I. Appraisal Waivers (PIWs) Do Not Run With Properties Alone; Borrowers Need to Qualify Too.
An agent asked me last night whether we could check whether his listing was eligible for a PIW. And unfortunately, we could not because we can only check for PIWs with a full borrower application.
We run the borrower’s application with the property address through Fannie’s or Freddie’s automated underwriter to see if we get a PIW. Weaker borrowers often do not get PIWs for the same address that might yield a PIW for a strong borrower.
I should finally add that Fannie and Freddie sometimes yank PIWs and require appraisals when a borrower’s financial situation or loan terms change, e.g., reserves shrink, down payment is lowered, DTI increases.
II. Oil Is Crashing Again.
This bodes well for rates, but not so much for the world economy if oil is falling this much due to falling demand rather than just a massive increase in supply.
III. Why ARMs Now Scare The Sh*t Out Of Me: We Spend $2 For Every $1 We Collect in Taxes!
In the early 2000s, I made a small fortune as a loan officer pedaling extremely competitive ARMs tied to the Monthly Treasury Average or COFI indexes. The margins were so low that I could not get many of my borrowers to refinance out of them into fixed rates after the 2008 meltdown, even when fixed rates fell below 5%.
As an interesting aside, I offered the loans dirt cheap (making about 1/5 of what lenders make today) and made money on volume – often closing over 100 loans per month. What makes this interesting is that it was that model that scared Chase’s CEO, Jamie Dimon, so much.
It was not the slimeball brokers he often complained about (rightfully so). It was the super-low-overhead, high-integrity brokers who scared him because banks could not begin to compete with us.
Today’s regulations (that Mr. Dimon encouraged) make those low-overhead models impossible to operate, costing borrowers billions…
Anyway – all that is to say that I used to love Adjustable-Rate Mortgages or ARMs. But that was then…
THIS is what changed my mind: Washington Spends $2 For Every $1 In Taxes
Peter St. Onge recently posted the above 3-minute video to remind us that Congress now spends twice as much as it collects in taxes, running a $300 billion deficit in May alone.
What makes this so scary is that it will get much worse as soon as we hit an inevitable recession.
In addition, we have a GOP Congress that, despite its promises, can’t cut anything other than John Thune’s excellent hair and their values as soon as they get to Washington.
Social spending alone is still $2 trillion higher than it was prior to COVID – reminding us that Congress cuts nothing, ever, even when it is “temporary.”
TLDR: Congress can’t begin to raise taxes enough to cover expenses without crashing the economy, and Congress can’t cut – so Washington will have to print money to cover expenses.
And that means double-digit inflation and interest rates.
Why ARMs Scare Me!
ARMs have fixed periods lasting 5 to 7 years before they switch to adjustable-rate mortgages with 5% adjustment caps.
So, when the temporary fixed-rate periods end, borrowers will face the very real possibility of being adjusted into a double-digit rate environment – given our deficit train that we can’t stop (to paraphrase Lyn Alden).
ARMs can offer rates that are 1/4% to 1/2% lower than today’s fixed rates, but I don’t think that meager amount of savings is worth the risk.
Go fixed, or go home, I always say (starting now).
