Today's Real Estate Reality Blog

Like It Or Not “Cash-In” Refinancing Is All The Rage

If you own a home and/or know someone who owns a home, you have most likely heard of a cash-out refinance. During the economic and housing boom in the early part of the decade, cash-out refinances were all the rage and fueled consumer spending.

Fast forward to the present and check out these recent news headlines.

• “Cash-In Refinancing Rise in Second Quarter: Tied for Third Highest Cash-In Share on Record” – Freddie Mac, July 28, 2010
• “US Borrowers Pay Down Mortgages” – Financial Times, July 28, 2010
• “More Borrowers Are Paying Down Their Mortgages: Freddie Mac” – DSNews.com, July 29, 2010
• “Cash-In Refinancing Nears Record High in Q210: Freddie Mac” – HousingWire.com, July 28, 2010

So what exactly is a ”cash-in” refinance? A “cash-in” refinance is when a borrower brings cash to closing to get the home loan they desire. Yes you heard that correct. A borrower would bring their own money to pay to get the loan they desire.

Frank Nothaft, Freddie Mac’s vice president and chief economist, gives the following statement as to the rationale behind a “cash-in” refinance.

“Interest rates on fixed-rate mortgages are at 50-year lows, making refinancing attractive if borrowers qualify, and similarly rates on savings instruments like CDs are also very low, which makes the choice of paying down mortgage principal very attractive to borrowers with extra cash reserves.”

“If you pay down your mortgage balance you save the interest you would pay on the loan, about 4.6 percent at today’s rates, over the life of the loan versus earning a percentage point or less in CDs and money markets and without the riskiness of stock market investments, which have not performed well in the past couple of years either.”

It seems to make sense unless you read the details of the Freddie Mac 2nd Quarter Cash-Out Refinance Analysis. The report actually states the following as the main causes in the decline of cash-out refinancing:

1. Reduced Home Prices
2. Tighter Underwriting Standards for Loan-To-Value Ratios
3. Negative Appreciation Rates – Declining Home Values

Freddie Mac was quick to declare that “22 percent of homeowners who refinanced their first-lien home mortgage lowered their principal balance by paying-in additional money at the closing table”.

“Cash-In” refinancing is all the rage, not because homeowners want to, but because they have to.

Why Is Your Mortgage Approval Contingent On Form 4506-T

If you are in need of a mortgage, there is one document that could stop you in your tracks. It is IRS Form 4506-T.

What exactly is Form 4506-T?

Form 4506-T, aka. Request for Transcript of Tax Return, allows lending institutions to validate your income by confirming with the Internal Revenue Service (IRS) that you are a lawful tax payer.

For decades, prospective home buyers in Portage Indiana only had to provide their pay stubs, W-2′s and tax returns as proof of their income. Today the aforementioned documentation is just the minimum.

Uncle Sam due to his large role in residential financing (i.e. Fannie Mae, Freddie Mac and FHA) now wants to make sure that you have paid and will continue to pay your taxes.

So what’s the problem you ask?

The problem arises from the very safeguard that Congress mandated. Banks are required and forced to use Form 4506-T in order to validate every one’s income.

The form itself has not changed much over the years. How it is completed to the satisfactory nature of the IRS has though. They even go so far as to put the following disclaimer at the top of the form:

“Request may be rejected if the form is incomplete or illegible.”

Requests for transcripts are rejected by the IRS on a daily basis. The most common errors are illegible handwriting and non-compliant signature dates. A simple typographical error could cause a rejection and the IRS is not required to tell you the source of the rejection.

Most consumers and real estate professionals are not aware of the significance of Form 4506-T as it was used sparingly for loan audits in years past. Now that every loan requires it to be executed, the IRS themselves have become a bottle neck.

Even if you have electronically filed and made an electronic payment of outstanding taxes, the IRS may not be able to validate your tax returns.

How could that be?

Unfortunately, the processing side doesn’t know what the validation side is doing. The two systems are not fully integrated. This is how your mortgage approval and home loan transaction could be delayed.

New Homes Sales Gain in June, But What Does It Mean

After a down month in May, the sales of newly-built homes appears back on track.

As published by the Census Bureau, June’s New Home Sales report showed:

1. A 24 percent sales volume increase from the month prior
2. A 2-month drop in the supply of newly-built home

There are now just 210,000 new homes for sale nationwide.

June’s data is a major improvement over May, but it’s possible that the true “new home market” may be softer than the statistics suggest. This is for several reasons.

First, we’re comparing June’s sales data to the worst month in New Home Sales history.

In May, sales of new homes totaled just 267,000 units nationwide. That’s one-quarter fewer sales than in the previous worst month in New Home Sales history. May’s sales levels were awful by any measure but June’s improvement to 330,000 units remains second-worst sales levels ever posted.

Second, June’s new home supply of 7.6 months is elevated versus the historical norm near 6.0 months.  The last year has averaged 7.7 months.

For buyers of new homes in Chesterton Indiana, this combination of low sales volume and higher-than-normal inventory may be a positive. It’s the main reason why homebuilder confidence is reeling and the downturn has opened some doors for big discounts and deals. Free upgrades and closing cost credits can make a well-priced home even more attractive in Chesterton Indiana.

Plus, home affordability in Chesterton Indiana may never be better with mortgage rates at all-time lows and expected to rise later this fall.

What’s Ahead for Mortgage Rates This Week: July 26th

Mortgage markets worsened last week for the first time in 6 weeks. Investors were pleased with corporate earnings reports and the European bank stress tests results.  Stocks gained on the news, and bonds lost.

Mortgage rates rose last week, but only slightly. Rate are still hovering near their lowest levels of all-time.

Of the bigger stories last week was Existing Home Sales. As reported by the National Association of Realtors®, sales volume was down in June and home supplies were up. But figures were a bit better than expected, giving some hope for housing.

Notably, the number of move-up buyers outnumbered first-timers and the national median home price rose, suggesting that mid-to-upper home prices are getting some support.

This week, the market gets additional two pieces of housing data to add to the mix:

1. New Homes Sales (Monday)
2. Case-Shiller Index (Tuesday)

Both will have an impact on mortgage rates. In general, better-than-expected data should cause rates to rise in Indiana; worse-than-expected data should cause rates to fall.

Also this week, there’s two consumer confidence reports, the Fed’s Beige Book, and late-in-the-week inflationary data.  Mortgage markets should remain volatile with so much news headed down the pipe.

It’s too soon to declare the current 3-month rally over, but it’s been 3 weeks since rates dipped. This can be a signal that mortgage rates have finally bottomed and that it’s time to lock your rate.

If you’re floating a mortgage rate, or thinking about a refinance, it’s time to get locked in. Rates may drop this week, but then again, maybe they won’t. There’s little sense gambling on a bet as big as a mortgage.

Existing Home Sales Drop But Move Up Buyers Rise In June

Consistent with most post-home buyer tax credit housing news, the National Association of Realtors® says Existing Home Sales eased lower last month.

An “existing home” is a home that cannot be considered new construction.

The 5 percent drop in sales from May to June was expected, but a closer look at the month’s data reveals some interesting trends.

First, repeat buyers accounted for 44 percent of home resales in June, up from 40 percent in May. That’s a healthy increase for just 4 weeks’ time and the tax credit is a likely catalyst. First-timer buyers bought starter homes owned by former first-timers, who were then free to “move up” to larger, more expensive property.

Housing markets can be trickle-up and, not coincidentally, the jumbo/luxury housing market is now in the midst of rebound.

Second, June’s “distressed sales” accounted for 32 percent of all home resales, up from 31 percent in May.

A figure like this hints at the large role foreclosures continue to play in a Portage Indiana home buyer’s home search strategy.  And why not? The National Association of Realtors® suggests that distressed homes are sold at a 15 percent discount.

Lastly, take note that home inventories are still rising in Portage Indiana. As of July 16, 2010, there were 262 homes actively listed for sale in Portage Indiana and inventories are back to their highs from December 2009.

Overall, the Existing Home Sales data from June is a mixed bag. There’s support for the middle- and upper-price tiers, but a growing overhang of supply. The market looks favorable for buyers given low mortgage rates and strong negotiation leverage.

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