7% rate on a 30-year mortgage looks unlikely this year

The predictions seemed to come from every direction, but the message remained the same: Interest rates for mortgages would come close, if not hit, 7 percent by the end of this year.

Now, more than halfway through 2004, it seems unlikely that interest rates will hit that 7 percent mark as originally predicted. Instead, they’re still hovering around 6 percent, despite one hike in the federal funds target rate and another, which is widely expected to happen today. Perhaps the worry of significantly higher interest rates this year was simply a myth.

“In reality, (rates) declined in the first quarter, shot up during the second quarter and then came back down,” said David Lereah, NAR’s chief economist. “The bottom line is mortgage rates have been lower than expected, the economy is improving and jobs are being created in an environment of strong housing demand – all favorable factors for record home sales.”

The Federal Open Market Committee meets today and is expected to raise the federal funds target rate by .25 percent, bringing it to 1.5 percent. The federal funds target rate is the borrowing rate banks charge each other overnight. Fixed mortgage rates tend to align closely with the 10-year Treasury bond, which generally reflects what the market is expected to do longer term, as well as any anticipated changes in the federal funds target rate.

Because of that, mortgage rates increased in anticipation of June’s hike in the federal funds rate and didn’t inch upwards after the actual announcement. In fact, they have declined since the announcement, and have not increased in anticipation of today’s expected hike. That has kept housing sales brisk and has economists revising their original forecasts of an interest rate of about 7 percent by the end of the year.

A closer look at interest rates over the past 18 months reveals mortgage rates that have hovered in the very affordable 5 percent to 6 percent range and have deviated only slightly from that. Even the high end of that range – 6 percent – is a far cry from the rates of just a few years ago that were closer to 8 percent.

In January 2003, mortgage rates hit 5.92 percent, the first time below 6 percent in years, according to Freddie Mac’s primary mortgage market survey. They continued dropping, eventually hitting 5.23 percent in June 2003. But the next month saw a spike up to 5.63 percent, followed by 6.26 percent in August.

The remainder of 2003, however, saw interest rates drop, though they didn’t come close to hitting June’s low. The year ended with 5.88 percent as the average fixed-rate mortgage in December.

The first three months of this year saw interest rates drop as well, eventually hitting 5.45 percent by March. But they then sprung back up: 5.83 percent in April, followed by 6.27 percent in May and 6.29 percent in June. That jump can be largely attributed to the anticipated hike in the federal funds rate at the end of June.

In July, the average was 6.06 percent and dropped further after last week’s release of July payroll data.

Given those figures, will rates hit that 7 percent mark this year?

Some economists don’t think so. NAR, for example, has already revised its economic forecast to predict lower than originally expected interest rates. As recently as June, the trade association had forecast that the fixed-rate mortgage could reach 6.9 percent this year. Now, it is forecasting that it will gradually rise to 6.4 percent in the fourth quarter.

David Berson, Fannie Mae’s VP and chief economist, has said he believes mortgage rates will end the year well below 7 percent.

The Mortgage Bankers Association is in the same camp. Chief economist Doug Duncan said he expects mortgage rates between 6.5 percent and 6.75 percent by the end of the year. They’re not likely to go higher than that this year, but could be lower.

“If economic growth slows significantly, rates will not reach that level but rather be between 6.25 and 6.5 percent,” Duncan said. “The Federal Reserve will continue to raise interest rates a quarter point this meeting and once or twice more this year.”

Some experts attributed a surge in home-buying activity over the past few months to a rush to get into the market before rates continued their expected upward climb. They still predicted a banner year for real estate sales, but those expectations appear to be even more likely given the reasonable expectation of continued low mortgage interest rates.

Toss in the upcoming presidential election and no one is eager to see rates climb significantly higher and risk raining on the housing parade of the past few years. Instead, most will be happy to concede that higher interest rates this year were simply a worry and nothing else.

Elementary school teachers, police officers, licensed practical nurses, retail salespersons and janitors cannot afford to purchase median-priced homes based on median income in a number of metropolitan areas of the country – and particularly in some Southern areas – according to “Paycheck to Paycheck: Wages and the Cost of Housing in Counties,” a study produced by the Center for Housing Policy for the National Association of Counties.

Atlanta, Ga.; Baton Rouge, La; Birmingham, Ala.; Charleston, S.C.; Charlotte, N.C.; Columbia, S.C.; Greensboro, N.C.; Jackson, Miss.; and Melbourne, Fla., were the most unaffordable metropolitan areas for people working in these occupations.

On the rental side, the annual study found that, based on median income, retail salespersons and janitors must pay an excessive portion of their income in order to rent a one-bedroom or two-bedroom apartment in the majority of cities studied.

While housing experts often focus on housing affordability issues in the Northeast and West, the study found that “key occupations in the majority of Southern metropolitan areas studied are dealing with significant housing affordability problems.” For example, police officers, firefighters and elementary school teachers earning typical salaries cannot afford to purchase a median-priced home in Flagler County, in the Daytona Beach, Fla., metropolitan area; Fulton County, in the Atlanta metropolitan area; and Buncombe County, in the Asheville, N.C., metro area.

The county-specific rental data also reveals that retail salespersons, janitors and construction laborers in Flagler County and Fulton County must pay an excessive portion of their income in order to rent one- and two-bedroom apartments. In Buncombe County, janitors are unable to afford a one-bedroom apartment, and a retail salesperson and construction laborer must also pay more than what is considered affordable to rent a two-bedroom apartment based on typical salaries.

“Although affordability issues continue to be prevalent in areas that we have come to expect, such as the Northeast and West, these latest findings demonstrate the growing home-ownership disparities in the South for our nation’s vital community workers,” said NHC Chairman G. Allan Kingston, president and CEO of Century Housing. “Additionally, in all but a handful of the Metropolitan areas studied, the current rental market is forcing retail salespersons and janitors to pay in excess of what is considered affordable in order to rent a one- or two-bedroom apartment based on median income.”

“This survey shows that the lack of affordable housing in America’s counties is a growing problem, affecting working families in urban, suburban and rural areas,” said National Association of Counties president Angelo D. Kyle. “The men and women who police our streets, fight our fires and educate our children deserve the opportunity to live in the community in which they work. The National Association of Counties will continue to work with the Administration, Congress and industry leaders to push for sound affordable housing policy.”

The six occupations studied were police officers, firefighters, elementary school teachers, retail salespersons, janitors and construction laborers. The Center for Housing Policy is the research affiliate of the National Housing Conference. Freddie Mac paid for the study.

Jeff Byrd, president of Eagle Realty in Roseville, Minn., stood up during a real estate conference two weeks ago and asked about the legality of rebates that are paid to consumers without lenders’ knowledge. Byrd questioned whether real estate companies that offer real estate transaction-related rebates keep lenders informed about these rebates, and whether fraud is committed if lenders aren’t informed about the rebates.

The real estate panelists he addressed, who were brokers and executives at discount and limited-service real estate firms, had no immediate answers.

A number of real estate companies offer some form of rebates to consumers, among them LendingTree, HouseRebate and some Help-U-Sell franchises. Byrd said this week that he has continued to probe into the rebates issue.

“I am getting conflicting opinions on the legality of commission rebates that are not shown on the HUD-1,” he said. The HUD-1 is a standard financial disclosure form used in real estate transactions. “Some loan officers state that all agreements relating to the transaction, including rebates of commission to the buyer, must be disclosed.” But a lawyer who Byrd spoke with suggested that “the buyer representation agreement is a confidential fiduciary contract between the buyer and the buyer’s agent and any rebates that are a part of it are confidential and do not need to be disclosed.”

As with any legal matter, opinions can differ. State laws vary in the treatment of real estate rebates, and a few states prevent rebates. Byrd said he’s interested to know whether real estate companies and enforcement agencies, alike, are paying attention to the issue.

Brian Sullivan, a spokesman for the U.S. Department of Housing and Urban Development, said all fees paid by buyers and brokers should be listed on the HUD-1 form. “Any fee paid, either by the buyer or by the broker (regardless of whether it’s paid outside of closing) must be disclosed on the HUD-1.”

The department instructs loan officers to itemize “all charges imposed upon the borrower and the seller by the lender and all sales commissions, whether to be paid at settlement or outside of settlement, and any other charges which either the borrower or the seller will pay for at settlement.” And all charges to be paid outside of settlement should be included on the HUD-1 form and marked “P.O.C.” for “Paid Outside of Closing,” Sullivan also said.

So far, there haven’t been any high-profile challenges to rebate practices among discount real estate firms, said Mike Thiel, associate counsel for the National Association of Realtors. “I’m not aware of any enforcement actions related to that,” he said.

An absence of disclosed information about rebates is more likely to be considered a breach of contract than a matter of criminal fraud, Thiel said, unless the rebate amount was substantial. But in general, it’s best to document all financial aspects of the transaction on the HUD-1 form, he added. “If I were to advise somebody (about rebates), I’d say, ‘What the heck, put it down there.’ ”

Eric Cunliffe, LendingTree
Eric Cunliffe, senior vice president and general manager of realty services for LendingTree, which links consumers with mortgage brokers and Realtors and offers several types of rebates to consumers, said the company paid out about $5 million in consumer rebates in 2003, with most of those rebates relating to real estate transactions and a small percentage relating to mortgage transactions. This year, LendingTree expects to give out about $10 million in rebates, Cunliffe said.

LendingTree offers rebates in the form of airline miles, gift cards and credits to closing costs, and these offerings and the disclosure requirements can differ in various states, Cunliffe said. “Our legal team…has a requirement for each of the brokers to disclose these rebates as appropriate in the states where they’re taking place,” he said.

In a single-sided transaction, the typical Lending Tree consumer rebate would be about $1,000 for a home priced at $225,000, according to a LendingTree business report, while the consumer rebate in a double-sided transaction might amount to $2,000 of the total commission.

Rick O’Neil, president of real estate discounter Help-U-Sell, said some individual franchises are offering consumer rebates, and the company is investigating a universal rebate policy. “We’re looking as a corporation to incorporate that,” he said. There are “different rules and regulations within each state. We’re looking at this very, very closely,” O’Neil said.

Cody Ann Moran, Century 21 Findley Real Estate
Cody Ann Moran of Century 21 Findley Real Estate, a member of the Georgia Real Estate Fraud Prevention & Awareness Coalition, said she hasn’t heard of enforcement actions involving real estate rebates to consumers. But there is a general litmus test for separating mortgage fraud from compliance. “The simplest way to determine the difference between whether it’s fraud or not fraud: If the lender knows about it then it’s not fraud – if the lender doesn’t know about it then it’s fraud,” she said.

Of course, there are gray areas, Moran said. A common type of violation involves a seller who doesn’t have time to complete home repairs prior to the close of the transaction, and instead writes a check to the buyers outside of closing. “If the lender doesn’t know about it, that becomes an issue. If the lender goes back and sees that those repairs were not done, then that becomes a fraud issue,” she said.

Moran said another typical example of fraud involves a buyer who cannot afford a down payment on a home. Loan officers have in some cases proposed some creative financing, involving a revision to the sale contract, to allow the transaction to go forward without the down payment. Moran said enforcement agencies typically go after repeat offenders.

Byrd said that though his company has refused to participate in such practices, “We have had loan officers pressure us to have the seller write a check to the buyer outside of closing for the difference between the amount of closing costs agreed to on the purchase agreement and the actual amount of closing cost.” For example, sellers might agree to pay $7,000 in closing costs for the buyer while the actual closing costs were $4,000. In these schemes, the seller could then pay the $3,000 difference to the buyer “outside of closing without the underwriter’s knowledge,” Byrd said

SAN FRANCISCO—Real estate investors are eying an expected increase in foreclosures over the next year due to rising interest rates and slowing home-price appreciation. But the Internet and new technologies are changing the methods used to obtain these investment properties.
Alexis McGee, president of Foreclosures.com, said more than 90 percent of homes that are in default don’t appear on the Multiple Listing Service. Therefore, investors or those interested in investing should be aware of all the channels that exist for unloading these properties.

“In the next year, we’ll see a huge amount of foreclosures,” McGee said.

Panelists speaking Friday morning during Inman News’ Real Estate Connect 2004 explored new technologies and strategies for tackling the influx of home-loan defaults and foreclosed properties they expect to see in the coming year. The panel was titled, “Default Management: Innovations in property disposition.”

Foreclosures.com is a real estate investment advisory company that focuses on distressed properties. McGee pointed out four foreclosure investing systems, including purchasing homes in pre-foreclosure or default; “back-door investing,” which involves buying the junior note of a home in pre-foreclosure; buying homes at auctions; and working with lenders on purchasing REO, or “real estate owned,” homes.

Each foreclosure investment channel has risks, McGee said. Pre-foreclosure properties, for example, are subject to financing; back-door financing involves buying a senior class note; at Sheriff’s auctions, investors usually agree to pay all cash and properties aren’t subject to inspections upon purchase; and with REOs, lenders expect to receive top price for the properties, so often they aren’t bargain purchases.

Although foreclosures currently are at low levels, McGee believes investment opportunities are ripe since she’s already seeing signs of a slowdown in some coastal markets. Foreclosures.com released a report during the conference last week pointing out warning signs of a down market. The report cited areas where income levels haven’t kept up with the pace of median home price appreciation.

“Have your shopping bags ready,” McGee said.

The many homeowners who have stretched their budgets too thin to cover the cost of a mortgage, those who have taken advantage of low-interest rates to take cash out of their home equity and those who banked on adjustable-rate mortgages are vulnerable to rising rates and market softening. These homes may eventually end up on the foreclosure investor’s target list.

Chad Neel, president of Fidelity National Asset Management Solutions, discussed changes in REO property displacements. Fidelity is a third-party provider of REO services for lenders, investors and real estate agents and brokers. The company operates BuyBankHomes.com, a Web site that specializes in connecting buyers and sellers of REOs.

Neel said pockets of REOs have starting forming in Denver, Dallas, areas in North and South Carolina and Colorado Springs, Colo., to name a few. He said that more than 200 properties in BuyBankHomes’ inventory are in the $1 million-plus value range.

“There are not a lot of REOs in the traditional areas we’re used to seeing,” he said.

Technology has made significant changes in the REO market by enabling new communication tools and methods for gathering and managing property data, as well as eliminating about half the previous amount of paperwork required to facilitate these processes. And companies like BuyBankHomes now have real-time updates on properties.

Another company using technology to create efficiencies in the REO marketplace is REO.com. The company provides technology for lenders that want to sell their REOs using more efficient processes.

REO.com President Dana Keith, who spoke on the default management panel, said that as more lenders adopt technologies to streamline their REO sales process, more real estate listing agents will adopt the technology as well. Listing agents will have to learn the new systems in order to sell these properties.

Jim Saccacio, president of RealtyTrac, also sat on the panel during the conference. Saccacio challenged everyone to pay attention to the technological efficiencies currently taking place in the default management industry to see how they might transfer to other businesses.

“Innovations in default management will move the marketplace,” Saccacio said
By Jessica Sweseyby

We are purchasing a new home and haven’t decided whether to hire a home inspector. When we sold our previous home, my husband accompanied the buyers’ home inspector to learn what inspectors do. Next week is the final walkthrough with the builder. Our Realtor advises us to hire a home inspector, but my husband says we don’t need one. Instead, he plans to go through all the same exercises as our buyers’ home inspector, and he should be able to find any serious defects. Best of all, the builder lives a few doors away and is willing to fix any problems that arise. With a one-year warranty, any faulty conditions not spotted during the walkthrough will certainly surface during that time. Our family and friends also believe a home inspection is unnecessary, but your opinion would be greatly appreciated. – Lori

Dear Lori,

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Your inclination to forego a home inspection on a brand-new home reflects the common wisdom in most new-home purchases, but it is an invitation to costly trouble, and here’s why:

You say that your husband plans to repeat all the same exercises as your buyers’ home inspector. Please understand that these were not exercises. They were the carefully considered applications of years of home inspection experience and of cumulative knowledge related to property defects. Your husband observed the inspector’s movements only, not the forensic processes that occurred within the inspector’s mind while he evaluated your home. It takes at least 1,000 home inspections to become truly qualified as a professional home inspector. There is simply no way that an average homeowner could discover the defects that would be apparent to a well-seasoned home inspector.

You also say that any problems not spotted during the walkthrough will certainly surface during the one-year warranty period. This is only true of defects that become visibly apparent or that affect observable functions, such as rubbing doors, a leaking dishwasher, or a noisy garbage disposal. Here are just a few examples of the kinds of problems that would most likely not be discovered on a walkthrough inspection or during the first year of occupancy:

1. Construction defects within the attic;

2. Faulty wiring within the breaker panel;

3. Improper flashing at roof penetrations;

4. Chimney contact with combustible construction;

5. Noncompliance at the garage firewall;

6. Substandard flue connections at the water heater;

7. Inadequate combustion air supply for the furnace;

8. Reversed polarity at wall outlets;

9. Lack of ground fault (shock) protection at required outlets;

10. Improper vent configuration at drain pipes;

11. Unsafe venting of exhaust at the furnace;

12. Inadequate height of the chimney above the roof, etc., etc….

Problems such as these would eventually be discovered when the time came for you to sell the home. The buyer’s home inspector would then reveal them, the builders warranty would probably have expired, and the responsibility for repairs would then be yours. To resolve these details now, while the warranty is in effect, find the most qualified home inspector in your area. A competent inspector will definitely find problems that would otherwise escape discovery.