Mortgage Rate Watch

Provided courtesy of: http://www.mortgagenewsdaily.com/consumer_rates/

Mortgage Market is Freaking People Out
Tue, 31 Mar 2020 21:30:00 GMT -

There are too many counter-intuitive and frustrating developments in the mortgage market to comprehend all at one time, let alone discuss.  That's not a cop-out as much as it is a favor I'm doing for you.  If we tried to cover all of the nonsensical ground right here, this would become yet another wall of text in this era where they're all too common.  So I'll try to make this pithy and interesting.

The bottom line is that mortgage rates are all over the place, depending on the lender and the loan program.  Lender rates on the same program are farther apart than they've ever been.  Day-to-day and intraday movements are huge and seemingly random.  Whereas mortgage rates typically take a vast majority of their guidance from the trading levels in the mortgage bond market (95%+), the correlation is less than 50% right now.  On many mornings (like today), mortgage bonds say rates should be lower, yet they were unequivocally higher for most lenders.

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Mortgage Rates Are Amazing and Terrible
Wed, 25 Mar 2020 22:42:00 GMT -

Depending on what you're looking at, when you look, and where you look, mortgage rates could either be amazing or terrible.  Large, upstanding, secure, solvent, excellent lenders are as much as a full percentage point apart from one another on the same loan quote.  That essentially NEVER happens in the mortgage market--not with all of those qualifiers anyway. 

This is a symptom of the "mess" that coronavirus has made of the financial market.  For those that want to pretend there's some unique mortgage-specific issue that makes things more difficult for the mortgage market versus other sectors, look around you.  To whatever extent it's been "inconvenient" for the average 401k to lose more than 20% of its value in 3-4 weeks, the mortgage market has faced "inconveniences" on a similar scale.  Compared to airlines, oil, retail, food service, and a laundry list of other sectors hit hard by COVID, the mortgage industry merely gets a participation trophy in this race to terrible.

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Construction Loan

Construction Loan

A construction loan' also called a home construction loan in the United States is any value added loan where the proceeds are used to finance construction of some kind. In the United States Financial Services industry, however, a construction loan is a more specific type of loan, designed for construction and containing features such as interest reserves, where repayment ability may be based on something that can only occur when the project is built. Thus, the defining features of these loans are special monitoring and guidelines above normal loan guidelines to ensure that the project is completed so that repayment can begin to take place.

Underwriting of loans

Almost all lenders are concerned that their money lent is repaid, so underwriting of construction loans usually focuses on how that might occur.

In the most basic situation, that of an individual building a home for themselves, a business building a property for business use, or an investor building a property to rent out, the fundamental guideline is for the lender to imagine once the loan has been fully extended and converted into a normal mortgage and the building is occupied, whether the individual, business, or investor can afford to pay back the loan on a monthly basis. In the case of the individual, where the lender attempts to predict whether the individual can pay each month the loan payment that would occur once the person moves into the house, the lender would be primarily looking at the amount of income the individual receives. In the case of the business, a similar analysis would occur. In the case of an investor building rental property, a special appraisal would be ordered which would attempt to predict what the rents will be and whether they will be enough to pay back the loan, plus all expenses and still give the renter a certain minimum amount of income. The key point here is that no matter how valuable the building might be once completed, almost no lender would extend a loan for more than what the occupier could afford, because even though they will not have to make any payments during construction they would have to make monthly payments once completed and there can be no assurance that the owner would pay down the loan enough to make the monthly payments affordable once the project is completed.

Beyond this guideline, the next most common rule is a minimum cash injection requirement. Even if, for example, a business might be able to afford a monthly payment of a loan high enough to pay for the entire construction project, many lenders would require them to instead use a certain minimum portion of their own cash to complete the project. The reason for this is both to psychologically and economically tie in the owner with the project (hopefully making it less likely that they would walk away from the project if something goes wrong), and to give the lender a cushion whereby if something goes wrong they are more likely to be able to sell the real estate at a value that would better cover the loan amount. This guideline is often termed a "loan to cost" requirement, i.e. the lender will only loan up to 85% of the project costs.

The final major guideline is the maximum loan amount the lender will allow relative to the completed value of the project. This rule is designed to help ensure that, after the project is completed, if the borrower stops paying the payment, the lender can sell the property and hopefully recoup all the funds loaned.

Construction Loans are often extended for developers who are seeking to build something but sell it immediately after building it. In this case, a special appraisal is ordered to attempt to predict the future sales value of the project. The first guideline above, affordability, is usually not used because the owner would immediately attempt to sell the property. However, it is used sometimes for example when a developer is building condominium, the lender might evaluate whether if the project was changed from condominium to apartments if the rents received would more than repay the loan each month. Cash injection requirements are often higher due to the added risk (the immediate need to sell). The loan to value requirements however are often the most impactful. This is because the value is often calculated differently than how people might assume. For example, if a developer is building a 20-unit condominium project, a lender might not just loan a certain percentage of the predicted future total value of the condominium, but only a certain percentage of the value of the condominium project if, because of an emergency or unforeseen circumstance, the entire building had to be sold at once to one buyer (known as a bulk sale). Since the realizable sales price in this case might be much lower, the maximum loan many lenders would extend would be much lower.

 

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