The Lending Coach

Coaching and teaching - many through the mortgage process and others on the field

Market Uncertainty in the Banking Sector – Does This Impact Real Estate and Mortgage Rates?

I’ve been asked by many real estate agents and clients about how this week’s banking uncertainty might impact the real estate and mortgage markets.

Two banks have collapsed since last Friday and the federal government jumped in to guarantee depositors at those institutions. However, there’s still a lot of uncertainty about what this means to the markets.

Fortunately, depositors at Silicon Valley Bank — which failed Friday after a bank run — and New York-based Signature Bank — which collapsed Sunday — will see their money guaranteed by the federal government.

The U.S. Treasury, Federal Reserve, and Federal Deposit Insurance Corp. (FDIC) announced measures to guarantee that depositors would be able to receive all of their money back from those failed institutions.

For a great read on the details, I’d invite you to read this piece from Statechery

Housing/Mortgage Impact

This situation looks nothing like 2008 when subprime lending and easy credit spurred a foreclosure crisis.

As a matter of fact, many experts see mortgage interest rates coming down because of this incident.

“I don’t think the bank failures will have a material impact on the housing market in the western U.S. The failures are idiosyncratic, and given the government’s decision to pay all depositors, I don’t expect there to be a problem in the broader financial system,” Mark Zandi, chief economist at Moody’s Analytics, told MarketWatch.

He added, and “if anything mortgage rates may decline given the flight to quality into the bond market and prospects that the [U.S. Federal Reserve] may delay its rate increases.”

Mortgage lenders — which includes many banks — may not necessarily see problems with liquidity, said Sam Hall, property economist at Capital Economics.

person with keys for real estate

“The direct impact on the housing market is likely to be small. Moreover, SVB’s holdings of residential mortgage-backed securities (MBS) account for a very small share of the overall market, so the forced selling of those assets is unlikely to put any downward pressure on MBS prices,” he added.

Al Otero, portfolio manager at Armada ETF Advisors, also said that the two banking failures may have forced the Federal Reserve to not raise rates, which could help the housing market.

There’s a rally in rates across the yield curve, Otero said, “and an expectation that the Fed will now ‘pause’ raising the funds rate at its March 21-22 policy session.”

“We could see a material reduction in mortgage rates going into the spring sales season,” he added, “which would be a substantial positive for the housing market.”

You can find more here…

The Federal Reserve

The bank failures may actually soften the Fed’s stance on interest rates.

“The hawkish tenor of Fed Chair Jerome Powell, in his Senate testimony last week and with the February rate hike, indicated a 50-basis-point increase was likely for the March rate decision” say’s NerdWallet’s Anna Helhoski.

You can read Anna’s full article here…

But the Silicon Valley Bank and Signature failures have clouded that outlook.

In a widely reported analysis of the failures, Goldman Sachs said it no longer expects the Fed to deliver any rate hike at the March 22 meeting, adding they had “considerable uncertainty about the path beyond March.”

Michael Feroli, chief U.S. economist at JPMorgan Chase & Co., was widely reported saying he expects a 25-basis-point hike at next week’s meeting.

In Conclusion

The heightened economic risk brought on by the failed banks and the government’s response is likely to bring a short-term boost to the housing market by way of lower mortgage rates. 

Secondly, the Federal Reserve might now re-think forceful rate increases that appeared imminent just weeks ago.  That should trigger lower mortgage rates, as well.

For buyers shopping now, a drop in interest rates would be a welcome boost to affordability – so reach out to me for more details, as it would be my pleasure to help would be borrowers navigate this environment.

“The Time of Maximum Pessimism is the Best Time to Buy”

There is plenty negative talk about housing these days.

Let me tell you why I think it’s a great time to make that purchase.

As legendary investor Sir John Templeton said, “The time of maximum pessimism is the best time to buy”.

There are currently fewer than 1 million homes in inventory compared with 4 million homes that were in inventory back in 2007. Meanwhile, the U.S. population has grown by close to 30 million.

The most recent report on existing home sales showed that closing transactions were down slightly in January. But the same report also showed that the inventory of available homes is at very low levels.

Plus, a deeper look at the report shows that many of the homes reported as inventory are already under contract and therefore unavailable for purchase.

Take a look at this chart showing active listings, they are near record lows:

And you might remember from your Econ 101 class that supply and demand is what sets prices.  Smaller supply means that a higher price is to be paid…so I do believe that home prices will not be going down any time soon!

Secondly, when inflation trends slow, we should see more favorable mortgage rates. This would create even more available buyers in a tight inventory environment and that could be very supportive of higher home prices.

You can find more about the supply issue here…

All things considered, the opportunity in this market appears to be very favorable.

Do reach out to me to find out more, as it would be my pleasure to help you finance that investment property or the home of your dreams.

The “Self-Sufficiency Test” – a Unique FHA Regulation for 3-4 Unit Properties

Are you looking to become a homeowner and build a long-term investment strategy at the same time? Purchasing a multi-unit property is a great way to accomplish exactly that.

For those wanting to buy a 3 to 4–unit property and are planning to use FHA financing, the property will need to pass the “FHA Self-Sufficiency Test” to qualify, if you plan on using expected rents as income.

Many people that invest in multi-family housing live in one of the units. So, this rule exists to make sure the property would still be self-sufficient if the borrower moves out. It requires lenders to compare the estimated rent generation and the expected mortgage payment.

The Basics of the FHA Self-Sufficiency Test

The FHA wants lenders to determine if the property being financed is what they consider “self-sufficient”. In other words, the monthly mortgage payment must be equal to or less than the total rent received.

A property isn’t self-sufficient if the mortgage exceeds the amount of rent the borrower will receive. 

Additionally, the borrower must have three months’ worth of mortgage payments in savings for qualification purposes.

Again, this test only applies if the borrower is using expected rents as income on their mortgage application.

Passing the Self-Sufficiency Test

Let’s assume that a 3-unit complex has estimated total rents of $4,500/month based on the appraisal.

By regulation, the lender must now apply a 25% “vacancy factor” to that total rental figure, making the expected usable income $3,375 per month.

This $3,375 needs to be more than the estimated “all-in” mortgage payment, if the borrower is using expected rents on their application for qualification purposes.

This all-in payment includes all taxes, insurance, mortgage insurance, and any HOA/community fees.

In order to pass the self-sufficiency test, you’ll need to know the net rental income for the property. You can obtain this number from an appraiser. This professional can determine the potential of the rent you can receive for the property according to the current market.

This test is one of the largest hurdles in qualifying for an FHA loan on a 3-4 unit property. Passing it means the home will pay for itself, assuming you receive the designated rent.

In Conclusion

I run these estimates upfront for my borrowers while they’re out shopping for properties to avoid any issues. When rates and prices are high, this FHA self-sufficiency rule can be a hindrance on someone’s ability to use FHA to buy a 3 or 4 unit property.

Thankfully, duplexes are excluded from this rule and conventional financing has some lower down-payment options available.

Please contact me directly to discuss your current situation and how you might be able to take advantage of an FHA loan for a multi-unit property.  It would be my pleasure to help you!

Big and Welcomed Changes Here For New FHA Loans

FHA mortgages have long provided first-time homebuyers and those with less-than-stellar credit an affordable way to achieve home ownership. But one of the main drawbacks of these mortgages has been that their mortgage insurance costs are relatively high.

Reduced mortgage insurance rates go into effect today for many FHA borrowers. The typical borrower will pay 0.55% of their loan amount annually in mortgage insurance costs (as opposed to the .85% rate previously) – a decrease of 30%!

The White House announced Wednesday that the US Department of Housing and Urban Development (HUD) will lower annual mortgage insurance premiums (MIP) on FHA mortgages. These loans are insured by HUD’s Federal Housing Administration.

Mortgage insurance is required on all FHA loans (regardless of down payment size) to allow for more flexible qualification requirements, like a lower credit score.

FHA mortgages are used for primary residences, not 2nd homes or investment properties.

Overview of the Changes

Mortgage insurance is paid as a percentage of the borrower’s loan amount, and how much an individual pays depends on how much they borrowed, their down payment, and the loan term. Currently, most borrowers pay an annual mortgage insurance rate of 0.85%.

To show the monetary value of this change, a borrower in a $265,000 home would save about $800 per year. A borrower with a $467,700 home – the national median home price in December 2022 – would save more than $1,400 annually, according to the HUD press release.

By reducing the costs for this type of loan, more people may be able to afford owning a home.

This is especially true for low-income and first-time home buyers, who tend to benefit from FHA loans the most.

This change is a welcome reprieve for Americans who, in the last year, have experienced higher home prices, housing costs and mortgage rates.

The Bottom Line

By reducing the costs associated with getting an FHA mortgage, HUD aims to make home ownership more affordable. 

Nearly 84% of FHA mortgage borrowers are first-time homebuyers, and 43% of FHA borrowers are low income, according to HUD.

Also, FHA mortgage rates are generally lower than conventional rates. So, it will be in buyers’ best interest to have a mortgage pro who can work with them to figure out which loan program would be the best for their current situation.  It wouldn’t surprise me to see conventional loan originations drop because of these FHA changes.

Where Can I Get More Information?

Contact me directly to discuss your current situation and how you might be able to take advantage of today’s FHA changes.  It would be my pleasure to help you!

How To Re-Focus In Competition After A Mistake

Every athlete makes mistakes; however, not all athletes rebound from them.

How do you deal with mistakes during a competition? Do you quickly refocus on your game, or do you dwell on mistakes for too long?

As I’ve mentioned previously, one of my favorite athletic mental coaches is Dr. Patrick Cohn of Peak Sports Performance. Dr. Cohn is a sports psychologist out of Orlando Florida.

Dr. Cohn has written an article recently on how to overcome mistakes in your mental game. I’ve posted it here…

Why focusing on mistakes interferes with athletic performance:

1. Fearful of making mistakes can paralyze athletes or cause athletes to be hesitant in competitions and lead to the same mistake you seek to avoid.

2. Ruminating about mistakes fosters negative emotions, lowers confidence, and interferes with decision making.

3. Dwelling on one mistake mentally takes you out of the game. You are no longer fully immersed in the present moment.

When you fail to refocus after a mistake, you give your opponents a significant mental edge.

How to counter mistakes:

1. Understand mistakes are a part of the game – Every athlete makes mistakes from time to time. There is no perfect performance or perfect athlete.

When you accept this fact, you will not be so hard on yourself after making a mistake in a competition. In addition, you will be more willing to take risks during a competition.

2. Let go – When you focus forward, you lessen the impact of mistakes. Letting go of mistakes keeps your confidence intact and prevents negative emotions from taking over your game.

3. Refocus on the next play – The goal is to minimize the amount of time between making a mistake and immersing yourself back in the game. The mental skill of refocusing is the hallmark of elite athletes.

In the AFC Championship Game, Kansas City Chiefs quarterback Patrick Mahomes fumbled the ball in the third quarter, giving the Cincinnati Bengals the ball on their 45-yard line. The winner of this game would advance to the Super Bowl.

Instead of panicking, Mahomes remained poised and finished the game with 326 passing yards and two touchdowns, leading his team to a 23-20 victory.

After the victory, Mahomes talked about his mindset after the fumble.

MAHOMES: “I think when you’ve been in some big games now a couple of years in a row, you’ve learned from your mistakes, and I felt like the year before, I let one mistake kind of compound into two, three, or whatever it was. Whereas this game, this last one, instead of worrying about, ‘Man, I made a huge mistake when we probably could’ve had a good chance of giving ourselves a big lead,’ (the mindset was) let’s not magnify it. Let’s move on to the next play.”

The mistake itself is not the problem. The issue lies in the inability to react with composure after the mistake.

Since focusing is a skill, you can learn to become proficient in your ability to refocus. When you learn to refocus quickly, you will feel confident you can rebound after a mistake in stressful circumstances.

Acknowledge the mistake without self-judgment. “Instead of saying, “I’m so stupid for throwing an interception” tell yourself, “Look for the open receiver or scan the field for receivers in single coverage.”

Remind yourself that the mistake is in the past and you can’t change it or get it back–you can only move on to the next play.

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