This week features Trevor Bennett of Countrywide Home Loans and Jim Reppond discussing the current mortgage market and what the new Fed discount rate and overnight funds rate cut means to the market. Good discussions on conforming and non-conforming loan, “blended loan rates”, seller financing incentives, and more.
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Jim Marks: Hello and welcome to the Seattle Real Estate Podcast. I am your host Jim Marks of Virtual Results, and with me as usual I have the Seattle Specialist, Jim Reppond, Founder of the Reppond team; the number one producing Coldwell Banker Bain team in all of Seattle. Today we're going to discuss a topic that's getting a lot of press recently, the Turbulent Mortgage Market. Joining Jim and I this morning, we're excited to have Trevor Bennett. Trevor is a leading Mortgage Banker and top producer with Countrywide Home Loans in the Northwest. Trevor specializes in providing residential financing for Seattle and the surrounding areas. We are pleased to have Trevor to assist our listeners in navigating through this Turbulent Mortgage Market. Jim, Trevor, thanks for being here.
Jim Reppond: You bet Jim, good to see you.
Trevor Bennett: Thanks Jim.
Jim Marks: Jim, I will start with you. We have invested some time two weeks ago in our first time Home Buyers Podcast, speaking about the financing challenges in the Real Estate Market. Have we seen a significant change in the last two weeks?
Jim Reppond: Well, yes Jim, we have. Actually just yesterday when the Fed dropped their discount rate by half a point and that was a big shot in the arm for the market, that's doubled what most of the economist thought was going to happen. So, while it's still too early to tell how that's going to affect overall mortgage rates, there is a general thought that they will slowly drift down as a result of that, and there is at least one or two more meetings before the end of the year, so other things could happen as well.
Keep in mind, whenever the Fed does something like this, it typically takes four to six months for it to all work itself through the market. Trevor knows more about this than me, but I know it's more directly affected to the bond market, which firms started moving out of bonds into stocks right away, and actually there was even a slight uptake in interest rates, but no one expects that to hold and if anything it should drift down lower than what it was. Be very helpful to the people who have those home equity lines of credit or adjustable rate mortgages, give them a little relief, which should ease and open up a little liquidity in the market.
So, all of this is good news for the mortgage industry and of course the real estate industry in general. We expect buyers to get excited. There have already been some surveys out that said that now buyers are more likely to purchase a home now that the Fed has cut rate than they were there before that.
So, again back to a market where — it's a seller's market, where you see buyers jumping in and it becomes more competitive again, maybe appreciation continues to happen. Seattle has been fortunate in that arena anyway versus the rest of the nation in that we still have appreciation and growth in this area while other areas are seeing actually depreciation of homes, and some of them dramatically in markets that had over appreciated in the last few years. Seattle again is not one of those, so that's all good news.
Jim Marks: Trevor, one of the things we're hearing a lot right now is the difference between conforming and non-conforming loans. Perhaps you can shed some light on what the difference is, and let's talk a little bit about today's buyers and their current financing options.
Trevor Bennett: Sure Jim. There is a more significant difference right now between conforming and non-conforming loans. Conforming loans are those loans that meet Fannie Mae and Freddie Mac guidelines, and they're $417,000 or less. Non-conforming loans are those loans that don't meet Fannie-Freddie guidelines, they're greater than $417,000, and there could also be other factors that make them non-conforming such as a stated income loan.
A few months ago the spread between a conforming and a non conforming loan was around a quarter percent. If a conforming loan was at 6.5%, you might be able to get a non-conforming loan for 6.75%. Non-conforming loans are also known as jumbo loans. Today, that spread is a little greater. We're seeing the difference in interest rates between conforming and non conforming loans closer to a half a percent or even greater. That's generally because the secondary market perceives greater risk for non-conforming loans. The money for those non-conforming loans comes from the big Wall Street investment firms, and right now with the news that's going on surrounding the Subprime Debacle, there is less of an appetite for those non-conforming loan types, and that's why consumers are paying a little more right now.
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Jim Marks: Very good. So, is this environment then changing — basically what affect is it having on the current requirements and guidelines for borrowers? Are we seeing a tightening of funds, is it tougher for a borrower to qualify for a loan than say it was one or two years ago?
Jim Reppond: We have seen underwriting guidelines tighten up a bit. There are still a lot of great options available for folks, not only with 20% down and great consumer credit, but also for people with less money down and credit challenges. But yeah, we have seen guidelines tighten up in terms of loan to value, combined loan to value, loan amounts, and consumer credit scores. We're constantly looking for ways to structure loans in the most cost effective way for our clients.
In the past if somebody was borrowing over $417,000, we would typically use a non-conforming loan type and it wasn't an issue. With the greater spread between the interest rates for conforming and non-conforming loans now, we are looking for ways to try to keep the loans into the conforming loan type.
If somebody is buying a $600,000 home, for example, and they're putting 20% down that would be a loan amount of $480,000. On a zero point loan their interest rate is likely going to be in the low sevens. Well, now we're looking at it, that same example of $600,000 purchase, possibly having one loan setup with a conforming loan, limit of $417,000, and then using a second mortgage to cover the difference, so that we're still financing 80% of a loan, but we're keeping the majority of the aggregate loan amount within conforming loan limits.
With the Federal Reserve's drop in the Federal Fund's rate of a 0.5% yesterday, that option is looking even better. If we have one loan of $417,000 that's now in the mid sixes, because it's a conforming loan amount, and the second mortgage at prime, which is now 7.75%, rather than having a non-conforming interest rate in the low sevens, a consumer will end up with a blended rate between those two loans in the upper mid sixes. So, it is a dynamic market. This will change over time, and as loan consultants, our advice will need to change with the market so that we can provide the most value to our clients.
Jim Marks: Now Trevor, you mentioned the difference in between the non-conforming rate and the blended aggregate rate. Historically, aren't both these rates still low and isn't it still a great time to finance a home?
Trevor Bennett: Yeah, Jim, historically they are still really low. Conforming interest rates have stayed in the mid sixes for several years now. Even back when the Federal Fund's rate was at 1.25% and prime was at 4.25%, conforming interest rates were in the mid sixes. They are still in the mid sixes. A few months ago they were in the upper mid sixes, but they stayed relatively stable. The Federal Reserve's move yesterday really does help out those people who are using second mortgages to finance part of their purchase, or using second mortgages to pull additional equity out of their homes possibly to invest in other real estate. So, to answer your question, yeah, mortgage rates still are relatively low.
Jim Marks: Now Jim, if a seller decides to create some flexibility in an effort to make his house stand out or make it more desirable to buyers, are there things he can do to make the financing more attractive or easier for buyers to qualify? What can a seller do to help a buyer purchase his home?
Jim Reppond: Absolutely Jim, and that's something that we're starting to see a little bit more of in the marketing of homes. One of the things that a seller can do is offer to buy down the points, and they can get either the interest rate lowered or offer to cover some of the closing cost. As Trevor will attest to, we need to make sure that these things are covered upfront in the Purchase and Sale Agreement, not negotiated later during the contract, but these are things that you can use to entice buyers.
A lot of times they have just got the fear of this whole mortgage Subprime Debacle in their head, and they don't really understand what it means, all they know is or think is, oh my gosh, my mortgage is going to be higher. If they see some opportunity for that to be reduced, gosh, that's as good as a price reduction in many markets, and this one included. So, that's one of the things that a seller can do is offer to buy down the loan and get a better rate for the buyer, and/or pay for closing cost.
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Sellers need to be careful. They need to work with a professional realtor who understands the nuances of this type of advertising. There are Federal Regulations that you have to be very careful; when you disclose one portion of information about a loan, you have to disclose all of it; the old API standards, if you will. So, things like that can't just be really nearly discussed or advertised without professional knowing what to say and how to say it so that you don't get in trouble in terms of marketing. But that can be very helpful, and we have seen properties move because of that in both this market and other markets.
Jim Marks: Jim, last but certainly not least as we do in every podcast, how is the market in general since our last podcast for buyers and sellers?
Jim Reppond: Well, we've seen an increase in inventory. We are still at about a 3.2 to 1 ratio of inventory to spending sales, and that historically is still a sellers market and a strong one. So, it just seems a little bit slowed down because we were at such a fast pace up until now for the last three years.
I would like to make the analogy, if you have been going 100 miles an hour down the freeway and all of a sudden you see that State Patrol car on the side of the road and you slow down to 60. 60 seems real slow for the first five minutes, but you know what, 60 is normal. That's what we're starting to see is a bit of a normal market, and it's still based on the numbers and just crunching the statistics out there; 45 days on market, 3.2 homes on the market versus each pending property is a very strong market.
So, sellers have to just make their expectations meet what they were in the normal market level and they will be fine. You price your home correctly, you have a nice property for sale, it will sell, there are buyers out there buying them.
Jim Marks: Still a great time to buy or sell.
Jim Reppond: Absolutely, and with this little bump in the arm from the Fed, it's even a better time because this inventory is not going to be here forever, and now as more buyers jump into the market, you may see some of that inventory evaporate and get sold off. So, the opportunities for the better homes, the better buys, are going to go away fairly quickly.
Jim Marks: What an informative podcast. Well, that wraps up this episode of the Seattle Real Estate Podcast. I would like to thank our special guest, Trevor Bennett, and let our listeners know that he can be reached at area code 206-940-2558, or feel free to send him an email at Trevor_bennett@contrywide.com.
Also, important to remember, you can influence the content of this podcast by submitting questions or suggestions for topics for this real estate podcast to the Reppond Team blog at www.seattle-realestate.com. Jim, Trevor, again, a very informative podcast and thanks so much for your time.
Jim Reppond: You bet Jim, thank you.
Trevor Bennett: Thanks Jim.
Jim Marks: This has been the Seattle Real Estate Podcast featuring Jim Reppond. Thanks for listening.