Things We Heard When We Put Our Ears to the Ground:

Mortgage Guidelines are tightening up

Chase this week planned to reduce the maximum Loan to Value (LTV) down to 70% on all its jumbo mortgage products for properties in New York City. That means, if you plan to borrow more than $765,600 to buy a residential property in the city, they’ll require a minimum 30% down payment. 

Chase and other banks also made it more difficult for self-employed borrowers this week. Some lenders won’t offer jumbo mortgage products to a self-employed borrower at all, while others will make a hefty pricing adjustment in those situations, pushing rates higher or bumping up the overall cost of the loan. 

When guidelines tighten up or adjustments are made to a rate, it’s always an indication of risk, or at least perceived risk. Lenders limit risk by tightening guidelines and they hedge against riskier situations by charging more to borrow in those instances. 

The changes that Chase made will impact both its retail mortgage division as well as dozens of correspondent and wholesale lenders who fund jumbo loans through massive lines of credit with Chase. So it’s not just the mortgage banker you’d find at the branch. There are still other options, but pay close attention because mortgage lenders often play follow the leader. 

CAP Rate Challenge

At the very beginning of the pandemic, in the early weeks of quarantining, The Espinal Adler Team challenged its members to find apartments that would make ideal investment properties. In this particular challenge, the only criteria was to find condo units in Manhattan or Brooklyn with an attractive “cap rate,” which is short for capitalization rate. 

Investors use cap rate to measure the potential return on a real estate investment. The formula for calculating cap rate is simple. You divide a property’s net operating income by its total value (or actual purchase price). 

Higher prices in Manhattan compared with most other places results in relatively lower cap rates. The team found several units with a cap rate over 4% and a few that even approached 5%. If we would have expanded our search to Queens or the Bronx, we likely would have seen cap rates over 7%. 

Since then, the Manhattan real estate market has been turned on its head. Asking prices have fallen significantly in most instances, but rents have fallen even more dramatically. Both purchase price and rental income are primary variables in the cap rate formula, so we thought it would be interesting to compare numbers from the exercise to what we’re seeing today. 

Back in April, one of the agents on the team found a 2-bedroom condo on the West Side with a cap rate of 4.15%, a relatively attractive number at that moment. The asking price was $1,900,000 and similar units in the building were fetching around $83 per square foot for rent. 

Even if we assumed we could get a 15% discount on the price, and the seller dropped to $1,615,000, similar units in the building are now renting for around $56 per square foot, dropping the cap rate in that scenario to 2.85%, significantly worse than what we saw prior to the pandemic. 

Remember, cap rate is just one way to measure a property’s worth and it doesn’t even take into account the property’s potential to appreciate in value. 

The Vibe from Loan Officers

A lot of loan officers I know have been on edge lately. Their refi rollercoaster might be slowing down just a tad, but most of them still have a healthy pipeline of loans that need to make their way through a clumsy, jammed-up process. 

From a monetary standpoint, an overwhelming pipeline of loans is a great problem to have for any loan officer. The more you close, the more you make. But psychologically, it’s a bumpy road. 

I’ve heard a lot of 2020 horror stories about refinances lasting for five, six, and even seven months. During a period of normal volume, a refinance might make it through in 30-60 days, so when it drags on for more than twice that long, borrowers begin to lose their patience. Delays by the bank cause your supporting documentation to expire, which means you have to gather another round of pay stubs and bank statements.  

If you haven’t refinanced in the last couple of years and you think you might benefit from it, enter the process knowing that it might take a while. Take comfort in the fact that you’re not legally obligated to close by a certain date, the way you are when you’re purchasing a home.