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Home builders look to tax breaks, easing of mortgage rules to stimulate recovery

The home construction industry has compiled a list of 20 recommendations — from tweaking the mortgage stress test to tax breaks for builders and billions of infrastructure stimulus spending — that it says will help builders and consumers boost the economic recovery post-lockdown.

If governments don’t invest in the construction industry, they are risking an erosion of consumer confidence that could lead to a potential credit crisis and extended job losses, warns a 36-page presentation by three home industry associations to the Ontario Jobs and Recovery Committee, chaired by Finance Minister Rod Phillips.

Some of the industry recommendations, including a more dynamic mortgage stress test and a return to 30-year amortizations, would cost little to no new government money, says the joint report by the Building Industry and Land Development Association (BILD), the Ontario Home Builders’ Association and the Canadian Home Builders’ Association.

It suggests that if new condo owners were allowed to begin paying their mortgage immediately upon occupancy without waiting for the municipality to register new buildings — a process with growing delays — it would free up $9.5 billion of trapped liquidity to consumers, builders and lenders.

Some recommendations such as the elimination of the Ontario land transfer tax through the end of 2021 and the removal of HST on new homes for two years, would come at a cost.

Among the other ideas being floated are home renovation and energy retrofit tax credits, the elimination of GST on rental construction and renovations and, the allocation of $2 billion to roads and other infrastructure projects.

The report is really aimed at all three levels of government to meet construction industry challenges but also consumers who will be more cautious about their financial exposure in the future, said BILD CEO David Wilkes.

Wilkes said the industry recognizes that governments have already made significant investments toward COVID-19 and that municipalities are struggling with uncertainty on how to pay the operating costs on community services and transit. He said that is why builders have presented a range of options.

The priorities, he said, are around faster approvals, lengthening funding horizons and relieving the tax burden so the construction industry can get back up and running and that the Toronto region’s housing shortfall doesn’t worsen as a result of the public health crisis.

The last thing governments or industry want is to find in five years the construction cranes have moved on from the GTA, he said.

An industry analysis in the report suggests that a downturn in new housing construction could reduce the GDP by $5.2 billion and cost as much as $2.9 billion in lost wages and earnings.

“We went into this situation recognizing we had a housing shortfall. We want to make sure that shortfall is minimized as we come out of it. There is a responsibility to ensure we deliver housing, but there’s also an opportunity to help kick-start the economy by providing opportunities for construction to move quicker than it currently does,” he said.

Although construction was designated an essential business through the shutdown, public health and safety measures, supply chain issues and other delays have slowed work. A survey of BILD members found there were 498 active housing projects in the GTA, including 276 in the City of Toronto. Sixty-five per cent of those were reporting delays of three to six months and 32 per cent expected longer delays, said Wilkes.

“With the delays, there should be a hard look at costs associated with new development from development charges to other fees and charges and potentially put a freeze on those,” he said.

The industry says that government fees and taxes account for a quarter of the cost of a new home in the GTA.

Some of the measures around expedited approval times, development charges and mortgage measures to ease borrowing were items the industry lobbied for during the last federal and provincial elections.

“We have been consistent in our recommendations and our views for the last couple of years,” he said, adding that the GTA’s housing needs dovetail neatly with an economic recovery.

The residential and commercial development industry says it employs 360,000 GTA workers earning $22 billion annually. The GTA, of which construction plays a significant economic role, generates 20 per cent of Canada’s Gross Domestic Product and 50 per cent of Ontario’s GDP.

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How Lower Fed Funds Rate Affects Mortgage Rates

Point of Interest

Fluctuations in the Federal Reserve target rate have wide-reaching ramifications for mortgage loans.

Lowering the Fed funds rate affects many things, including mortgages. It does this by encouraging banks and lenders to decrease the interest rate on loans and expand the number of loans they provide. In simple terms, lowering the Fed funds rate increases the supply of available money to banks that they can earn interest on, making it possible for them to offer lower interest on loans without losing as much net interest gain as they otherwise would.

Mortgage loans come in different types. One type of particular interest to people is the VA loan, a home loan backed by the Department of Veteran Affairs, which doesn’t require a down payment when purchasing a home. This kind of loan can make it easier for people to buy a home while the Fed fund rates are low, even if they don’t have the cash available for a down payment. VA loans are available to active service members and veterans.

What are Fed funds rates?

Fed funds rates are defined as “…the interest rate at which depository institutions trade federal funds (balances held at Federal Reserve Banks) with each other overnight.” Reserve requirements refer to the fact that all banks are required to reserve some of their money as a guarantee for their customers, making sure that account holders will have immediate access to money when requested.

The Federal Reserve uses the Fed funds rates to intervene in the economic system to increase stability, especially in times of crisis, as is being seen during the coronavirus pandemic. For instance, they have lowered the Fed funds target rate, which reduces the interest rate at which banks borrow money from each other to meet their Fed funds reserve requirements and leads to banks and lenders offering lower interest rates for their customers.

Lowering the Fed funds rates provides the banks with more money to work with, making it feasible for them to loan money at a lower interest rate. By increasing the availability of loans in this way, the Federal Reserve is encouraging a heightened movement of money through the economy, through an increase in loans coupled with a decrease in the risk of loans as captured by interest rates (the lower the interest rate, the less likely a loan is to be defaulted on).

Why does the Fed change interest rates?

Interest rates are one of the Federal Reserve’s primary tools for stabilizing and preserving the economy’s health. Normally, it is often a method of controlling inflation. Increasing interest rates reduces the free movement of money and counters inflation while lowering the rates frees up money and stimulates the economy. The Federal Reserve aims for an inflation rate of 2% over time. This policy is designed to optimize the staying power of the American dollar and high rates of employment. During a crisis, such as the coronavirus pandemic, this goal has become tricky, if not temporarily unsustainable.

Beyond the minor alterations to Fed fund rates that occur in regular times, the Federal Reserve can alter the Fed fund rates in response to an economic crisis. By lowering the Fed funds target rate and freeing up the movement of money, the Federal Reserve is making it easier for businesses to avoid collapse during a time when the financial market is otherwise paralyzed. When loans are more affordable and available, they become a more viable way for businesses to avoid bankruptcy during an economic crisis of this nature. These loans will likely go towards covering costs of operation and employee wages during a time when actual paying business is at an extreme low. If affordable loans can sufficiently bolster lowered profits, then the companies can stave off bankruptcy and layoffs.

How do lower Fed funds rates affect mortgage rates?

This lowering of the Fed funds rate has multiple effects upon mortgage rates. Many experts expect mortgage rates to take a dip, of varying degrees, while the Fed target rate remains low. When the Federal Reserve lowers the Fed funds rates, it increases the amount of money that banks can loan and earn interest on, because it reduces the rate of interest at which banks lend money to each other to meet their reserve requirement. In simpler terms, banks have cheaper access to funds and can loan money at a lower rate to a higher number of people.

How do lower Fed funds rates affect consumers?

For homeowners, the lowering of the Federal Reserve target rate can lead to the opportunity to refinance a home and end up with a lower interest rate on their mortgage loan. For people considering buying a home, the lowered Fed rate can make it easier and cheaper to obtain a low-interest mortgage. Even a couple of percentage points difference in mortgage interest rates can reflect hundreds of dollars difference in monthly mortgage repayments. These historically low Fed fund rates can create an excellent time for new homeowners to emerge and take advantage of lowered interest rates on mortgage loans.

Should I refinance my loan with lower interest rates?

Knowing when to refinance a mortgage can be tricky, but when the Federal Reserve lowers its target rate is an excellent time to consider it. However, there are numerous factors and costs that go into the refinancing process. If you can achieve an interest rate reduction of one or more percentage points on your mortgage, you have the finances to fund the refinancing process and you aren’t planning to sell your home in the near future, then financing can be a smart move.

For example, if you have a home valued at $200,000, and you want to obtain a home loan for it, the monthly payments at 6% interest will be $1,000. With a 4% interest rate—just two points lower—the monthly payments on that loan would be $667.

Now, if you were refinancing a mortgage with $200,000 left on it, that could achieve a lower interest rate, but it would involve upfront costs. These costs include mortgage application fees, loan fees, insurance fees, property fees and closing fees. In this case, it can be useful to get a tally of the fees and costs from the bank you’re considering and then calculate how much money you would save on the lower mortgage rate in comparison to the amount needed to spend to initiate the refinancing of your mortgage. If the amount saved on interest is significantly higher than the amount spent on refinancing, it can be a good idea to refinance.

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Jims Mortgage Corner

Jim,

Our bankruptcy was discharged more than three years ago and we would like to buy a home in the near future. How much time must pass before we can qualify for a mortgage? After we filed our bankruptcy, we stopped borrowing money and paid cash for everything. What should we be doing to build good credit and how long will the bankruptcy impact our credit scores?

Elizabeth, Grand Junction

Dear Elizabeth,

When you first filed bankruptcy, it can have a substantial impact on your credit score by up to 100 points or more. It will have a negative impact on your score while it is on your credit file, but after two years you should see less of an impact on your score. Until the bankruptcy falls completely off your credit report, it will continue to have a small impact on your score.

Before I spend more time on how a bankruptcy impacts your score and what you should be doing now to build good credit, let me answer your first question. The good news is that you can qualify for an FHA or VA loan now since the waiting period is two years from the discharge date. USDA is based on three years from the discharge date to the date of the loan application. Depending on the loan size, if FNMA or FMAC is required (also known as conventional) you will need four years from your discharge date or dismissal date. I encourage you to meet with your lender and they can determine which loan you could qualify for at this time.

When you filed for a bankruptcy, it was most likely a Chapter 7 or a Chapter 13. A Chapter 13 will stay on your credit report for seven years from the filing date. A Chapter 7 will stay on a credit report for 10 years from the filing date. All creditors that you included in the bankruptcy will remain on your credit report for seven years, whether it was a Chapter 7 or 13.

In addition to the bankruptcy showing up under public records, most creditors included in the bankruptcy will show “included in bankruptcy,” which will also negatively impact your score. Occasionally these creditors will continue to report the account after the bankruptcy is discharged since they can do this for seven years. By continuing to report it, this will bring the reporting date current and it will continue to have a negative impact on your scores.

While filing a bankruptcy will significantly impact your credit score, it will not be permanent. I can imagine the last thing you would want to do is borrow money after you have filed a bankruptcy. However, I encourage you to get two to three secured credit cards and/or lines of credit to reestablish your credit. Most banks and credit unions offer secured credit cards or lines of credit. You provide them a small amount of money (collateral) to establish a credit limit and you use them the same way as an unsecured credit card. Most important, make sure they will report to all three credit bureaus (Equifax, Experian and Trans Union) so you get credit for these new accounts and your payment history. Keep your balances low and make your payments on time. This will be the best way to build new credit and improve your credit score.

I hope this provides you a plan to rebuild your credit.

Jim Kaiser

Branch Manager, NMLS #1721861

Cherry Creek Mortgage Co., Inc. NMLS 3001

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Mortgage Interest Rates Today, June 8, 2020 | Key rates mixed

Mortgage rates moved in different directions today. The average for a 30-year fixed-rate mortgage was flat, but the average rate on a 15-year fixed ticked up. On the variable-mortgage side, the average rate on 5/1 adjustable-rate mortgages tapered off.

Rates for mortgages are constantly changing, but they remain much lower overall than they were before the Great Recession. If you’re in the market for a mortgage, it may be a great time to lock in a rate. Just don’t do so without shopping around first.

30-year fixed mortgages

The average rate for the benchmark 30-year fixed mortgage is 3.52 percent, unchanged since the same time last week. This time a month ago, the average rate on a 30-year fixed mortgage was lower, at 3.51 percent.

At the current average rate, you’ll pay a combined $450.16 per month in principal and interest for every $100,000 you borrow.

You can use Bankrate’s mortgage calculator to get a handle on what your monthly payments would be and see what the effects of making extra payments would be. It will also help you determinehow much interest you’ll pay over the life of the loan.

15-year fixed mortgages

The average 15-year fixed-mortgage rate is 2.87 percent, up 3 basis points over the last seven days.

Monthly payments on a 15-year fixed mortgage at that rate will cost around $684 per $100,000 borrowed. Yes, that payment is much bigger than it would be on a 30-year mortgage, but it comes with some big advantages: You’ll save thousands of dollars over the life of the loan in total interest paid and build equity much faster.

5/1 ARMs

The average rate on a 5/1 adjustable rate mortgageis 3.19 percent, falling 6 basis points since the same time last week.

These loan types are best for those who expect to sell or refinance before the first or second adjustment. Rates could be substantially higher when the loan first adjusts, and thereafter.

Monthly payments on a 5/1 ARM at 3.19 percent would cost about $432 for each $100,000 borrowed over the initial five years, but could climb hundreds of dollars higher afterward, depending on the loan’s terms.

Where rates are headed

To see where Bankrate’s panel of experts expect rates to go from here, check out our mortgage interest rates forecast.

Want to see where rates are at this moment? Lenders across the nation respond to Bankrate.com’s weekday mortgage rates survey to bring you the most current rates available. Here you can see the latest marketplace average rates for a wide variety of purchase loans:

Current average mortgage interest rates
Loan typeInterest rateA week agoChange
30-year fixed rate3.52%3.52%N/C
15-year fixed rate2.87%2.84%-0.03
30-year fixed jumbo rate3.61%3.63%-0.02
30-year fixed refinance rate3.61%3.62%-0.01

Should you lock a mortgage rate?

A rate lock guarantees your interest rate for a specified period of time. It’s common for lenders to offer 30-day rate locks for a fee or to include the price of the rate lock into your loan. Some lenders will lock rates for longer periods, sometimes for more than 60 days, but those locks can be pricey. In today’s volatile market, some lenders will lock an interest rate for only two weeks to avoid unnecessary risk.

The benefit of a rate lock is that if interest rates rise, you’re locked into the guaranteed rate. Some lenders have a floating-rate lock option, which allows you to get a lower rate if interest rates fall before you close your loan. In a falling rate environment, a float-down lock could be worth the cost. Because mortgage rates are not predictable, there’s no guarantee that rates will stay where they are from week to week or even day to day. So, if you can lock in a low rate, then you should do so rather than gamble on interest rates falling even lower.

It’s important to keep in mind: During the pandemic, all aspects of real estate and mortgage closings are taking much longer than usual. Expect the closing on a new mortgage to take at least 60 days, with refinancing taking at least a month.

Why do mortgage rates move up and down?

Mortgage rates are influenced by a range of economic factors, from inflation to unemployment numbers. Typically, higher inflation means higher interest rates and vice versa. As inflation rises, the dollar loses value, which in turn drives off investors for mortgage-backed securities, causing the prices to fall and yields to climb. When yields climb, rates get more expensive for borrowers.

Generally speaking, when the economy is strong, more people buy homes. That drives demand for mortgages. Increased demand for mortgages can cause rates to increase. The opposite is also true; less demand can lead to lower rates.

Current mortgage rate landscape

The current mortgage rate environment has been unstable because of the coronavirus pandemic, but generally rates have been low. Mortgage rates are rising and falling from week to week, as lenders are inundated with forbearance and refinance requests. In general, however, rates are consistently below 4 percent and even dipping into the mid to low 3s. This is an especially good time for people with good to excellent credit to lock in a low rate for a purchase loan. However, lenders are also raising credit standards for borrowers and demanding higher down payments as they try to dampen their risks.

Methodology: The rates you see above are Bankrate.com Site Averages. These calculations are run after the close of the previous business day and include rates and/or yields we have collected that day for a specific banking product. Bankrate.com site averages tend to be volatile — they help consumers see the movement of rates day to day. The institutions included in the “Bankrate.com Site Average” tables will be different from one day to the next, depending on which institutions’ rates we gather on a particular day for presentation on the site.

To learn more about the different rate averages Bankrate publishes, see “Understanding Bankrate’s on-site rate averages.”

Shopping for the right mortgage lender? See reviews of lenders nationwide.

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U.S. mortgage rates nudge up, yet remain near all-time low mark

For the sixth consecutive week, U.S. mortgage rates stayed below 3.30 percent, according to Freddie Mac.

The 30-year fixed mortgage rate averaged 3.18 percent for the week ending June 4 — up slightly from 3.15 percent last week. A year ago, mortgage rates stood at 3.82 percent.

Low mortgage rates help propel U.S. home sales and the refinance market.

“While the economy is slowly rebounding, all signs continue to point to a solid recovery in home sales activity heading into the summer as prospective buyers jump back into the market. Low mortgage rates are a key factor in this recovery,” said Sam Khater, Freddie Mac’s chief economist. “While homebuyer demand is up and has been broad-based across most geographies, supply has been slower to improve. In fact, the gap between supply and demand has widened even further than the large gap that existed prior to the pandemic.”

Favorable rates have been helping Dayton-area home sales, especially home prices. However, local sales fell 22 percent in April largely due to the Covid-19 pandemic, according to Dayton Realtors.

The previous record low was 3.23 percent in early May.

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Like Reverse Mortgages, Alternative Equity Tapping Faces Educational Hurdles

A reverse mortgage allows senior citizens to access the equity they’ve built up in their homes in order to access additional cash to accomplish certain goals. Whether that’s making ends meet during their post-working years, to finance a home improvement project, to pay for some kind of care or to tap a more stable resource in a down stock market, the reverse mortgage can provide a necessary degree of flexibility for those who can qualify for it.

That fact is key, though: not everyone who seeks out a reverse mortgage can qualify for one, whether you’re talking about an FHA-sponsored Home Equity Conversion Mortgage (HECM) or the increasingly expansive suite of private reverse mortgages being made available by lenders. For those who may be either unable or perhaps unwilling to engage in a reverse mortgage transaction, alternative equity tapping companies can present a viable alternative in the form of products like sale leasebacks or shared equity investments.

However, similarly to the kinds of hurdles faced by reverse mortgage companies that often have to deal with rampant misunderstanding of the product category, alternative equity tapping products are largely an even deeper niche than reverse mortgages and come with their own levels of misunderstanding.

Similar hurdles to understanding

For shared equity investment company Point, product education accounts for a major investment and aligns with one of the company’s core values of transparency. This is according to Michaela Gifford, business operations lead at Point.

“We require homeowners to have a comprehensive understanding of what Home Equity Investments (HEI) are and their associated costs,” Gifford tells RMD. “Although HEIs are new to some homeowners, it’s a very intuitive class of product. Fractions are one of the earliest tools we all learn in elementary school math so fractional sharing of home equity and appreciation is easy for homeowners to grasp.”

For senior clientele who are generally already familiar with reverse mortgages, the fractional sharing arrangement of Point’s HEI product provides an “easy-to-comprehend alternative to complicated negative amortization tables,” Gifford says.

QuantmRE, which also offers a shared equity investment product, tends to focus on offering an alternative to debt-based lending in its appeals to clients. This helps to facilitate greater understanding according to Matthew Sullivan, founder and CEO of QuantmRE.

“In each case where the homeowner is looking to unlock equity, they are looking for a cash sum that they can use for a specific purpose – for example, paying down high cost credit cards, remodelling their home etc,” Sullivan says. “In our case, we are offering an alternative, equity-based solution that gives the same outcome that the homeowner wants from a loan – i.e a cash lump sum. Our challenge is to explain how it is possible for us to provide this lump sum without the additional burden that comes with a debt-based product.”

When facing major challenges for product education, the biggest issues that QuantmRE stems from their being confused for a lending entity because of the explanations surrounding a lack of interest, monthly payments and debt. The company also encounters assertions about the cost of engaging in such an arrangement, and suspicion from seniors that it’s some kind of scheme to take away their homes.

“These types of reactions are understandable because the product is relatively new and solves such a huge problem for so many homeowners,” Sullivan says. “In order to combat these initial (misguided) assumptions, it is important that all of our communications with potential customers are entirely open and transparent. My view is that all of the companies in this sector (QuantmRE, Unison, Point, Noah, Hometap) are working towards the same objective. I believe all of the companies in this sector understand the importance of building trust with potential customers at every stage of the process.”

Comparison with reverse mortgages

When it comes to comparing the ubiquity of alternative equity tapping products, the alternative products have a noted advantage due to its relative simplicity in comparison with reverse mortgage products. This is according to Jarred Kessler, CEO and co-founder of sale leaseback company EasyKnock.

“I think [a sale leaseback] is a much easier product to understand,” Kessler tells RMD. “We’re buying your home, you pay us this rent, and this is what you get at the end. So it’s not as complicated, it’s pretty straightforward to understand. But, the brand awareness and the trust factor is more challenging because people may have not heard about it before.”

Still, EasyKnock has previously engaged with the reverse mortgage industry in the past to facilitate solutions for borrowers who may not qualify for that product, and that acceptance has only increased due to current events, Kessler says.

“We’ve seen an accelerated acceptance of our product,” Kessler says. “[We’ve even seen] reverse mortgage loan officers expressing interest in finding more arrows in the quiver to sell, because either they can’t sell the reverse mortgage, or more people need other options.”

In Point’s case, comparison with a reverse mortgage to facilitate more understanding isn’t described as a key element since it has a counseling apparatus to ensure optimal understanding of the arrangement by clients. It’s during this counseling process that reverse mortgages may come up as an alternative option for them.

“To ensure older customers have a thorough understanding of our product’s financial implications, we require that our customers aged 62 and over either a) complete a one-hour financial counseling session with an independent non-profit HUD-certified financial counselor, or b) have their heirs, as interested parties, review and consent to the HEI agreement,” Gifford says. “During the financial consultation, options other than a HEI which may be available to customers are discussed, including reverse mortgages, other housing, social services, health and financial options.”

The ability to compare and contrast different options is generally helpful for clients in making a decision, Gifford shares.

“Customers 62 and over definitely value the ability to compare products as there may be a lack of familiarity with Point’s HEI and there may be false assumptions made of solutions like reverse mortgages,” she says. “It’s best for everyone if we strive to find the best solutions rather than just promote the product we happen to offer.”

At QuantmRE, sometimes prospective borrowers assume on their own that the shared equity investment it offers is itself a reverse mortgage, Sullivan explains.

“With many of our potential customers, we have seen that there is a natural assumption that our home equity agreements are some form of reverse mortgage as there are no monthly payments,” Sullivan says. “With regards to the comparison with reverse mortgages, we do try and explain at the beginning of the sales process that our agreements are not a loan, they are not a line of credit and they are not a reverse mortgage.”

Brand awareness

Even in comparison with reverse mortgages, shared equity investments and sale leaseback products are not nearly as well known as the concept of reverse mortgages. This presents a unique difficulty for alternative equity tapping companies to overcome that is decidedly different from the general perception of reverse mortgages in the public.

“For us, the biggest challenge is around awareness,” says Jeffrey Glass, CEO of Hometap. “We offer something that hasn’t really existed (at least not at scale) for homeowners. It can be very confusing for homeowners to understand the difference between an equity investment in one’s home versus something like a home equity loan.”

Reverse mortgages don’t often come up in Hometap’s educational processes, since most of its clients are exploring an alternative to other kinds of home-based solutions, Glass shares.

“Reverse mortgages do not come up often in our conversations, since most of our homeowners are considering us in comparison to cash out refinances, HELOCs and other second mortgage products,” he says.

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