Life of an Escrow

(Printed from an article from Alex Aguilar)

Fed Discount Window Cut - What does it mean for you?

The Federal Reserve has taken significant action in the last few weeks due to the credit crunch. And now they've made an unexpected move by cutting the discount window rate, which is great news. We'll get to that in a minute, but first let's look at recent events and understand what they mean.

Market movement

To date, over 120 mortgage companies have closed their doors due to reduced liquidity. The result: borrowers who want to take out non-conforming loans have fewer, more expensive options.

Many media outlets have incorrectly added fuel to the fire by stating mortgage lending has stopped altogether and borrowers can't get a loan without a 20% down-payment. This is not true.

Conforming interest rates and loan programs, those backed by Fannie Mae and Freddie Mac, have not been significantly impacted by recent events. Even better, interest rates have come down from recent highs. While this is good news, the market is experiencing unprecedented volatility and changes could come at any time. Borrowers need to act swiftly and decisively in today's climate.

What did the Fed do?

Now back to the discount rate. This is the interest rate charged to commercial banks and other depository institutions on the loans they receive from their regional Federal Reserve Bank's lending facility. The Fed's decision to cut this rate provides stability in the financial markets and this can be good for all of us.

How exactly does this provide stability? Here's an example: imagine you just wrecked your car and it requires $5,000 worth of repairs. You have a short-term need for cash to pay your mechanic. Even though you know you will eventually be reimbursed by your insurance company, you still need the cash now. So, do you sell off stocks to get the cash, or tap into an equity line of credit? Most likely, you draw from that line of credit rather than liquidating a long-term investment.

This is what the banks are facing in today's liquidity crisis. And Bernanke's move helps them avoid long-term damage by supplying access to short-term cash.

It's important to note the discount rate is different than the Fed Funds Rate, which directly impacts interest rates you pay for Home Equity Lines of Credit, credit cards, and automobile loans. Most importantly, the discount window rate cut does not directly impact home loan rates.

What should you do now?

Information, knowledge, and expertise are the building blocks of sound financial decision making. If you are considering financing or are in the process of financing a home, you should tap into the knowledge and resources of a skilled mortgage professional. I would welcome the chance to help you navigate these choppy financial waters.

And even if you are not presently planning on any home financing - it still pays to make sure your credit score is as high as possible, in case a credit or lending need does come up before you expect it. Again, please feel free to contact me - I am ready to help on all fronts.

(Copied from an article received from Dennis Reese, Teamwork Mortgage)

Barry Bonds may have broken the all-time home-run record recently, but you wouldn’t know it by looking at the headlines. The only "Bonds" the media seems interested in are mortgage bonds – specifically mortgage-backed securities.

To date, subprime mortgages have been credited for bankrupting well over 110 lenders and seriously damaging operations at many major mortgage firms. They've reportedly wiped out 5 hedge funds, tens of thousands of jobs, and have led to millions of foreclosures with millions more on the way. And, as if that weren't enough, subprime mortgages are also blamed for massive volatility in the stock, bond, credit, futures, and real estate markets here in the US. And it's this volatility that is now spreading like a virus into other major financial sectors around the globe. Some say losses in the mortgage securities market alone could reach hundreds of billions of dollars this year.

This means that, for any American looking to buy, sell, or refinance their home, they are confronting a very different market from the one that existed just 6-12 months ago. The US Federal Reserve has already begun pumping billions of dollars into the US banking system in order to address what is clearly a credit crisis that will change how we borrow money for years to come!

How did this happen?
The recent real estate boom was fueled by a period of record home appreciation and historically low interest rates. Banks, in order to compete, loosened guidelines and began offering more funding to more borrowers through riskier, non-conforming or "exotic" mortgages.

These ideal lending conditions persisted for several years, supported by high demand, historical real estate data, home prices, and massive trading volume/profits on mortgage-backed securities and other financial instruments on Wall Street.

Then, in 2006, a slowdown in real estate led to a deterioration of home values, an increase in inventories, and ultimately to today's tightening of credit guidelines, leaving many investors unable to sell or refinance out of their existing positions. Many Americans who had tapped into their equity were suddenly tapped-out and overextended as home values fell. Foreclosures followed in record numbers and a re-valuation of mortgage bonds and other financial instruments created the credit/liquidity domino effect we're now experiencing.

Unfortunately, it's going to get a lot worse before it gets better. According to the latest estimates, over 2 million subprime and Alt-A adjustable rate mortgage (ARM) holders will face payment increases of up to 30%-100% when their loans reset in the next 2 to 18 months. These loans make up less than 40% of the total mortgage market, but the negative effects, as we have seen, of increased foreclosure activity can have a ripple effect throughout the industry and around the globe.

What does this mean to you and your mortgage?

Sellers: If you're planning on selling your home, be prepared for an even smaller pool of qualified buyers. While some experts predict a settling of this credit crisis over the coming year, tightened credit guidelines and diminishing mortgage products could knock out as many as 15%-30% of potential qualified buyers. Now is not the time to sit and wait for the best possible price. Have a serious talk with your Real Estate Agent. Having experienced buying/selling transactions in your area, he or she can help you price your home accordingly. He or she can also help ensure that your buyers are pre-approved and stay pre-approved throughout the entire transaction.

Buyers: Get pre-approved by your mortgage professional. While there are a lot of great deals out there, getting credit is becoming tougher and tougher, and it's taking longer and longer to complete a transaction. Remember, what you qualify for today could change tomorrow in a volatile market. For those looking to refinance, keep this in mind. There is no time to delay! Communicate with your lender. Don't do anything that could negatively affect your credit, and make sure you get all your documentation in on time.

ARMs Borrowers: If your ARM is scheduled to reset in the next 2-18 months, you need to schedule an appointment with a mortgage professional right away. Whether your ARM is subprime, Alt-A, or even if you have a pre-payment penalty, don't let a default or foreclosure situation sneak up on you. Did you know that your monthly payments can increase anywhere from 30% to 100% once your loan resets? At the very least, give yourself the peace of mind of knowing what your adjusted payment will be. A good loan officer can help calculate the numbers.

Borrowers with less-than-perfect credit: Each week it seems lenders are shedding more and more mortgage products. Many lenders have stopped offering No-Doc loans and are reducing all forms of Stated-Income loans. While it might be challenging, borrowers with credit issues need to see a loan expert. Often they have credit repair resources and other strategies to help you reach your financial goals.

Finally, don't let the headlines get to you. While all looks bleak and scary now, there's an important concept to embrace: all markets, while cyclical in nature, are self-correcting, be it credit, real estate, stocks, or bonds. For the last 6 or 7 years, real estate was booming and riding high. The correction we're experiencing now – while it seems harsh and could get much worse – is, in a sense, "natural" and directly related to the extremely loose guidelines and perhaps overzealous lending and leveraging during the boom cycle.

Most real estate agents are hesitant to "tell" you how much to offer on a home.  The reason is we never really know the seller's bottom line and don't want to tell you to offer more than you wish at first.  You could get the house for less than we think, but won't if you don't ask.  Taking the heat from the seller or their agent is part of our job.  Keep in mind that a really low offer could well preclude the chance of receiving a reasonable counter-offer if the seller is insulted by your low-ball offer.  In such cases, the counter usually comes back at or above full price, if it comes at all.

Before writing the offer, obtain as much of the following informatin as possible:

1)   Determine the market condition.  Hot, cold, neutral?  Low on inventory, saturated? 

2)   What did the seller pay?  Although this is not relevent to the seller it does provide background informatin for you.  They won't sell low just because they bought low, and neither would you!

3)   Determine the seller's loan balance.  Again, not a factor to them in accepting your offer but it could be important to know if they are in a short-sale (upside-down) position.

4)   Check out the comparable sales (comps).  What have similar homes sold for recently?  This is the foundation for the seller's pricing decisions.  Your agent can provide data, especially important is the last 6 months'.

5)   List to sale ratios.  Are most of the sales at 95% of the list price?  See what the history has been.  An offer of 85% probably won't be received well.

6)   Square foot averages.  See #5.

7)   Have your agent check to see if the home was previously on the market and how long has it been on the market this time around.

Just a few hints...