2010 Mortgage outlook.

I hope everyone had a very happy holiday season and is ready for the new decade! 2010: The Year We Make Contact was a notable sci-fi movie and also could be an apt catch phrase for the real estate market this year. I predict that quite a few first time home buyers will "make contact" in 2010 thanks to a continued stream of REO foreclosure properties coming on the market keeping housing supply high and prices low. Extended tax-credit incentives coupled with low-down FHA financing programs make the down payment requirements less restrictive which will enable many to purchase. When it's possible to get a $400,000 house with $15,000 down payment and then later receive a $8,000 check from the IRS essentially getting into a home for $7,000 out of pocket, the buyers are going to be coming out of the woodwork. (Although it should be noted that monthly mortgage payments on low down payment FHA loans are notably higher than conventional loans). Equally important to the first time buyer or anyone getting a mortgage is the historically low interest rates, currently about 5% on a 30 year fixed mortgage under $729,000. Our $400,000 example above with only $15,000 down would be a monthly mortgage payment of $2157 at 5% interest. All of these buyer-positive factors will allow many buyers to make contact with their first homes in 2010.

Where will mortgage rates head in 2010? I personally believe that with so many dollars being printed in the last 18 months, the US has MASSIVE inflation looming. Supply and demand states that the more of any one item there are, the less valuable it becomes. The US dollar is no exception. Those who want to maintain the value of the dollar (all Americans, the gov't, the fed) must increase interest rates in order to make holding $USD more attractive. Over the longer term I believe that interest rates have nowhere to go but up, as much as Uncle Ben and the Fed will try to keep them down to encourage economic growth. Unless the fed wants to devalue the dollar to hyper-inflationary German levels it must move interest rates up. Moving rates up will increase mortgage rates. I am advising all mortgage clients to fix in their rates right now.

Remember that a fixed rate mortgage is as good a hedge against inflation as any other investment (Gold, Commodities, Chinese Yuan, etc). As the value of the dollar decreases, the amount of dollars that a borrower owes against their property remains the same but the market price for that property is increasing because dollars are worth less. It takes more dollars to buy the same things, because the value of a dollar is decreasing as more are created. Taking a 30 year mortgage loan at fixed interest will be at a fixed dollar/value ratio based on the day the loan is created. That ratio will continually diminish as inflation continues. For an example consider a person who bought their house in 1960 for $50,000 and got a $40,000 mortgage. Annual inflation back then was about 4%. So by 1970, their dollars were worth about 60% of what they were when they borrowed the $40,000 in 1960, but they still owe only $40,000. That $40,000 is now worth $66,000 but they still owe only $40,000(This example is oversimplified for educational purposes.) Track the progress of the 1960 vs. the modern day dollar here. $1 in 1960 is worth $7.15 in 2010 which means the real dollar value of the mortgage loan decreased by 710% in that time. Even if the fair market value of the real estate did not increase at all, an owner would have seen a 710% return simply because of inflation. Real Estate prices in Eagle Rock, CA and Los Angeles at large have increased by much more than that. In this case, the borrower would have paid off the mortgage from 1960 with much cheaper 1990 dollars. A fixed rate mortgage is one of the best inflation-fighting investments around.

2010 will bring a new set of guidelines and paperwork for mortgages. Banks and brokers are updating to a totally reworked set of disclosure forms. These forms were designed by HUD with the intention of making it easier for the consumer to understand the terms of their mortgage. Some think the new forms are an improvement and others do not, it is a point of contention in the mortgage world and the residential real estate industry at large. All RESPA effected institutions are required to conform to this new legislation as of 1/1/2010. I will be interested to see the general public's feedback for the new protocol in the months ahead. If you are getting a new mortgage loan in 2010, please comment here on your experience (especially if you have gotten one before-compare the old and the new). FHA appraisals will now have to be done through AMC (Appraisal management companies) which means more FHA loans will fall out because of low appraisals. This situation with AMCs has been the norm for conventional loans for a long time, much to the chagrin of many mortgage originators, brokers, appraisers and agents. Now FHA will be similarly effected. What causes the controversy with AMCs is that frequently the properties will appraise below what the buyer has purchased it for, and the lender will not fund the mortgage. Because of AMC regulation, the borrower must pay for the appraisal ahead of time (Typically $415-$720 in Los Angeles) without knowing if it will appraise for that amount. The appraisal order goes to the lowest bidder, who sometimes comes from 100 miles away and knows very little about the market conditions of the property they are appraising. Real estate is a localized thing and different zip codes can mean drastically different values. This fact usually gets overlooked by bargain AMC appraisers and their appraisals are not accurate. Getting stuck with a low appraisal is not a pleasant situation for a borrower, so if you are buying a property in a multiple-bid situation, exercise prudence with your overbidding. Having a good real estate agent and realistic expectations of value will remain important in 2010.

Still NOT allowed in 2010 are electronically signed loan docs and/or disclosures. Although a handful of pioneering lenders are adapting to E-signatures, the majority of banks and lenders are not allowing them. In this regard, I believe the mortgage industry is lagging far behind other paperwork-heavy industries. The benefits of E-signing are self-evident and numerous: Requiring paper kills trees. It costs money for paper, ink and storage and takes much longer than electronic signing. Usually the mortgage industry is an early adapter of technology, when I began in the business in 2003, the processors were already using Twitter-like dispatching programs to get conditions delivered, and were advanced systems allowed large files to be transferred easily. The lenders all had very advanced back-end programs and it seemed everyone was very high-tech. (I joined Myspace that year, incidentally from a mortgage contact.) The industry is still buzzing with tech, but is stonewalling a ground-floor innovation with E-signatures. It is confusing to me why the mortgage industry at large would not be using electronic signature technology.


To ask me any questions about mortgages email me at Sky@skyminor.com. I hope 2010 is a productive and eventful year for everyone.