left for buyers of these types of mortgage on Wall Street.

[Borrowers] are becoming trapped by the same issue facing the poorest subprime homeowners: falling home prices erase equity and make it impossible to sell or refinance without losing money.
The number of U.S. homes valued at more than $729,750, the jumbo-loan limit in the most affluent areas, entering the foreclosure process jumped 127 percent during the first 10 weeks of this year from the same period of 2008, data compiled by RealtyTrac Inc. of Irvine, Calif., show. The rate rose 72 percent for homes valued at less than $417,000 and 78 percent for all homes, RealtyTrac said.
“It’s the trickle-up effect,” said David Adamo, chief executive officer of Luxury Mortgage Corp., a home-loan bank in Stamford, Conn. “Just like homeowners in smaller homes, these homeowners anticipated being able to refinance mortgages to continue making payments and at a future date sell for a gain and put it toward their next home. That strategy backfired when the market for jumbo mortgages dried up.”
……..

Many of these borrowers took out loans they really could not afford. Loans like ARM's with low teaser rates or Pay-Option ARMs where they did not even make payments that covered the monthly interest. These people committed financial suicide when they signed their loan documents. Most should have know better but they let greed and keeping "up with the Jones" drive their decisions to live in McMansions. Others have had unexpected things happened to them such a job loss or illness but I would venture that the majority just bought the biggest house they could get at the time.

As more of these jumbo loans default, prices will continue to drop and Banks will continue to have losses. It's a simple supply and demand equations with the job outlooks as the wild card.