At the Silvar MLS breakfast meeting this morning a panel of top silicon valley mortgage advisers spoke and had the following comments regarding the continuing changes in the home financing market:

• Continual Change – This is a time of extreme variability for home financing, not seen in the past 20 years.  Lenders are constantly changing programs and rates and there is no consistency between lenders – one lender may have a better interest rate for one program and not another.  The players are constantly changing, too;  i.e., First Federal shut down its wholesale lending facility in February.  Genworth is no longer going to be providing private mortgage insurance.

• Why the moving target? – What’s happening is that lenders temporarily lower rates to grab market share and then when they get too busy they raise rates again to slow the spigot.

• Will rates drop to 4%?  Don’t wait for interest rates to drop to 4% – they may not and, if they do, it will likely be for a very short period of time and the borrower will just be lucky.  Remember that the federal support programs expire mid year 2009.

• Doesn’t the government set mortgage rates?  Street rates for mortgages are not determined by governmental policy – they reflect the “coupon rate” investors are willing to pay for “packaged securities” and the market street rate is generally 1/4% to 3/4% higher than the coupon rate.  For example, last week most of the packaged security transactions had a coupon rate of 4.5% so street rates for mortgages are currently about 5%. This data is published weekly by the Federal Reserve Bank of New York.

• Isn’t credit tight?  There is lots of mortgage money available to loan except in the non-conforming jumbo loan category where there still is not much of a wholesale lending market.

• The stimulus bill, which was just passed Congress and just signed into law will again raise the upper limit for Jumbo Conforming loans (backed by Fannie Mae and Freddie Mac) from $625,500 back up to $729,750, but this has not been processed yet by the backing agencies so currently the max is $625,500.

• Refinancing – There are fewer lending professionals still in the business today, so there is a reduced capacity to process loans, but there is a current boom in refinancing so purchase loans do not necessarily have priority.

• Interest rate buy-downs are now “the thing.”  A month ago if you paid 1 point you would only get 1/4% reduction in the rate; now a 1 point buy-down will get a 1/2 to 1% reduction.

• Seller assistance in financing is also an important factor.  Under FHA rules the seller can pay buyers recurring and non-recurring closing costs up to 6%!

• FHA financing, which in the past was not a significant part of the market because of the high price of homes, is once again important.  In California, FHA is now accounting for 55% of the lending closings!

• Experience Counts - Working with FHA can be frustrating to inexperienced lenders.  There are lots of technical rules which must be complied with.  For example, there is a potential problem with condos built without FHA approval (which includes most of those in silicon valley) and only 10% of the loans in a condo project can be FHA.

• Low Down Payments – FHA is governed by law and not regulation. That is why a buyer with lower FICO score (620+) can still get in with only 3 1/2% downpayment.  FHA is also liberal in accepting part of those low down payment as gifts from related family members.

• PMI - Low down FHA loans require mortgage insurance, but this can even be financed in the loan.

• Documentation – Lenders are asking for information from buyers that they have not asked for in the past – buyers must provide everything asked for or the loan will not close.

• Contingency Periods – Lenders generally need extra time during the contingency period than in the past.  Buyers need to be pre-approved, but the property being purchased also needs to be approved.  21 day contingency times are not unreasonable.

• Appraisals are coming under great scrutiny.  Two appraisals are needed for FHA jumbo loans.  Starting in May 2009 there will be a new code of ethic which limits contact appraisers can have with interested parties so there is no coercion.