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Lessons in Lending

by admin

An end to the buying frenzy, less speculators and a return to a normalized market: Nobody said South Florida’s mortgage industry was boring. Greater Miami’s top lenders can prepare you to best serve your clients in the upcoming year. You can arm yourself with advice and information regarding new products, rising interest rates and tougher credit policies.

As Miami basketball fans, snowbirds and residents know, “heat” is a word often applied to South Florida. It’s a characteristic that packs our stadiums, drives our tourism and crowds our beaches. The word’s recent and frequent relation to the South Florida real estate market, however, is not as positive an application.

Amid talk of a “heated” South Florida housing market and rising public fear, it is especially important for real estate professionals to stay well informed. In order to assuage your clients’ doubts and help them secure the kind of financing that can seal a deal, you’ll need to know what’s abuzz in the mortgage industry. Miami Agent has the breakdown from top area mortgage professionals who can identify and explain the most significant industry trends and issues.

The past is the past
Realistic Realtors should be prepared for the fact that the excellent market conditions that fueled home sales cannot be sustained through the coming year.

“[The year] 2005 was a free-for-all,” says Sara Gutierrez, president and CEO of Brickell-based mortgage firm South Bay Lending. “Lenders were relaxed in their guidelines and allowed more investors with little assets to enter the marketplace. In 2006, credit guidelines will be stricter, as requirements to purchase investments will be harder to achieve.”

Robert Ward, the East Florida area sales manager for National City Mortgage, says the low rates offered to buyers in 2005 are part of the reason rates are going up in 2006.

“Pay option adjustable rate mortgages were extremely popular,” he says of last year’s trends. “These loans have negative amortization, meaning your principal balance increases after each payment and, typically, carry an artificially low rate for the first month and higher than average rates thereafter. In 2005, many people forgot that interest rates go up, too, and have been caught off-guard in this ‘moderately increasing’ rate environment. Just imagine what will happen when rates continue to move upward.”

A bright future
On the bright side, South Florida will likely not feel the impact of these rising interest rates as heavily as other markets. Brian Cumpton, the branch manager of National City Mortgage’s Biscayne office, says that while the rising interest rates might decrease the buying power of local buyers, South Florida will continue to benefit from its international ties.

“The South Florida market is not as dependent on the national and local economies, compared to other markets in the United States,” Cumpton says. “We have a lot of foreign buyers, and they are as not affected by our rising interest rates because they can borrow money from other economies.”

In addition, Ward notes that while “speculator” purchases will likely decrease, the entirety of the housing market will not be affected.

“The normal owner-occupied, second-home and buy-and-hold investor purchases will stay at pretty good levels,” he says.

Shanda Peetros, a mortgage consultant at the Broward-based Homewealth Financial, says that 2006 will have some favorable changes in store. “The new federal laws regarding credit cards will facilitate debt consolidation,” she says. “The increased conforming limit makes lower rates available for people who have Jumbo loans.”

A stable South Florida
As bad as the idea of rising interest rates sounds, both Gutierrez and Ward maintain that the news is not negative. In fact, many mortgage professionals believe that in the long run, South Florida will benefit from the inevitable market correction.

“Fewer speculators, a.k.a. ‘investors,’ will mean a more normalized market for us in South Florida,” Ward says. “In my opinion, the upward movement in interest rates will mean people will be less inclined to jump into real estate.”

In turn, this more calculated approach to real estate purchases will help lead to a stable, reliable market that will also drive investment.

“I think that in 2006 the marketplace will become more stable and less volatile,” Gutierrez says. “The buying frenzy will be calculated based on real rates of returns, instead of an inflated return.”

Protected by ‘Big Brother’
As the inflated market is normalized, the individual investor can operate in a safer environment.

“The ‘speculators’ and ‘flippers’ will be tempered,” Ward says. “This is a result of not only interest rates but a wave of proposed regulations by many of the government agencies who regulate banks, credit unions and mortgage companies that are meant to correct some of the excesses we’ve seen by speculators. If these changes pass, it may be much harder for flippers and speculators to do the ‘little or no money down’ thing.”

Gutierrez agrees. “I predict the credit policies for lenders will limit the inexperienced investor from entering the marketplace.”

What goes up…
Interest rates may be rising, but that does not mean all prices will increase. In fact, rising interest rates could mean lower housing costs.

“Affordability dictates prices,” Gutierrez says. “The consumer will buy if he or she can afford to carry the debt. As rates increase, there will be a reduction in affordability. Properties will stay on the market longer, as sellers realize that the prices that were being asked in 2004 and 2005 are no longer affordable in the current market. This realization on behalf of the sellers will cause the prices to drop in order to even out with the rise in the rates.”

What to expect
In terms of which mortgage plans are most popular, both Ward and Gutierrez cite interest-only products.

“Interest-only mortgages are definitely something that have caught on big,” Ward says. “Typically, these mortgages are fixed for a period of three, five, seven or 10 years and have interest-only payments for the first 10 years. After 10 years, the borrower is required to start paying principal and interest. These loans help many people get a home that they normally can’t afford.”

“The long-term, fixed interest-only products will allow many to afford bigger mortgages while keeping the monthly cash flow affordable,” Gutierrez adds.

However, Ward notes that this kind of loan comes with a risk. “Since you’re deferring your principal payments to a later date, your monthly payment will go up,” he warns.

Cumpton points out there is a variety of interest-only products, and buyers should be careful when making their choices.

“A lot of short-term borrowers and investment property owners have chosen to go with interest-only products,” he says. “These are not the negative amortization loans, but loans that require interest-only payments each month. Therefore, these are a lot safer than those option ARM products that have a negative amortization option attached to them and adjust on a monthly basis. Most borrowers today are becoming more and more educated on how to use their home or their investment property as a true investment to them.”

Choosing wisely
To help your client truly make the most of his investment, you can suggest careful and long-term choices, according to our experts.

“[The year] 2006 will be a good year to invest in real estate if you have the reserves to keep the property for several years,” Gutierrez says. “The investor who plans on buying and flipping will not be gratified, whereas the long-term investor will see the increase in value over the next three to five years.

“Any year is a good year to invest in real estate if you look for the good deals,” Ward says. “There are good deals in every market. You just have to find them.”

Of the group, Peetros is the most optimistic. “People are still buying homes,” she says. “Homes will continue to appreciate, even if at a more stable rate. I think the market is still hot and the trend is still high and, this year, people will be investing in condos and co-ops. I think that investing in Florida, you can’t go wrong.”

COPYRIGHT 2006 AGENT PUBLISHING LLC

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CONTACTS

Shanda Peetros
Senior Mortgage Consultant
Homewealth Financial
[email protected]

Robert Ward
East Florida Area Sales Manager
National City Mortgage
[email protected]

Sara M. Gutierrez
President/CEO
South Bay Lending
[email protected]

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