A year ago, 30-year fixed-rate financing was the name of the game. Recently, the adjustable-rate mortgage (ARM) made a comeback.

The 5/1 ARM is popular with some homebuyers and homeowners with equity who are refinancing. The attraction of a 5/1 ARM is that it offers a fixed rate for five years that is significantly lower than what is available on 30-year fixed-rate mortgages.

At the end of May, 5/1 ARMs were available from some lenders with interest rates as low as 3.75 percent with no points. Points refer to the loan origination fee: 1 point is equal to 1 percent of the mortgage amount.

The interest rate on a 30-year fixed-rate loan was as low as 4.5 percent with 1 point. Interest rates vary from one location to the next, and not all mortgage products are available in every state.

Last year, high-end buyers paid a premium for jumbo financing, if they could find it at all. At the end of May, some lenders offered 5/1 ARMs for 4.5 percent in amounts up to $1 million to borrowers with a 20 percent cash downpayment, and up to $2 million or more with 25 percent down.

The downside of a 5/1 ARM is that at the end of the fifth year, your mortgage payments could jump significantly. To determine your new interest rate when the five years of fixed-rate financing expires, a margin is added to an index that fluctuates over time to arrive at your ARM rate for the next year. There should be a cap on how high the rate can go each time it adjusts (in this case, annually) after the initial five-year period.

Let's say the index on your 5/1 ARM is the 1-year constant-maturity Treasury rate (CMT). In April 2010, the CMT was 0.45 percent. If you're margin is 2.75 percent, and your mortgage converted to an ARM in April 2010, your new interest rate would have been 3.2 percent. However, in April 2006, the CMT was 5.9 percent, which would have given you an interest rate of 8.65 percent and a huge jump in your mortgage payments.

HOUSE HUNTING TIP: Often the initial fixed-rate payments on a 5/1 ARM are interest only. Some 5/1 ARMs start at a rate -- called a teaser rate -- that is lower than the current index plus the margin. This could result in a significant rate and monthly payment increase at the first adjustment. Make sure your 5/1 ARM doesn't have a prepayment penalty, so that you have the flexibility to pay down the principal balance at any time without penalty.

One way to protect against a large increase in your mortgage payment when the loan converts from fixed-rate to adjustable is to pay down the principal balance. Each time the interest rate changes, an ARM is recast so that the monthly payments are based on the new principal balance.

Despite the savings possible in the first five years of a 5/1 ARM, low fixed-rate mortgages are the choice of most homebuyers and borrowers who plan to stay put for the long term. In the current volatile housing market, buying for the long haul is a good strategy.

Homeowners who don't intend to stay long in their home are good candidates for a refinance to a 5/1 ARM. For example, empty-nesters who plan to trade down to a smaller home within the next five years would pay the loan off before it converted to an ARM, with possibly much higher monthly payments.

It's even possible to get cash back on a 5/1 ARM refinance, or consolidate debt, as long as you have sufficient equity in your home.

THE CLOSING: On a refinance, some lenders will lend up to 80 percent of the appraised value, less loans you already have secured against the property.

By Dian Hymer, Tuesday, July 6, 2010.

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Fannie Mae has put lenders on official notice that they can only use appraisers who are knowledgeable about the area in which they are being asked to value property, and who have the ability to access records on recent sales in those markets.

In a June 30 notice updating several policies related to appraisals, Fannie Mae also fleshed out previous guidance to lenders on the selection and use of comparable sales, saying appraisers must consider a property's condition when choosing to use foreclosure sales or short sales as comps.

Fannie Mae is also barring lenders from making unilateral changes to appraisal reports, including the appraised value, saying only the appraiser who completed the original report is authorized to change it.

If lenders can't work out their difference with the appraiser, they can order a formal review or a new appraisal, Fannie Mae said, but must stick with the new appraisal's findings.

The mortgage securitization giant also said that new rules for appraisals adopted last year by Fannie Mae and Freddie Mac don't bar Realtors or other authorized third parties from requesting that appraisers correct factual errors in their reports, or provide additional information or explanations about the basis for their valuations.

Some lenders cited the new rules as justification for policies that prohibit communications with appraisers, Fannie Mae said.

Since the new rules for appraisals were adopted in May 2009, Realtors have complained that lenders have been relying more on appraisal management companies, and that appraisals are more likely to fall short of the contracted sales price.

The Home Valuation Code of Conduct, a product of New York Attorney General Andrew Cuomo's investigation of the mortgage securitization process, was intended to protect appraisers from coercion by lenders.

Although it does not require lenders to use appraisal management companies, commonly referred to as AMCs, many lenders choose to employ AMCs to ensure they are compliance with the code.

Realtors and independent appraisers claim that AMCs often employ appraisers with little experience in the markets in which they are asked to provide valuations. Builders have also complained that the inappropriate use of distressed properties as comps have dented new-home prices.

Federal regulators that oversee Fannie Mae and Freddie Mac have defended the code of conduct, saying it's improved the quality of appraisals.

In ruling that Fannie and Freddie would not be required to fund an independent institute to investigate complaints about attempted violations of the rules, the Federal Housing Finance Agency noted that the code will no longer be in effect after Nov. 1.

Language in the financial reform bill now under consideration by lawmakers would require a new Consumer Financial Protection Bureau to draft new interim rules for protecting appraiser independence within 90 days of the bill's passage that would supersede the Home Valuation Code of Conduct.

In the meantime, Fannie Mae says post-purchase reviews of mortgage loan files have identified issues with appraisals, leading it to add new policy requirements and clarifications to a number of appraisal sections of the selling guide it publishes for lenders.

Appraiser selection

The new guidance on appraiser selection begins on page 476 of the selling guide, and is effective immediately. Lenders must use appraisers who "have the requisite knowledge required to perform a professional quality appraisal for the specific geographic location and particular property type," Fannie Mae said, as well as access to "necessary and appropriate data sources for the area in which the appraisal assignment is located."

Although the Uniform Standards of Professional Appraisal Practice (USPAP) spell out procedures that allow appraisers who haven't demonstrated their knowledge and experience to accept and complete assignments, Fannie Mae said it will not allow that flexibility.

"In addition to knowledge, experience, access to the appropriate data sources, and geographical competence, the quality of appraisal work is a key criterion that the lender should use in selecting an appraiser," Fannie Mae said. The requirement for an appraiser to produce a high-quality work product "must always outweigh fee or turnaround time considerations."

The Federal Housing Administration adopted new appraisal guidelines on Feb. 15 that include "geographic competency" requirements.

Choosing comps

Guidance to lenders on the selection and use of comparable sales begins on page 532 of the selling guide, and is effective immediately.

Appraisers will be required to perform a neighborhood analysis in order to identify the area that is subject to the same influences as the property being appraised, based on the actions of typical buyers in the market area.

If an appraiser believes a foreclosure sale or a short sale within that area is an appropriate comp, the appraiser cannot assume it is equal to the subject property, Fannie Mae said. Appraisers are required to identify and consider any differences from the subject property, such as the condition of the home and whether any stigma has been associated with it.

When performing valuations of newly built homes, appraisers may need to rely solely on the builder of the property for comparable sales data, Fannie Mae said.

If comparable sales data is not available from typical sources, such as public records or multiple listing services, appraisers are permitted to verify recent sales of new homes by viewing a copy of the HUD-1 settlement statement from the builder's file.

Fannie Mae will continue to require at least three comparable sales, although more may be submitted. While comps from the subject property's neighborhood are preferred, comps located in competing neighborhoods are allowed, as "these may simply be the best comparables available and the most appropriate for the appraiser's analysis," Fannie Mae said.

When that situation arises, appraisers must indicate the comparables are from a competing neighborhood, and address any differences that exist, instead of simply expanding the subject property's neighborhood boundaries to encompass the comps selected.

Lender changes

Guidance on lender changes to appraised value and guidance on addressing appraisal deficiencies begins on page 543 of the selling guide, and applies to all loan applications dated on or after Sept. 1, 2010.

If lenders have issues with any findings in an appraisal report, including the appraised value, they must attempt to resolve their concerns with the appraiser who originally prepared the report, Fannie Mae said.

"It is not acceptable for the lender to exercise blanket discretion by arbitrarily changing the opinion of market value from a report for use in the lending process," Fannie Mae said.

Only the appraiser who originally completed the report is authorized to make changes. If lenders can't resolve their concerns, they may order another appraisal report, but must rely solely on that report's estimate of market value.

Lenders cannot "simply average the two opinions of market value in order to arrive at a final value conclusion," Fannie Mae warned.

In another miscellaneous change to policies governing appraisal forms and report exhibits beginning on page 492 of the selling guide, Fannie Mae stated that for loan applications filed on or after Sept. 1, 2010, it would require interior photographs of specific rooms and areas whenever an interior inspection is performed.

By Inman News, Wednesday, July 7, 2010.

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Freddie Mac (OTC: FMCC) today released the results of its Primary Mortgage Market Survey® (PMMS®), with the 30-year and 15-year fixed-rate mortgages reaching record lows for this survey. (The 30-year fixed-rate survey began in 1971, and the 15-year began in 1991.)

30-year fixed-rate mortgage (FRM) averaged 4.56 percent with an average 0.7 point for the week ending July 22, 2010, down from last week when it averaged 4.57 percent. Last year at this time, the 30-year FRM averaged 5.20 percent.

15-year FRM this week averaged a record low of 4.03 percent with an average 0.7 point, down from last week when it averaged 4.06 percent. A year ago at this time, the 15-year FRM averaged 4.68 percent.

5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 3.79 percent this week, with an average 0.6 point, down from last week when it averaged 3.85 percent. A year ago, the 5-year ARM averaged 4.74 percent.

1-year Treasury-indexed ARM averaged 3.70 percent this week with an average 0.7 point, down from last week when it averaged 3.74 percent. At this time last year, the 1-year ARM averaged 4.77 percent.

Frank Nothaft, vice president and chief economist, Freddie Mac, notes: "The decline in mortgages rates over the past few weeks echoes the recent signs of weakening confidence in the strength of the economy, particularly the housing and consumer sectors. For example, homebuilder confidence declined in July to lows not seen since April 2009, as measured by the NAHB/Wells Fargo Housing Market Index, following the large drop in housing starts reported for June."

"Similarly, July's consumer confidence dropped to the lowest level since August 2009, based on the Reuters/University of Michigan's Consumer Sentiment index. We see these as part of the normal pattern of ebbs and flows in recovery and believe that there is sufficient momentum to carry the U.S. economy forward, albeit moderately."

Published: July 23, 2010

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With the uncertainty of the economy, many people are looking for ways to cut back. When it comes to selling their home, homeowners often don't want to put much money into getting it ready for the sale. While that's certainly understandable, properly preparing a home before listing it goes a long way to helping attract serious buyers and offers.

It's not that you have to upgrade or completely renovate a room in order to make your home more marketable. Polishing up and tiding up a few key areas can have a remarkable impact. With that in mind, you don't have to spend a fortune to do this. In fact, you can make your home appealing even on a budget. Here's a few ways.

Whether or not your buyers cook, all seem to be interested in the kitchen. So this is where we begin. Chipped cabinets with peeling paint are unsightly. I've seen kitchens where the countertops are nice—maybe granite—but the cabinets are a shocking mess. It's a simple solution to reface them. It doesn't have to cost a lot. A new paint job for the kitchen walls and cabinets can give the whole area an updated look and make the kitchen area inviting even to those who rarely use it! You might also consider replacing the cabinet handles—you'd be amazed how much difference that makes. One last thing, don't leave dirty dishes in the sink. Remember the adage: the way you live in a home is not the way you stage it.

This next tip refers not to one particular area but instead to highly trafficked areas. Doorways, hallways, the lower part of walls, and baseboard trim—anywhere else where those nasty scuff marks, fingerprints, and dust settle in. Put a little elbow grease into washing and/or repainting those areas and notice what a difference it makes. I remember when I used to list real estate I went into a home and saw tons of pictures taped to a teenager's door. It was a nightmare. The homeowner eventually peeled off the pictures and repainted the door, so much more attractive. If you're dealing with a small space, you might try something that may seem counter-intuitive. The Star Tribune reported that moving furniture 1.5 to 2 feet away from the walls can help to make a room look larger. Pressing furniture up against the wall gives it a crammed look.

Mow your lawn and water the plants. It sounds so basic but really this is often overlooked. In the hurry, to pack boxes, shove items in closets, and get the pets out of the house before an open house, homeowners sometimes neglect to take care of the landscape. Thus flowers start to wilt, the grass browns and the overall yard has an everyone-forgot-about-me look. For more tips read my column, Simple Way to Grow Healthy Lawn.

Grout your way into buyers' hearts. Yes, the fine lines do matter. Walk into your bathroom after reading this article and look carefully at your tub and tile on the floor. Does it look grubby? Need a good scrubbing? Or does it really need to be re-grouted? That soap scum build-up and mold will really stand out to buyers. And while fixing it doesn't take much, sometimes homeowners simple opt not to take care of this before listing. Maybe they presume that it's not that big of a deal and that it's an easy fix. The first part is incorrect and the latter is absolutely correct—so roll up your sleeves and fill in the lines. It could just lead to the signing on the line on sales contract. Best advice is to see your own home the way you survey a home that you'd like to buy—that's typically with a very critical eye. Then fix it up. The changes could result in a faster sale at a higher price.

by Phoebe Chongchua
Published: July 23, 2010

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