Dan Hartman

I only have a minute to post right now, but I wanted to make sure you're aware that there has been a dramatic shift in mortgage pricing this morning.

This morning the Fed announced it was going to buy $600 Billion in mortgage assets. This has had a huge impact on rates, with most mortgage rates at least .375% better on RATE than they were yesterday. If you’ve been waiting for the right time to lock a floating loan, or you’ve been waiting on refinancing for a better rate, it’s here. Today is the day to make that move, but don’t hesitate, because this may not be the case come tomorrow, and I certainly wouldn’t hold my breath waiting for next week.

I'll provide more news as soon as I can, in the meantime, I'm reaching out to everyone I can who has been considering a refinance so they can take advantage of this before it' too late.

Dan Hartman

Senior Mortgage Advisor

Province Mortgage Associates

(401) 263-8655

http://www.provincemai.com

Earlier this year, we learned that the Jumbo mortgage was going to be a bit bigger for a time. For a year, the limit for mortgages purchasable by Fannie Mae and Freddie Mac was temporarily increased from $417,000 to as high as $729,750 through the beginning of 2009 as a component of the Economic Stimulus Act of 2008. That date is now fast approaching.

The original purpose of this temporary change was to address a mortgage market problem that arose in late 2007 and early 2008, specifically that demand for securities backed by Jumbo mortgages had decreased precipitously. By opening those loans to Government-Sponsored Agency purchase, the government’s hope was that it would be able to maintain property turnover. For the most part this was a success.

Supplementing the Stimulus Act limit increases, the Housing and Economic Recovery Act passed in August provides for extended loan limit increases in certain markets where home prices are significantly higher than the national average. In these markets, limits will be increased as high as $625,500 for purchase by GSAs and FHA insurance. This will continue through the end of 2009, and can potentially be extended beyond.

We’ve also seen recent releases of information regarding the 2009 limits for Fannie and Freddie loans, and FHA information has been coming out, so let’s take a moment to recap the new limits for single-family homes.

2008 2009

Maximum GSA $729,750 $625,500

Maximum FHA $729,750 $625,500

Local Limits

Rhode Island (all) $475,000 $426,650

Massachusetts FHA

Greater Boston $523,750 $465,750

(includes Essex, Middlesex, Norfolk, Plymouth and Suffolk counties)

Worcester $385,000 $285,200

Bristol $475,000 $426,650

Massachusetts GSA

Greater Boston $523,750 $465,750

Worcester $417,000 $417,000

Bristol $475,000 $426,650

Connecticut FHA

Fairfield $708,750 $511,750

Hartford $440,000 $320,850

Windham $272,500 $271,400

Connecticut GSA

Fairfield $708,750 $511,750

Hartford $440,000 $417,000

Windham $417,000 $417,000

What does this mean for the mortgage and real estate markets? At this point, a majority of our lenders have cut off new registrations of higher balance loans for many areas, getting an early start on the new loan limits. For the most part, I don’t anticipate a major impact will result from this. In spite of the lower loan limits available in our market area, home prices are also significantly lower, and even homes that require rehabilitation under a FHA 203(k) mortgage should be able to be served.

There are two areas I anticipate will be hardest hit on the FHA originations side, specifically Greater Hartford, Connecticut, and Worcester County, Massachusetts. These areas had a very large decrease in their FHA mortgage limits, and, as a result, I think there is a possibility that sales of properties will be impacted by the change in limit. Specifically, I can think of at least one client who is considering some properties in Worcester County, who probably will be affected.

If you have questions about your pre-approval, please double check with your Mortgage Advisor as to any changes in your approval status. If you aren’t working with a Mortgage Advisor, I would appreciate the opportunity to assist you.

Dan Hartman

Senior Mortgage Advisor, MBA

Province Mortgage Associates

www.provincemai.com

(401) 263-8655

Last week, we looked at some of the most significant factors that are considered in condominium approval. Let’s examine the 5 methods allowed for approval of a specific condo.

Fannie Mae / FHA Approval

Fannie Mae and the Federal Housing Administration used to approve condominiums following an exhaustive process that involved extensive questionnaires, appraisals, review of hundreds of pages of condo documents, and, as often as not, site visits. As the housing market has worsened, the expense of performing these reviews was no longer justified. Despite their termination of this process, both FNMA and FHA maintain an extensive list of approved condominiums, and many lenders utilize this list as the basis for accepting condos as collateral.

Limited Review

A limited condominium review can be approved if a project is established, and if the buyer’s qualifications are strong enough. A limited review will be called for in the initial automated approval, and is typically granted only to borrowers with stronger qualifications and larger down payments. Recently, I have only seen limited reviews approved for buyers with at least 10% down payment and 720 credit scores, but for buyers with these stronger qualifications, a limited review is a very simple way to purchase a condominium.

What constitutes an established condominium? To be considered “established”, a condominium must be 100% complete, including all units in all phases, and all common elements, and the unit owners must be in control of the association.

Condo Project Manager

Condo Project Manager, or CPM, is an automated system provided by Fannie Mae that operates for a condominium much the way that Desktop Underwriter works for homebuyers. Once all the relevant information has been gathered, the closing attorney will be asked to provide a specific letter of reference, at which point the underwriting lender will be able to input data from the appraisal, and the condominium questionnaire, hoping to receive a good result from the system. Assuming acceptable findings are returned, no further approval is required for the condo. If not, there is one option left.

Full Condominium Review

Quite possibly the most paperwork intensive process in all of mortgage lending is the full condominium review. Condominium documents typically consist of one hundred or more pages of legal description, plans, and specifications, and must be considered line-by-line in determining eligibility, in a process that typically requires 3-5 business days after all documentation is submitted. Because of the degree of detail required to complete full condominium reviews, not all lenders offer to perform these reviews. If you believe your property may not qualify using the other methods, it is important to ensure the lender you are using offers this option.

A Few Insurmountable Hurdles

We’ve looked at several different methods by which condominiums can be approved. Before closing, let’s take a quick look at a few conditions that make condo financing nearly impossible.

Investor concentration: If more than 50% of the project’s units are owned by people holding them as investments, obtaining institutional financing is nearly impossible. Many Alt-A lenders offered “non-warrantable condo” financing until recently, however most have stopped. NB: the 50% figure will also include unsold units, so in a 3-unit complex, financing the 1st unit in is quite challenging. Recent success has been seen in such complexes where 2 units are sold to separate, owner occupant buyers, at the same time.

Incomplete construction: If construction is still in process for the complex, apart from construction of phases other than the subject unit’s phase, it is very challenging to obtain financing. Banks are concerned that the developer may be unwilling or unable to complete construction, thereby impairing the value of other units.

Ownership concentration: This refers to the percentage of units owned by a single entity, excluding the developer. Banks are concerned that if a single person owns more than 10% of the units in the complex, that person may have enough influence with the condo board to force decisions that are not beneficial to the project as a whole. For smaller projects (10 units or less), this rule is still in place, but is modified such that no owner may own more than a single unit.

Condominium financing is different from mortgage lending on non-condominium properties, but it doesn't have to be scary. Knowing the right way to get a property approved will alleviate most problems. Of course, this is not a comprehensive review, however, it is my hope that this will provide a good overview of the condo approval process, and some of the pitfalls that can be avoided. If you have condominium questions that aren’t answered here, please contact me directly.

Condo photos courtesy of Jim Dusty of Gordon Appraisal, used by permission.

I’m going to open this up this article with a shocking revelation:

Condominiums are not the same as single-family homes.

Lenders do not view condominiums in the same way as single-family homes. There are additional risks that are considered, additional documentation that must be obtained, the result of which is that purchasing a condominium can be tougher than it seems. Let’s take a look at a few factors that are considered in evaluating condominium mortgages, and at the 5 ways that condos can be approved for conventional financing.

Completion

Banks are most concerned with the aspects of a condominium that can impair the future value and marketability of the property. A condo unit in a complex can be only as valuable as the complex as a whole. As a result, banks want to know about the degree of completion. Specifically, it is important to know if construction of all units in the complex or phase is completed.

Banks will also ask if all common elements are completed. Why? As a unit owner, you will hold title to 1.17% (or whatever percentage it is) of all common elements in the development. If the common elements are not completed, the property is worth less than might be expected. Likewise, if one or more units are not completed, the value of other units can be hurt. For a bank, the worst case scenario is that pending units remain uncompleted, reducing the number of units paying association dues. Also, as we are seeing with foreclosed homes, unoccupied, non-completed properties are a blight on all those around them, and have an adverse affect on value.

Occupancy and Ownership

Another question banks will ask about a condominium development regards occupancy and ownership. What does this mean? History and research have shown that mortgages on properties occupied by their owners are less likely to default. Similarly, condo complexes occupied by unit owners will tend to be better investments for lenders, as people tend to take care of their homes.

To account for this, banks will ask what percentage of the units are owner occupied, looking for a 51% or higher ratio for approval. Unsold units in a new development will be considered non-owner occupied for this calculation, which makes financing more difficult for the first half of such units.

Ownership is also a major consideration, as concerns arise when a development has a small number of owners holding a large number of units. This can be a concern, as one or two owners holding a significant proportion of the units could block capital improvement projects in the future, potentially risking the value of the complex.

Specifically, banks will want to know if any one entity owns more than 10% of the units, and will typically avoid financing such a complex. The one exception to this rule is new developments, where the developer is typically exempted on all previously unoccupied units.

Other Factors

Banks are also concerned with several other aspects of the condominium’s administration. The association board is typically controlled by members of the association, however, newer complexes are often administered by the developer until a sufficient number are sold. Banks will ask about who controls the association, however this is typically not a problem so long as a plan is in place to transfer control of the association to the unit owners, and the association is sufficiently capitalized.

A popular method of building new-built condominiums is in phases. Phasing permits a developer to build little by little, reducing the capital requirements of a large project. This can be very beneficial to the builder, as it helps to maintain liquidity, and reduces carrying cost for unsold units. In some cases it can present problems for lenders, especially if upcoming phases include common.

We’ve reviewed the significant factors that are a part of the condo approval process. For a breakdown of the 5 available methods of obtaining condo approval, please continue to part II.

Condo photos courtesy of Jim Dusty of Gordon Appraisal, used by permission.

Earlier this week, I recapped the market phenomenon referred to as a "Flight to Safety". In such a situation, investors flee riskier investments, in favor of assets that are more secure, such as oil, treasury bills, and gold.

What happened today is clearly such a Flight to Safety.

As you know, the Federal Reserve announced yesterday it would lend $85 Billion to help stabilize troubled insurer American International Group, a company that insures homes, cars, businesses, and mortgages, among other things, while investing its assets in stocks, bonds, mortgages, and other investments. This loan came with a very high price: 11.5% interest on the lent funds, and the possibility of a nearly 80% equity stake in the company. At today's closing price of $2.05 per share, that 80% stake is worth a paltry $3.87 Billion.

A good investment? At the 22:1 payoff that is needed for the equity part of that equation to work, there's another term for that:

BET.

On a roulette table, there is only one bet that pays out greater than 22:1, and that is playing just a single number. Of course, the government isn't just betting on the likelihood of its equity stake paying off, rather, it made the loan because it feels there is a reasonable chance that AIG will be able to repay the loan, with interest, and, at current rates, assuming the Fed is vindicated, there will be a tidy payoff. If the Fed can borrow the $85 Billion at current market rates around 3.4% for government borrowing, it will make about $13.7 Billion in net interest income over the 2 year term of the loan. If the Fed is wrong, guess who will be holding the bag on that $85 Billion.

If you guessed us, you are correct.

Wall Street thought about this possibility today, and decided it didn't like that outcome at all. Sharp selling ensued, leading to a greater than 4% decline in all major indices.

Remember, when investors sell one class of assets, for today, stocks, they typically buy another. Today saw investors aggressively buying crude oil, pushing its price up about 7% to just over $97 per barrel. Gold saw its largest one-day increase EVER, increasing by $70 on the day, nearly a 10% increase.

The big story of the day was on the money market where short-term investments maturing in less than one year saw huge trading volume, and a price surge that caused their yields to drop near zero. At Tuesday's close, the 3-month treasury bill was priced to yield 0.64%. By day's end today, its yield stood at 0.01%, a decline 63 basis points. The 6-month treasury fared even worse, dropping 74 basis points in yield to close at 0.69%. Essentially, this means that investors are willing to sacrifice all possibility of return on their investments just to have a chance at those investments holding value.

Of course, when stocks are down 4% today, and nearly 8% since Friday, just holding value doesn't seem so bad, does it?

Mortgage rates may see some benefit from recent events in the future, but at present, all mortgages are viewed as risky investments, and as a result, the lower demand for risky investments has pushed up mortgages slightly this week. At 2006 risk levels, 30-year fixed rates should be approaching 5% right now. Instead, they are hovering just under 6%. Hopefully this government intervention will help to build a foundation under the market.

Please check back Friday for an update on the Mortgage-Treasury Spread!