Hey guys welcome back. So last week Josh and I did a video on the mortgage market and an update, and you guys reached out and gave us really positive feedback, and also asked some additional questions.
So, we wanted to follow up this week with another update, and probably keep this going at least once a week to kinda keep you guys informed of what’s going on in the mortgage market with regards to interest rates, guideline changes, and also how that plays into real estate.
If you’re new to the channel do me a favor, hit the Subscribe button if you’re interested in all things real estate related, especially with trending topics now, and how it’s all affected, and I’ll do the same for Josh, since it’s posted on my channel, I’ll put his YouTube channel below, so that you can link to him as well.
But let’s get the conversation started on lending guidelines changes. So last week I posted a video with regards to Chase Bank. Chase has recently changed their guidelines to say hey look, we’re not gonna take any new loans unless it’s at least 20% down and a 700 credit score.
Now, as we both know, Chase is a big bank, never really been that aggressive, but when I posted that I had some feedback from lenders in the industry who reached out to me and said hey look, you made that video sound like you know, you can’t get a loan out there unless you meet that criteria.
So I thought that was a really good place to start, because you know people are still buying houses with less than 20% down.
People are still refinancing, so can you still get a loan, like what have you seen change in the last say six weeks with regards to lending guidelines, and what are people looking at right now, if they’re looking to buy a house, or looking to refinance?
– So a really good way to look at this is as as a bell curve, you remember that from college? The really dumb kids were way down here, and the really smart kids were way out here. The only people in trouble right now, are having a hard time getting loans, are the really smart kids and they’re really dumb kids. The people in the middle, the fat part of the bell curve, we’re fine. So, if you had a really low credit score, a lot of that is gone.
For the most part, anything under 620 is really hard to get right now, unless you go to a hard money private money lender. They’re available, but the terms are worse than they were a month or two ago, ’cause most of those lenders backed out. Less supply of lenders willing to do it, and more demand, or as much demand kinda pushes up the prices higher on that, in terms of interest rates.
On the other side, the jumbo stuff, the big players for the last three, four years in the jumbo space have been the Chase, Wells, B of A, U.S. Bank, and they’ve tightened up a lot. They haven’t gone away. They’re still making jumbo loans, so on that end, it’s not a matter of, hey just the loan per product doesn’t exist, you’re seeing a little bit higher credit scores, a little bit lower loan to value.
They’re not all as extreme as 80% on Chase. So, if you’re in that bucket, and you’re wanting to see what’s available, you may end up getting pushed to a bank or credit union that’s actually loaning their own money, versus securitizing that stuff, but for the majority of people that are in the middle of the bell curve, they’re getting your FHA, VA, Fannie Mae, Freddie Mac loan.
We have a lot of overlays right now, which basically Fannie Mae and Freddie Mac say, here’s the guidelines, and then lenders put their own guidelines on top of that, and that’s just forced more by the market than the agencies right now.
Fannie and Freddie have made a few minor tweaks to what you’re able to do, but the bigger portion is coming from the lender themselves, because they’re saying, hey, this is where I sell my loans, and the people that are buying them are getting more restrictive, and the biggest thing, you know, you and I have talked heavily about forbearance what that means for borrowers, what it means for the servicer is a big problem if a loan goes into forbearance.
So what they’re doing is, most of these overlays relate to, let’s make sure we’re not putting new loans on the book that are likely to go into forbearance. So we had hit on it last week, you’re gonna do a verification of employment right when your loan docs go out, and another verbal verification, probably the day the loan closes. They want to make sure right through closing that you still have your employment.
If you’re self-employed, we need to show that your business is open and operating. Probably the best example I have right now, is a girl that owns a hair salon, and the hair salon can’t operate, so we can’t credit her with any income, even though she’s got a spectacular history of earnings income, and we’ll see what that looks like once the market opens back up, but any industry that’s non-essential and shut down, it can be really hard.
If you are essential, depending on the lender, they’re doing things like saying hey we’re gonna give you a 25% haircut to your income, saying, hey, your qualifying, if it was 100 grand, we’re gonna give you 75 grand. If they’re not doing that, they’re always saying we want to see six to 12 months reserves. So okay, this can be a problem for your business in the short run, but you saved money, you have money sitting around.
It’s not gonna prevent you from making your payments or present a problem to us in not receiving our monthly payments. So the folks that contacted you, you’re absolutely right. For the most part, most borrowers who are still working, are still going to be able to qualify. If you look at the low credit scores again, that’s less than about 5% of the market that was under 620 credit scores, so very, very few people impacted on that end.
So you said something that I want to kinda help people understand if they don’t understand it, you said the word overlay. So basically, again, in layman’s terms, an overlay, say FHA says, hey look, we’re willing to go down to a 620 credit score, but the lender that you’re doing your loan through right now says hey no, you know while FHA says 620, we still want to see a 660, or a 680, and that’s because they essentially want to be able to protect themselves, one, if they can’t sell that loan, and they have to hold on to it, they want to make sure that that borrower can pay, and then secondly, they want to be able to sell it on the secondary market, in case any of these guideline changes do happen you know, in the interim.
So, with that said, you said 620 or lower is pretty much gone. So does that mean that just the overlays are creating that, or FHA has truly changed the guidelines and said hey look, we’re not doing anything under 620 now.
FHA is fine, the lenders like, almost universally across, when I say, almost, there are a handful. I mean two or three in the country that said, we don’t care, we’re gonna keep underwriting to FHA guidelines. Now they can’t sell the servicing on those, the servicing rights, so generally those two or three lenders are big enough, that they said, We don’t care, we’re gonna keep them, service them ourselves, and whether it’s three months, or 18 months from now, the servicing market’s gonna come back, and they’re big enough and they have the financial wherewithal to make that decision, but for the most part, 98% of lenders have put that number somewhere between 620 and 660 as the minimum.
Got it, and so the reason I brought that up for viewers, people watching this, is like don’t decide yourself whether or not you can qualify. Go to a professional, let a professional look at your credit, look at your income, because the guys that are still around doing loans, are the people that are gonna last, the people are gonna make it through this tough time, and most of these guys are pros. They know what they’re talking about.
– One of the big things Jeb, is I always to talk about this isn’t to knock any other channel. You have mainly three choices when you go to get a loan. You can go to direct lenders which in this day and age, is really just the big banks Chase, Wells, B of A, we mentioned them. They’re gonna own their own money.
They still may sell the loan after the fact, but they’re loaning their own money, they make their own rules on some of their products, some of ’em they follow agency guidelines, but they have one set of guidelines, it is what it is. On the other end we’re brokers, we can go to 150 different lenders. So, if one says we’re at 620, one says we’re at 660, and one says we’re at 700, we go where the borrower fits, and you’re gonna try and find them the best terms on that.
And sort of in the middle is a midsize mortgage bank, like an example here in Orange County is New American Funding. New American Funding, they’re not monolithic like Chase, where they just have one set of guidelines. They can take in a loan. They probably have three to six investors they can sell those loans to.
So, they have a little bit of that ability. If one of their investors says, hey we’re only taking 700 credit scores, they have another investor that goes to 640, and the only reason I say that is, don’t go to your bank and talk to someone at the bank and be told, hey I don’t qualify and not talk to someone that has a wider breadth of options in the current market.
– No, understood, and so that that’ll take us right into interest rates. So I did an update yesterday, and which I’ll link to above, with regards to kind of a weekly recap, if you will, on all things real estate and mortgage, that happened over the last week. And one thing that came out this week, that I thought was worth mentioning, two things really.
One is that another lending guideline change, so Chase came out and basically said, they’re no longer doing home equity lines of credit, which I don’t know, is really a huge deal, but you can touch on that a little bit, and then secondly, interest rates at a 30-year low, or more or less than a 30-year low, based on an average.
– Well the quote that you’re talking about, there’s the Freddie Mac primary mortgage market survey. So Freddie Mac every week does an average of all of the loans that they purchased, and usually there are some points involved in there, but for last week it was a 3.31 on a 30-year fixed, the lowest we had got in the last crisis was like late 2012, early 2013, was about 3.34. So it’s a real headline, it is true, but we’re in California, you do most of your business in Orange County, which is on the high end of California, which is on the high end of all states. What we’re not seeing that translate to are high balance loans.
So throughout most of the country, Fannie Mae and Freddie Mac have a maximum loan limit, and it’s gone up over the last few years, $510,400. It’s a big loan, so for most people that covers them. But when we’re in Orange County, when the median list price is $800,000, even if you put $30,000 on that, you’re up at $560,000.
So Fannie Mae and Freddie Mac, the whole concept of high balance loans, was a bandaid. During the last crisis, there were no jumbo loans, or very little jumbo loans, so they said, well we’ll create this high balance. We’ll go to one and a half times our standard loan limit in high cost areas, but they never really wanted to be that piece of the market, so they said to any lender making loans and securitizing them with Fannie or Freddie, they said only 10% of the dollar amount of the loans that you send to us, can be high balance.
So, right now, we had so much refinance volume in January and February, that also skews to higher loan amounts, because you have a higher loan amount, that takes less of a movement down in rates, for it to make sense for you to refi. We were inundated with high balance loans. So every lender on the planet right now, where we’re at that 3.375, that 3.3 with zero points.
If you want that loan, and you are high balance, you’re looking a point, point and a half, or you can go up to about 4%. So for us, we have a big reservation list we call it. It’s basically it looks like you have to check in at your local restaurant, we’ve got a list of people that would like a table as soon as one comes available.
At a certain point, that’s gonna ease up, because historically, if we say we’re at 3.3 on a standard balance, your high balance should be 3.425, still really, really good, and we’re seeing a much bigger spread than that, or the alternative to pay points, which again, if you have a $600,000 or $700,000 loan, you probably don’t want to pick up another $6,000 or $7,000 at the closing table, to get that really good rate.
Got it, so, you know, with that said, you know, we’ve had a conversation off the camera, where we’ve talked about, and you’ve done videos on this, talking about the difference in where, say the 10-year Treasury note, versus where interest rates are, and how while they’re not directly related to each other by any means, we know that, you know, that interest rates are directly tied to mortgage-backed securities, but over time, they’ve kind of trended in the same line, right.
So if the 10-year Treasury goes down, interest rates typically go down, although not directly. Maybe it takes some time to do that, so we’ve had the conversation that based on right now where the 10-year is, typically if we were in a normal market, interest rates right now would be at 2.375, 2.5, somewhere in that.
So, look at the spread between the two over the last 10 years has varied anywhere from 1.3 on the low end to 2 on the high end, and has averaged 1.7. So, with the 10 at .65 right now, it would tell you that we would be expecting a 30-year fixed rate at like 2.35. If we were at the high end of that range, you know, you’re at 2.65.
Anywhere you cut it, we should be under 3%, and the reason we’re not is the problems that we’re having in the servicing market of lenders being concerned with the forbearance issues. We have capacity issues. Lenders have more business than they know what to do with, while they just sent all their employees to work from home, which they’ve never done before.
So, all of these things will work their way through, so the question just becomes, where does the 10-year settle out? Does, you know, are we at .65, just because of coronavirus, and once everyone’s back at work, we go up to 1.5, and this is where rates should be, or do we get things to kind of normalize, and we’re still at a .65, or even lower on the 10-year, and we get 30-year fixed rates, somewhere in the threes.
There are some really sharp people that follow this, that run really big mortgage companies, and they have this sort of belief that hey, 30-year fixed rates are never gonna go under 3%, just no one will buy them. We’ve also looked at 10-years and said, well, who would buy a 10-year Treasury at .65? But in other countries, they’ve gone as low as zero, and negative, and people for irrational reasons keep buying them.
So, if the 10 stays at this level, if the crisis stretches on, things stay at this level, we will see opportunities for lower interest rates. So probably the big thing you’re thinking here is, okay, well should everyone wait? Should we wait for lower rates?
Yeah, if I were gonna refinance right now, should I wait, or if it makes sense, should I take advantage?
And I tell anyone if it makes sense today, you ring the cash register. We don’t look at something and say, hey rates are at a 20-year low right now, or matching at least the lows of the last 20, 25 years, and go no, I don’t want that, I think they’re going lower. There is a chance that they go lower, but there’s also a chance that home values dip a little bit and you don’t get your appraisal.
There’s a chance that it gets worse, and your employer instead of laying off 10% of employees, 60% are gone, and you don’t have a job. So we want to be defensive. This isn’t the market to be aggressive. If there’s an opportunity there to increase your cash flow, lower your interest rate, maybe pay off some higher-rate debt.
I’m not suggesting in any way a return to 2005, when people were using their house like an ATM, but, when we’re in sort of dangerous times, and there are concerns, and we don’t know how this shakes out over the next six to 12 months, not a bad idea to reposition and maximize your monthly cash flow, and take advantage of the lower rates. And the reality is, if things go down that path, and we end up at 2.5 six months, 12 months from now, you can always redo it.
Got it, so no, I think that’s awesome. And so, say for example, now earlier, a moment ago I mentioned Chase not doing home equity lines of credit. So say for example I didn’t want to refinance. I just wanted to pull an equity line out. Is that even a possibility in this market, or, like where does that come?
Yeah, as of today, absolutely. I have a couple of lenders, and I know most of the banks that offer them are still offering them. So, on our end, the two banks that we offer them through, still offer them, and they say they’re not going anywhere.
It’s not a guarantee ’cause a month ago, Chase would have told you no, and HELOCs are an important part of our product offering, so ask me again next month. But as far as right now today, yeah, you can absolutely get a home equity line of credit.
Now, what are rates right now on a home equity line? And do we ask, because with rates being so low on say a 30-year, and I’m kind of naive to this, because I don’t follow the home equity line of credit market, if you will. So, you know, in theory, if rates are a point, point and a half lower on a 30-year fixed rate. I mean, does it make more sense to just refinance the whole loan into one lower rate. That way I don’t have to worry about rates going up, or what are your thoughts?
Most likely, the prime rate’s at 3.25 right now, and back in 2000 to 2005 when banks went nuts, and wanted to give everyone a home equity line of credit, we would see things like prime minus 1%. So if you had one of those loans, and prime’s of 3.25, you’re at 2.25.
It’s fantastic. What we see more commonly is, if you are at the perfect bank with a super low loan to value you might get prime, but most likely you’re anywhere prime plus 1% to 3%. So, if you’re a 4.25, 5.25, 6.25, on a home equity line of credit, as long as you’re planning on putting the money to use right away, I would definitely just look at taking the cash out of your home, and the exception would be if you just wanted it as a safety net, but the reality is, we saw in the last bust, that banks will pretty quickly shut those lines down.
They don’t want to be the safety net that you have sitting there on their dime, and then tap it at the last minute. So I wouldn’t really rely on it for that. In theory, it’s great, it just didn’t work out that way the last time we had a downturn, and I wouldn’t expect it to this time if this drags on to the point where you would want to use that safety net.
Right, and now just so I know, a home equity line is still a variable rate, or are they fixed now?
Absolutely a variable rate.
Based on prime plus whatever, so as prime goes up, you’re always gonna have that prime plus 1 to 3, whatever that is.
Right, got it. So I mean, you know, all this is very helpful, I think for people watching. I mean, is there anything else that you think is worth mentioning this week, that’s either happened in the market, or you’re seeing on your end that people can find value in?
No really, we’ve both in our channel and yours, and the conversations we’ve had on video here, covered the forbearance stuff. Just remember it is there, it’s there as a last resort. We are really unclear, every day I get more information that clears things up a little bit, but still a lot of lack of clarity.
So I posted today from another loan officer, that their client got forbearance about four weeks ago, and they have a late, showing on their credit report already. It is against the law under the CARES Act, but it doesn’t mean that when, hey, new laws are enacted or new legislation comes out, that everyone’s gonna figure out how to follow it.
So, that person is probably gonna get those removed off their credit, but it’s gonna be a pain in the butt. So I had a long conversation with one of our biggest lenders that we put loans through yesterday, and they sell to three, four different servicers, and he was just explaining what a difficult position it’s putting them in, and how much uncertainty they still have on their end.
So, from the forbearance stuff, the big thing I would say is, if you don’t have any other options, and you’re gonna miss a payment, by all means use forbearance, but a lot of people have pitched it’s a bandaid. Everyone should take it. It’s like vitamin C just eat it, chew it up, it’s good.
There’s going to be negative repercussions, and even the servicers themselves, and the agencies don’t know what they are. So, as those come out, you and I will do updates. We’ll have the info out here, but no one really knows right now exactly what they’re gonna look like, and how they’re going to be corrected. At some point, those loans have to be brought current, and how that’s gonna look so it’s just interesting to watch.
And then I want to follow up too, on something we mentioned last week. So, you had mentioned in our video last week how you had a client who went into forbearance, went to make a payment, and the lender wouldn’t accept this payment. We mentioned that in the video like I just said, and I had a couple of you guys, viewers reach out and say, hey look, no I’m in forbearance, I was able to make my payment, the lender took it.
So, what I will say is, you know, maybe that’s the case you know, the instance in some cases, so have that conversation with your bank when you’re calling to ask about forbearance. I mean, the things that you should be asking are, when do I have to pay this back?
Is it going to affect my credit, which both of those technically have been written into a bill that, in theory, it should be the same across the board, but unfortunately at the moment it’s not. So, those two questions you should be asking, and the third is hey look, what happens if I come into money in the next 15 days, or I get my job back, or I’m no longer in a hardship, can I make my payment, or do I need to cancel the forbearance, or what the situation is?
So, not that I’m gonna throw that back on you guys to do your own homework, but I am because, you know, it sounds like we’re getting mixed reviews, depending on who the lender is. So just make sure you know, if you’re gonna do forbearance, and you’re unsure whether or not you can make the payment, just know upfront, that way you’re not putting yourself in a position where you’re, you know, keeping yourself from making a payment, if you wanted, or are able to.
And the advice that I give everyone, there’s so much uncertainty around it that I would stay away from it, unless you absolutely need it. If you need it and it’s an emergency. I mean, every medicine they’ll give you in the hospital, there’s side effects, there’s negative things that come with it, but if you need it, you take it.
It’s just what you have to do. But if you can avoid it, if there’s other options, I would steer clear of it until we get some more clarity, hopefully by the time we get the clarity, everyone is back to work or the majority of you are back to work and don’t need it. But just remember, it’s medicine, there will be side effects. Take it, take it with care.
No, understood, so I think we’re gonna end it there. I mean I think, it’s a long video as it is. Anybody that gets this far, we appreciate you guys watching, clearly. Do us a favor though I mean, you know, if there’s things in the video that you have questions about, comments, you have additional things you want us to talk about, comment below.
Contact myself or Josh directly. Again, I’ll put his information in the description below, but as always, I mean both of us appreciate you taking the time to watch, and you know, any last parting words there Josh?
No, just the same thing. Any questions you guys are coming across, we’ve got time. You know, Jeff and I work a lot of hours in a normal market, but when you’re trapped at home and looking at four walls, having a new and novel question to answer is a good way to pass the time.
So anything that you come across, if you’ve talked to a servicer about a forbearance agreement, if you’ve talked to someone about getting a loan, and they’ve given you an answer you don’t like, or you just want to double check on a rate, whatever it is, ask questions. We’ve got time we like to give answers.
No cool, and I think we’re both pretty good about commenting on on your questions below too. So, you know, make sure you put ’em in there. But anyway thanks for watching guys. we’ll see you again next week.
Have a good one.