MORTGAGE RATES REPORT

June 18, 2009 Mortgage Rates Report: Ouch! 5.5%

Mortgage rates rose, yesterday afternoon and early today.  Yesterday's decline was old-fashioned profit taking, by mortgage bond traders.  Today, the renewed theme of economic recovery and Government overborrowing revived the inflation hawks from the dead:

Treasuries fell for a second day as the index of U.S. leading economic indicators rose more than forecast in May and the U.S. prepared to announce the amount of 2-, 5- and 7-year notes it will sell next week.

Ten-year yields climbed from a two-week low amid concern President Barack Obama’s record borrowing will overwhelm demand as the deepest recession in 50 years shows signs of easing. A government report showed manufacturing in the Philadelphia region contracted at the slowest pace in nine months and the Labor Department said the total number of people continuing to collecting unemployment insurance dropped for the first time since January.

This is why I'm "biased towards locking rates".  We had been floating loans since last Friday and yesterday morning, I locked on the early strength.  Amazingly, the mortgage rates market deteriorated by .375% in rate between NOON (PST) yesterday and this morning.  I'd like to say I'm prescient but I"m just risk averse.  When the mortgage bond traders sell off to the extreme, I'll float for a few days but I never want to be to greedy.  That's why I pulled the trigger yesterday morning and initiated locks.

Let's continue the bias and lock all new loans at application.  I think we'll see weakness through tomorrow and Monday in fear of the amount of money the Government borrows.

We're back to Monday's original rates:

Conv        5.3755% (no points)  5.125% (1 point)
FHA          5.5%  (no points)         5.25%  (1 point)
VA              5.5% (.25 point)           5.25%  (1.25 point)

All loan quotes assume a 740 credit score, full income documentation with acceptable debt-to-income ratios, and required down payments (20% for conventional, 3.5% for FHA, and zero-down for VA).  We will charge a 1% origination fee plus a $695 processing fee.

Apply online now.  It's really simple and should take about 20 minutes.

What's The Cost Of Renting?

Does buying REALLY make sense?  In this goofy real estate market there really are some costs associated with renting instead of buying a home.  Opportunity costs but costs nonetheless.

Why are folks buying homes today?

1- They're cheap. It's going to go up in price. It won't be for awhile but still a good reason to buy .
2- You can write off your mortgage interest.  That's not true for most home buyers today.
3- A fully-amortizing loan is like a forced savings account.  Illiquid savings account but I'll buy that.
4- The US Government is bribing people to buy homes.  We'll harvest that $8,000 tax credit.

Let's run some numbers.

June was considering a Pacific Beach condo for $278,000.  She currently pays about $1,000/month in rent.  She's considering this condo purchase with a VA loan because she's a veteran of the US Army.  Her total payment, including the property taxes and HOA fee, would be about $2200.  June's a nurse who makes $80,000.  She's single so she currently takes the standard tax deduction of $5,700. She plans to hold the home for five years and expects to sell it for 15% more than today's price; she'll net $296,000 after sales expenses (in 2014).

What is the cost of NOT purchasing the Pacific Beach condo today?

1- Let's assume June's right about the appreciation.  She stands to make $18,000 in five years; that's about $300/month.

2- June doesn't fully benefit from mortgage interest deduction.  If she stays put, she can write off $5,700/year (479/month).  She will have paid about $75,000 in interest over the next five years or $1250 per month.  When we back out her standard deduction ($479/month), her benefit of buying the home is that she can write off an extra $771/month.  She'll also be able to deduct her property taxes (289/month) for a total MARGINAL income deduction of $1,060.  That saves her about $365/month in income taxes.

3- June will pay that loan down to $257,000.  That builds equity up of about $350/month.

4- The effect of the $8,000 legal bribe is about $133/month, over five years.

5- June's closing costs are $6,000. Amortized over five years, that's an added expense of $100/month

June's opportunity cost of NOT buying, exclusive of appreciation, is $748.  Subtract that from the $2200 payment and her payment "feels like" $1452.  She gains $352/month by renting instead of buying.

The big question is...will June make 15%, over five years, by owning this home?

or...can June negotiate a lower price, by about $45,000, so that her monthly payment drops about $350/month?  At $233,000, June is actually losing money by renting.

June 17, 2009 Mortgage Rates Report: Approaching 5.0%

Mortgage rates have improved since last Friday.  I felt we could delay locks (float) in hopes of better rates and that's proved to be fruitful. Lock-in your mortgage rate on the strength of this improvement.

Inflation doesn't appear to be a threat.  Yesterday's Producer Price Index reflected the threat of higher oil prices but came in within reason; the mortgage bonds market liked what it saw.  The Consumer Price Index, released this morning, was well under expectations; this should be positive for mortgage bonds and could lead to lower rates.

I expect our morning rate sheets (no points, 1% origination fee) to look something like this:

Conv        5.125%
FHA          5.25% 
VA             5.25% 

Next week's Fed meeting could stifle speculation that it will hike interest rates later this year:

Federal Reserve officials are considering whether to use next week’s policy statement to suppress any speculation they’re prepared to raise interest rates as soon as this year.

While policy makers have signaled they accept an increase in longer-term Treasury yields as the economy improves, some are concerned at any premature anticipation of rate rises. Fed staff have examined the Bank of Canada’s public intention of foregoing an increase until 2010, according to a person familiar with the matter, without concluding the statement has proven effective.

I have mixed feelings about the Fed adopting a policy akin to the Bank of Canada's rate commitment.  Markets crave stability but react to reassuring news in a volatile fashion.  I wouldn't be surprised to see mortgage bonds decline on such news; traders might think the Fed has abandoned its commitment to taming inflation.  Counter-intuitive thinking?  Absolutely but reason and rational thought sometimes give way to fear.

I'll update rates later, if necessary.

Apply online now.  It's really simple and should take about 20 minutes.

 

What Wired Mortgage Brokers Are Saying About June Mortgage Rates

The first week in June inspires thoughts of lazy afternoons on the beach, stunning sunsets, camping, and family vacations.  The mercury on the thermometer is not the only thing rising; so are retail mortgage rates.  If you've been reading, you'll notice that mortgage rates jumped almost one full percentage point since Memorial Day weekend.

It spooked me to the point of changing my overall bias towards locking-in loans at application rather than cautiously floating rates to try and "snag the bottom".  Here's a look at what mortgage professionals who maintain an online presence are saying:

Dan Green from Cincinnati highlights why folks should shop for lenders, not loans:

The frenzied pace of change is making it next to impossible for mortgage applicants shop for "the lowest mortgage rate".  By the time a buyer talks to competing lenders and gather the rate quotes, it's time to start the process over again.  It's giving Skyline-style heartburn to home buyers in Cincinnati, for one.

Rhonda Porter from Seattle ponders a penniless Fed, still trying to keep rates low:

The New York Fed purchased another $25.8B in mortgage backed securites to attempt to keep rates at their artifical lows…it makes me wonder how much higher today’s rates would be if when they run out of the allocated funds or if they just decide to change plans and stop buying MBS.

Justin McHood in Phoenix reminds us that higher mortgage rates mean less buying power:

Although I don’t remember what 10%-20% interest rates felt like, I can remember well what 7% interest rates felt like – it wasn’t that long ago! If interest rates rise to 7%, the P/I payment on a $200k loan will go up by $327 per month.

Are we going to see 10% interest rates in the foreseeable future? I don’t know, I will leave that to the experts to pontificate about. What I can say for certain though is that as interest rates rise, people are going to buy “less of a house” than they are currently buying.

Orlando's Chris Brown explains why you have to shop for a loan quickly:

As markets worsened, selling begat more selling, amplifying Wall Street’s total losses. As mortgage bond prices fell, mortgage rates went up. By a lot.

Mortgage markets are notoriously fickle and yesterday’s events proved it. Days like Wednesday are precisely why insiders recommend shopping for mortgage rates in a compressed timeframe. The faster you finish, the lower the risk of losing low interest rates to new market conditions.

If you're shopping for a home loan, you can see that the loan quotes you receive are less important than the lender who issues them.  Find a lender with whom you feel comfortable.  If you choose to work with me, you can:

Apply online now.  It's really simple and should take about 20 minutes.

Don't Fight the Fed: June 2009 Rates Won't Break 5%

If you've been paying attention, you know that I have the heart of a trader.  I try to offer analysis  rather than opinion.  Last week, I felt the bond traders were overreacting to optimistic economic news and commentary by politicians.  I generally ignore those folks and focus on the Fed.  I said that one of the first rules of investing was "Don't Fight The Fed"; I won't.

This morning's par mortgage rates (with 1%origination fee):

Conventional:      5.375%
FHA/VA                    5.50%
Jumbo(>$417K)   5.875%          

Last November, The Fed released this:

The Federal Reserve announced on Tuesday that it will initiate a program to purchase the direct obligations of housing-related government-sponsored enterprises (GSEs)--Fannie Mae, Freddie Mac, and the Federal Home Loan Banks--and mortgage-backed securities (MBS) backed by Fannie Mae, Freddie Mac, and Ginnie Mae.  Spreads of rates on GSE debt and on GSE-guaranteed mortgages have widened appreciably of late.  This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally.

Yesterday, Fed Chairman Ben Bernanke said this:

We continue to expect overall economic activity to bottom out, and then to turn up later this year. Our assessments that consumer spending and housing demand will stabilize and that the pace of inventory liquidation will slow are key building blocks of that forecast.

Bernanke might just be off the "support the MBS market" bandwagon.  If he ain't opening the Fed checkbook, expect mortgage rates to naturally gravitate towards the 6% plus level by the end of the year.  This won't happen immediately so there will be periods of market overreaction, which will cause me to issue a "float" recommendation.  Generally speaking, my bias has changed from "there will be sunny days tomorrow", for mortgage rates to "there may be a storm-a-brewin'".

I've got you locked if you're closing your loan before June 21.  Today, I'm locking anyone who is closing by July 15, 2009.  The past two weeks have been a fun ride and many of you got 5% mortgage rates by being patient and nimble.  The tacit change in Fed bias has me too worried right now; lock all loans at application.

Apply online now.  It's really simple and should take about 20 minutes.

Expect June 2009 Mortgage Rates To Improve

UPDATE:  Now locking all loans closing before June 21, 2009.

The catastrophic mortgage rates meltdown is almost over.  The mortgage-backed securities market dropped significantly, driving retail par mortgage rates from 4.5% (8-9 days ago) to a high of 5.375% (Wednesday).  While many cautioned that mortgage rates were headed higher, I separated personal opinion from my analysis and suggested that bond traders overreacted.  I advised borrowers to suspend the rate lock decision until retail mortgage rates came back down to 5% or better.  I expected that to happen next week. 

I was wrong...

...it just happened.   One of our leading banks "repriced" this afternoon and the retail par rate is now 5.0%. 4.875% has a quarter-point cost.  If you have to close next week, 5.0% isn't a bad rate to grab.  I think we'll see the rest of the lenders follow this big bank's lead, early next week.

What could make this mortgage rate recovery advance to 4.5% next week?  Remember, mortgage bonds drive retail mortgage rates so we want to be looking for bond-friendly events. Investors look for safe havens when there is unrest in the world.  US Treasuries and mortgage-backed securities are a favorite safe haven.  If North Korea launches more missiles or Iran keeps taunting Israel to the point of armed conflict, investors might buy bonds which would drive down mortgage rates.  Increased Fed mortgage market intervention is likely too.

What could reverse the current recovery and send mortgage rates to 5.5%?  Inflation, or the fear of it, is the market enemy number one.  If traders think the economic recovery is nigh, we could see rates inch up again.  I think that's unlikely; the economic data we receive suggests the opposite.  If traders get back on the McClintock-Gross bandwagon and think that the US Government is about to declare bankruptcy, we'll see higher mortgage rates.

My money's on a sputtering economy, a pugnacious North Korea, an annoying Iran, and a sustained mortgage rates recovery.  I'm looking for rates to get back to to 4.75% by the end of next week.

Apply online now.  It's really simple and should take about 20 minutes.

June '09 Mortgage Rates May Not Rise, Despite Mortgage Industry Insiders' Opinions

Mortgage rates have jumped in the waning days of May, 2009.  This meteoric rise is striking fear into the hearts of home buyers, folks looking to refinance, and mortgage industry professionals.  I noted that three people triggered this collapse and suggested that locking-in a mortgage rate tomorrow, might just be a bit hasty:

What’s this mean to you? Locking in your mortgage rate is probably a hasty decision right now.  Expect Ben Bernanke to speak by Friday in his gentle, reassuring tone.  Tim Geithner should be front and center, calming down those impetuous bond traders tomorrow.  Mortgage rates should drift down by the end of next week.

The Chinese, Tom McClintock, and Bill Gross are all correct; the US government’s actions are inflationary and destructive.  They are all correct but early.  The time to panic will be this fall; hopefully you’ll do what you need to get done by then.

Why am I, a self-proclaimed “free-marketeer”,  banking on the Government to bail us out of this little mess? If you’re a regular reader of Mortgage Rates Report, you know that there are two sides to me:

1) conspiracy theory loving member of the Vast Right Wing Conspiracy (who is unhappy with our nation’’s course in fiscal policy) and …

2) buttoned-down, former Wall Street securities broker.  The latter side of my personality is more interested in the analysis of Government policy rather than the former side’s opinion. Lend your ear to the former securities broker rather than the crack-pot Libertarian.

What this means to you, the potential home buyer or mortgage shopper, is that my opinion, as far-flung as it may be at times, is subordinate to my analysis of the situation.  I tend to hold a contrarian opinion to the traditional,  mortgage industry, knee-jerk reactions to market movements.  While most originators scream “Rates are going up ! “, I want to be looking beyond the next 48 hours and trying to discover what might happen next week and next month.

I said, earlier tonight, that the Federal Reserve Bank has a boatload of money shelved to spend on the purchase of treasury bills and mortgage-backed securities, in order to provide access to cheap capital during the recession.  While I’ve never met the man, I have been reading Fed Chairman Ben Bernanke’s position papers, about the Fed’s role during The Great Depression, for years:

Despite the varied theories espoused by many establishment economists, it was none other than the Federal Reserve that caused the Great Depression and the horrific suffering, deprivation and dislocation America and the world experienced in its wake. At least, that’s the clearly stated view of current Fed Chairman Ben Bernanke.

I don’t expect him to change his posture because China waived its economic saber at one of his subordinates.

and now…

Here comes the excuse spin for MASSIVE Fed intervention over the next few days:

The Federal Reserve may step up asset purchases to prevent its balance sheet from contracting until policy makers are convinced an economic recovery has taken hold, Fed officials and analysts said.

Demand for some of the Fed’s emergency programs has waned as the grip of the credit crunch loosens, with loans to banks shrinking 38 percent since Jan. 1. The main tool to keep the central bank’s holdings from falling from the current $2.1 trillion would be more purchases of Treasuries, said analysts including former Fed Governor Laurence Meyer.

Demand for Fed loans has waned so it need more assets for its balance sheet (rather than reducing its liabilities).  What this means is that they intend to inject more liquidity into the system because they don’t see an economic recovery underway… just yet.  The unexpected jump in mortgage rates could stall the de-leveraging of the American consumer before fiscal policies could gain traction.  Make no mistake about it; the Fed wants everyone to have a shot at a 4.5% mortgage rate and will use all of the arrows in its quiver to get those mortgage rates down…

…until the close to a billion arrows left are all gone.

Don’t panic just yet. I’m sometimes early in my predictions but I think Bernanke’s going to be writing some big checks in the next 7-10 days.

Apply online now.  It's really simple and should take about 20 minutes.

Higher June '09 Mortgage Rates? Not So Fast

We’re in the “Era Of Finger Pointing” so I”ll just pile on; mortgage rates have skyrocketed in the past week and it’s all the Chinese, Tom McClintock, and Bill Gross’ fault.

Tom McClintock is a  California Congressman (and former gubernatorial candidate).  Congressman McClintock wrote an opinion piece, in the Washington Times this past weekend, that suggested that the budget crisis in California foreshadows the inevitable national crisis:

What can California do? Its credit is stretched to the breaking point, and increasing tax rates now produces decreasing tax revenues. Its deficit vastly exceeds resolution by conventional budget reductions. There is no line item labeled “waste,” and the state’s deficit vastly exceeds the truly obsolete and overlapping programs strewn throughout its budget.

McClintock’s summary and warning:

The decline and fall of the California Republic is a morality play in the form of Greek tragedy. Before dismissing California’s agony as the just price for its hubris and folly, though, heed this warning: Congress is well under way toward imposing the same policies on the rest of the nation. California is just a little further down that road.

Bill Gross is perhaps the most prescient fixed-income money manager in the world.  He’s often known for being early but correct.  Mr. Gross suggested that America’s soverign debt might lose it’s rock-solid AAA rating and that we’re headed for the junk bond heap:

Bill Gross, manager of the world’s biggest bond fund, warned on Thursday the United States will eventually lose its top AAA credit rating, a fear that had already spooked financial markets on Thursday and could keep the dollar, stocks and bonds under heavy selling pressure.

Throw in the unsolicited money management advice from our largest creditor, the Maoists, and you have a recipe for a panic run on mortgage bonds.

Mortgage rates responded appropriately; the mortgage-backed securities market sold off about 3% in the last five days.  This means that a 4.5% mortgage rate, that cost 1 point a week ago, costs 4 points today.  This is a short-term overreaction.   Moody’s rating service, mostly owned by Friend of Obama (FOO), Warren Buffett, reaffirmed the US Treasury’s Aaa (highest) rating today:

And today, Warren Buffett’s Moody’s (MCO) went ahead and decided to kick sand in Bill Gross’s face yet again. How so? Moody’s affirmed the U.S.’s Aaa rating, arguing that “the U.S. economy’s long-term resilience and key role in global affairs should bolster its ability to resume a strong performance following the current recession.”

In addition to the Gross-slap Warren Buffett administered today, the Fed still has $600-700 billion earmarked to support mortgage-backed securities.  This means that they can buy a bunch of mortgage bonds, to bid up the lost 3% and drive rates back down into the 4’s.

Is this crazy? Why are we borrowing from Mao to subsidize Joe’s mortgage?  The answer lies in the depression recession war; we gotta subsidize housing by any means available if we want to pull out of the economic nose dive- even if it means we have to bribe “Big Daddy Buffett” to git ‘er done.

What’s this mean to you? Locking in your mortgage rate is probably a hasty decision right now.  Expect Ben Bernanke to speak by Friday in his gentle, reassuring tone.  Tim Geithner should be front and center, calming down those impetuous bond traders tomorrow.  Mortgage rates should drift down by the end of next week.

The Chinese, Tom McClintock, and Bill Gross are all correct; the US government’s actions are inflationary and destructive.  They are all correct but early.  The time to panic will be this fall; hopefully you’ll do what you need to get done by then.

Apply online now.  It's really simple and should take about 20 minutes.

VA Home Loans: Seller Can Pay Veteran's Debt To Qualify

We've talked about seller contributions towards closing costs but did you know the seller can pay off a veteran's debt to qualify?  The seller contribution is limited to 4%.  Typical VA closing costs in San Diego total about 2-3 % of the selling price; that "extra" 1-2% could be used to "buy the rate down" or to retire the veteran's debt for qualification purposes.

Here's a real life example:

One of our borrowers was buying a $380,000 home in Mira Mesa.  The seller agreed to pay 4% of the sales price towards closing costs ($15,200).  Closing costs for a 5.25% VA loan were about $8,000 while a 4.75% VA loan would have had $16,000 in closing costs.

We opted to accept the higher rate and use the extra $7600 in seller contributions to pay off the veteran's car loan; this eliminated a $500 payment from the veteran's debt-to-income ratio.  The borrower earned about $83,000 annually and would have had a debt-to-income ratio of 48% which exceeded to VA guideline of 42%.

When we paid off the car loan (using the $7600 in "free" seller contribution), the debt-to-income ratio dropped to 41.6% rendering the loan APPROVED.

Sometimes, you gotta be a juggler to get loans approved in this market.

FHA & VA Mortgages Are Assumable

One of the benefits we often forget, when describing VA home loans and FHA mortgages, is they are assumable.  What this means is that a buyer can "take the payments over" from a seller, if the existing loan is a FHA mortgage or VA home loan. 

First, let me tell you why this is exciting:

Today, a VA home loan rate will be around 5%.  I believe that inflation will kick in, sometime in the next 6-18 months, causing mortgage rates to skyrocket to 6.5% or higher.  Left unchecked, inflation could drive mortgage rates into double digits by 2012.  The good news is that home prices will probably jump up, too (if runaway inflation is present).

How hard will it be to sell a house in five years, with mortgage rates at 10% ?

Pretty tough...unless you can offer the buyer a below market interest rate.  Let's assume a San Diegan buys a $300,000 home today and finances $306,000 with a 5% VA home loan.  His payment will be $1,642.

That same veteran looks to sell that home, in 2014, for $400,000 but VA home loan rates are at 10%.  The new buyer, looking to finance $408,000 at the market rate of 10%, would have a payment of $3580; that's over twice the original payment.

What would happen if the selling veteran, held a $100,000 second mortgage, for 25 years, at 12%, and allowed the buying veteran to assume his 5% VA home loan?

The payment on the second mortgage would be $1,053. Add the (now) 25-year, original VA home loan, at 5% payment of $1,642 and you have a financing package that is about $900 cheaper than a $408,000 VA home loan.

Now, here comes the bad news:

VA home loans are only assumable to other veterans (that limits the market).  Technically, any deed transfer would trigger a due-on-sale clause causing the original VA loan to be called.  Pragmatically, that doesn't happen.

Unless the original loan is formally assumed, with VA approval, the selling veteran will have his VA home loan eligibility tied up.

Even with a formal assumption, the selling veteran is still responsible for the original loan payments for the first five years.  You had better be certain that the buyer is credit-worthy.

The seller is stuck with a note, not cash.  That note could be sold on the secondary market but prices are typically about 70 cents on the dollar; that could cost the seller some $30,000 in profit.

The same rules apply for an FHA mortgage, too (except that neither the buyer nor seller needs to be a veteran).

On balance, the assumption of a VA home loan or FHA mortgage could be an excellent selling feature.  Low prices and historically-low mortgage rates make these loans a consideration when comparing them to a conventional loan.