Archive for September, 2008

How Mortgage Rates Responded To The “No” Vote On The Bailout Bill

David Kosmecki | September 30, 2008 in Uncategorized | Comments (0)

When Congress defeated the $700 billion Bailout Bill, mortgage rates improvedMonday afternoon, the U.S. House of Representatives defeated the $700 billion “Bailout Bill”, surprising Wall Street and the world.

The Dow Jones Industrial Average responded by falling 777.68 points — its largest one-day loss in history and, this morning, every newspaper in America is covering the story as front page news.

Lost in the coverage, however, is how the “No” vote created a terrific opportunity for mortgage rate shoppers.

Yesterday, as money fled the tanking stock market, most of it ended up getting parked in the relative safety of government-backed bonds which includes, of course, the mortgage bonds. This rising demand for mortgage bonds caused rates to fall.

To investors, stock markets represent risk and bond markets represent safety. So, when market sentiment changes, as it did yesterday, Wall Street players often shift their dollars from one forum to the other. This is why yesterday’s stock sell-off was good news for mortgage rate shoppers — the added demand for “safe” securities drove down rates.

Conforming mortgage rates were lower by about an eighth-percent Monday.

Now, today, mortgage rates are opening flat, suggesting that markets are in a Wait-and-See Mode. Wall Streets knows that the defeated bill will re-emerge later this week and, when it does, expect traders to respond accordingly.

If the new-look bill is viewed as favorable to U.S. businesses without harming taxpayers, expect stock markets to improve and mortgage rates to rise. If the bill fails to accomplish that goal, however, expect mortgage rates to improve.

Looking Back And Looking Ahead : September 29, 2008

David Kosmecki | September 29, 2008 in Uncategorized | Comments (0)

Mortgage rates bounced around last week, ending up worse overall. It was the second straight week in which rates deteriorated. Sentiment was driven largely by the proposed Emergency Economic Stabilization Act of 2008 — a.k.a. The $700 Billion Bailout.

The good news is that Congress drafted its bill Sunday evening and within the 110 pages, there is an important clause that should be good for mortgage rates.

On Page 40, it says, summarized:

  • The U.S. Treasury gets $250 billion up-front
  • It must ask the President to approve its next $100 billion
  • And Congress must approve the remaining $350 billion

In other words, the U.S. Treasury checkbook is not “open”. By limiting the Treasury’s spending to $250 billion up-front, with the next $450 billion subject to third-party approval, some of the market’s inflation concerns from last week should ease, providing downward pressure on mortgage rates in general.

But, that said, there’s a few important data releases this week that could counter-effect these improvements.

First, on Monday, it’s September’s Personal Consumption Expenditures data. The report sounds fancy with a name like Personal Consumption Expenditures, but it’s really just a Cost of Living measurement, adjusted for human behavior.

For example, if whole grain cereal gets too expensive, PCE assumes that Americans will substitute for another breakfast food. This is one reason why PCE is the Fed’s preferred measure of inflation.

If PCE is higher-than-expected, it’s considered to be a signal of inflation and mortgage rates should rise.

In addition, on Friday, the jobs report is released. It’s widely expected that the September’s job growth was negative (for the 9th straight month) and that unemployment remained in the 6.000 percent range.

Rates up or down, it’s too hard to predict. Therefore, if you see a mortgage rate with a comfortable accompanying payment, consider locking it in.

With as fast as markets have moved this year, you can be pretty sure the rate — whatever it is — won’t last for long.

If My Mortgage Lender Fails, Are My Payments Still Due?

David Kosmecki | September 26, 2008 in Uncategorized | Comments (0)

If my mortgage lender fails, are my payments still due?Thursday, federal regulators seized mortgage lender Washington Mutual. The Seattle-based thrift became the third “big name” lender to close its doors since July, joining IndyMac and Lehman Brothers.

In 2007, these 3 lenders represented about 10 percent of the mortgage market and their subsequent failures are confusing American homeowners.

The most prevalent question:

If my mortgage lender fails, are my payments still due?

And the answer is an unequivocal “yes”. If a mortgage lender is seized, goes bankrupt, or is otherwise closed, it doesn’t change the terms of the bank’s mortgages whatsoever — just maybe the mailing address.

This is because a mortgage (and its corresponding note) is a legal contract between the lender and the lendee, signed on the date of closing. It is binding and cannot be altered by either party. The only way to “end” the contract is to pay the loan in full.

This can happen in one of 3 ways:

  1. The home is sold and the mortgage is repaid
  2. The home is refinanced and the mortgage is repaid
  3. The home loan is paid down to $0 balance by the homeowner

So, when a mortgage company fails, its loans are paid-off in full and, therefore, all of the failed company’s mortgage contracts remain in effect. Payments are still due.

When this happens, failed lenders will usually transfer their mortgage assets to a new lender’s servicing department. This means that homeowners will write the same check for the same mortgage but to a different company.

To reduce confusion around transactions like this, the government puts two safeguards in place. First, it requires the former lender to send a 15-day advance notice of the change to the homeowner. And second, it requires the new lender to do the same.

In situations like this, the onus is ultimately on the homeowner to open and read his mail, and make changes accordingly. It’s especially important for people who pay their bills online as opposed by paying them manually; you likely won’t get notified if you’re sending payments to the wrong place.

Falling Home Supplies Are Bad News For Home Buyers (But Good News For Home Sellers)

David Kosmecki | September 25, 2008 in Uncategorized | Comments (0)

The August Existing Home Sales report was released Wednesday, showing a decline in the number of homes sold nationwide, and a reduction in the median sales price.

Not surprisingly, the media singled these two statistics out, playing them as a big negative.

They’re not.

The decline in sales wasn’t good, but it wasn’t terrible, either — sales were actually up in half of the regions around the country.

And, citing “median sales price” is somewhat pointless because median sales price only measures the price point at which half the homes sold for more, and half sold for less.

No, it’s the third statistic in the report that deserves as much — if not more — attention that the previous two. According to yesterday’s press release, the national home supply is decreasing.

This is terrific news for home sellers.

In its report, the National Association of REALTORS said that the nation’s existing supply of homes for sale fell by 7 percent in August.

At the current pace of sales, that represents a 10.4-month supply, down from 10.9 months in July. With a reduced supply of homes for sale, all things equal, home prices would increase.

This is Supply and Demand in its most basic form.

Economists and experts have long noted that reducing the housing supply is one of the key elements to a sustainable housing recovery and we’ve seen several indications that this is happening, including builders not building as much.

Longer-term, this is good news for home sellers because a reduction in housing supply tends to lead to higher prices.

FHA Makes Homeownership More Affordable — But Not Until October 1, 2008

David Kosmecki | September 24, 2008 in Uncategorized | Comments (0)

The FHA established a moratorium on new loan fees, effective October 1, 2008Earlier this year — and for the first time in its history — the FHA changed its funding fees and mortgage insurance structure.

Effective October 1, 2008, it’s repealing those changes.

Partly to keep FHA home loans affordable, and partly to comply with new laws, the FHA is rolling back its up-front fees and ongoing mortgage insurance requirements and replacing them with new ones.

The new up-front FHA fees are as follows:

  • 1.750% : All purchase and “standard” refinances
  • 1.500% : All “streamline” refinances
  • 3.000% : All FHASecure programs for delinquent mortgagors

These fees are paid as a one-time cost at closing, and are calculated by multiplying the loan size by the fee. A $200,000 FHA purchase, for example, now carries a $3,500 one-time charge.

Ongoing mortgage insurance requirements have changed, too. These changes are based on the loan type and the amount of equity in the home.

  • 15-year fixed with 90% borrowed or less: 0.000% annually
  • 15-year fixed with more than 90% borrowed: 0.250% annually
  • 30-year fixed with 95% borrowed or less: 0.500% annually
  • 30-year fixed with more than 95% borrowed: 0.550% annually

Mortgage insurance premiums are calculated by multiplying the initial loan size by the annual premium. The same $200,000 FHA purchase outlined above, using a 95% 30-year fixed mortgage, would require a monthly mortgage payment add-on of $83.33 until the loan is paid in full.

FHA-insured mortgages have grown in popularity this year because, while the guidelines of other mortgage products have tightened, FHA guidelines have remained relatively loose. FHA allows 3.500 percent downpayments on purchases, for example, and allows “cash out” refinances to 95 percent.

Fannie Mae and Freddie Mac do not.

What Happens To Mortgage Rates When Crude Oil Adds $25 In One Day

David Kosmecki | September 23, 2008 in Uncategorized | Comments (0)

Crude oil prices jumped $25 at one point Monday, ending the day up by 16 percent.

This is an unwelcome development for home buyers because the same market forces that pushed up oil prices had a similar impact on mortgage rates.

It all comes down to the U.S. dollar.

Because both crude oil and mortgage-backed bonds are denominated in dollars, the fate of both instruments has been closely tied to the greenback lately.

With respect to the mortgage market, when the dollar has been strengthening, rates have tended to fall. And, when the dollar has been weakening, mortgage rates have tended to rise.

Yesterday, the U.S. dollar had its worst one-day performance against the Euro in history so it only follows that conforming mortgage rates spiked. Across the board, they added about a quarter-percent.

Add this quarter percent to the run-up from last week and conforming mortgage rates are now close to 0.750% higher than where they were last Monday, further evidence that how quickly the market can move.

Looking Back And Looking Ahead : September 22, 2008

David Kosmecki | September 22, 2008 in Uncategorized | Comments (0)

In a historic week for American Finance, mortgage rates rose considerably, reversing a 3-week trend through which rates had fallen.

The U.S. Treasury is the biggest reason why most conforming mortgage rates increased by a half-percent.

Hank Paulson’s government group helped to restore investor confidence that had steadily eroded from concern to fear since July 2007, before succumbing to outright panic last week.

Wall Street nerves were so frayed that at one point Wednesday, yields on government bonds were actually in the negative; investors were paying the U.S. government to hold and protect their money in exchange for a guaranteed loss of investment.

After the Treasury’s interventions, however, a sense of normalcy returned to Wall Street. Money poured back into stocks, siphoned from the bond market and that pushed rates higher.

This week, it’s anybody’s guess what will happen.

From a data perspective, it’s light — there’s Existing Home Sales, New Home Sales, and not much else. From a policy perspective, however, the week is heavy:

  • Congress is expected to authorize “hundreds of billions” for market support
  • Ben Bernanke and Hank Paulson will testify before the Senate Banking Committee
  • 7 members of the Fed are making public appearances

With so much rhetoric, it’s difficult to predict how mortgage rates will perform this week. The stock market may be the best predictor of rates.

If stocks are up, risk-taking is back in vogue and the bond market should suffer, pushing mortgage rates higher. By contrast, if traders stay clear of stocks in search of safer investments, mortgage rates should fall.

How To Lower Your Mortgage Rate Every Time The Market Dips

David Kosmecki | September 19, 2008 in Uncategorized | Comments (0)

Getting low mortgage rates is matter of preparationGetting a great, low mortgage rate is often a combination of luck and preparation.

Consider what happened in conforming mortgages this week:

  • Monday, mortgage rates plunged to their lowest levels of the year
  • Tuesday, they bounced back in full
  • Wednesday, they clicked higher by a eighth-percent
  • Thursday, they clicked higher by another eighth-percent

And so, here we on are Friday, four days after the best rates of the year, and the mortgage market barely resembles itself. Despite what the papers tell you, mortgage rates are not low anymore.

That’s the luck element — you can’t plan for rates moving up and down.

But, if you missed Monday’s plunge, and don’t want to miss the next one, all you have to do is get prepared. Then, you’re waiting for luck when it happens.

There are 4 basic steps to prepare for low rates and the key is to follow them before rates plunge, not during. That way, you’re ready to pounce on low rates at the moment they present themselves.

Call you loan officer to give a mortgage applicationThe first step is to contact your loan officer.

If you don’t have a loan officer, or your loan officer is no longer in the business, ask a friend for a referral. Do not call the 800-number on your mortgage statement — you’ll almost always get a better “offer” from a live person than from a call center representative.

Next, give your loan officer a complete mortgage application, including a “credit pull”. Be honest and accurate and don’t worry about the credit check harming your score — the bureaus protect it for a period of 30 days.

Then, ask your loan officer what supporting documentation will be required to approve your eventual home loan. Whatever it is, gather it and send it in — either by fax or email.

And lastly, be ready to act when your loan officer calls with the good news. If rates have dipped to lower-than-normal levels, it likely won’t last long.

This preparation process is very similar to what home buyers do before making an offer on a home. Getting ready for a refinance is like getting pre-approved, but instead of waiting to pick out a home, it’s waiting to pick out a rate.

So, to summarize:

  1. Contact your loan officer
  2. Give a complete application
  3. Gather and submit supporting documentation
  4. Be ready to act

Mortgage rates don’t plunge often, but when they do, it’s usually short-lived. If you’re prepared for when it happens, you can lock in the best mortgage rate available at the best possible time.

It will be your lucky day and you will have been ready for it.

What’s Good For Home Sellers Is Bad For Home Buyers : Builders Are Dialing It Back

David Kosmecki | September 18, 2008 in Uncategorized | Comments (0)

In August, home builders broke ground on the fewest number of homes since January 1991.

It was the 16th straight month in which Housing Starts declined.

But, although the press labels these statistics indicative of a recession, home sellers nationwide quietly applaud them.

With fewer new homes coming on the market, home sellers are finding that there’s less competition for buyers, helping them to command higher prices for their homes.

It’s Supply and Demand in its most basic form.

But that’s not all that home buyers have to worry about. The most recent Existing Home Sales report showed an increase in sales nationwide, plus a reduction in the number of single-family homes for sale.

Again, Supply and Demand. Good for sellers, bad for buyers.

However, we should keep in mind that real estate is local. What we see in national and regional trends are not as important as what’s happening in your town, your neighborhood, and your street. But, if we learn one thing from the chart above, it’s this: builders are rational.

If homes won’t sell, builders will stop building them. And, sooner or later, the market — and home prices — will catch up.

Making English Out Of Fed-Speak (September 2008 Edition)

David Kosmecki | September 16, 2008 in Uncategorized | Comments (0)

For the third consecutive meeting, the Federal Open Market Committee left the Fed Funds Rate unchanged at 2.000 percent.

Of interest to mortgage rate shoppers, the FOMC led its press release with comments about the health of the financial and labor markets, calling them “strained” and “weakened”, respectively. The relative weakness in both of these areas has contributed to low mortgage rates of late.

The FOMC also noted in its release that, although economic growth has slowed this year, the historically-low 2.000% Fed Funds Rate should foster “moderate economic growth” in the future.

In the wake of the announcement, Wall Street is rallying. Investors like what the Fed had to say and this is attracting money to the stock market at the expense of bonds.

Mortgage rates have given up all of Monday’s gains, and then some.

Parsing the Fed Statement
The Wall Street Journal Online
September 16, 2008