Your Chicago Mortgage Guy

FHA To Get More Expensive April 2012

It's not official yet, but all the buzz is that we are about to get a Mortgagee Letter from HUD increasing both the upfront and monthly mortgage insurance premiums for FHA loans.  Currently a consumer will pay 1% of their loan amount as a premium up front, typically rolled into their loan.  As of April 1st, that will increase by .75% to 1.75%.  Monthly Mortgage Insurance will also be increasing by .10%.  On loans greater than a 95% LTV, that will take the monthly premium to 1.25% and for loans less than 95%, to 1.15%. 

Not long ago, the up front Mortgage Insurance Premium was 2.25%, and the monthly .55% or lower.  In an effort to boost reserves in their MI pool, they flipped the model, taking more monthly from a borrower, but less up front.  Now though, the Federal Government wants out of the mortgage business.  Simple as that.  By increasing the up front premium, it will make FHA less and less desirable as a loan product, forcing borrowers to look at low down payment options from Conventional Banks and Mortgage Insurance Companies.  The hope is that as the market improves, there is an increase in bank products, to fill this void. 

It is also the long term goal that these products are actual bank products, and not mortgage products backed by Fannie Mae or Freddie Mac, further removing the Federal Government from the Mortgage market. 

Effect on consumers?  Well, short term, money is getting more expensive.  The long term hope would be that more product, more competition is good for the consumer.  But, we have a long way to go before that becomes reality.

Joe Burke

Your Chicago Mortgage Guy

773-742-6707

joe@yourchicagomortgageguy.com

 

 

Ribfest Chicago - Lincoln/Irving Park/Damen - Friday June 10th - Sunday June 12th

 

Reasons To Buy A Home - The Mortgage Interest Deduction

While having lunch with a Realtor friend of mine yesterday, he commented that most of his colleagues still have a hard time explaining to potential buyers the benefits of Home Ownership.  At first I thought, wow, what are you doing in this business!  But, it really got me thinking.  There is a layer of negativity that is hovering over our industry right now.  It's not just media.  It is very real, to everyone out there, owner or renter.  We know people underwater on their mortgages.  We have friends and family members that are suffering through the foreclosure process or a short sale.  Relatives that are enduring problems within condo associations or who cannot get their mortgages refinanced or modified, even though it seems that the bank would want to help them.  Given the circumstances, it's really not that hard to believe that the very professionals who are supposed to be out there promoting home ownership, can't give a ringing endorsement for owning a home!

So, over the next couple of posts, I will try to accentuate the positives and give some perspective on what even Warren Buffet believes is currently a great investment. 

The Mortgage Interest and Property Tax Deductions are probably the most tangible and easily sold benefits to Home Ownership, but also the least understood.  Even I don't like getting into this one, in a general sense, because every individuals taxes are different and I am far from a CPA.  So, I went online and pulled tax forms from irs.gov and put together a very simple example of how much owning a home can save a single property owner in a given year. 

For this exercise, I am assuming the following.  The tax payer is a Single Man or Woman, makes $75,000.00 a year and purchases a $200,000.00 home at 5% down.  That would have them carrying a mortgage of $237,500.00.  I used an interest rate of 5% on a 30 Year Fixed for my calculations.  The only other assumption I made here is that the tax payer puts 10% into a 401K, reducing their taxable income to $67,500.00. 

Taking the standard deduction of $3650 this year, that leaves their taxable income at $63,850 and leaves them with a tax in 2010 of $12,150.00. 

Now, using the assumptions above, in the first 9 years of Home Ownership, the tax payer would pay no less than $10,000.00 in mortgage interest.  In our area, they would also typically pay about $3750 in property taxes, which is also an itemized deduction associated with owning a home.  That puts their Schedule A deduction between $15500 the first year in the home and $13750 by year nine.  Now, here's what happens.  That deduction reduces the taxable income, dollar for dollar.  Subtracting that from your $63,850, puts the tax payer in a lower tax bracket, thus reducing there overall tax to around $8300.  So, the home owner, between years 1 and 9, will save an estimated $3500-$3800 per year.  That's $31,000.00 over nine years.  Those are real dollars, not paid to the IRS, and a huge benefit to owning a home.

Now, this scenario is going to be different for everyone buying a home, but that's how it works.  The Mortgage Interest Deduction is a very real, tangible benefit to owning a home.  One that comes with a dollar sign attached!

Joe Burke

Your Chicago Mortgage Guy

773-742-6707

joe@yourchicagomortgageguy.com

 

Dodd – Frank In Action. A Short Play….

<Phone Ringing>

Your Chicago Mortgage Guy: Hello, this is Joe.

Jim The Borrower: Hi Joe. Good News, we got the property!

YCMG: That's great, congratulations, now it's time to start talking mortgage rates. What price did you agree to and when is your closing date?

JTB: We agreed to $375,000.00 and a closing date of May 31^st. After our last conversation, Jill and I decided to go with the 30 Year Fixed option at 20% down.

YCMG: Perfect. At 20% down, you guy's will avoid Mortgage Insurance. Our 30 Year Fixed today is at 5.00%.

JTB: That sounds about right. We've been looking around and everyone seems to be quoting either 5.00% or 5.125%. What's confusing though, are closing costs. What are your costs?

YCMG: Our standard bank fees here total $1295.00. That's for Origination, Appraisal, Application, Credit and Flood Certs. Today though, I can pick up all of those fees. In fact, I can give you a credit totaling $1500 at a rate of 5.00% today.

JTB: Wow, that's the biggest credit we've been offered so far. What I don't understand though is, why does everyone want to pay my fees?

YCMG: Well, according to the new Dodd-Frank legislation, I cannot make any overage on an interest rate any more. So, to stay competitive I am crediting it back to my borrowers. That's good news for you.

JTB: Yeah, that is great! What are the chances of getting to 4.875%?

YCMG: Good question, we are really close to that today. In fact, we are only off by .05%. If you wanted to pay that as an origination fee, I could get you to 4.875%. That's only $150.00.

JTB: What, seriously? Could I still get the credit?

YCMG: No, if you pay an origination fee, I can't give you an closing cost credit.

JTB: So, it's not $150, it's actually $1650?

YCMG: Yes, I guess that's true.

JTB: And, you probably make less money at 4.875% then as well?

YCMG: No, my employer has to pay me the same, regardless of rate. But, 4.875% is below my 1.00% threshold. That's why I have to chare you the .05% to get to the 1.00% threshold on my rate sheet.

JTB: So where did the credit come from at 5.00%?

YCMG: 5.00% was at 1.5%, so I was giving you the extra .50% back as a credit.

JTB: This is getting confusing. What would you have been quoting me before this new legislation went into effect?

YCMG: Well, seeing as you were shopping rates, I likely would have been quoting you the 4.875%.

JTB: Would I have been paying the extra $150?

YCMG: No. But, that depends on what my competitors would have been offering. It's even possible I would have given you a credit.

JTB: At 4.875%?

YCMG: Yes.

JTB: I thought this legislation was for the consumer? I thought it prevented you from steering me into a higher rate to make more premium?

YCMG: It does, but it also sets a floor because my employer can't pay me less money just because I want to be competitive.

JTB: I don't understand.

YCMG: It gets even better. While you might get a $1500 credit at the higher rate, that will cost you another $6700 over the life of your 30 Year Fixed.

JTB: Who get's that?

YCMG: Fannie Mae and your servicer.

JTB: Wait, I thought this legislation was supposed to protect the consumer from the banking industry?

YCMG: Me too.

 

New Generation of Homebuyers Looms - NASDAQ.com

Great article about the most educated, informed and tech savvy generation in history.  

 

New Generation of Homebuyers Looms - NASDAQ.com.

Looking Past April 1st and Dodd-Frank

If you are a Loan Officer right now, you are hearing a lot of doom and gloom about the imminent implementation of the Dodd-Frank legislation aimed specifically at our commission structure.  I could put up lengthy posts about this issue, but anyone that isn't in my seat isn't going to understand most of it, or for that matter, care very much.  But, I have been thinking about the positives that are going to come out of this, and there are many.  Not just for the Consumer, but for the Loan Officer and even our Realtor partners.

I previously posted a very concise article regarding the future of the Loan Officer and our industry in general.  I do not think that the Loan Officer is dead, but I do agree that the days of just writing loans, without any expertise, is over. 

There aren't many indsutries like Mortgage and Real Estate where you don't have to be a full time employee to participate in the process.  If you spend the time and money to get licensed as a Loan Officer or Realtor, I guarantee you that someone will give you a phone and a desk to sell mortgages or real estate.  Think about that.  Beyond the basic licensing requirements, you don't need any other background or knowledge to come in and do what we do.  Scarier still is that they do get deals.  I call these the 'Brother In Law' deals.  When you ask who they are using to buy a house and they say, 'Well, my Brother In Law is a first grade teacher, but he sells mortgages on the side'.  Really?  So, you are going to trust the single largest purchase of your life to a guy that writes maybe five or six loans a year?  Yes.  It happens all the time.

Our industry has changed so much in the past 18 months, that even the most seasoned in our industry can struggle to keep up.  We have added disclosures and compliance at an astronomical rate.  The smallest mortgage shops are doomed at this point.  There isn't any way that they will be able to keep up with the compliance part of the puzzle and the margins have become so slim, there just isn't any room for profit anymore.  The bulk of these firms are home to the lowest volume sales people, and they will not be picked up by the lenders left in the wake.  It's just to expensive now to justify bringing on sales people that aren't working full time.

This is a plus for the consumer.  We are already a pretty lean industry of sales people when compared to our numbers in the mid 2000's when we topped out.  Our ranks should be left with the most experienced sales people, the ones that have been out selling themselves as Mortgage Advisor's, rather than the sales people only concerned with the transaction at hand. 

It's never been more important to vet your Loan Officer.  It's well within bounds to ask how long they have been in the industry.  You should ask what their specialty is and what their volume is like.  An experienced loan officer is probably already sharing this with their potential clients and will likely have references ready to go to back them up. 

Now, the downside for the consumer will be reduced competition.  But, it's Friday and I think I'll leave you with the positives.  Check back next week for how this legislation will hurt the consumer.

Joe Burke

Your Chicago Mortgage Guy

773-742-6707

joe@yourchicagomortgageguy.com

 

Is the Loan Officer Dead? 2010 Market Trends & 2011 Predictions by Rick Roque | The Niche Report

Is the Loan Officer Dead? 2010 Market Trends & 2011 Predictions by Rick Roque | The Niche Report.

Trader's Joe's in Portage Park?

If you live in the Old Irving or Portage Park area, there are whispers that we could get a Trader Joe's at the Six Corners.  Read the thread below, and if you can, please write to the coporation that own's Trader Joe's.  We could sure use it.

 

Letter writing campaign advocating for a Trader Joe's in Portage Park

 

As OIPA has written before, the former Bank of America (BoA) site at 4901 W. Irving Park in the 45th Ward has been sold to a developer.  According to reports in the Nadig Press, this developer has built for Aldi's and other food stores in the past.  It is our understanding that the firm is trying to assemble an entire city block--not all of it was owned by BoA--in order to build.

 

Many residents have expressed a desire for a Trader Joe's in that Portage Park location.  Both Aldi's and Trader Joe's are owned by the same company.  The Portage Park Neighborhood Assn. and the Friends of Portage Park are spearheading a letter writing campaign urging Trader Joe's to locate here, and OIPA wholeheartedly supports that effort.

 

Please use the sample letter below, or write your own citing specifics.  Why is this area a good match for a Trader Joe's and their product mix?  What are their criteria for locating new stores and how can we meet them?

 

Letters and/or emails should be directed to:

 

Doug Yokomizo

Head of Real Estate

626.599.3700 office

626.301.4431 fax


SAMPLE LETTER FROM PPNA & FOPP, to fax, snail mail or email:

Doug Yokomizo

Trader Joe's Company, Inc.

Corporate Headquarters

800 South Shamrock Avenue

Monrovia, California 91016

 

Dear Mr. Yokomizo:

 

Through our community organizations and neighborhood conversations, we hear of a possible development of an existing +3 acre property at 4901 West Irving Park Road, Chicago, IL 60641 by a group who, in the past, has developed Trader Joe’s Markets.

This particular site is ripe with benefits that include a designated Chicago TIF district to assist with development costs, active community and business associations, two active Chicago Parks, easy highway access with two intersecting 4-lane arteries that include bus routes and a recently completed $20 million streetscape beautification project that included new sidewalks and pedestrian amenities, paved roads, new street & pedestrian lighting, community identifiers and pedestrian friendly integrated planter boxes.

As a resident of the northwest side of Chicago, I am writing in strong support of this exciting possibility. I have no doubt that Trader Joe’s would be warmly welcomed and supported by our community and neighboring communities which has been documented and studied to not only have limited grocery options but also, on average, more expensive choices than other neighborhoods.

I hope this letter helps to convince you that Portage Park is the perfect location for a new Trader Joe’s and you’ll consider this site as an option toward your business expansion.

 

Sincerely,

 

Your name and contact info here

Commercial Space In Your Condo Building – How Much Is Too Much?

There has recently been a lot of talk about the health of individual Condo Associations and Projects, and what constitutes a safe Condominium investment. The Chicago Tribune ran a terrific article a couple of weeks ago about this very topic, and frankly, scared the bejeezus out of a lot of potential buyers and realtors. You can see the article in its original form here. Chicago Tribune - Condo Deals Die Article

This article touches on a number of things, which we are going to cover here over the next week or two, but something I have been running into a lot lately is the way Fannie and Freddie are now viewing Commercial Space in Condo Buildings. If you live in a major city, this could very well affect you.

Fannie Mae, Freddie Mac and FHA have long had guidelines in place that state that a Condominium Project cannot contain more than 20% Commercial Space. So, what constitutes 20% commercial space? Technically it is supposed to be square footage. When a developer has the Declarations written for a building, there is a survey done of the building itself and the square footage that belongs to each individual unit. This is used to determine the amount that each unit pays into the HOA for dues.

Now, picture any four unit condo building on a commercial thoroughfare in Chicago. While it might seem obvious from the street that each unit takes up the same amount of space, and that 100% divided by 4 is 25% each, that isn't usually the case. In most cases, the survey will include parking that may only belong to the residential units, or common space like a roof deck, or a deck above a garage, that only belong to the residential units, that push the percentage of ownership of the commercial space under 20%, thus conforming to Fannie/Freddie/FHA condo guidelines.

When the commercial space still doesn't conform to this 20% threshold, it has long been commonplace to separate the commercial units from the residential Home Owners Association. Until recently if the commercial spaces didn't appear in the declarations and didn't contribute to the HOA, they were not considered part of the residential project and were excluded completely. Recently, Fannie Mae, Freddie Mac and FHA have clarified this issue and this no longer holds true. If you have commercial space in a condominium project, regardless of whether they are part of the residential condo association, that square footage is now factored into the condo approval.

This is not a big deal in our first example, but a very big deal for many existing condo projects. For instance, if you have a 3 unit condominium building on a commercial thoroughfare, you are virtually out of options for financing. Another example would be some older condo conversions with multiple commercial and even multiple levels of commercial space, and no clear declarations stating percentage of ownership, because maybe these units were never part of the association.

So, what are your options then? They aren't good. If you fall between 20%-25%, and the rest of the association is in good shape and you have a strong file in terms of the borrower, there is a good chance you can get an exception through Fannie/Freddie. You can also generally find a portfolio lender that will overlook the percentage of ownership, but at a higher down payment. If you are between 25%-30%, you can apply for an exception, but the higher the percentage of commercial, the less likely you get it approved.

If you are in a property where the percentage of commercial is over 20%, you may want to look at the original survey and see if it is truly reflective of where your current project is. For instance, if a roof deck was added, or common space was added over a garage, they property now has more residential square footage, and the Declarations could potentially be changed. The original survey may also have been done incorrectly and the commercial space, when including common elements belonging to the residential units, may just be incorrect.

If you are in one of these larger buildings where the square footage isn't clear at all, it's best to be prepared when you go into this either with documentation showing the calculated square footage. At the end of the day, it's a judgment call by the appraiser as to exactly what percentage is residential verses commercial, and even they aren't always sure. A single appraiser doesn't always even have the type of access that would be necessary to walk off an entire properties square footage, much less the time or patience to do so in the first place. Remember, these guys are only making a couple hundred bucks to be out there for a very short period of time.

If you have any questions, feel free to reach out to Your Chicago Mortgage Guy!

Joe Burke

Your Chicago Mortgage Guy

773-742-6707

joe@yourchicagomortgageguy.com

 

FHA to get a little more expensive. Maybe that 97 Conventional isn't so bad after all...

WASHINGTON – As part of ongoing efforts to strengthen the Federal Housing Administration’s (FHA) capital reserves, FHA Commissioner David H. Stevens today announced a new premium structure for FHA-insured mortgage loans increasing its annual mortgage insurance premium (MIP) by a quarter of a percentage point (.25) on all 30- and 15-year loans.  The upfront MIP will remain unchanged at 1.0 percent.  This premium change was detailed in President Obama’s fiscal year 2012 budget, also released today, and will impact new loans insured by FHA on or after April 18, 2011. 

via portal.hud.gov