Nest’s Sweat the Details podcast continues, and we’re excited to bring you interesting conversations that touch on real estate — and how we look beyond real estate for inspiration.
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Summary:
Real estate and property taxes – they go together hand-in-hand. This week we spoke with Sally Hudson, Virginia Delegate, and UVA professor about how a land value tax might change how we tax properties, and how that would affect urban design, parking, affordable housing – basically everything in real estate.
We hope you’ll join us for the next episode of Sweat the Details. View the full transcript below.
Jim:
Hey, Jim Duncan with Nest Realty Sweat The Details. This week we had Matt Hodges, Lender in Charlottesville at Atlantic Bay Mortgage come in and gave us an education on mortgages, what rates are doing, what they might do, what mortgage applications are doing. We talked about all sorts of things as far as location efficient mortgages, mortgage trends. It was a good conversation amongst some really good people. I hope you all enjoyed it.
So we’re sitting here with Matt Hodges with Atlantic Bay Mortgage based here in Charlottesville. Matt, how you doing?
Matt:
Good morning, Jim. I am Great.
Jim:
Fantastic. So where are mortgage applications?
Matt:
Well, mortgage applications are all over the place on any given week. There’s different supply and demand, there’s different product that comes out. We like to look at one year over year, the same week to where we were last year. And according to the MBA, the Mortgage Bankers, we’re 27% down on applications for purchase loans. We don’t care about looking at refinances, obviously, they’re a hundred percent rough
Jim:
The refis are a hundred percent off?
Matt:
There are some cash out refinances for people who need that. Yeah.
Jim:
So what do you think that’s going to happen from the second half of this year?
Matt:
Okay, so the Federal Reserve is desperately trying to get inflation under control. They have two great mandates. One is price stability, the other is employment or full employment. We’re well past full employment at roughly 3.7%, but we’ve got this stubborn inflation. And they really want it to be closer to 2%. I think they’d accept 2.5%. We’re well past that right now. So they are tightening. They are not buying mortgage-backed securities, they’re not buying treasuries. They’re letting it roll off of the books right now. That is having an effect and they have since paused their tightening in the last month. They want to see what the results are of their previous work.
Jim:
So my last question for, Jonathan, Keith hop in, is so on that interest rate thing we see with the Fed every week or month or whatever it is. When that goes up down, my clients will say, “They’re raising rates, I need to move.” Is that an accurate response or is that the right response to hearing that the Fed fund rate is being changed?
Matt:
No. The long-term rates is what we care about. What are mortgage rates? They are long-term. The Federal Reserve is influencing short-term lending rates. So we’re talking about car loans, credit cards, HELOCs. And to some degree ARMs that are self-funded by the bank or the credit union with deposits.
Jonathan:
So along those lines, we talk about rates and what the Fed does and how the Fed impacts it. We were talking a little earlier, and we’ll post this chart in the show notes, but there’s what we’ll call an abnormally high spread between the 10-year treasury and the 30-year mortgage. So normally when the 10-year treasury is 3.5%, the mortgages are about 5.3. Today with a 3.5% 10-year treasury mortgages are almost a seven. Why is that?
Matt:
Yeah, because we are in a volatile world right now with inflation. And most specifically, those who look at the pricing and purchasing of mortgage backed securities believe that there’s going to be a refinance opportunity that comes along. My best guess is somewhere in six to 36 months. I know that’s not very precise. I’m not an economist. I cannot give you numbers there. But I do believe that interest rates will drop significantly because the Fed will have done their job.
Keith:
So what you’re looking at though is the spread is larger because the investors who are backing these long-term purchases of the mortgages are assuming that they’re not going to have those mortgages on the books for very long. So they’re trying to pick up their spread while they can so that when it refinances, they don’t lose money if it refinances within 12 months or so, is basically what you’re saying. That’s why the spread has to-
Matt:
Yeah it’s called prepay speed.
Keith:
So why-
Matt:
It’s assumed right now that 30-year fixed have a fast prepay speed.
Keith:
So why do we not have loans then that instead of having points upfront, just have prepay points that basically say, “Instead of going in at 6.6%, we’re going to go in at 5.3. We’re going to offer you the mortgage of 5.3, but if you choose to get out early, you’re going to then pay us a penalty that’ll become the spread.” Because that would seem to be, it would make the actual purchase market far more liquid, make it more available for people to get into homes at a more reasonable price. And the investor would have the protection on the backend. Why do we not see products like that happening?
Matt:
Consumer Finance Protection Bureau. It is-
Keith:
So she can’t do it.
Matt:
It is not allowed. It is a non QM loan. I do not know of any investors that actually offer prepayment penalties of getting out of the mortgage. It’s just not a thing.
Keith:
We have balloons in other loan products though, don’t we? Not mortgage side?
Matt:
Not balloons per se, but we do have adjustables from five, seven, 10/1 ARMs that stay fixed for those fixed periods of time.
Jim:
In the last 9, 10, 12 months, have you seen an increase in people going for ARMs? And if so, what terms are you seeing?
Matt:
Yeah, so there’s definitely been inquiries about it. Not necessarily do all the buyers look to jump on that ARM. They’d be taking a risk, right? If you’re buying a property and it is your long-term goal for ownership, but that’s what most of our buyers are looking at is they’re going to live in this house for five to seven to 10 to more years. Why put yourself into an ARM? Because they’re hearing in the news, there’s a real likelihood that interest rate is going to drop in the future. So I’m willing to bet and pay a lower interest rate, get the shorter duration, which by the way, most countries have. Are we the only country in the world that has a 30 or fixed?
Jim:
I think we are.
Matt:
Everyone else’s 5/1 ARMs or greater. So it is a bet that most buyers are probably going to pay off with is having a lower rate that’s fixed for some period of time that they feel comfortable that there’ll be a refinance opportunity.
Jim:
I heard the other day that the thing is 94 or 96% of Americans last year got a 30-year fixed rate mortgage. And I’ll be curious to look at the stats today because it’s at least through my lens and attorneys I talked to and other agents is that we’re seeing more and more ARMs. And I’m advised my clients to at least ask that question of the lender, of what’s the difference between 30-year fixed and a 10-year ARM or 7/1 ARM. Because three and five, I don’t even know. I have no idea if they offer those. And frankly, I don’t want to know. Because most of my clients are not buying for a three-year term. Because I think that’s far too risky for most of my clients’ thresholds.
Matt:
The 3/1 ARM does exist, but it’s not priced well generally ever. You start with a 5/1 ARM, you look at 7/1 ARM, you look at 10/1 ARM. And the pricing on them is all of the board because there’s not a market per se for it. It’s an asset manager at a bank, a depository bank or at a credit union who’s saying, “What is my rate of return over our deposits? Where can it go? Where can it generate the best rate of return?’ And so they’re willing to put a sliver higher than their depository rate and realize, “Yeah, it’s going to get paid off, but that’s okay. We still made a profit during those 1, 2, 3 years.”
Jim:
So if you have an agent who comes to you and says, “I’ve got a buyer looking at X price point,” what is your guidance? Where do you start with that advisory process with that agent or with that buyer” and at what point do you say, “Have you thought about an ARM?”
Matt:
Yeah, it’s a holistic approach. You’re looking at everything about the buyer. You try to get to know who they are, what their goals are, what their income is, what their liabilities are, make sure that they’re not going to feel stressed with a payment. It’s oftentimes assets of, what do you have available to use as a down payment? Do you have family money? Because where the interest rates are right now, whether they be ARM or fixed, they’re significantly higher than they were a year ago, 18 months ago. We try to do the best job we can with giving advice to a client that does not infringe upon a financial advisor, a CPA, somebody else that is a professional, but gives them real data to work with. And we will talk about, adjustables, we’ll talk about fixed rate based on what the client’s needs are, what their requests are, and where we see it’s going.
Jonathan:
So I’ll jump in and piggyback off of how you’re coaching buyers in today’s world. You’ve been doing this a long time, you’ve clearly got a amazingly deep background in the industry. Can you tell us how the conversation with the home buyer has changed? Somebody who’s preparing to be a home buyer, how has that changed over the past 10 or 15 years? From 15 years ago when you were working with somebody to what you’re working with them now, how has it changed and how has your conversations with them evolved?
Matt:
Yeah, it’s a fascinating question because I’m in my 25th year now of lending all here in Charlottesville, and I wouldn’t say order taking, but it definitely was a different perspective early on in my career. At this point, 25 years in, whether somebody buys today or a year from now or two years from now, I do a lot of divorce work, for example. Those are longer processes. Regardless, I want to make sure that the client fully understands what they’re getting into, what the options are for the future, what their rate of return differences in down payment. Do you put down five or 10 or 20%, and what does that do with your rate of return of monies that are in the market? So it’s often involving a financial advisor to make sure that the path for the client financially is healthy. So it is so much of our consultative process that we go through. And generally it’s a little bit of an intake interview and then it’s feeding back information to the client to make sure it’s captured accurately so that they can start thinking critically about how they’re going to finance their either first biggest purchase or their next biggest purchase. This is the biggest thing that they’ll ever buy in their lives.
Jonathan:
Right. And then today’s market being really so tight with inventory, if a buyer comes to you today, what are the couple steps, the first steps that you have with them to make sure they are prepped and ready to make that offer when the right home comes on the market?
Jim:
Before you answer that, and also how far in advance of looking in earnest should the buyers start with you?
Matt:
Sure. Yeah, both are really good topics. Jonathan, the process of getting somebody ready today is vital to them being successful in making an offer. We see a very reduced inventory of properties out there because there’s so many houses that are locked up with low interest rates. So when something comes on that matches the needs of the client, they need to be ready to strike. That could be an evening, it could be a weekend, it could be a holiday. Those are the times that we often write our contracts and that we are preparing to get a pre-qualification letter to the realtor requesting it. So we don’t want to have that work to do specifically the prequal piece when they’re making an offer. So it is encouraging without feeling like you’re a bully, you want to encourage and make sure that if they want to get into this process, they’ve got to understand that a seller and a listing agent require that letter attached to it. So we try to do as much prep work in advance as possible so that you as a realtor and the client know, “I can afford this. This is the payment.” It fits debt income ratios for the lender, but more importantly, it fits their needs.
Now, Jim, in terms of when, in terms of talking to somebody a year out, we’ve got clients that are dedicated to an academic year with a university that’s not at UVA, but they intend on coming here. We start that conversation. And if there’s a strong feel good that everything looks good in the picture, including credit, we talk, we build up a relationship, we create a worksheet, which is based on today’s interest rates, not a year from now, but we create all that. If there’s a concern with a client that, “I’m not really sure where we are right now with my credit, my ex might have done something, there’s a collection on my report,” then we’ll get deeper and we’ll get a pull immediately. Not because I think that they’re going to buy immediately but because we need to be prepared for the future. So it’s a case by case evaluation for clients when do we do all of those steps. I want more earlier, but I want to respect the privacy of the client as well.
Keith:
So Matt, I want to go back to one of the comments that you made that the US is the only country that or one of very few countries has 30-year mortgages. We have seen over all of our real estate careers, different trends of what takes place in mortgage lending. Whether it’s PMI with higher debt in or higher loan to values, or if we’re layering mortgages and trying to create non PMI type scenarios. There are different methods that take place on your end. Back pre-bubble, during the subprime market, we saw negatively amortizing loans, we saw all kinds of stuff that was bad. What trends are we seeing right now in the lending? And are there any innovations that you think are going to change the way that purchasers can look at what their long-term obligations are, how we focus on the mortgages? So that’s two different questions, but-
Matt:
Yes.So in terms of innovations in the mortgage world, there’s two things I think that are key. On the mortgage insurance side, it has become much more effective to buy monthly mortgage insurance because it’s so cheap. The marketplace has six or seven mortgage insurance companies that compete hard for it, a very efficient marketplace. It is scaled by credit score, by occupancy, by loan to value. It all makes sense. It’s perfectly logical and it’s relatively inexpensive.
Keith:
And it can be removed-
Matt:
And it drops off automatically. It’s 78% loan to value, 80% at the request of the client. It can be removed earlier in years two to five with other compensating pieces, namely going to 75% loan to value, not 80. But I’m getting into the weeds here.
Jim:
Well, that’s why I tell my clients that I know the right people to send them to because whatever you just said, I don’t want to know.
Keith:
But it can be removed.
Matt:
It can be removed and it should be removed. Sometimes it makes more sense to do it as a refinance because the interest rate market has moved-
Keith:
May have changed.
Matt:
And the values have gone up. Now the second piece is in terms of efficiencies, we’ve got something called loan level pricing adjustments. We’ve always had them, but they’ve really come into their own where you have stacked costs on top of investment and second homes, specifically. Fanny and Freddie’s mission is not to originate loans except for primary residences. So you get the best interest rates on primaries. And the last check I made on second versus investments, it’s relatively identical, so it’s crazy there. But where I was going with the loan level pricing adjustments is, for all those risk factors, there are costs associated with them.
One of the great things about the clients that I work with is often they fit below median income for our area, and they’re able to get all of these waived. And you’ve got to know that. You’ve got to talk to your client about where they’re buying, what their effective income is, because we can get you a much lower cost to the process, and we can get you much higher loan to value. So somebody who is just starting out and the debt to income ratios work can put 3% down, not five or 10 or 20, and still have reduced mortgage insurance, lower interest rate. And they’re treated properly because it’s the mission of Fannie and Freddie to help that first time home buyer get into the market. Keith, you want to expand on your second question again?
Keith:
Well, the innovation point, just the question of what changes can take place in the mortgage industry that can affect what our ability is to transact home sales? And that’s the big question.
Matt:
One of the biggies is appraisal waivers, right? Property inspection waivers, PIWs. In a competitive situation that can help your client win the deal because it’s essentially appraisal gap-
Keith:
And this is a situation where you are saying, “We’re not going to require an actual physical appraisal of the property because of the financial strength of the borrower.”
Matt:
Correct, exactly. So the loan to value, the FICO credit score. A lot of things go into what generates a property inspection waiver, and a big chunk of it is what Fannie and Freddie’s database looks like.
Keith:
So it’s coming out with a far more solid pre-approval when you’re submitting an offer to purchase a house.
Matt:
That’s correct. And that’s a nice innovation that’s come over the last several years. Now it has been tightened up recently. Fannie Mae specifically said, “We are going to stop approving as many,” and I think that there’s some concern there that this continuing inflation of properties is going to retreat. We call it disinflation if it slows the growth, and deflation if it actually goes negative. How often does that happen in our Charlottesville marketplace though? Probably not that often.
Jim:
Is the viability of an appraisal waiver, is that tied to any kind of, for lack of a better term, his estimate? Any AVM that says that house is probably worth 650? Is that part of the algorithm at all?
Matt:
We’re not told what’s in the algorithm. It’s much like the automated underwriting from Fannie and Freddie for the credit side. We know how to get an approval, but we don’t know specific data points that Fannie and Freddie are looking at in that instance. We know because they’ve told us that they have a massive database of property. And there’s an algorithm that they use to determine, in this instance, is this property going to be eligible? And there’s certain barriers, like on a purchase, you’ve got to be at 20% down payment. You are required to do that in order to get a property inspection waiver.
Jim:
I’m so curious now to know what’s in that black box.
Matt:
Yes.
Jim:
Good luck.
Jonathan:
Yeah. So in your lens, working with as many buyers as you do in our area, what are the common liabilities that they have as far as like… And I’m thinking my clients have student loans and car payments are increasing, child childcare, things like that. Are there anything that you’ve seen that’s increased in the last three-years and that’s common across your buyer set?
Matt:
Yeah, you mentioned childcare, which is an interesting concept because it doesn’t exist as a true liability for FHA or conventional loans, but it does for VA loans. It’s part of residual income that is required. So there’s by region, south, Midwest, west, all that, a number of people in the household what the residual income is for a veteran. Part of that is what is the childcare costs. Now you also mentioned student loans. Student loans are, many of them, most of the federal still have no repayment. They’re still in deferral. But I’m starting to hear that clients are coming out of deferral and they’re having real numbers. We have to treat deferred loans depending on its Fanny, Freddie, FHA, VA, they all have different qualifications on how you take the big pot of money, $50,000 student loan, and what does that create in terms of a liability? It could be $500, it could be $250, it could be some other number. So that is important.
And we’re seeing a ton. And this probably gets more to your question, we’re seeing a ton of student loans. There is a lot out there compared to earlier in my career when I did not see as many student loans. Car loans, they exist. Clients often say, “Hey, if we need to get rid of that one, I’ll pay it off to make the debt to income ratios work.” They’re sophisticated enough to even come to me beforehand and say, “I can pay that car off.”
Jim:
Last question that I have for now until I start thinking some more. Years ago, there was a concept of location efficient mortgages, where if you lived within 10 miles or whatever of your place of employment and your residence, you could get a lower loan package or whatever.
Keith:
So before you respond to that, Matt, let me also add to where Jim is going on that, I want to talk about energy efficient mortgages because we’re really talking about the total cost of home ownership. And so can we talk about the way the mortgage industry overall is dealing with both location, proximity, cost of transportation, but also the high performing homes and the way mortgages are handling that?
Matt:
Yeah, so the Pearl Certification and the like, that is not generally accepted within the mortgage world. It’s not being used. There is an energy efficient mortgage that can be attached to VA loans. They can do energy efficient improvements before closing. We just don’t see it. It’s just not a driving force within the world of mortgage lending. It hasn’t become acceptable probably because there’s not enough volume to it. Now in terms of living and working close, there’s no benefit in the mortgage world for that. The flexibility of where somebody lives is dependent on what their employer says they can do. And we all have discussed in the past that this marketplace is such an attractive area that we’re seeing a huge influx from New York, from California and from Northern Virginia. And guess what? Those three areas are more expensive for housing than our areas, and they’re willing to pay for it. And that’s forcing out some of our more local buyers.
Jim:
A dangerous question, but shouldn’t location and energy efficiency be part of that equation? If my mortgage is X and then I’m paying a thousand dollars a month in oil, which would be insane.
Keith:
I will go back and it’s been a number of years since I don’t represent buyers and sellers on a regular basis, but I did have a buyer once who was working on the west side of town and their drive till we can afford it mentality took them to rural spots that were east of town. And we sat and we talked about the price of this house that they were buying, which I think at the time when we looked at it, basically they were going to be transporting themselves 35 miles from their home to their job each direction every single day. And we looked at it and we said, “Based on the cost of transportation, you should be spending 60, $70,000 more to live in the community of your job.” But they said, “We can’t qualify for that mortgage. We can qualify for this mortgage.” It’s like, “You can qualify for this mortgage, but you just added all of the expense in your actual car maintenance.” And so the mortgage isn’t paying attention to it. And yes, Jim, should we be looking at that as part of the cost? Every buyer should be looking at that as part of their cost. It should completely be part of their total cost of home ownership.
Jim:
Right. I look at that and we all try to advise our buyers to look at the total cost of ownership. And I think, we talked about this years ago, you wrote a blog-
Keith:
We’ve done the spreadsheets. Absolutely.
Jim:
The blog post about guy called it gas price math when gas was so super expensive.
Keith:
Well, there’s also though, part of it is that the EPA has done testing on the actual cost of home ownership of homes that are built in the 1950s with almost no energy efficiency built into that house. Very what we would call today, low performing homes, versus a high performing home where you were no longer on public transportation and no longer at access. And it is much more expensive to live in new communities in the ex-urban ring than it is to live in an urban, older home. Even though the quote expenses of owning those older homes are higher.
Jim:
I’m just frustrated over here that we don’t look at things more holistically.
Keith:
Well, I think the buyers should be looking at it holistically, and I’d hope to think that Matt is having that conversation with them as well. But the reality is, from a underwriting perspective, you can’t guarantee that someone isn’t going to change jobs and move and pick a job that’s 18 miles farther from their home than their current one. In which case, how do you then adjust to that mortgage conundrum? And so that piece is out of our control. So we just assume that the buyer needs to take on that responsibility-
Jim:
The energy efficiency is within-
Keith:
Energy efficiency is absolutely. And we know it, and it is an ongoing expense that we can quantify.
Matt:
Logic certainly speaks to that. We should be looking at energy efficiency. Regarding the client that drives a long distance, there’s more penalties in the mortgage world than anything that is, okay, so you’re buying in Crozat, but you’re working in DC and you do not have a telecommute letter. What are you going to do? Well, I’ve got to account apartment lease up in Northern Virginia, or I’ve got to find that you’ve got a family member that you stay with Sunday night through Thursday night. We analyze distance to job significantly.
Keith:
What’s the mileage point where that becomes an issue?
Matt:
It’s a variable thing.
Jim:
It’s a black box. I’m so tired of the black box.
Matt:
Culpeper to DC, no problem. Madison to DC, probably okay. Green to DC, maybe not. Ave Mall, [inaudible 00:28:07] not.
Jonathan:
Listen, Ave Mall to DC is 150, 120 miles. Culpeper is 30 or 40 miles to DC. So somewhere between 40 and 85 miles is the black box area.
Matt:
It’s a judgment call. It’s not a black box, by the way. It’s an underwriter judgment call.
Jim:
Can we talk to an underwriter?
Jonathan:
It’s worse than a black box.
Jim:
What should buyers and sellers and agents be reading and watching on a limited basis? Because this very delicate, because it’s easy to get so much information and become overwhelmed. I could read 30 stories today, but I’d like to read three.
Matt:
Wow. So it’s hard to put a client into a position of, “You should be following Bloomberg and reading what’s happening with the 10-year treasury each day.” That gets overwhelming and it’s just fuzzy in their head. I’d much rather the client and the loan officer, me or whomever talk on a daily or a weekly basis as they’re looking at properties and we talk about this is what’s happened. I had a conversation with a client the other day who said, “Okay, I think we want to continue to float because I’m reading this about the Federal Reserve and these inflation numbers are coming out.” I’m like, “I’m really glad that you’re educated in this.” But most don’t want to be. They’re already living life, right? They’re looking for a house. But it’s counting on that professional to bring forth to them. They want to do the research on their own. Great. But I’m going to help them through that process.
Jonathan:
Cool. Yeah, that’s great. So as we wrap up here, I’ll put you on the spot for a second. It’s a podcast called, Sweat The Details. In your Business, like I said earlier, you have dove in for the last 25 years and know the business backward and forward. On a daily basis, what’s the one detail that you sweat that you think makes the biggest impact on you?
Matt:
Oh, wow. That’s a deep question. I guess what I am concerned with on a daily basis is that my client base is informed. They are reacting to the news that’s out there. The properties that come on board, they’re ready to act. They’re not discouraged. It’s essentially making sure that the client is prepped and comfortable for that purchase. And if they’re not, they need to step back. So maybe that’s it, is I’ve got a ton of people in pre-approved status, but as prices go up and interest rates go up, they’re not comfortable with it. So I want to make sure that they are.
Jonathan:
Yeah, that’s great preparation and trust and comfort, so love it.
Jim:
Matt. Thank you.
Matt:
You’re welcome.
Keith:
Thanks a ton.
Jim:
Thank you. Hey everybody, thanks for listening. If you have a minute or two or less, would you mind rating us and reviewing us wherever you listen to your podcast? Believe it or not, it actually really helps. Thanks so much. Talk to you next week.