Question of the
week: Why is my loan closing waiting for the IRS?
Answer: For the past several years lenders have required a
completed IRS Form 4506 prior to final approval and closing. Form 4506 is sent
for the lender to the IRS for the purpose of verifying that the federal tax
returns provided by the borrower for the application matches the returns the
borrower filed with the IRS. Or, if no tax returns are required the IRS will
verify that there are no items on the filed tax returns that would require the
lender to review tax returns, such as Schedules C (self-employment) or E
(rental property) filed with the return.
When your signed loan
application is turned into our processing system your Form 4506 is submitted to
the IRS for processing. If your loan package originated in October, or
December, or even January the IRS would return the completed report in
approximately 2 weeks for the most recently filed tax return.
This time of year with
the number of filings increasing exponentially each week as the April 15th
tax deadline approaches, the processing time at the IRS slows considerably. The
current estimate for the IRS is return of the 4506 results is six weeks or more
from the date you file your return—if filed electronically. This means if you
electronically file your federal tax return for 2014 today, March 6th,
and we send in Form 4506 to the IRS we will receive the results April 17th
or later. The reason for the delay is we must wait for the IRS to receive and
have your return filed into their system and then have personnel process the
The good news however
is that until April 15th we do not need 2014 tax returns, but can
use your 2014 W2 and 2013 federal tax returns. While the processing of the 4506
request will still be longer than it will be later this year, because your 2013
taxes are already in the system the return of the 4506 results will be just a
few weeks instead of five, six, seven or more.
For some however the
2014 tax returns are needed due to higher income than on prior year’s taxes or
because losses on prior year(s) returns are lower or non-existent on the 2014
return. If this is the case then buyer, seller, agents and everyone involved
will need to exercise patience waiting for the IRS to process and return the
request to verify the submitted returns.
If you are purchasing
a home at this time of year it is very important to discuss the status of your
federal income tax filing, when it was or will be filed and whether your 2014
taxes are needed for you to qualify for your new home. If you have any
questions regarding your taxes and how they may impact your qualifying, or
timing, for the purchase of your new home please call me.
Have a question? Ask me!
Remember, with Dennis it’s not just a mortgage,
it’s your complete financial picture.
good week for rates. Slipping all week, Mortgage Backed Securities dropped
hard at opening this morning and have continued to fall through the morning
(lower MBS prices means higher interest rates). Very little economic news early
in the week that impacts interest rates, the most significant being personal
income and spending figures released on Monday. Income barely rose in January,
up 0.1% and spending declined for the second straight month (down 0.2% from
December). This news should have been rate friendly but investors shrugged it
off and appeared to be selling mortgages and other bonds to capture gains and
use technical models to adjust their holdings.
First Friday of the month we get the monthly jobs report from the Labor
Department. The news was a major market mover as the report indicated 295,000
jobs were created in January, well above the estimate of 240,000 jobs and well
above the downward adjusted figures of 235,000 new jobs in December. The
headline data, total jobs created and the unemployment rate dropping from 5.7%
to 5.5% over-shadow more details in the report such as the labor participation
rate declining to 62.8% and hourly earnings increasing just 0.1%. The data
caused a strong sell-off for MBS and equities as investors see the news as indication
that the Federal Reserve will increase its discount rate in June.
near term we can anticipate investors beginning to price a Fed rate
increase into the market, this will put upward pressure on mortgage rates until
and unless economic data is presented that contradicts a strengthening labor
market and economic growth. For those who have been floating rates to try to
capture just a little bit better rate they may have missed their opportunity,
at least in the short term. Always best to lock through your escrow period and
chance missing a potentially lower rate than float and miss the rate you could
Friday March 6, 2015: Rates are higher from last Friday and as you can see
by the chart conforming and high-balance rates are at their highest levels
since early December and up almost one-half a percent from their lows the last
week of January. Whether we hit resistance at these levels and we see rates
move sideways for a while is unknown for a week or more, in the meantime
exercise caution and lock when you can.
MORTGAGES AT COST OF 1.25 POINTS
conforming 3.75% Up
high-balance conforming 3.825% Up 0.125%30 year FHA 3.25%*** Flat**30 year FHA
high-balance 3.375% Flat**Please note that
these are base rates and adjustments may be added for condominiums, refinances,
credit scores, loan to value, no impound account and period rate is locked. Rates
are based on 20% down (3.5% for FHA) with 740 FICO score for purchase
mortgages. ***FHA rates have no points and credit towards closing costs **Rates
are flat week over week but credit is lower
If you don’t know
to set your clocks ahead when you go to bed Saturday night then you need to get
out more, either that or I’m flattered that your primary source of this
reminder is the Weekly Rate & Market Update.
I am no fan of
the Daylight Savings Time clock adjustments, I wasn’t when the Spring
adjustment was in April and even less so now that it is early March. The argument
for lengthening the period for DST is that it saves energy as it is light
later, but what about those of us who get up early in the morning? Just as it
was getting light in the mornings so the Early Risers were not getting up in
complete darkness, able to walk our dogs in daylight and enjoy the sunrise in
solitude the clocks move and we are back in the dark ages for another month or
This year we will
have 8 months of DST, running from this weekend until November 1st.
If Daylight Savings Time is running 8 months shouldn’t we call it “standard
time” and re-label “standard time” Daylight Wasteful Time?
We’re King for a
day I would abolish Daylight Savings Time and let our cycles of light and dark
run as God wants them to run and let man-made time stay constant through the
Off my soapbox
and through with the rant, thank you for listening.
Have a great
Question of the
week: Should we get an adjustable rate mortgage?
Answer: Probably not.
Some home buyers are
tempted by the low initial payment an adjustable rate mortgage (ARM) thinking
that by the time their payment is due to increase they will either be earning
more or they can refinance to a fixed rate.
The two assumptions
are the beginning of what could be a big problem in the future.
First let’s look at
the assumption you will be earning more money in 3, 5 or 7 seven years. Not an
unreasonable assumption for many people, though the question is not just if you
are making more, but if your increase in earnings keeps pace with or outpaces
the increase in interest rates.
Say you purchase a
home and get a $400,000 mortgage with a 2.75% rate on a 5/1 ARM (rate and
payment are fixed for five years then rate and payment can adjust every year).
Your payment is $1630 per month; let’s assume this is 35% of your gross income
making your salary $4650 per month.
Five years from now the
most your interest rate can increase is 5% to a rate of 7.75%, which on your
remaining balance of $356,000 would give you a payment of $2670 per month, an
increase of 64%. So that the payment remains 35% of your income, your salary
would need to increase to $7630 per month, an increase of 64% over five years.
Consider the job and profession you are in and the likeliness that your income
will increase 64% in the next five years, or about 12% per year?
As to the second
assumption, that you can refinance in the future, any refinance you engage in
will be at a higher rate than your ARM rate and lead to a higher payment, and
given the current low rate environment the rate most likely will be higher than
today’s fixed rate payment. Keep in mind that the current ARM rate is always
lower than the current fixed rate. So in the future if your rate adjusts to
7.75% the fixed rate available at that time will be higher than the 7.75%. But the loan balance is lower after five
years of payments. True, but still not low enough to off-set the large increase
in interest rate compared to the today’s rate.
Either scenario puts
you in a potentially very challenging financial situation in the future.
If you were to take
the $1630 per month payment you would have if you used an ARM for financing and
instead got a 30 year fixed rate loan at 3.625% you loan balance would be
$360,000 or 10% lower than the ARM. Or you could obtain a $400,000 loan with
the fixed rate and have a payment of $1820 per month, or 39% of your gross
And you payment would
remain the same for the 30 year life of your loan.
Financing your new
home with an ARM to make it more affordable can likely result in a less
affordable home in the future. If the only way you can feel comfortable paying
for the home you really like is to use an ARM for financing then you should be
looking at a way to really like a less expensive home; if you don’t believe me
ask some of the millions of families who lost homes during the Great Recession
because they could not afford the payments of the homes they really liked. Your
best financing option for the short and long term is almost always a long term
fixed rate, and fixed payment, mortgage.
not a quiet week on the data front. Plenty of action for the business and
economic writers and pundits this week with some major data releases (home
sales, CPI, consumer confidence, GDP) plus Fed head Janet Yellen testifying to
the House and Senate. The result was a roller coaster week for the mortgage
look at the numbers. For home sales January was a poor month, declining
nationally by 4.9%, with the lowest rate of sales since last April. With the
drop in sales the national median price dropped below $200,000 for the first
time since last spring. New home sales faired better with transactions on par
with December, which had a huge jump in sales from November. Pushing the higher
sales were price concessions as the median price dropped 2.6% for the month.
Higher home sales are an indicator of economic growth and consumer confidence
and can lead to higher rates.
peaking in January consumer confidence has dropped in the twice monthly report
due to fewer respondents optimistic with their expectations. The drop in
confidence is a bit of a head scratcher with prices dropping, the Consumer
Price Index for January dropped 0.7% from December and is down 0.2% from
January 2013. Taking out food and energy and CPI is up 0.2% for the month and
1.6% for the year. These numbers are good for consumers who see their income
buy more, however not so good news for the economy as price contraction can
lead to deflation. This reading should be positive for lower rates.
we received the GDP revision for the 4th Quarter. The initial
estimate was that the economy grew at a rate of 2.6%, the revision lowered that
growth to 2.2%. The revision was mostly due to lower estimate for growth in
inventories, so not that big of a deal as it would be if the lower estimate was
due to consumer consumption of goods and services.
all the big data news was the needle mover for investors, Federal Reserve
Chair Janet Yellen had testimony this week to both the Senate and House
committees for banking and financial services. Anxious to hear a peep about
when and/or how much the Fed will raise its discount rate (for recap of the Fed’s
roll in rates see last week’s
Yellen said that the Fed was more than likely raising later in the year,
apparently beyond the June up-rising many have expected. She indicates the Fed
feels economy is close to full employment, not sure the new normal on GDP and
that Fed rate increase will be dependent on improvement in inflation (i.e.
higher than we saw this week) and labor market.
comments on both Tuesday and Wednesday one of my partners and I were
discussing how we cannot remember a wider set of interpretations of Fed
comments. Some pundits and analysts were claiming Yellen said higher rates are
on the way, indicating rate increases will happen soon, and others were
interpreting her remarks that the economy is still lagging and the Fed will
retain low rates for longer than expected. Reading the remarks I am in the
former category, especially as she mentioned prices and inflation has been well
below the Fed’s target range for years.
Friday February 27, 2015: With all the news and commentary Mortgage Backed
Securities experienced another roller-coaster week with some big swings daily.
As the dust settles today MBS buyers are out pacing sellers and prices are
slowly rising (lower rates) as investors seem to take the long view on rates
that I have. It is a choppy market and it feels as if the next big spike in
rates is waiting to happen, I urge caution and a conservative approach to lock
your rate as soon as you are able to remove the risk of getting caught if they
do spike. Week over week rates are pretty flat from last Friday.
conforming 3.625% Flat
high-balance conforming 3.75% Flat
30 year FHA 3.25%*** Flat
30 year FHA
high-balance 3.25% Flat
Please note that
these are base rates and adjustments may be added for condominiums, refinances,
credit scores, loan to value, no impound account and period rate is locked. Rates
are based on 20% down (3.5% for FHA) with 740 FICO score for purchase
mortgages. ***FHA rates have no points and credit towards closing costs.
Looks like a
stormy weekend for Southern California. I have always said the best time to
look at property in the region is when it is raining so you can see if there
are leaks in the roof, windows or doors and where water may collect and puddle
causing potential problems down the road.
Of course stormy
weekends are also good for staying inside with a cozy fire, a good book or
stack of old movies….and perhaps a little amber liquid to sip slowly. Or for
those who are fans, Netflix released Season 3 of House of Cards today, now
there is something to watch with a bit of the whiskey.
Have a great
Question of the
week: Will the Federal Reserve raise mortgage rates?
Answer: No, the Federal Reserve will not raise mortgage rates
because they cannot raise mortgage rates. What the Fed can do however is raise
the “discount rate” and that can action can have impact on other interest rates
in the economy, including mortgage rates.
A lot of attention is
focused on the Federal Reserve and their “raising interest rates;” but the only
interest rate the Fed directly controls is the discount rate, the rate the Fed
charges member banks to borrow money from its discount window, usually for an
overnight loan to cover the reserve requirements for the bank. By raising and
lowering this interest rate the Fed controls the amount of money banks can
borrow and lend and therefore can impact the amount of money in circulation.
Other interest rates
in our economy are set by lenders or investors. Credit card rates, auto rates,
equity lines, the prime rate, are set by banks. As we learned last week mortgage rates are set by investors bidding on Mortgage
Backed Securities. US Treasury rates are also set by investors bidding at
auction on the debt offerings from our government.
When the Fed raises
its discount rate there is a ripple through the economy with other rates. If it
costs more to borrow money then banks will charge more to lend money. Most
impacted by increases by the Fed are equity lines which are tied to the Prime
Rate, which is set by individual banks but usually they set the same rate, and
other consumer rates. Mortgage rates can tend to move with increases, or
decreases, the Fed makes but sometimes act independently—such may be the case
should the Fed increase its discount rate later this year.
Long time readers of
the Weekly Rate & Market Update know that mortgage rates are very dependent
on economic conditions. Economic conditions are not terrific, prices are
stagnant, employment while improving still has tremendous wage lag and a low
participation rate, manufacturing is slow and consumer consumption is not
pushing a growth spurt in the economy. These are the factors that investors
consider when buying stocks or bonds, strong economic conditions lead investors
to buy stocks and sell bonds causing rates for long term debts—like
mortgages—to go up; weak economic conditions lead to the opposite actions and
mortgage rates go down.
The past several years
have been a bit of an anomaly due to the Fed not only keeping its discount rate
low but also flooding the economy with trillions of dollars it used to purchase
mortgages and U.S. Treasury debt—this cheap money flowed into Wall Street as
banks and corporations used the funds to buy each other’s stocks and not to
invest in their companies to grow and expand as was the expectation from the
When the Fed does
finally raise its discount rates the short term result will most likely be a
drop in stock bond prices, resulting in an increase in rates. Longer term,
unless economic conditions improve somewhat significantly we should see rates
drift back down after the initial jolt and settle in, or near, the range
mortgage rates, and other long term rates, have been in for the past year or
Can the Fed raise
mortgage rates? No, but its actions will affect mortgage rates.
expectations for that rate drop further into the year was the release of
the Producer Price Index (PPI) on Wednesday. A measure of the prices paid by
producers, i.e. suppliers, of goods and services, PPI is a gauge of inflation
and a key piece of data for Fed governors as they decide when to increase their
discount rate. After declining 0.3% in December the PPI dropped 0.8% in January
and is down 0.1% from last January. Savvy watchers of the economy will be
thinking, sure it fell because of the drop in oil and gas prices, and this is
true. However…taking out food and energy prices the PPI still dropped 0.1% for
the month and has risen only 1.5% from last January. The three consecutive months
of decline in this index is worrisome as it puts deflation into play as a top
concern for the economy. A negative PPI reading is positive for lower mortgage
rates as it provides investors with data that rates will, and should, stay low
for a longer period of time.
data is choppy as the number of initial unemployment claims fell last week
to 283,000 filings, down from 304,000 the prior week. This gives us several
weeks with large changes from week to week, up one and down the next, providing
us with no real guidance as to labor market momentum. The lower unemployment
claims fall generally the higher rates will rise.
when…..the Weekly Rate & Market Update was filled with news of Italy,
Greece, Spain, and their economic troubles pushing our mortgage rates around?
Well we are being influenced again by the European troubles and squabbles as
Greece’s new leadership negotiates with Germany and the European Union to
extend repayment terms for the bailout they received. Greece thinks the
repayment terms are too punitive—which is why the new government was elected
because the Greek voters feel it is unfair for them to suffer because of the
overly generous payments they have been receiving are being cut. Germany and
other members of the EU that are on the hook for billions in bailout funds don’t
want to be paid back less then they loaned and enable the Greeks to ignore or
be immune from consequence of the prior poor fiscal policies. What could be at
stake ultimately is the entire economic union in Europe and the unified
currency, the Euro. If Greek leaves or is forced out of the Euro and the EU
will other nations follow? Keep in mind as our markets gyrate on news of the
negotiations that Greece’s economy is roughly that of Arizona’s.
of negotiations. The stand-off
between the ILWU representing the longshoremen in ports on the West Coast and
the Pacific Maritime Association is having reverberations through the economy,
and not in a positive way. Goods are sitting off shore and are not being
delivered to manufacturers or retailers, goods are sitting in ports and not
being loaded to ship to the other side of the Pacific causing delays in
payments to domestic exporters. As the stand-off continues and goods sit
companies dependent on those full trailers moving will be starting to cut back
on expenses—which usually means workers. This stand-off could be an impetus for
a decline in national economic growth and higher unemployment, and lower
mortgage rates as a result.
Friday February 20, 2015: Our short week started off with Mortgage Back
Securities dropping significantly (lower MBS prices = higher rates). It started
as reaction to news from the holiday on Monday that a Fed governor was seeing
higher rates possibly in June, continued on news from Greece and then became a
technical selling spree. Once the Fed minutes came out that had no real news
that should move markets, and the economic data in the form of PPI confirmed
the Fed’s comments of a slow economy MBS and bonds started to scrap back and as
I write this half of the sell-off has been recaptured. The net result is that
rates are higher from last Friday and at their highest point on a Friday since
the first Friday of 2015.
conforming 3.625% Up 0.125%
high-balance conforming 3.75% Up 0.125%
My sister says
she gauges how old she feels by how old I am, since she is the oldest and I am
the youngest. I get what she means as our youngest turned 13 this year—I’m the
dad to two teenagers. So while I think (and sometimes act like) I’m 25 and
think when I look in the mirror I’ll see that 25 year old, looking at my kids
and my real self in the mirror I’m needing to adjust that inner voice a little.
I’ve not seen a lot of the films nominated but two that I have seen that are “American
Sniper” and “Imitation Game.” Both excellent films with great performances. I
think this is the first year in sometime that I want to see all the films
nominated for best picture—thankfully Netflix is in our lives to enable that
desire coming to fruition.
Question of the
week: How come the rates go up and down every day?
Answer: This is a question that is frequently asked and one I try
to answer about once a year, so if you’ve read it before you may want to skip
this section. (Though I have some new information impacting rates recently
Mortgages are paid by
borrowers and collected by lenders, but for the past several decades your
mortgage payment does not end up with your lender but most likely with
investors. This is because even though Stratis Financial funded your loan, your
loan will not be owned by Stratis Financial, nor any other lender, but more
than likely with Fannie Mae, Freddie Mac, Ginnie Mae or an investment company.
And investors bid daily on Mortgage Backed Securities (MBS) which are pools of
mortgages sold by Fannie, Freddie, etc.
Using Fannie Mae as an
example, every day Fannie Mae is auctioning MBS pools to investors with an
underlying interest rate for the pool, say 3.5%. Investors bid on the 3.5% pool
and depending on the sales the 3.5% securities, which effectively act like
bonds, are either sold at a premium or discount. If sold at a discount then the
3.5% pool will repay at a rate higher than 3.5%, say 3.625%; conversely if the
bidding is hot and heavy and the is sold at a premium then the rate of return
is lower than 3.5%, say 3.375%.
When pools are selling
at a discount then mortgage rate sheets that day will be higher, when pools are
selling at premiums the rates will be lower.
Why would someone pay
a premium for an investment and get a lower return? Because even at a lower
return that investment is considered to be better for the investor than one
that may have a higher return. For instance with all the problems in Greece and
their possibly defaulting on their debt would you rather own mortgages in the
United States with a 3.375% return or Greek bonds with a 7% return? 6%?
Competing with the
Mortgage Backed Securities that determine our mortgage rates are government
bonds, issued by not only the United States but other entities, states,
municipalities, foreign nations. Recently both Apple and Microsoft have
announced bond sales, which increases supply in the market and higher supply
leads to lower prices which leads to higher rates. Back to our Greece
comparison, Apple issued it multi-billion dollar bond in Europe (bids were in
Euros) with rates of 1.082% for an 8 year note and 1.671% for a 12 year note—close
the rate of return had you purchased corresponding US Treasury notes. By buying
up the issue investors were indicating they felt Apple was as safe an
investment as the United States Government.
Also competing with
the mortgage markets for money are the stock markets, is the rate of return on
Mortgage Backed Securities too low so investors are willing to put their money in
the more volatile equity markets? If so then rates will rise when this happens.
Are events in the country and world such that the equity markets are too risky
and investors want a safe haven and (practically) guaranteed return on their
investment? Then rates will drop as they by the MBS offered by Fannie and
Every week I recap
economic news released during the week and its impact on mortgage rates. Rates
have been historically low since the recession due to many factors, primarily
an anemic economy that has little to no inflation and monetary and fiscal
policies encouraging low rates to try to stimulate economic growth, inflation
and higher employment. Any economic news that shows signs of growth and
inflation will cause rates to rise. Investors do not want to be buying
investments that are fixing their returns at 3.5% for the next decade or more
when they anticipate rates rising in the near term and they can possibly get
4.00% returns. Conversely if they see rates may be dropping they do not want to
be buying 4.00% investments that will be refinanced and paid off early as rates
drop to 3.5%.
mortgage rate is determined by investors and their best guesses as to where the
markets may be headed and what risk, or gamble, they are willing to take. Add
in some supply issues, either too much or too little, and the result is a rate
sheet that says what today’s interest rate and cost will be for the mortgage
you are seeking. And by the way, that rate sheet can, and often does, change during
Confused about why
rates change every day? It can be confusing but I am always here to explain
what needs explaining and working to ensure you understand all you want and
need to know about your mortgage and the mortgage process.
readers of the Weekly Rate & Market Update may recall that last week’s
economic news lent
support to the Fed raising its short term borrowing rate sooner rather than
later due. Not a lot of news this week but the two pieces of data released yesterday
puts a little dampen on the little enthusiasm from last week.
spending a few weeks below the 300,000 mark initial unemployment claims for
the week rose 26,000 from the prior week to 304,000 filings. The four week
average of claims dropped for the third week in a row, to be expected after the
drops two and three weeks ago. The four week average of those collecting
unemployment insurance payments is at 2.4 million. The news this week is
favorable to lower rates as it reflects more layoffs than anticipated. Coupled
with announcements from several major employers the past few weeks of layoffs
they will be making in 2015 the recent filings below 300,000 per week may have
been lows for the year. Let’s hope not.
second data release that caused some pull back from last week’s positive
expectations was retail sales data for January. Following a disappointing drop
of 0.9% in sales in December, retailers saw January sales decline another 0.8%.
Much of the drag on the sales numbers was the lower price of gas at the pump,
however it appears Americans are not taking their savings from Shell and spending
it at The Gap. The data is inconsistent with recent reports of increased
discretionary income and consumer confidence. If we are making more and feeling
more confident why are we not spending more? This is a critical question as
consumer spending makes up 65-70% of our economy. While it is great that incomes
and confidence are rising, but absent transferring the incomes to spending our
economic growth will continue to be stagnant and not robust, or even
strengthening. This news is positive for lower rates.
is the other shoe…after the Thursday releases of unemployment filings and
retail sales, today we received the corresponding data for consumer confidence
as reported by the University of Michigan. After climbing to highs not seen
since before the recession in January the index dropped in the mid-February
reading. So while retail sales did not reflect the same month positive growth
in confidence, the sales numbers for January seem to have been a pre-cursor to
lower confidence in the coming month. With the lower confidence number our
consumer spending data for February should show another downturn. This data is
positive for lower rates as it reflects slower economic activity ahead and reduced
incentive for rates to rise with a growing economy.
Friday February 13, 2015: With a light data week and not a lot going on
internationally as Greece and the EU continuing to talk about whether there
will be forgiveness of Greek debt, default by Greece, more bailouts or
mandatory Ouzo toasts every Friday throughout the European Union to stimulate
the Greek economy rates were pretty dull this week. With Monday being a holiday
we can anticipate some crazy trading later today as money managers seek safe
haven for their funds over the long weekend, nothing that should cause rates to
conforming 3.50% Flat
high-balance conforming 3.75% Down 0.125%
A lot going on
this weekend. We have the first of back-to-back Friday the 13ths, Valentine’s
Day and President’s Day holiday. Throw in a sleepover tonight for daughter’s 13th
birthday party, family adventure to the Hollyhock House tomorrow, golf
tournament for Dad on Sunday and we are looking at a fun filled weekend to
celebrate all that is going on.
opportunity to count blessings as I look at all that is going on with my best
friend and Valentine by my side every day making me laugh and love.
Day to all, keep your heads about you for those who suffer triskaidekaphobia
(yes I needed spell check) and a toast to the Presidents who have brought our
nation to where it is today—the greatest in history.
Question of the
week: What impact does the reduction in the FHA mortgage
insurance premium have on my situation?
Answer: As announced earlier this year FHA mortgages that
originated on or after last Monday January 26th have lower monthly
mortgage insurance premium than those originated one business day before. The
monthly rate declined from 1.35% for most FHA mortgages to 0.85%, the half
percent reduction is pretty significant on its impact on monthly payments.
So who benefits?
Obviously those using FHA mortgages to purchase new homes, but also those with
current FHA loans who are paying the 1.35% premium and may be eligible for a
Streamline Refinance rate reduction.
On a $400,000 mortgage
the reduction in the monthly mortgage insurance premium (MIP) equates to a
savings of $167 per month.
For borrowers who purchased
a $415,000 home with FHA financing and closed in late December 2013 or early January
2014 with the current rate of 3.5% and the 1.35% MIP their payment could drop
up to $250 per month between current lower rates and the decrease in the MIP.
homeowners the lower MIP either makes the same home more affordable or allows
you to purchase a slightly more expensive home with the same payment.
As for the comparison
between using FHA versus conventional financing, the numbers for the same sales
price still skew towards conventional for most transactions because in most
cases the monthly mortgage insurance is still a bit cheaper and also FHA still
has an upfront mortgage insurance premium of 1.75% added to the loan balance.
Taking a $400,000
sales price with 5% down and buyers with 720 FICO scores using today’s rates.
The total housing payment (PITI) for the FHA buyer would be $2461 per month,
for the conventional buyer the monthly payment is $2425 per month—and the
monthly mortgage insurance payment ($207) may be lifted after 24 months if
payments are made on time.
The spread between the
FHA and conventional mortgages has closed.
However, if borrowers have FICO scores lower than 720, only have 3.5%
available for down payment, require a co-signer who will not be living in the
property (such as parent purchasing home or condo for college age children), or
purchasing a condominium unit in an FHA approved complex then FHA might be the
best—or only—option for low down and low rate financing.
In my opinion the
total mortgage insurance charged for FHA mortgages is still low and seems to be
against the mission of the program to provide affordable, low down mortgages to
homeowners. The increase in the mortgage insurance premiums over the past few
years has been an attempt by the government run program to increase its capital
reserves, but as we have seen the increase in the mortgage rates have decreased
the number of FHA mortgages funded, thereby not have the desired effect of
raising those reserves significantly—certainly not as much as the reserves
would have increased had the mortgage insurance premiums been left alone or
lowered slightly to encourage more borrowers with higher credit capabilities to
utilize the program.
news this week on employment. Personal income and outlays for December led
the week off with news which showed a slight increase in personal income and a
decrease in purchases. Year over year the growth in personal income outpaced
spending and inflation which indicates an overall net savings. This is mixed
news for rates, higher personal income should lead to higher spending which
should lead to higher rates; however we have seen a slow but steady increase in
income the past several months without a corresponding increase in spending.
increases may not be coming to those in manufacturing as yet another index
measuring manufacturing has shown another month of slower production.
Manufacturing is an important component for a healthy economy as it provides
higher paid wages, impacts our trade surplus or deficit and there is tremendous
velocity due to the number of vendors for materials and services required to
support each manufacturing job. Slower manufacturing production is positive for
mortgage rates as it can be a precursor to economic slowdown.
we commented on the unusually large drop in unemployment insurance filings.
This week the number of filings increased by 11,000 from the prior week, which
was less than expected and lends credence that the 42,000 drop in initial
filings the prior week may not have been an anomaly but reflective of
strengthening employment. Any positive news for employment is negative for
lower rates as it signifies economic growth in the future.
first Friday of the month we get the Department of Labor report for
employment for the prior month. An interesting report this morning that showed
an increase of 257,000 jobs nationwide in January, as well the number of jobs
created in December was adjusted from plus 252,000 to plus 329,000—a very large
adjustment. The headline grabber usually is a decline in the unemployment rate
but the report showed an increase in the base rate to 5.7% due to an increase
in the number of people looking for work. Due to January seeing many states
mandatory increase in minimum wage take effect the average hourly earnings
increased 0.5% while the average number of hours worked held steady.
today has Fed watchers thinking it gives a green light to the Fed to
increase rates sooner rather than later as the positive labor reports indicate
a tightening labor market. As the labor market tightens higher output, income
and consumer spending should follow which should result in an increase in inflation.
Wanting to get ahead of inflation increasing to fast the Fed can pre-emptively
slow it down with rate increases ahead of higher prices.
Friday February 6, 2015: After last Friday’s GDP news pushed rates down at
the end of the week, today’s labor news has pushed rates back up. An erratic
Mortgage Backed Securities (MBS) market most of the week as investors looked at
Greece and oil production/prices showed MBS prices slowly drifting down but
mostly sideways. The labor news today say MBS markets open down sharply (higher
rates) and continue to drop as investors bail out of their positions and take
profits accumulated over the past several weeks. How much of today’s move is
technical trading and how much is a trend we will not know for another several
days or more. FHA high-balance shows a drop because the lowest rate available
to us has gone from 3.375% to 3.25%, the lower rate removes the credit
conforming 3.50% Up 0.125%
30 year FHA
high-balance 3.25% Down
It seems like a
lot longer than five days ago that we saw the almost indescribable finish in
the Super Bowl. The final quarter of that game and especially the final minutes
exhibited why I, and millions of others, love sports as we do. Swings in
momentum, outstanding athletic feats, decisions that will be good for arguments
over a beer for years to come all played out on the biggest stage in front of
the largest television audience in U.S. history.
We had the pleasure
of going from the emotional ups and downs of watching athletic brutes crash
into one another to the auditorium of Wilson High School later that evening to
watch our daughter and other Long Beach Ballet company dancers perform in a
series of dances that show cased the grace, athleticism and poise of the young
women and men in the program. Quite a juxtaposition of the use of the human
body, from high speed collisions to graceful leaps, pirouettes and arabesques.
Dennis C. Smith, California Bureau of Real Estate Broker #00966315; NMLS #296660
Stratis Financial Corporation, California Dept. of Real Estate Broker #01269597; NMLS #238166