Mortgage Rates category archives

Yeah, that’s right.  The biggest kick in the stomach since the September/October meltdown of 2008.   What is that kick in the stomach?

It’s the government’s withdrawal from the mortgage backed securities market.  We’ve already talked about how the government’s market share in the residential mortgage market has climbed to an all time high.   But this is something else.   In addition to that, the government has committed to spending almost $1 Trillion (that’s $1,000,000,000,000) in buying mortgage backed securities in an effort to keep rates lower.

If you recall, when the Fed announced they were buying Mortgage Backed Securities, rates dropped by .375% over night.    As we’ve discussed on here before, many people believe that it’s reasonable to expect rates will edge up by about that amount over the next 5 months as the Fed winds down their purchase plans.

But this article, and the report that Meredith Whitney gave yesterday (see the next post) give serious credence to the fact that it could be substantially worse than that.   Why?

• Because the credit qualify of mortgages has deteriorated substantially since then.
• Because the investment market has changed since then.
• The appetite for mortgage backed securities is probably substantially less than what they expect that it is.

Now if we apply the Vanderwell Rule of 50% (what’s that? - simple, take their estimates and “tone them down” by 50%) what does that say for mortgage rates?

It essentially says that we’re going to be looking at a minimum of .5 to .75% higher rates in the next 6 months.

Viewpoint: Like Us, Whitney Sees Risks in Fed’s MBS Exit : HousingWire || financial news for the mortgage market

I’d qualify that – I’d say let’s hope it emerges into the public view over the next four months, because it could be – if the Fed exits as planned at the end of first quarter 2010 – the biggest kick in the stomach housing and financial markets have gotten since surviving the near total shut down of credit last fall.

Nothing…..

Did they change anything on their statement?

Nope.

Will it have an impact on mortgage rates?

I don’t think so.

Freddie Mac just released their quarterly Refinance Report, which shows that half of borrowers who refinanced a conventional loan during July-September 2009 lowered their mortgage rate by at least 17 percent, or 1.1 percentage points below their old rate.  The accumulated savings from all of these refinances amounts to $3 billion over the first year of the new loans.

What’s driving people to refinance their homes?  Historically low mortgage rates. 

Current mortgage rates are significantly lower than they were just a few months ago. Today’s average 30-year mortgage rate of 4.78 percent is now 77 basis points (or 14 percent) lower than it was in June, when the 30-year fixed mortgage rate was at 5.55 percent, the highest level this year.

That means that on a $200,000 loan (assuming a home value of $250,000), the monthly principal and interest payment would now be $1,046.91 versus $1,141.86 for the same loan in June, saving the borrower $94.95 per month, or $34,182.00 over the life of a 30-year loan.

If you are thinking about refinancing, now is a great time. An easy way to shop for a mortgage is through Zillow Mortgage Marketplace.

• Submit an anonymous loan request, and receive unlimited custom quotes from lenders.  On average, borrowers receive 26 quotes within seconds. 
• Sort and filter quotes by APR, rate, fees, monthly payment, lender rating, distance to the lender, or True Cost, which incorporates interest rate, fees, points, and time into one easy-to-compare number.
• Use the interactive Break-Even graph to determine how long you need to live in your home to offset the cost of refinancing.  This graph also show the cumulative savings that will occur over the life of the new loan.
• After comparing quotes side-by-side and reading lender reviews and ratings, you decide which lenders to contact…they don’t call you.

Lots of news happening today:

• Gross Domestic Product for the 3rd quarter came in on a preliminary reading at 3.6% up.   That’s great news, right?  Well, it’s good news, but look at the temporary stimulus measures that propped that up.   The cash for clunkers auto stimulus program is supposed to have added 1.7% to the overall number.   So we’d be at 1.9% without that.    What do you suppose the housing market would look like without it’s $8,000 version of cash for clunkers?   Yeah, that’s right.    So, besides for the temporary stimulus measures, which are exactly that, temporary, we’re not looking all that good.   Temporary euphoria going on in the stock markets and on CNBC right now though.
• Speaking of temporary euphoria - the markets are happy because initial jobless claims fell by 1000.   That’s right ONLY 530,000 people got laid off last week.   Whew, that feels better.    NOT.
• Exxon Mobil’s earnings fell - but remember what oil prices were like a year ago?   No big surprise there.
• The talk continues in Washington about whether there really is a too big to fail and what to do with the likes of Citibank, AIG, GMAC and the like.   
• The talk continues about an “extend and pretend” home buyer tax credit designed to push the housing troubles down the road.   Lots of talk, lots of people saying that it’s passed.   It hasn’t yet.    Passed a couple of committees, yes, but a true up or down vote in front of the House and Senate and signed by the President, nope.    When we do have a solid plan, I’ll tell you what I know and what I like or don’t like about it.   Until then, it’s all rumor and innuendo.

So what are mortgage rates doing with all of this news?   Really nothing.   Rates have remained stable today.

My recommendation remains to lock all loans because the potential for an increase in rates is greater than a potential for a decrease.

Stay tuned, it could be an interesting week with the jobs claim next Friday, the Fed meeting soon and just a lot of stuff going on.

Markets: The bond market has reversed itself the last two days and is headed higher once again.  It has broken through a couple of lines of resistance and is now trading at what my sources say is “an unsustainable level”.  More on that below.  Current levels on the FNMA bond correspond to 30-year fixed rates below 5%, though not very much below.  Still.

Analysis: What is the definition of “unsustainable”?  If you ask me, unsustainable means “you can’t keep doing this forever”.  These days, it seems to also mean “you can’t keep doing this for long enough to matter,” as when a football team grabs an early lead through fancy trick plays, but shortly runs out of those and cannot sustain the advantage.  It matters which we’re talking about, because the bond market certainly is in Unsustainable 1 territory, but not - again, just as clearly - in Unsustainable 2 territory.  We know this because we’ve been here before.

So we’re here, and we’re here long enough to matter, IF.  It is absolutely true that most lenders (and this is especially true with the new federal babysitting regulations) cannot react fast enough to help you take advantage of rates that will be abnormally low for only a few hours.  It is also true, however, that some lenders can, and the number that have that capability can be increased by your timely action.  DO NOT WAIT FOR RATES TO HIT YOUR TARGET ZONE BEFORE YOU START TALKING TO YOUR LENDER.  That’s not going to work, people.  For most, a couple of hours is just not enough time to get all the documents whizzed back and forth before a lock becomes possible, not with rates moving with this kind of volatility.

Since I already used the running analogy last time, let me use a hunting one here.  If you think you’re going to get the perfect shot on a deer by waiting for the deer to get in the right area, then going in after it, you’re crazy.  The way to make sure of a good shot is to get there first and wait.  Similarly, the way to make sure you get the rate you want - and 15-year rates are in the very low 4s right now, for instance, with 5-year ARMs in the mid 3% range - is to get your documentation together and go over it with your lender BEFORE you need to shoot.  That gives you the very best possible chance to get exactly what you want.

These days, a couple of extra days is a godsend.  Get moving now, and give yourself a break.

Here’s what I wrote about item #1 on the list last time:

6 months ago is ancient history. What your neighbor sold his house for 6 months ago doesn’t matter.   What the seller was asking for the house 6 months ago doesn’t matter.   What matters is what the market will support today.

So, how are things the same and how are they different?   A couple of things that need to be discussed:

How are things the same?

• What happened 6 months ago is still ancient history.   Since I wrote the first piece, Fannie, Freddie and FHA have tightened up their appraisal guidelines and they will no longer allow an appraiser to use a sale that is more than 90 days old unless they have no other comparables and can write a 5 page essay of why they need to use that one.
• I can’t tell you how many times over the last 12 months, I’ve heard people say, “3 years ago, the seller bought the house for $100,000 more than what I’m paying the bank for it.   I’m getting an awesome deal!”    My first response is, “Maybe.”   Maybe you are getting a deal.   But maybe the seller bought it at the peak of a bubble in the market and paid way too much and now things are just adjusting down to the market.    Maybe it’s not down to what the market will really absorb for the house and if you tried to sell it next year, you’d end up selling it for less than you paid for it.
• “They just dropped the price by $50,000!”   This is a great deal!    Maybe, but then again, I can put my house on the market for $650,000 and then offer to give you $100,000 off the asking price.   Is that a good deal for my house?  (Hint - my house is still WAY overpriced at $550,000 - but I’ll sell it to you for that.)

So what is different?   A couple of things are a bit different from last year:

• The First Time Home Buyer Tax Credit/Buyer Frenzy - If you are any where near the radio/newspaper/any mortgage lender or Realtor, you’re probably getting sick of hearing about the $8,000 first time buyer tax credit.   I’ve written about it before and I’m not going to discuss it here other than to discuss it’s impact on property values.  
• As the number of first time buyers has skyrocketed in virtually all areas (got to get that free money), it has stablized and in some areas has turned around the property values in the lower end of housing prices in many areas.  
• So that can actually show prices now being higher than what they were 6 months ago (for certain segments of the market - but certainly not all of them).  Does that mean that the market has turned around?   Do you rush to buy now because houses are going to be more expensive next year?
• Or is real estate going to follow the same route that automobiles did with the “Cash for Clunkers” program?   You know, the one where sales spiked during the first few weeks of the plan, then slowed down and after the program was over, they dropped quite dramatically?   If that happens to real estate, then how does that play into the plans of  first time home buyer?    If they can’t make it to the November 30 deadline (and time is almost up), do they buy now any way thinking prices are going up or wait because prices are going to come down?

In summary, 6 months ago is ancient history in real estate even today.   However the government’s initiatives that have been attempting to prop up the housing market and encourage first time home buyers have made the calculations and prognostications of what is and what might happen with housing prices much more challenging.

Next we’re going to look at the question of whether what you paid for your house matters or not and the negative equity situation.

Okay, here’s basically what Paul Volcker is saying:

• The government needs to start unwinding the “bailout” programs that it has done and it needs to do that before it looks like they need to, not after we can all see that we need to.
• If we wait until we can see that we need to do it, it’s too late and the problems are going to get out of control “on the other side.”
• He’s got a lot of credibility in this area because he is the guy who gets credit for stopping inflation back in the early ’80’s but he had to raise rates to 20% to do so.

So what does that mean to interest rates?   Particularly the rates that we’re most concerned with, mortgage rates?

A couple of thoughts:

• If the government unwinds their programs (the free money, the ultra low interest rates, etc.) in a systematic and measured response and starts doing so before inflation becomes an issue, I expect that we’ll see interest rates go up by a substantial but rational amount.
• If the government doesn’t unwind their programs until after inflation becomes an issue, then we’re going to see the entire interest rate market get hammered and we’re going to see the Fed have to raise short term rates a LOT higher than they would if they have a reasoned and proactive approach to it.   This in turn will put a LOT of upward pressure on mortgage rates and I expect we’ll see rates that will make us long for the days of 6 and 7% rates again.

Let’s face a couple of realities of the markets:

• Money can’t stay “free” forever.   Rates are going to go up - the only question is by how much.
• When someone borrows money, they eventually have to pay it back.
• The greater the risk of inflation, the higher the rates are going to be.
• The more proactive the government is fighting inflation, the lower rates are going to be.

Fed Can’t Wait Too Long for Policy Shift: Volcker - General * US * News * Story - CNBC.com

The enormous amounts of liquidity pumped into the U.S. financial system by the Federal Reserve are not inflationary “at the moment” but will become so at some point, Paul Volcker, the former Fed chairman and a White House adviser, said on Thursday.

Volcker, now an economic adviser to President Barack Obama, said it was difficult, but necessary, to start draining the billions of dollars in liquidity even while unemployment rates remained high as the U.S. battles out of recession.

“You have to act against what seems like common sense. If you wait, it’s too late,” Volcker said while answering questions after a speech on financial markets at Harvard University’s Kennedy School of Government.

Volcker is best known for bringing down raging inflation in the United States after he was appointed Fed chairman in 1979 — chiefly by pushing the federal funds rate, the central bank’s key policy tool, to a peak of 20 percent in 1981.

Okay, here’s my synopsis of what Dr. Roubini is saying:

• Yes some of the rally is fundamental.   Any time you step back from disaster, there’s a sense of “wow, we survived.”
• But the market is rallying like a V shaped recovery is happening and the current employment situation doesn’t justify that.
• So, we’re most likely going to see an adjustment in the market.   Roubini’s estimation is some time in the next 6 months.

So what does that mean for the mortgage markets?
A couple of scenarios that I can see playing out:

• If the adjustment/correction is a mild and orderly one (they haven’t been lately), then I don’t expect it will have a major effect on mortgage rates.   Money would move from the stock market to the bond market and that could push down some, but not significantly.   Keep in mind that at the same time, we’ll have the upward pressure of the Fed leaving the mortgage backed securities market.   So I’d expect the two to wash out with very little change.
• If the adjustment is a CORRECTION, we could see a dramatic movement of money.   Depending on the emotional toll that comes from it (aka “here we go again?”), will determine if money goes from the stock market into bonds and mortgage backed securities (push down on rates - see above) or if money goes all the way to cash.   If people just get out of the market and take everything to the sidelines, then we could see higher rates and lower stock prices.

The way I see it, if Roubini is right (and I wouldn’t bet against him on this one), the two most likely scenarios of how that would play out would result in either stable rates or rising rates.

Keep that in mind as you make plans going forward.  

Roubini Warns of ‘Significant Amount of Froth’ in Markets - Real Time Economics - WSJ

“Some of [the rally] is fundamental,” he said. “We avoided Armageddon, there is a light at the end of the tunnel, and risk aversion is lower.”

“But it has occurred so fast, so soon, in my view that it’s diverging from the underlying economic fundamentals,” he said. “Markets today are pricing in a V-shaped recovery and they have to start pricing in a U-shaped recovery, so the fourth quarter or first quarter could see a correction.”

Rates aren’t the only consideration when shopping for a mortgage - but they get all the attention.

Consumers often compare mortgage rates as if they were shopping for the best deal on a DVD player or a trip to Mexico. But borrowing money is an entirely different endeavor because a consumer’s individual financial profile directly affects the terms of the loan. Banks aren’t selling 60″ plasmas, they’re investing in real estate. And like all other investments, the transaction involves a certain amount of risk. After all, when lending money, banks are looking to minimize risk.

The best loan candidates garner access to the widest variety of programs at the lowest rates - and two seemingly similar loan candidates can lock-in different rates. Why is this?

Knowing methods lenders use to evaluate risk factors will give you a better understanding of how rates are determined – and how you can become the ideal mortgage candidate.

Credit. Lenders reward borrowers who can verify strong longstanding credit history with timely payments across several credit lines. While a 680+ score used to be the top range, lenders have raised the threshold to 720, giving even higher rewards to 740+ candidates.

Equity. Lenders offer premium rates to borrowers who are more financially vested in their property. 20% equity (or down payment) enables borrowers to forego a second loan or private mortgage insurance, and shows a solid commitment to retaining the property. 40% equity / down payment (and above) can yield an even higher reward with access to better rates.

Income. Lenders prefer borrowers with a steady paycheck. Self-employed or commission-based borrowers must furnish tax returns from the previous two years in order to demonstrate a steady stream of income. The same applies for borrowers who own their own businesses.

Escrow. Property taxes exist in the first lien position. Essentially, the government is “always at the top of the list” and must be paid first for you to maintain proper title and ownership of your property. Lenders prefer to pay your property taxes directly to the government to ensure timely payment and to protect their investment. Adding tax escrows to your mortgage payment increases your monthly balance, but it’s a stress-free way to save for your bi-annual tax payments.

Residence. Home is where the heart is - and lenders price rates on primary “owner-occupied” residences lower than those on vacation homes or rental properties. Banks minimize their risk because borrowers are more likely to maintain their immediate surroundings rather than a property they visit infrequently or rent to others.

Loan Amount. Fannie Mae and Freddie Mac insure conforming loans. In the State of Illinois, the maximum conforming loan amount is $417,000 (and has been since January 1, 2008). Loans above $417,000 are not insured by these government agencies. While it would make sense that lenders want you to borrow “more” in order to increase their return on a larger principal, they’d actually prefer to decrease their risk and value an insured investment over a larger, more profitable loan.

Purpose. Often times, a lender will consider the “loan purpose” as a risk factor when determining lending guidelines. For example, if you’re refinancing your loan to obtain cash (i.e. a “cash-out” loan), your interest rate might be slightly higher. If you’re refinancing a first and second loan, a lender will offer slightly higher rate if your home equity line of credit or “second” loan was secured after your home purchase.

Knowing these factors will help you understand why there isn’t just a universal interest rate for every single borrower - and why you might garner a different rate than your neighbor, co-worker or even your spouse.

Consult with mortgage advisor at least once every year to review your mortgage and to learn if you can capture a better rate or adjust your program as your own financial needs change. If you’re thinking about selling or refinancing, check your credit for any erroneous claims and to ensure that your bills are up to date.

Good luck!