Where are mortgage rates headed? What to watch.

Fannie Mae’s 30 year mortgage rates have fallen more than 9% over the past 60 days after hitting a high of 3.84% in mid-March.  This is after increasing more than 20% from early November, just before the presidential election.  So what should we be looking at for 2017 as we try to divine the future of mortgage rates and the potential impact on residential real estate?  We’d focus on three things, in this order.  First, and maybe most importantly, we’d focus on the new administration’s tax, trade and regulatory policies.  Both the equity and long-term bond markets have baked in expectations that the new administration and the Republican controlled Senate and House will reduce corporate taxes (and maybe personal taxes) and reduce or simplify regulations that restrict business.  To the extent these expectations are unmet, we’ll see 10-year treasury yields slide which should push 30 year mortgage rates down.  Second, long-term bond yields are tied to long-term growth expectations.  Watch for weakness (or strength) in employment and inflation numbers.  Mortgage rates are only indirectly influenced by Federal Reserve interest rate policy.  They are much more directly influenced by expected economic strength.  Finally, we would watch what the Federal Reserve does with respect to working down its balance sheet.  During the Great Recession, the Fed’s balance sheet grew to $4.5 trillion from less than $1 trillion.  The Fed has announced its intention to begin to reduce the size of its balance sheet.  This likely will involve some combination of selling assets and simply not buying more of various assets that come due.  This all makes sense.  The Fed needs to work itself back into a position where it has some tools at its disposal to effectively assist during the next recession.  Nonetheless, the pace at which the Fed ultimately moves to reduce the size of its balance sheet will put upward pricing pressure on U.S. Government bonds which should in turn put upward pressure on 30 year mortgage rates.

DSCR versus No-DSCR Loan Products

Lending is a pretty boring business devoid of genuine innovation.  Some refer to it as the second oldest profession.  Very little is new under the sun with it.  Nonetheless, us lenders sometimes try to employ the left sides of our brains.  The end result often either is a poorly conceived loan product or a terribly named loan product.  Such is the case with the burgeoning class of single-family rental loan products that refer to themselves as “DSCR or No-DSCR” loans.  What in the world does that mean?  DSCR stands for “debt service coverage.”  That is about as clear as mud.  Debt service coverage is fancy lender speak for “does the monthly rent for the property generate enough cash flow to pay the monthly mortgage payment, property taxes and property insurance.”  So what is a DSCR loan and what is a No-DSCR loan?  A DSCR loan is a loan where the ratio of the monthly rent to the monthly principal, interest, taxes, insurance and association dues drives the overall size and pricing of the loan.  A No-DSCR loan is a loan where that same ratio is considered but is not the only, or maybe not even the primary consideration that the lender uses to price and size the loan.  The No-DSCR loan is a DSCR loan, it is simply poorly named.

Why is this important now?  This week we announced a new loan offering, the LTRFlex Custom, a low or flexible DSCR product.  This new offering is designed for the active real estate investor that may not be seeking only cash flow, but instead long-term property appreciation, when they assess the health of their buy and hold portfolio.  So, when we consider customer applications for the LTRFlex Custom, we consider a blend of the cash flow and appreciation potential of the property, as well as the creditworthiness and investment experience of the customer. 

If you'd like to get more information on our LTRFlex Custom program, you can contact your Account Executive or fill out a form here to have a representative get in touch with you.

Investing Using an IRA – Is it for You?

Ever thought of investing in properties using an IRA? For many investors, it’s a viable option, but it can come with a price if not done correctly. U.S. News and World Report recently tackled this subject in an article highlighting the benefits and pitfalls of investing using funds from an IRA.

Described as “not a passive investment,” the author suggests that only experienced investors should buy property using an IRA. Part of the reason for this advice is the “hoops” investors have to jump through as well as the requirement for investors to use a custodian in the transaction, which is a company that can hold their assets, or a trustee.

On the other hand, for savvy, high-net worth investors, using a self-directed IRA can serve as a tax deferment strategy. In addition, using a Roth IRA allows investors to transfer their property tax free. For a traditional IRA, investors will pay taxes when the account is paid out, whereas with a Roth IRA, investors can withdraw without having to pay taxes under the condition that it is a qualified distribution (a five-year holding period and the investor must be 59.5 years of age or considered disabled).

Despite the tax benefits, the author advises that the average investor shy away from using this strategy, stating that concerns include illiquidity and following detailed laws from the IRS. For example, one cannot use an IRA for a rental and then end up using the home for personal reasons.

Also, there are guidelines regarding how the property can be repaired and how much compensation can be collected to name a few. Violating these rules can cost big, with one prohibited transaction triggering a business tax, causing the full IRA to become taxable.

One final word of advice? Take note of the fees involved with a transaction such as this. Trustees charge transaction and other fees, and with so few trustees specializing in IRAs, they often charge several hundred dollars per property. To read the full article, click here.

Foreclosures Down from 2015

According to CoreLogic’s 2016 National Foreclosure Report, the country’s foreclosures, both inventory and completions, is down from one year prior. Inventory was down 29.1 percent, while completions were down 16.5 percent from July 2015.

Foreclosure completions totaled 34,000, down from 41,000 in 2015. In September 2010 at the peak of the housing crisis, there were 118,009 foreclosure completions. Foreclosure completions indicate total homes lost to foreclosure, while foreclosure inventory refers to homes at any stage of the process.

Foreclosure inventory in July 2016 totaled 355,000 or 0.9 percent of homes with mortgages, down from 501,000 or 1.3 percent of total homes last year.  

Study of Craigslist Ads Shows State of the Housing Market

Craigslist, love it or hate it, has become the resting place of all kinds of housing ads in markets across the country. Large homes, small homes and apartments are all listed on the site, posted by everyone from mom and pop shops and independent landlords to large companies and nationwide realtors.

That’s why researchers at the University of Berkeley chose to look at millions of Craigslist posts to uncover details about the housing market in a new way. With more rental cost data than commercial providers can give and better real-time information than the Census Bureau, Craigslist seemed like the best place for the Berkley Urban Analytics Lab to start to gather housing market data.

What they found, reported on in the Washington Post, reveals familiar news—New York, San Francisco, Boston and North Dakota have the most expensive rents in the country. The data also showed some new trends including the monetary difference between the most expensive and least expensive rents in each city.

It also found the differences in each market as to what is available in lower-cost options. For example, a renter will have a hard time finding a San Francisco apartment at the running cost of Atlanta housing. For many more expensive cities, lower-cost units are not widely available.

Researchers identified some problems with the data, including that not all landlords/apartments use Craigslist for advertising, some markets rely more heavily on brokers and others had more plentiful posts. But by taking 1.5 million posts from 2014, they believe that they reported some very useful insights.

To read the full article published in the Journal of Planning, Education and Research click here.  

Financing a Short-term Rental (Vacation) Property

By: Jeff Ball, CEO, Visio Lending

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So, you’re taking the plunge and buying your dream vacation property. You and your family will love it, and you plan to rent it out to help cover expenses. Or, maybe you already own a vacation rental and have done so well on short-term rentals (STRs) that you are interested in buying one, two or even many more. What are your financing options?

Your financing options fall into three main buckets: conventional, portfolio and alternative. We’ll start with the simplest case. If you are buying your first vacation property, you probably should start by looking at a conventional mortgage (Quicken, Wells Fargo, Chase, etc.) similar to the loan you have on your primary residence.  Rates and fees will be pretty similar to what you can expect on your primary residence.

To qualify, you’ll need to put 10%-20% down, have two to 12 months cash reserves (the amount depends on your credit score and down payment), and your monthly combined mortgage payments on your primary residence and second home (including taxes, insurance and any HOA dues) cannot exceed 45% of your gross monthly income. In meeting this requirement, the lender will assume you won’t generate any income from renting your new home. So you’ll need to meet the gross monthly income requirement without any rent credit. Plan on 60-120 days to close. Also plan on providing your full tax returns, a lot of income and asset verification documentation, and a variety of letters of explanation.

But what if you are self-employed, or maybe asset-rich but with little taxable monthly income, or maybe you already own a number of rental homes? In these situations, you should skip conventional and go straight to evaluating portfolio and alternative mortgage solutions. Portfolio is just a fancy way of saying, “community bank.” If you have a good credit and have an ongoing relationship with a local bank, then you should talk to them to see if they might finance your new home purchase.

Typically, these loans will be a bit more expensive in terms of fees and rate than a conventional loan. Also, they usually will amortize over 15 or 20 years rather than 30 years, and include a “balloon” payment after five years. But your local community bank will hold this loan in their loan portfolio (hence the name), so they can be a bit more flexible than a conventional lender. Again, plan on a lot of documentation and 60-120 days to close.

Alternative mortgage lenders typically offer a faster, smoother process with more approval flexibility, but at higher costs. At Visio Lending, we offer our 30-year STRPro that has a fixed interest rate for seven years. On the STRPro, we need to know your credit score and then we underwrite your loan on the potential rental stream your vacation property could generate if used as a short-term rental property. 

Our rates and fees are higher than a conventional or bank portfolio lender, but our process is fast (usually 21 business days or less), simple (less documentation) and dependable. And because we offer a full 30-year term, the monthly payment on the STRPro will be similar or maybe even lower than with a portfolio loan. With our STRPro, an investor can build a portfolio of cash flow generating short-term vacation rental properties as part of their overall investing strategy.

STRs, including vacation rentals, are an exciting and rapidly growing new asset classes. Airbnb and HomeAway, among others, are raising awareness of this exciting new opportunity. Others are building next-generation property management tools and companies to help owners efficiently manage their STRs.

For example, Rented.com adds an interesting twist by enabling property owners to solicit competitive bids from property management companies, including bids that guarantee monthly rental cash flow to the owner. Using sites like Rented.com can help you plan your STR strategy even better.

To find out more, visit www.visiolending.com and www.rented.com.