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Tag: Freddie Mac

Castles in the Sand

Mortgage interest rates rising again

Written by Louise Bolger on . Posted in Business, Castles in the Sand.

Here’s a little perspective on the continuing increase of the 30-year, fixed-rate mortgage. Several months ago, I did an analysis of the average fixed-rate mortgage rates starting in 1971 recorded on Freddie Mac’s website. At the time, something told me that I should hang onto this research, however, I had no idea how much I would be referring to it during the past couple of months.

Since the Federal Reserve decided to increase interest rates in an effort to control inflation, the housing market has been substantially disrupted. Currently, the U.S. mortgage rates have reached their highest level in more than 13 years. The average interest rate for 2008 was 6.3% and we are already seeing rates at or near 6%. In June, the Federal Reserve increased rates by 0.75% points and Fed Chairman Jerome Powell indicates things are not likely to change soon. He hints that at the July meeting there will be another 0.75% increase. Mortgage rates don’t automatically increase when the Fed raises rates, but they are heavily influenced by it.

What we’re seeing happening around the country and in Florida is a decline in the number of sales, not a decline in sale price. Even though there is some increase in the number of new properties hitting the market, it is so marginal it doesn’t even come close to providing enough inventory to satisfy hungry buyers. In Manatee County in May, the supply of single-family homes finally exceeded one month, which is anemic when you consider that a six-month supply of available properties has traditionally been the benchmark for a healthy real estate market.

Complicating the availability versus demand ratio even further is the fact that so many homeowners refinanced their mortgages when rates were under and just over 3%. These homeowners have no incentive to sell any time soon and move on or up to another home. Even potential retirees are rethinking the benefit of selling, helping to freeze the market, not to mention the pandemic providing a new way to do business remotely, allowing employees to work from areas of the country with lower housing prices shifting the market.

Because the interest rates were so low for so long, buyers were able to purchase larger and more expensive homes. However, now with less purchasing power, young buyers are facing the reality of settling for a smaller home with fewer amenities in an area they may not really want to be. Housing costs in the country have jumped from 24% of the average household budget in the early 1970s to 27% in the late 1980s to 35% in 2019 with higher housing costs likely to come based on the increase in sale prices.

Most real estate professionals and economists don’t see prices going down. Goldman Sachs estimates housing prices will grow around 10% this year nationally and Bank of America forecasts 15%. So, it doesn’t look like the Federal Reserve’s plan to lower the heat on the housing market by increasing mortgage rates has worked; there is still a huge demand for properties. It has, however, brought a lot of pain to first time and marginal buyers.

Tony Veldkamp, the president of the Realtor Association of Sarasota and Manatee wisely says, “If the time is right for someone to purchase a home, they should not let interest rates deter them if they can afford the increase in payments. Homes can be permanent, whereas interest rates are temporary.”

I agree. The big picture is that interest rates are still low relative to other times in our history, and that’s my perspective.

Castles in the Sand

Condo living getting more complicated

Written by Louise Bolger on . Posted in Business, Castles in the Sand.

Florida is the mecca for condo living. East coast, west coast, the Panhandle, Orlando – no matter where you go in Florida, it’s likely you will trip over a condominium complex. However, the carefree condo living turnkey lifestyle so many Floridians have come to love is under the scrutiny of Fannie Mae and Freddie Mac.

I’ve written frequently about needing a “condo personality” to successfully embrace the condo lifestyle. “Live and let live” is the approach all condo owners should adopt. Losing total control of your property and the ability to make even small decisions is not for everyone.

You may love that all of the landscaping is taken care of, but you may hate that you can’t plant your tomatoes at the beginning of the season. You may love that you don’t need to clean and add chemicals to the pool, but you may hate when another resident tells you your grandchildren are making too much noise. And you may love that the roof repairs are someone else’s responsibility, but you won’t like the special assessment you have to pay to do the repairs.

Now, after the Surfside catastrophe, as predicted, there is more fallout. Florida lawmakers have passed legislation requiring recertification of condominium buildings three stories or taller that are more than 30 years old, or more than 25 years old within 3 miles of the coast, ongoing every 10 years thereafter. Now Fannie Mae and Freddie Mac are getting into the act.

The majority of lenders follow Fannie and Freddie guidelines when they are qualifying individuals for home mortgages, and they in turn guarantee the loans. Now Fannie and Freddie are requiring certain actions in order to mitigate their risk of loss for mortgages they are backing. The quasi-governmental agencies are creating a database of condominiums ineligible for financing and, therefore, they will not approve mortgages for buyers in these buildings.

Primarily they are looking for maintenance issues in older condo buildings that will make them ineligible for secured mortgages. The major issue is significant deferred maintenance and unsafe conditions. Are the deficiencies, defects, substantial damage or deferred maintenance severe enough to affect the safety, soundness, structural integrity or habitability of the property? Do the required improvements impede the safe and sound functioning of one or more of the building’s major structural or mechanical elements? And has the building not passed or completed inspection required by local ordinance or state statute?

In addition, lenders, with the assistance of condo boards and/or managers, are being asked to complete a questionnaire regarding the condition of the building. Most of the questions involve knowledge of deficiencies in structural integrity and safety. Some of these questions can be answered by board members, who are usually residents of the building, but others may require professional documentation. As of now the permanent requirements are still being worked on and will be available to lenders in the coming months.

This will be a new responsibility for condo boards whose directors are charged with maintaining buildings and preserving their value. If a lender is uncertain or unable to confirm the safety of the building, they will decline the loan so as not to jeopardize their relationship with Fannie Mae and Freddie Mac.

At this point it’s confusing, but will probably smooth out over time. If you own a condo unit or are considering purchasing one, be aware of changes on the horizon. Even if your purchase does not require financing, you still want to guarantee the building you’re purchasing is secure in order to keep your carefree lifestyle carefree.

Castles in the Sand

Surfside: More collateral damage

Written by Louise Bolger on . Posted in Business, Castles in the Sand.

It’s not surprising that as time goes on, more and more of what I’ll call “collateral damage” surfaces related to the Surfside building collapse on the east coast. This time, it’s related to mortgage qualifying regulations.

Fannie Mae and Freddie Mac, the quasi-government agencies that set the standards for residential mortgage financing, are asking questions about the viability of condo buildings before approving financing. Specifically, they said they would stop buying mortgages from lenders in buildings with significant deferred maintenance or safety issues.

Fannie and Freddie have provided lenders with new in-depth questionnaires to be completed by condo management companies, associations or boards about the condition of the building where financing is being requested. The Catch-22 on this is that the individuals responsible for filling out the form aren’t sure of how – or are indeed qualified – to answer all the questions. Some of the questions really need to be answered by a structural engineer, or at the very least, a home inspector.

This is a huge potential problem for buyers requiring financing on a condo since the lenders are worried about their financial exposure related to the condition of the buildings they hold the mortgage on. This is already slowing up the loan approval process, particularly for condos in the more affordable price ranges. Of course, this could have a negative impact on the condo market for both condo values and the ability to sell.

Another aspect of this is how mortgage qualifying regulations will affect volunteer board members and management companies. The more complicated the process and the more likely the risk of liability the more difficult it will be for associations to recruit residents to serve on a condo board. In addition, management companies will have to ramp up their staff to understand and complete additional paperwork. This additional work will certainly be billed back to the associations.

Fannie and Freddie have taken the position that these measures are meant to protect residents from unsafe buildings and to ensure that aging condos are undergoing the necessary repairs and are funded to do so. They have indicated that they will work with associations to minimize disruptions related to the questionnaires, but how long that will take is anyone’s guess.

Fannie Mae and Freddie Mac have enormous power in the real estate market and although they do not set building codes, they do have the power of the purse when it comes to approving financing. Since they control approximately half of the country’s home loans, and between 7% and 9% of condo and co-op loans, we’re talking about what could be a big impact on the market.

Before you give up on a condo purchase that involves financing, most of what is stated above will not apply to the average condominium association. Buildings that obviously have major structural defects that have been put off and are underfunded will certainly have an issue, but the average building that has been maintained will likely be approved. It may take a little longer for the paperwork to be processed at the beginning, but the end result may actually be beneficial to buyers.

As I’ve said before, collateral damage as a result of the Surfside collapse will be around for a long time, but we’ll get through it.

Castles in the Sand

Fannie, Freddie and Ginnie

Written by Louise Bolger on . Posted in Business, Castles in the Sand.

Fannie, Freddie and Ginnie may sound like the title of the newest coming of age beach read, but that couldn’t be further from what they actually are. Nevertheless, this trio may also be going through a coming of age moment which will have a heavy impact on home finance.

Most people have heard of Fannie Mae and Freddie Mac, which are government-sponsored but not government guaranteed entities that package mortgage loans into mortgage-backed bonds. Ten years ago, after the financial crisis, the federal government took them over into a conservatorship and bailed them out with taxpayer money.

At that time, they were thinly capitalized because they purchased subprime loans with little down payment from buyers who were also not vetted properly. As we all now know, this created the famous housing bubble that burst with millions of foreclosures around the country. Well, Fannie and Freddie are at it again creating risk by accepting high-risk, low down payment loans. For years even before the housing bubble some members in Congress and the House Financial Service Committee have been attempting to reduce the scope of Fannie and Freddie and protect the American taxpayer.

There has been talk in Congress of developing a private capital program in conjunction with Ginnie Mae. Ginnie Mae is a government-owned corporation that guarantees bonds backed by home mortgages that have been guaranteed by a government agency, mainly the Federal Housing Administration and the Veterans Administration.

FHA loans have been around a long time, designed to help borrowers who couldn’t get conventional home loans because they had low credit scores or limited resources. However, unlike the subprime loans from 10 years ago these borrowers as well as the properties they purchased were better scrutinized. FHA inspected the properties being financed through them and were sometimes a seller’s and realtor’s nightmare because of their thorough procedures. VA loans are also created through Ginnie Mae as a veteran’s benefit. Currently, only about 10 percent of mortgage-backed loans are originated through Ginnie Mae.

The program that is being floated is to work with private mortgage credit guarantors using the Ginnie Mae system creating a private capital buffer for the loan. Presumably, this would protect taxpayers from some of the risk encountered when Fannie Mae and Freddie Mac were taken over by the government and bailed out by taxpayers. The objective is to reduce the size of Fannie and Freddie and put some of the risk onto private capital.

Will this work? No one really knows and any threat to Fannie and Freddie will encounter enormous pushback from government officials not to mention Fannie and Freddie employees, who have an obvious financial benefit to keep expanding these agencies.

Not only are our primary mortgage lenders going through a generational change, but our newest generation of adults may also be going through a generational change. Gen Z children, who are now college age or about to graduate, appear to be a lot more serious about finance than their parents and even their hippie grandparents.

Having lived through the financial crisis and experiencing the scars left on their families, they are approaching adulthood with a more conservative bent. According to The Wall Street Journal, they are doing a lot less partying and consider being well-off financially an important part of their lives.

Who knew that kids raised on video games, youtube and texting would turn into a generation we haven’t seen since the Greatest Generation. Works for me and for the future of real estate.

More Castles in the Sand

Attorney or no attorney – that is the question

Honesty is the best policy – especially in real estate

Why aren’t you moving?