Archive for December, 2008

The Fed’s Parting Present For 2008 : Low Mortgage Rates

David Kosmecki | December 31, 2008 in Uncategorized | Comments (0)

The Fed announced the start to its mortgage-backed securities purchasing programFor its last move in an action-filled year, the Federal Reserve announced it will begin buying its pledged $500 billion in mortgage-backed securities next month.

For home buyers and mortgage rate shoppers, the timing couldn’t be better.

Because December 31 is one of Wall Street’s most thinly-traded days of the year, low volume is exaggerating the announcement’s impact on mortgage markets.

Mortgage rates are lower this morning.

However, you may not have much time to act. Few mortgage lenders permit after-hours rate locking and bond markets close at 2:00 PM ET for the holiday. If you miss today’s Fed-fueled low rates, markets re-open Friday for your second chance.

How To Shop For Mortgages In A “Vacation Week”

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

Mortgage markets are like any other market — in order for goods to change hands, a buyer and a seller must first reach an agreement to “trade” at a specific price point.

In general, the more buyers and sellers there are for a particular item, the easier it is to find that “fair value” and make the deal.

An abundant number of buyers and sellers often creates a liquid market in which assets — in this case, mortgage bonds — can be sold rapidly with minimal loss.

This week, though — with so many traders on vacation — the “liquid market” has gone illiquid. The treasury market posted just 41 percent of its normal, daily volume Monday, leading to erratic pricing in the mortgage bond market which, in turn, caused mortgage rates to follow.

For example, mortgage rates started the day lower yesterday before sprinting higher over a 30-minute, early-afternoon span. Markets were largely unprovoked by economic data, geopolitical developments, or technical factors. It just, kind of, “happened” and the move left mortgage rate shoppers in the dust.

That could happen a lot this week. So, if you’re in the market for a mortgage, be ready to lock quickly. With low liquidity, rates rarely sit still for long.

Mortgage Markets In Review : December 29, 2008

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

In a week defined by low volume and lack of conviction, mortgage markets idled ahead of the holiday last week. Friday’s post-holiday action was even slower.

After falling for two consecutive weeks, mortgage rates held flat last week.

It’s somewhat surprising that mortgage rates didn’t rise considering the flow of negative economic news last week:

Lately, each of these elements has played a role in mortgage rate movement but it’s the last bullet point that could throw home buyers and refinancing Americans for fits.

It’s because of the relationship between mortgage rates and the strength of the U.S. Dollar.

All things equal, a strong dollar pressures mortgage rates lower whereas a weak dollar pressures mortgage rates up. And, because the dollar’s recent beat-down has been swift, it wouldn’t be unexpected to see similar mortgage market movement at any time.

This week, like last, is interrupted for the holiday. Regardless, there’s much going on. Aside from two economic reports, there is nothing else for markets to digest and no planned speeches by members of the Fed.

Expect just a small number of traders to show up for work this week. This means volume will be especially light. But don’t be lulled into taking your eyes off the market — low volume on Wall Street is sometimes accompanied by high levels of volatility.

For now, mortgage rates are hovering near their 2008-lows. Given the path of the dollar and low-volume trading, that could all change in a flash.

For Real Estate Investors, Finding Good Loans Is Tougher Than Finding Good Deals

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

Fannie Mae will not guarantee more than 4 units per individualWith home prices falling across most parts of the country, investors in real estate are finding good value in certain rental properties. Unfortunately, they’re also finding it harder to get approved for a home loan.

After getting stung by defaults, conforming mortgage standards for non-owner occupied home loans tightened dramatically last quarter.

One major change was the reduction in the total number of homes Fannie Mae or Freddie Mac will finance for any one borrower.

Prior to the chance, the number of financed properties could be as high as 10. Today, that number is 4, stinging investors with large real estate portfolios. Going forward, buying properties isn’t the problem; financing them with conforming mortgage money is.

Another guideline change mandates larger downpayments.

Versus early-2008, when a real estate investor could buy a home with 10 percent down, today’s investor is required to pay 15. But, as an added wrinkle, few private mortgage insurers write policies against rental homes anymore, rendering the 15 percent downpayment insufficient. The de facto requirement, therefore, is now 20 percent down.

And then came the fees.

As part of its “pay-for-risk” pricing model, Fannie Mae added mandatory fees to all of its investor property mortgages this year. Based on loan-to-value, the fees are:

  • 75% LTV or less: 1.750 percent of the borrowed amount
  • 75.01 – 80.00% LTV : 3.000 percent of the borrowed amount
  • Greater than 80% LTV : 3.750 percent of the borrowed amount

So, if your personal plan includes the purchase of investment properties in 2009, consider the impact that tighter conforming guidelines, larger downpayments and higher fees will have on your bottom line.

All things considered, now may be a good time to make that rental property bid. Sure, prices may fall going forward, but increased acquisition costs may wipe out the long-term gains.

A Great Combination : Too Many Homes For Sale And Low Mortgage Rates

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

For the first time in over a year, the sales of “used homes” fell below the 5-million unit trendline, helping to push the total home inventory higher by 0.1 percent nationwide.

Based on the rate at which homes are selling nationwide, it would take 11.2 months for the existing housing supply to be exhausted.

For home buyers, this is an opportune time for negative news on housing.

First, sellers know that between now and the Super Bowl, housing activity will be light. The general scarcity of buyers may force a seller to accept a bid he wouldn’t have accepted otherwise.

Second, the economy is showing weakness and that, too, can concern a home seller. Buyers are less likely to extend themselves during times of economic uncertainty, further reducing the buyer pool and, again, putting pressure on the seller to “make a deal”.

And lastly, because the government has been trying to force mortgage rates down as a way to stimulate the economy, the weak housing data is actually making it cheaper to finance a home. This means that a well-qualified home buyer can better stay within budget.

Each 0.500 percent rate reduction saves $33 per $100,000 borrowed.

It is important to remember, though, that the U.S. housing market is not national — it’s highly localized. This is one reason why national real estate reports can be misleading. Just as figures from Phoenix have little to do with statistics from St. Paul, even data from neighboring ZIP codes can vary.

The universal truth, however, is that a home that is priced fairly will sell more quickly than a home that is not. And, until the Super Bowl passes in 45 days, expect fewer buyers to be out there competing for them.

The Unexpected “Tax” That The Refi Boom Places On Borrowers

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

Underwriting turntimes plus the Holiday Season put 45-day rate locks into focusIn late-November, the Federal Reserve pledged $600 billion to buy mortgage-backed securities. The announcement drove down mortgage rates and started the Refi Boom.

Then, the Federal Reserve made a second series of statements after its scheduled meeting last Tuesday, causing mortgage rates to plunge again. This started the Refi Boom’s second wave.

Because of the surge in refinance activity, mortgage lenders are “backed up”; initial file reviews are taking up to 12 business days in some cases.

Typically, this process takes 2 days.

Underwriting delays are problem for refinancing Americans because when a mortgage rate is locked, it’s most often locked for 30 calendar days — the standard Rate Lock Agreement contract length. If the mortgage doesn’t close within those 30 days, the applicant must either pay an “extension fee” to preserve the lock, or risk losing the rate altogether.

30 days may seem like a long time, but let’s consider a few external variables:

  • December 24, 25, and 26 plus January 1 and 2 are lost to holiday
  • December 27, 28 plus January 3, 4, 10, 11, 17, and 18 are lost to weekends
  • January 19 is lost to federal holiday
  • 3 days are lost to the Right To Cancel clause

This leaves 13 days to get from Application to Closing, and of those 13 days, 12 of them are being spent on the initial review. A 30-day rate lock, in other words, may be an inadequate agreement with some mortgage lenders. A 45-day agreement may be required instead.

Typically, 45-day rate locks carry higher rates or higher fees, versus their 30-day counterparts. This amounts to a “tax” on borrowers, a result of the nation’s rush to refinance en masse.

As always, the best way to preserve a rate lock is to be as responsive as possible to the process. Return paperwork when asked, schedule appraisals immediately, and arrange to signing closing paperwork on the first available day.

With mortgage rates low, application volume — and underwriting turntimes — should remain high into early-2009.

Mortgage Markets In Review : December 22, 2008

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

Mortgage markets improved last week for the second week in row. After the Federal Reserve said it would use “all available tools” to stimulate the economy, traders responded by driving mortgage rates to 50-year lows.

It didn’t last long, however.

After bottoming out early-Wednesday morning, mortgage rates trended higher all the way into Friday’s closing. It was the third time in 2008 that a sharp mortgage rate drop lasted less than one full day of trading.

Many Americans took advantage of the historically-low mortgage rates, locking in new home loans below 5 percent. And, in general, these homeowners shared 4 characteristics:

  • Credit scores of at least 720
  • At least 20 percent equity
  • Relatively low debt versus household income
  • Ongoing relationship with a loan officer

Now, the first 3 bullet points are easy-to-understand but it’s the fourth one that really mattered — it’s the trait that got people “real-time access” to low rates the moment they published.

After all, it wasn’t until Thursday morning that the press ran its stories about “4.5 percent mortgage rates” and, by that time, mortgage rates had already retreated — by as much as a full percentage point in some cases. Thursday morning’s news was a half-day too late.

Still, mortgage rates do remain low.

This week is trade-shortened and thick with data. In addition to two pieces of housing news and a consumer sentiment survey, we’ll get a look at the Federal Reserve’s preferred Cost of Living index. All four data points are expected to validate the recession, so don’t expect mortgage rates to move much.

Instead, the biggest threat to mortgage rates this week is momentum. If mortgage rates tick higher Monday and Tuesday, expect that to continue Wednesday into the 2:00 P.M. market close and then to resume again Friday.

Markets are closed Thursday for the federal holiday.

STOP! Before You Open That Store Charge Card To Save 15 Percent…

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

During the holiday season, retailers bombard shoppers with at-the-register offers to “open a charge card and save 15%”.

It’s an immediate money-saver, but for Americans in the market for a new home loan, taking advantage of the in-store savings could be a long-term loser.

This is because new credit card applications are damaging to credit scores. According to, “new credit” accounts for 10 percent of a credit score; recent applications may signal weakness in a borrower’s profile.

Meanwhile, conforming mortgage lenders make rate adjustments for low credit scoring applicants. As an example, a home buyer with a 20 downpayment and a 715 credit score would face an interest rate adjustment of 0.125%.

Below 700, the adjustments are even worse.

It’s okay to take advantage of in-store savings during the holiday season, but be aware of how it may impact your credit score. If you’re not applying for a new home loan in the next six months, chances are that you’ll be alright.

But, if you will need a new home loan, consider whether saving 15 percent on a $200 purchase is worth it if the long-term cost is paying an extra 0.125 percent on your new mortgage.

You’ll Get The Best Mortgage Rates If You Watch Certain Patterns

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

When it comes to mortgage rates, sometimes it’s better to “act now”.

On Tuesday, mortgage rates fell to their lowest levels in 4 years. It happened because the Fed said it would “employ all available tools” to resuscitate the economy.

On Wednesday, however, the markets had second thoughts.

After considering the long-term implications of a near-zero percent Fed Funds Rate and the cumulative cost of government intervention to-date, suddenly, traders grew fearful that U.S. government action would devalue the dollar and lead to inflation — the enemy of low mortgage rates.

As a result, mortgage markets unwound.

At first, the exit was a slow and orderly. Then, without warning, investors began a full-on sprint for the exits. By the end of the day, mortgage rates were higher by as much as a half-percent. Nearly all of Tuesday’s big gains were erased.

In hindsight, the reversal Wednesday wasn’t all that surprising — it’s the same trading pattern we’ve seen twice already this year. The first time was after the Fed’s “surprise” rate cut in January, and the second time was after the federal takeover of Fannie Mae and Freddie Mac in September.

Sharp rate drops tend to be followed by immediate bounce-backs, it seems.

But, unfortunately, not every would-be refinancing homeowner saw the increase coming. While those that locked at the first opportunity to save money are sitting pretty today, the rest that “waited for rates to go lower” are likely kicking themselves about it.

Going forward, mortgage rates may fall, or they may not. We can’t possibly know. But we’ve now seen the pattern 3 times now — when mortgage rates plunge like they did Tuesday, they rarely stay that low for long. When you find a rate you like, get in and get locked as soon as possible.

Sleeping on it for even one night may end up costing you dearly.

Explaining The Federal Reserve In Plain English (December 16, 2008)

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

The Federal Open Market Committee voted to cut the Fed Funds Rate by at least three-quarters percent today. The benchmark rate now rests in a range of 0.000-0.250 percent.

In its press release, the FOMC identified three key economic sectors in which activity has weakened since October. The FOMC noted that:

  1. The U.S. job market is deteriorating
  2. Consumer spending levels are falling
  3. Business investment is contracting nationwide

The Fed intends its rate cut to provide stimulate to each of these areas.

In addition, the voting members of the FOMC singled out inflation as a diminishing threat to the economy. This is an important admission because it’s well-known that cuts to the Fed Funds Rate can spark inflation. Rapidly falling oil prices and commodity costs, therefore, likely paved the way for today’s historic cut.

In its announcement to markets, the Fed gave The People what they wanted — a reassurance that the policy-making group would “employ all available tools” to help turnaround the economy. Lowering the Fed Funds Rate to an all-time low is one such step; its plan to purchase mortgage-backed debt in the open market is another.

After the announcement, stock markets rallied and mortgage bonds did, too. Rates ended the day slightly lower.

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