Disasters and Mortgages November, 2003 By Jim Woodard When disasters occur – major fires, earthquakes, tornadoes, hurricanes – many families find themselves in financial quicksand. They face heavy losses, along with spiraling emotional trauma resulting from the event. Among other concerns is the problem of dealing with their home mortgage, and continuing to make the monthly payments they agreed to pay. Most mortgage lenders are very empathetic with homeowners who have suffered loss from disasters. The first step the victim should take is to discuss their situation candidly with their lender. A workable plan will probably be worked out. In the case of the recent wildfires in Southern California, thousands of homeowners are facing hardship as a result of the widespread damage. “To help the Southern California families who have terrible damage or total destruction of their homes due to the wildfires, Fannie Mae has set up disaster relief provision specifically keyed to the needs of these homeowners,” said Ted Chandler, with the Western Regional Office of Fannie Mae – the nation’s largest buyer of existing home mortgage loans and supplier of funds for new loans. “These provisions will give lenders more discretion to help affected homeowners, such as temporary suspension or reduction of mortgage payment, or modifying the terms of the existing mortgage. All changes will be made on a case-by-case basis.” Fannie Mae’s business guidelines also advise lenders to counsel borrowers on all possible mortgage payment workout option and to inform homeowners of disaster relief available from federal agencies. Payment relief is available for singe-family mortgages (including condos) serviced by Fannie Mae lenders in areas affected by the fires. For more information, call Fannie Mae’s Consumer Resource Center at 800-732-6643. Other firms and organizations are pitching in to help the fire victims. For example, the U-Haul Company is offering 30 days of free self-storage to families affected by the wildfires in California. Free storage is offered on an as-available basis. Families needing more information about this self-storage assistance program should contact a local U-Haul Moving and Storage Center. * * * Profile of Mortgage Borrower Changing With mortgage interest rates remaining at near-record lows, and home values rising at a record pace in many markets, the profile of today’s mortgage borrower is changing. A huge increase in equity has been accumulated by homeowners in a short time period – equity that could be tapped to consolidate outstanding debt or generate cash for college tuitions, investments or other monetary needs. And with interest rates at such low levels, many homeowners are concluding this is the time for such action. The focus for many refinance mortgage applicants is shifting from reducing monthly payments on their home mortgage to using the growing equity to generate funds for other financial needs. Some homeowners have determined this is a strategic time to refinance their mortgage, combining their existing first and second mortgages into one new low-interest mortgage, thus saving money each month on payments. Others have concluded their personal financial needs would be best served with a new second mortgage as a means of generating funds. “An increasing number of borrowers are applying for a new cash-out refinance mortgage, where the balance of the new loan is greater than the previous mortgage,” said Michael Levy, president-CEO of Home Savings Mortgage, a major mortgage banking firm based in Oxnard, Calif. “This produces cash that the family can use for any purpose they desire.” Typically, lenders will loan up to 75 to 80 percent of the home’s current market value. A higher loan-to-value ratio loan can usually be arranged if private mortgage insurance (PMI) coverage is included. There are, of course, closing costs to consider – appraisal, credit checks, title insurance, etc. But in some cases there are ways to minimize these costs. For example, if it wasn’t too long ago that the title was researched for a previous title policy, a simple low-cost update of the policy might be possible. When considering a new loan, it’s best to discuss your needs and desires with a competent mortgage counselor. Your new loan can then be structured to meet your precise financial needs. * * * First-time Home Buyers: On the Increase Surprisingly, the number of first-time home buyers is growing, despite rising home prices to record-high levels in many markets. There are some interesting differences in the way first-time buyers seek out and purchase a home, compared with the practices of repeat buyers. For example, first-timers use available real estate and mortgage services and call on help from professionals more than those who have previously purchased a home. And they’re more apt to turn to the Internet for information. This is probably because first-timers are unfamiliar with the home purchase process, therefore feel unsure of themselves and perhaps a bit intimidated by the home buying scenario. Also, they often have particularly difficult home financing needs that call for professional help. About 85 percent of first-timer buyers use the services of a home inspector, compared with 80 percent of repeat buyers. And in searching for homeowners insurance, first-time buyers receive multiple rate quotes more frequently (59 percent) than repeat buyers (41 percent). About two-thirds of first-timers use mortgage insurance services, compared to half of repeat buyers. These figures are gleaned from a recent study and report from the National Association of Realtors. The survey was based on responses from a questionnaire mailed to more than 35,000 recent homebuyers. Since most home purchases are financed through a mortgage loan, especially purchases by first-time buyers, mortgage lenders and brokers are among the most frequently used real estate service providers, the survey confirmed. Other real estate services used most often include homeowners insurance, title insurance and appraisers. Just over a third of all home buyers said the main reason they chose a particular mortgage lender was on the recommendation of their real estate broker or salesperson. Buyers also often relied on the salesperson for recommendations for home warranties, environmental inspections, home inspectors and pest inspectors. * * * Future Direction of Mortgage Rates and Home Production Mortgage interest rates will gradually increase over the next few years, but reaching only 7 percent in 2005. That’s the recent prediction of the Mortgage Bankers Association. Single-family home production and purchases will remain robust, the MBA further predicts. The market will proceed at a lively pace, slightly slower than the volumes reached during the record activity of 2002 and this year. The multifamily residential and commercial sector should pick up in the second half of next year and retain its strength through 2005, the report noted. Single-family mortgage originations this year will break records in the purchase and refinance markets. Refinance loans will total $2.2 trillion this year and will represent 66 percent of all originations, MBA projects. In contrast, refinance loans will only account for 21 percent of total originations by 2005. Mortgages used to finance the purchase of homes will essentially remain flat at $1.1 trillion through next year, but will increase to $1.2 trillion in 2005. “The health of the real estate finance market is directly dependent on job creations,” said MBA’s chief economist Doug Duncan. “We anticipate significant job growth through next year and into 2005.” Mortgage interest rates will gradually increase over the next few years, but reaching only 7 percent in 2005. That’s the prediction of the Mortgage Bankers Association. * * * Home Sales at Record Levels The pace of both existing home and new home sale is rising to record high levels. Current sales of previously owned homes are clipping along at a rate about 21 percent above last year at this time. Sales of newly constructed homes are also strong, reaching record volumes. “Housing continues to provide major muscle to the national economy as we head toward the end of the year,” said Kent Conine, president of the National Association of Home Builders. “Thanks in large part to today’s excellent financing conditions that are lowering the threshold for first-time home buyers, sales of both new and existing homes are headed toward record-breaking highs this year.” David Lereah, chief economist for the National Association of Realtors, added this note: “The high volume of sales this year underscores the powerful fundamentals that are driving the housing market – household growth, low interest rates and an improving economy.” * * * More Families are Becoming Homeowners The proportion of American families who own their home keeps rising to record high levels, despite increasing home prices. The reason for this seemingly unlikely scenario was the focus of a recent study by the Research Institute for Housing, an affiliate of the Mortgage Bankers Association. “The results of our study highlight the key role a strong and growing economy plays in the raising of homeownership rates,” said Douglas Duncan, MBA’s chief economist. “The importance of households having a good job with steady income cannot be overstated. This allows them to accumulate savings for a down payment and carry monthly payments. And mortgage lenders continue to work hard at bringing new products and programs to the market to assist qualified families in getting mortgage credit.” The study showed that improved economic conditions and financial status of households associated with higher incomes, better employment opportunities, and demographic changes explain the dramatic increase in the overall homeownership rate during the past decade. The study also showed that households with blemished credit records and with recent problems in their ability to obtain credit can face serious barriers to homeownership. The MBA study also revealed that the homeownership gap between white and both Hispanic and black homeowners rates did not decrease much during the 1990s. However, by 2001 the disproportionate influence of credit barriers on homeownership for blacks relative to whites virtually disappeared. The number of minority renter households that are actively saving for a home purchase is sharply increasing. The proportion of white households actively saving for this purpose remained in the 15 to 20 percent range over the past decade. By 2001, the fraction of minority renters who were saving to purchase a home equaled or exceeded that of white renters, the study revealed. The increasing prices of homes in recent years has been somewhat balanced by decreasing costs of mortgage financing. We not only have near record low mortgage interest rates now available, but an increasing number of new mortgage products that allow homebuyers in certain situations to benefit from lower costs. These factors are allowing many families to purchase their own home earlier than they would otherwise be able to do so. Another key factor contributing to the rising proportion of homeowners is the development of the secondary mortgage market – firms that purchase existing mortgages and provide funds for more loans. The secondary market has given lenders an objective way to gauge credit-worthiness. It lowers closing costs by sparking competition among lenders. It also helps to reduce interest rates and creates an expanding range of mortgage products. And it lures foreign capital to the housing market, making borrowers less vulnerable to local economies. These are the observations of White House economic advisor Todd Buchholz, as expressed in a special report. “The ultimate impact of the secondary market has been enjoyed by families who can become homeowners with lower costs, less hassle, more choice and more peace of mind than ever before,” he said. | 
