Mortgage loans in Cook County just got a little more complicated. The new anti-predatory lending bill, SB1167, goes into affect today, July 1st. One of the provisions of the bill was to set up a database to keep track of all loans originated in Cook County. Borrowers who fall into certain risk categories will need to get counseling before they can close on their mortgage.

According to SB1167, all loans recorded in Cook County after 7/1/2008 are going to require either a Certificate of Exemption, or a Certificate of Compliance attached to the mortgage. The certificates will be printed from the Anti Predatory Lending Database web site set up by Cook County. Mortgage brokers and mortgage bankers who handle mortgages in Chicago and throughout Cook County are now required to enter the loan in the data base at the start of the transaction. This only applies to owner-occupied 1-4 unit residential properties.

Not every borrower needs the counseling though. The conditions that will trigger the counseling requirement are:

• Any purchase transaction where all borrowers are first time home buyers OR Any primary residence refinance where the loan has one of the features below.

1. The loan has an interest only feature
2. The loan has a prepayment penalty
3. The loan has a negative amortization feature
4. Total points and fees exceed 5%.
5. The loan is an ARM with an interest rate adjustment within the first 3 years. (We’ve been informed by the IAMP that 3/1 ARMs WILL require counseling, even though you may think that the rate adjustments are not “within the first 3 years, but occur after 3 years.)

The following loans are exempt from the counseling requirement: Reverse mortgages, Non-owner occupied (investment), Commercial and multi-family over 4 units.

Predatory lending has been the cause of a lot of foreclosures and a lot of ruined lives. Anything that can put a stop to it is worth doing. But like so many laws this solution isn’t going to have the impact that it is hoping for. For one thing, the real estate market has slowed down and mortgage guidelines have tightened. It’s not as easy to commit fraud when people are paying attention so a lot of the quick-buck sharks and sleazy operators have moved on. The other factor is that the market is ahead of the curve on a lot of these provisions. The loan features that trigger counseling are all features of sub-prime loans, mortgages for borrowers who couldn’t fit into the normal conventional guidelines. Sub-prime loans were the first casualty in the mortgage melt down last year, and no one is making those loans anymore. There will be some sophisticated borrowers who may be forced into counseling because they chose to refinance with an interest only mortgage for the cash-flow benefits, but if first time home buyers are taking on loans with these features they need to know exactly what they are getting into. The law will mean some loans will take a little longer, and it will add an extra step to the process. But who knows, maybe it will even help some people.

Illinois Mortgage Rates and News

Over the last year mortgage qualification has become increasingly harder. Two new changes go into affect next week which will ratchet loan approvals a little tighter still.

One is a change that only affects mortgages here in Illinois. Senate Bill 1167 will become law as of June 1^st. This law is aimed at predatory lending and the problems caused by sub-prime loans. It restricts the types of loans available, requires home buyers counseling for home buyers in Cook County who are taking out specific types of loans, and it requires more transparency so the consumer knows exactly what they are getting when they enter into any mortgage financing. There are some good features in this bill, but most of what they are legislating against has already gone away due to market forces in the mortgage market. Sub-prime loans have been a big problem and there is no question that they were abused. But there is no such thing as a sub-prime mortgage now, so this bill is coming too late to make any real impact.

The one part of this that is going to hurt some is that stated income loans will no longer be available in Illinois. Stated income loans were loans which didn’t verify the borrower’s income, but took whatever was stated as the Gospel truth. As you can imagine, this was a license for abuse, and there were way too many borrowers who bought homes with no idea how they would pay for them. That said, stated income loans do make sense for well qualified borrowers with complicated tax returns – self employed borrowers. These loans, like so many others, have been disappearing over the last year. The guidelines in the law are somewhat vague as to what is considered stated income, but the lenders who were offering this program are taking the cautious path, and are withdrawing from the market. It looks like this will be the final nail in the coffin for any loans that don’t verify income, which means it will be harder for self employed borrowers to qualify for a mortgage.

The other big change is that Fannie Mae brings out their new version of their automated underwriting system, DU 7.0. Most conventional loans are approved through the automated underwriting system, so this will have a huge impact on how loans are approved. On the good side, this version does away with the declining market policy. Last December, in a reaction to the down turn in the housing market, Fannie Mae came up with a plan to identify markets where the prices were falling, and require a higher down payment in those areas. The plan basically made it harder to get financing in the areas that needed it most, and was not a popular move. So getting rid of this plan is a step in the right direction. It will be looked at as a bigger step if the mortgage insurance companies follow the lead and stop their declining market policies, too. The rest of the changes in version 7.0 are not going to be positives for mortgage borrowers. Some of the changes include:

• Borrowers must wait a longer time after a bankruptcy or foreclosure before they can get a mortgage again, and when they are ready they will need a higher down payment and a better credit score.
• Debt to income ratios, that is how much debt you are carrying, will be much lower.
• Condos will now be considered riskier, and harder to approve.
• Having mortgage insurance on your loan will not reduce the risk of having less than a 20% down payment.
• ARMs will be considered riskier than fixed rate loans.

There’s more, but the bottom line is that this is a way of tightening more, and some borrowers who will qualify for a loan today, may not next week.

Illinois Mortgage Rates and News

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First Time Home Buyers Loan : Tax Benefits Make Real Estate a Smart Investment for Chicago Area First Time Home Buyers

Oil prices are up to record highs. Last week the price went as high as $135 per barrel, and I’ve seen predictions that it will be $150 or even $200 per barrel by the end of the year. We’ve all seen how this spike in prices has affected gas prices at the pump. Yesterday I filled up at $4.20 per gallon, about $15 a tank higher than what I’ve gotten used to paying (which already seemed too high). Depending on how much you drive, this extra cost is taking a nice sized bite out of your disposable income. Add that to the effect of higher gas prices on the economy as a whole, everything that needs transportation (both goods and people) now costs more, as does anything which is made with oil (fertilizer, plastics and so on). This means that prices in general are going up. So the question of the day is how does this affect our housing market here in Chicago and throughout the Chicago area?

The people who are feeling this the most are the people who have the longest drives to work. Over the last years the Chicago suburbs have spread out further and further. New roads have opened up and areas that used to be farm land, like Plainfield, Oswego and Huntley, are now booming suburbs. On the good side you can buy a lot more house for your money in these areas. The bad side is long commutes and now, with higher gas prices, much higher transportation costs. The growth in these areas has already slowed down because of the soft housing market. Will the high gas prices slow development in the far suburbs long term? Maybe. But only if gas prices stay high.

Part of the increase in oil prices is speculative. When ever a market starts moving in one direction, speculators jump on for the ride, magnifying the move. High speculation can lead to a bubble, and when the bubble pops prices fall. With the economy slowing down the natural effect of higher prices will lower demand. Also, the high prices will lead to more oil production, maybe in areas which were cost prohibitive before, but will now make sense with the higher price per barrel. So over time the supply will increase. After the Iranian revolution in 79 and through the early 80s the price of oil surged to record highs, and then dropped back down to the same level it was at before. It could be different this time though. India and China are growing and using more oil and some think we are nearing peak oil, which means the oil that is left will be harder to get to and harder to get out of the ground. These trends point to higher prices long term.

So if oil prices do stay high, how will this affect the real estate market? The conventional wisdom says -

• Demand will be higher for houses in the city and close to public transportation.
• Energy efficient housing will go main stream and there will probably be more tax breaks.
• Interest rate may move higher long term, as higher fuel prices feed inflation.
• Suburban sprawl will slow down over the long term.

I think these are all accurate predictions – if oil keeps going higher – but if history is a guide, I think it will be a while before we see any of these predictions come off in a major way. Oil prices were around $90 per barrel at the beginning of the year, so we have had almost a 50% increase since then. The question is whether the prices will continue to climb and, how far will they go. My guess is that we will have higher gas prices long-term, but there are reasons to think that prices will come down some first, and that we will get used to higher prices.

• The economy is slowing down and with consumers having less money in their pockets, or feeling like they have less money in their pockets, demand for energy will naturally slow down.
• People are driving less because of the high cost of gas. Travel was down considerably over the Memorial Day weekend.
• People will not only change their driving habits, they will also change what they drive. SUV sales have been circling the drain all year, and Hybrid sales have gone through the roof.
• Over time people get used to higher prices, and it will take a big increase before people change their habits for good.
• A lot of the increase in oil prices is due to speculation, and what goes up fast will often come down just as fast.

So my opinion is that oil prices will make people feel poorer for a while, but I don’t think they will make a huge difference in their home buying decisions. At least not for a while. I do think the far suburbs are going to take longer to recover, and high gas prices are part of that, but over building and high commuting times are bigger factors.

Illinois Mortgage Rates and News

A recent article in the Chicago Tribune talked about the amount of new condo units coming on the market this year here in Chicago. According to the article 5,984 units are due to come on the market this year. Last year there were 4,794 new units, and next year they are projecting 4,160 units. Condo construction has been a big part of the city’s resurgence over the last years, and the new condo units help to revitalize neighborhoods. But with so many units coming onto an already glutted market, at the same time that condo financing is getting increasingly more stringent, we are sure to see some problems.

Over the last few years we have seen a boom in new condos, both in Chicago and throughout the Chicago suburban area. Part of these were new construction condos, and a lot were conversions from apartment buildings to condo units. The condo conversions made sense when the market was flying. If you could buy an apartment building based on the rental income it produced, make some improvements to the property and change the ownership to condominium, the developers could sell the new units at a much higher per unit basis, ensuring a huge profit. The same economics apply to new construction condos, but the lead time between starting the project and finishing can take much longer. Because of the longer lead time, we are now seeing a surge in new units coming on the market, even though the market has shifted and demand is much lower than it was a year or two back.

Even as more condos are coming on the market, condo financing is getting tougher. Mortgage qualification has gone through a series of tightening over the last 9 months, and it is harder for most buyers to qualify than it was before, but this is especially true of condos. Condos carry a higher risk because the lender has to measure the risk of not only the borrower, but also the condo project. When processing a loan for a condo we need to send out a condo questionnaire which asks information about how many units have been sold and closed, how many units are owned by investors and what financial shape the condo association is in. In order to qualify for the best financing, the condo needs to meet Fannie Mae guidelines. Condo projects that have a history have an easier time, but they are still looked at as riskier than a single family home and some lenders require more documentation and charge premium pricing to finance any condo unit. But it gets tougher for new and rehab condos which have to go over a higher hurdle than existing condo units. Fannie Mae (and Freddie Mac) require a higher down payment and pre-sale requirements for early buyers. Not long ago there were lots of lenders willing to offer mortgages for condos that didn’t meet these guidelines, no matter how much they had available for their down payment. We still have lots of condo financing sources, but now lenders are pulling back. With less buyers able to qualify for financing, this means that there are fewer buyers, period.

The article picked up on this trend in the city, but the same thing is happening throughout the suburbs, too. I know of one large apartment complex in Naperville that converted to condo last year, but now has a sign offering condos for rent. The real estate market is slow right now, and the added units keep prices down until the supply of units is absorbed by new buyers, or possibly renters. New construction for single family homes has already ground to near a halt. With less new properties coming on the market this will help reduce the supply and this will act as a kick start when the real estate market starts to pick up again. It won’t be the same with the condo market. When the market for single family homes is on the upswing, condos will still be behind the curve.

The Check is in the mail – The first batch of economic stimulus checks are going out this week. Anyone who files a tax return up through October of this year is eligible, and with payouts of up to $600 per individual and $300 for each child under 17, this should cover several tanks of gas. What are you planning to do with your check? The idea behind the checks is the hope that if everyone goes out and buys something, this will kick the economy back in gear. There are of course, a few problems with this theory. First of all, not everyone is going to buy something. If you are feeling the economic pinch, you might rest easier putting this money in your savings account or paying off your credit cards. And those who do their civic duty and go out shopping are likely to buy foreign goods which will give a more limited kick. But if the checks make people feel more confident about their own finances, then the plan will have done its job. I think it will take more than this to prime the pump.

Take a ride on the Foreclosure Bus – I live in Dupage County, in the Western Suburbs of Chicago. The other day I noticed a number of small plastic signs set strategically along the side of the road. You’ve seen these kinds of signs before, they are often an ugly yellow that demands attention, and they usually appeal to some basic need, like sex or money. More specifically they tout themselves as the answer to what you need. Two examples are: Real Estate Investor Needs Apprentice – $40,000 per month, or Downers Grove (or Lisle, Wheaton, Glen Ellyn, insert your town) Singles Wanted, with a web site or phone number underneath. This was a new sign, one I hadn’t seen before. This one read: Tour Foreclosures by Bus. Now this got my curiosity going. I know that Hollywood has a tour of celebrity homes, and Chicago has architectural tours and ghost tours and all sorts of tourism related activities. But taking a tour of foreclosed properties seems a little bizarre. I know there are investors who are looking for ways to take advantage of the real estate slow down, and foreclosed properties sound like a natural. It’s not always easy to find the bargains, though. I have an investor client who put an offer on a pre-foreclosed property (a short sale – this is where the lender would have to agree to let the buyer buy for less than the full amount of the mortgage so they don’t have to go to the expense of foreclosing the property) 3 months ago. He’s still waiting for an answer. I called the number on the sign and was referred to a web site. The web site offers several tours in an “air conditioned bus” stopping at a variety of pre-foreclosed and bank owned properties. A Realtor is giving the tour and you will be able to make offers on the homes if you choose. The bus isn’t free, though. A ticket for one tour cost about $100, another tour of luxury homes was priced at over $300. But lunch is included. It is a sad fact of life that foreclosures are on the rise, even in the nicest areas. But if you are looking to invest, you don’t have to take a bus. If you are looking for investment property and need the name of a Realtor who can help you, let me know and I’ll direct you to an expert who can offer personalized service.

The Waiting Game – Tomorrow is a big day for those who are watching interest rates. The Federal Open Market Committee (the Fed) is expected to lower short term rates again by an anticipated .25 point. This cut is already built into the pricing, but the real interest is in what the Fed will say when they announce the cut. The last 2 meetings have ended up with major rate cuts, but some dissent from inside, as some Fed members worry that the rapid cuts in rate will go too far and fuel inflation. The conventional wisdom now is that the Fed is nearing the end of their series of cuts (for now, at least). If they say this in their announcement, look for mortgage bonds to surge and mortgage rates to fall. The Chicago PMI and the GDP (both show signs of strength or weakness in the economy) will also be released, so this should be a wild day for interest rates. I’ve been looking for rates to go lower, and I stand by that prediction.

Illinois Mortgage Rates and New