Cash-out Mortgage Applications Up

An increasing number of homeowners are refinancing their homes with a new cash-out mortgage, according to Freddie Mac, a major buyer of existing home mortgage loans and supplier of funds for new loans. This means the new mortgage had a higher balance than the old loan, thus creating cash for the homeowner in the refinance process.

Most of the new cash-out mortgages are at least five percent higher than the original loan balance, it was noted by Freddie Mac. During the last quarter of last year, 73 percent of all refinance mortgages were cash-out loans. That’s the highest share since the third quarter of year 2000. The number of cash-out refinance applications continue to grow.

Cash generated by refinancing a home mortgage is most often used for home improvements or remodeling projects. In some cases the cash is used for educational costs, business investments and other expenditures.

We see from our study that the overwhelming majority of refinance mortgage borrowers are extracting home equity rather than trying to reduce their monthly payments, said Frank Nothaft, Freddie Mac’s chief economist. One big reason is that borrowers are using the cash-out refinance option because the string of rate hikes by the Federal Reserve Board have pushed the rate up on home-equity loans. Home-equity loans are typically linked to the prime rate, he said.


Mortgage rates temporarily drop

As mortgage rates generally continue to rise, more families are deciding to take action now to find, purchase and finance a home. Applications for home purchase mortgages are up, according to a recent report from Mortgage Bankers Association. Most of those home buyers realize that the longer they delay a purchase, the greater will be their mortgage interest rate and thus their monthly payment. They want to take advantage of rates that are still at historic low levels. Even though all housing and financial experts are predicting rising mortgage rates, those rates occasionally drop a bit before continuing their climb. This presents a temporary window of opportunity for mortgage applicants.

As of March 1, we are in one of those interest-dropping periods. Mortgage interest rates have dropped for the first time in five weeks, according Freddie Mac. The average rate for a 30-year fixed-rate mortgage has dropped to 6.26, with 0.6 points (fees). The average one-year adjustable rate mortgage (ARM) rate is 5.32 percent, with 0.7 points. The 5-year hybrid ARM (with a fixed rate for the first five years) carries an average rate of 5.96 percent, with 0.6 points.

Soft inflation figures and market confidence that the Fed will continue to keep inflation low is keeping mortgage rates in check, said Frank Nothaft, Freddie Mac chief economist. Over the long term, we expect mortgage rates to continue bouncing back and forth from time to time.


Mortgage industry going high-tech

The mortgage industry is becoming more high-tech. A hot new trend is for lenders and underwriters to implement electronic document management (EDM) systems, virtually replacing paper systems. It’s rapidly becoming a must-have tool for major mortgage firms.

Historically stationed at the rear for archiving duty, EDM’s new marching order is to be deployed in the front line, according to Mike Bridges, president of PaperClip Software Inc. The industry is now heavily focused on compliance, and businesses are looking for easy-to-use technologies that reduce cycle time and generate cost savings. With all the new federal laws, regulations and upcoming state laws with teeth, EDM has become an essential compliance solution. Fortunately, EDM solutions have proven they’re up for the fight, he said.

Electronic document management replaces paper with the electronic image version of the original paper. The source paper is then committed to the paper archives or destroyed making the electronic image version the original. The future of EDM is apparent for processing and compliance benefits. Also, it has significant positive impact on all aspects of a company’s operation, improving communications between a company and its partners. Companies that have experience with this understand the overwhelming benefits and are moving EDM practices to the front-end of the process.


New property owner rights law introduced

New legislation has been introduced that would give property owners more clout in court proceedings. If and when it becomes law, it will give property owners new protections offered under the Fifth Amendment, according to a report from the National Association of Home Builders.

The Private Property Rights Implementation Act of 2006 (H.R. 4772) is designed to ensure that property owners get their day in federal court to defend their rights under the U.S. Constitution – rights that say no person shall be deprived of life, liberty or property without due process of law, nor shall private property be taken for public use without just compensation.

Owners of properties that are vulnerable to eminent domain seizure actions by their local government are particularly interested in this new legislative proposal. Under the current legal system, before a federal court will rule on Fifth Amendment takings claim, property owners must first litigate their case in state court. Bringing the case to state court and having a takings claim heard often precludes the owner from review by the federal courts.

A property owner is, in effect, blocked from using the federal courts to enforce the Fifth Amendment’s just compensation guarantee, said David Pressly, NAHB president. As a result, property owners throw up their hands and give up without ever getting a fair hearing in federal court.


More rental units to be built

Home builders are particularly optimistic about the multifamily rental market this year. There’s currently a strong consumer demand for rental units, creating a growing potential for builders, according to the National Association of Home Builders.

A balanced and stable multifamily market offers a range of options for people who want to rent an apartment home, and for those who want to buy, said Leonard Wood, chairman of NAHB’s Multifamily Leadership Board. The reports of rising demand for rental apartments and increased apartment starts indicate that this sector of the housing market is moving toward better balance. All classes of apartments are exhibiting greater demand. The biggest increase is reported for top-tier Class A apartments. Demand is also high for both mid-range rentals and lower-rent apartments.

Our survey of builders indicates such positive trends should continue over the next six months, said Dave Seiders, NAHB chief economist. For the first time since the beginning of last year, builder expectations are rising substantially for every class of apartment building.


Home inspections (pro and self) are up

A home inspection is increasingly becoming an integral part of home sale transactions. Up to 85 percent of total home sales in some areas include an inspection, according to the National Association of Home Inspectors – up from 5 percent in the 1980s.

Are those inspections really needed? Does the contracted service justify its cost? Are there viable alternatives? Before addressing those questions, let’s make it clear that a comprehensive inspection of a residential property before finalizing a purchase agreement is vitally important. That home probably represents the largest investment your family will make. You sure don’t want unwanted and costly surprises after you move in.

Most new buyers recognize those considerations and are signing inspection contracts in record numbers. Home inspections have grown to a $1.2 billion industry in a surprisingly short time period. And that creates one of the problems. The rapid growth of this industry naturally attracts many new practitioners – individuals who want a piece of that money-making pie. Some of those inspectors have minimal or no background for performing professional inspections. Others, of course, are highly qualified.

As for costs, an inspection fee typically ranges from $150 to $600, depending on the prevailing rate in local areas and the size of the house. An overall average fee is probably about $400. Additional fees may be charged for extra systems (pools, etc.). Is that cost justified? If a truly qualified inspector is selected, it probably is justified in most cases. But there is an alternative choice.

Some prospective home buyers are inspecting the property themselves, following guidelines established by seasoned professionals. Web sites are now available with information to help and guide consumers who want to inspect a property themselves. For example, Freddie Mac offers a Consumer Home Inspection Kit on their Web site. ( Freddie Mac recommends that a consumer inspection be followed by a professional inspection before the purchase contract is finalized. But many prospective buyers are undoubtedly satisfied with consumer self inspection alone.


Commercial real estate: Hot investments

Office, industrial, retail and apartments are particularly hot properties for investors this year. Sales transactions involving these properties are up by 44 percent for year 2004, according to Real Capital Analytics.

However, transactions declined a bit during the last quarter of 2005, normally the strongest time of year. This coincides with reports that investors are being more discriminating, especially with the large volume of properties offered for sale. The transaction volume and cap rates will probably level out this year. Prices per square foot may rise along with net operating income because landlords will have more leverage to raise rents, the report stated.

Commercial property sales last year smashed the record set in the previous year by a wide margin thanks to low interest rates, a surplus of investment capital and strengthening leasing markets, it was reported by Grubb & Ellis Company, a commercial brokerage/management firm.

Demand for assets drove the cap rates to record lows and prices to record highs across the board last year, the report stated. If interest rates stay low, real estate could remain a favored asset class for some time to come. However, investors will need to pay more attention to underlying fundamentals as value appreciation rates decline over the next few years.


Remodeling activity down

Home remodeling activity is slowing down, according to a report from the National Association of Home Builders. However, the remodeling market will remain strong at least through this year.

The rise in interest rates has slowed homeowner refinancing, often used to fund remodeling projects, said Vince Butler, chairman of NAHB’s Remodeling Council. The less frenzied housing market this year also contributes to a lowering of market expectations, but we still expect to see growth in the remodeling industry this year.

David Seiders, NAHB’s chief economist, sheds more light on the future prospects in remodeling. The market could not sustain the record pace of home sales and housing production we experienced last year. But we feel this year will be a solid year in the housing sector with ongoing growth in the remodeling industry. Homeowner equity will continue to support the industry this year, Seiders said.

The NAHB report noted significant problems experienced by remodeling firms last year and are expected to continue this year and probably for the next five years. For example, 71 percent of remodelers face high material costs, compared to 38 percent in 2001. Nearly eight in ten expect material costs to be a major problem this year. The availability of skilled labor ranked number two, as 67 percent of remodelers faced this problem last year and the same number believe it will continue this year. More than three out of four remodelers believe this issue will continue shaping the industry within the next five year. Also, 56 percent of remodelers believe the aging population will provide strong support to remodeling within the next five years.


Increasing number of unsold new homes

Sales of new single-family homes dropped by 5 percent in January, according to the Commerce Department. That left a backlog of unsold homes at a record level. Most analysts are viewing the new data as more evidence our national hot housing market that hit record sales levels for five straight years, is now cooling.

Many home builders are now starting to offer special amenities without additional cost as an enticement to attract buyers, according to David Seiders, chief economist for the National Association of Home Builders. Such amenity offers have risen by 41 percent during the past month. He also predicted that home price gains, which were running about 12 percent last year, will slow to about 6 percent this year.


Mexico: An appealing real estate market for U.S. buyers

With home prices continuing to accelerate in the United State, particularly in west and east coastal communities, buying a residence in Mexico is looking better all the time. And more people are opting to invest their money in Mexican real estate. Some people purchase a coastal residence in Mexico for their vacation or part-time home. It will cost them a fraction of the price they would pay for a comparable coastal property in the United States. Others purchase their full-time retirement home in Mexico.

Mexico’s real estate ownership laws have become more welcoming to foreigners in recent years – a factor that’s attracting more buyers who seek a warm climate, reasonable cost of living, a relaxed lifestyle, and of course lower prices than can be found in the U.S. There are significant differences between buying real estate in Mexico and in the U.S., said Jeff Seabold, president of CS Financial, a private mortgage banking firm based in Beverly Hills, Calif. It’s important to know how foreign ownership works in Mexico and what the buying process involves.

Since 1973 foreigners (non-Mexicans) have been able to purchase coastal and border properties if the transaction is handled through a Mexican bank trust, known as a Fideicomiso, Seabold pointed out. It’s similar to a trust in the U.S. where a bank holds the legal title to a property with all rights and privileges of ownership being held by the trust beneficiary.

In the case of a property purchased in Mexico, the foreign beneficiary enjoys the right to occupy or rent the property and may cause the transfer of title or beneficiary transfer to the property to any legally qualified person he may designate, Seabold noted. Beneficiaries are also allowed to modify their property in accordance with local zoning regulations. These trusts typically have an initial term of 50 years. They are usually renewable at any time or at the end of the 50-year period, for a relatively small fee, for additional 50-year periods.

The property may also be sold to a person legally authorized to own land or to another foreigner via a trust, at any time. The foreign buyer will then be in a position to capture the appreciation of the property’s value. The process is designed to protect the rights of foreigners and ensure the transactions are legal, Seabold said.


Jim Woodard writes a nationally syndicated newspaper column on real estate news and trends, carried in about 230 U.S. newspapers – along with freelance features. Reproduction of this report, in part or entirety, is prohibited without the express permission of the author. E-mail: Web site:

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