Dennis' Mortgage Blog

April 18th, 2014 9:47 AM

Question of the week: If you run a credit report will it mess up my score?

Answer: This is a very question for us to hear from clients during conversations for preapproving and determining options for refinances. Because there is so much misinformation regarding credit scores some people are over cautious for any credit report being pulled. As a result they are resistant to our obtaining all the necessary information we need to provide accurate and complete information.

My standard response is that I don’t have to pull a credit report if they do not want me to but I cannot provide a pre-approval letter for their offer until I do.

This can often lead to, “well I just got a free credit report on line, can you use that?”


When we pull a credit report it is through a company that is approved with Fannie Mae, Freddie Mac and HUD so the reports are accepted as accurate for showing the applicant’s credit history and outstanding obligations. The report we receive is a “tri-merge” report, meaning it combines reports from TransUnion, Equifax and Experian and provides the credit scores from all three bureaus.

When preapproving a loan, either for a purchase or refinance, we upload this credit report along with the other information from the credit report to the Automated Underwriting System (AUS) for either Fannie Mae (Desktop Underwriter) or Freddie Mac (Loan Prospector). The report that is part of our file is then read by the AUS and used for determining if the loan can be approved as long as all the evidence for income, assets and property match the information we uploaded.

Without having our credit report in our system to upload into the AUS for Fannie or Freddie a loan cannot be preapproved, therefore I need to pull my own credit report for your file

Regarding the impact on your credit scores, our inquiry has zero to minimal impact depending on your history. The models used to determine credit scores have built in a tolerance for multiple inquiries for different lenders in the mortgage and auto loan industries. This is because it is not unusual for someone looking to buy a car or home to speak with more than one lender and each will want to obtain their own credit report. As a result if you have spoken to two other lenders within the past week or two and then call me and rightly decide you want me to work with you on our new mortgage application, when I pull my credit report your credit score should be the same as the score with the first lender you spoke with a week or so before.

Inquiries that will have a negative impact on your credit scores are for consumer, or revolving credit for credit cards and department store cards. If you have multiple inquiries from different credit card companies and/or department stores it appears you are seeking credit from anywhere. This type of behavior is seen as a negative and will impact your score.

When you call or come in to get prequalified or preapproved to purchase your new home or to refinance your existing mortgage be prepared to have me ask you for social security numbers and dates of birth, I will need a credit report and this is the information I will need. 

Have a question? Ask me!  

Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.

Consumer spending is the most important component of our economy. Because of this any economic data that reflects on consumer spending trends is critical to forecasting our economy’s strength and direction. Monday’s retail sales report for March showed consumers coming to market across several sectors, autos, furniture, clothing all showed improved sales from February and overall retail sales were up 1.1% from the prior month and up 1.0% from last March. How much of the sales were pent up demand from shoppers staying home due to the severe weather the first two months of the year and how much of the sales increase is the result of improved consumer confidence in their economic future will be seen in future reports. This news should lead to higher interest rates as positive economic news generally leads to higher interest rates.

Stronger consumer buying usually leads to inflation and higher prices. In March the Consumer Price Index (CPI) increased 0.2% from February and was up 1.5% from last year; stripping out food and energy for the “core” rate prices rose 0.2% for the month and 1.6% for the year. The CPI increase was a break out from prior months and as such was able to support arguments for those who support the Fed raising rates sooner rather than later due to the size of the year over year increase and also those who support the Fed staying the course of extremely low rates for a longer period due to the solitary month increase and there being no trend of prices cracking the 1.5% annual inflation number. Yet. Inflation means higher rates, this report supports rates rising.

Following last week’s drop in unemployment claims to 300,000 this week saw 304,000 initial claims being filed signaling two weeks in a row with lower than expected filings. Some analysts are taking the back to back filings with some caution wondering to what extent Easter is impacting the filings, one expects Aprils employment report to be released the first Friday in May to be fairly strong. A strong job report for April will cause rates to climb, and remember it was the first Friday of last May that we saw rates start a strong climb that changed our markets.

Rates for Friday April 18, 2014: Markets are closed today due to Good Friday, but it was an active week for Mortgage Backed Securities (MBS). The first three days of the week MBS prices were active but moved sideways overall. On Thursday the positive unemployment claims numbers and a long weekend led to a big sell off in the market causing rates to spike as investors moved money out of MBS and other fixed rate investments. The sell off caused rates to move up off their five month low from last week.


30 year conforming                               4.125%             Up 0.125%

30 year high-balance conforming           4.375%             Up 0.25%

30 year FHA                                         3.625%             Up 0.125%

30 year FHA high-balance                     3.875%             Up 0.125%

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 credits available for closing costs at these rates and higher.



Spring Break has finally arrived, for students in Long Beach Unified and other districts that are off next week it seems like an eternity since Christmas Break ended at the beginning of January. Spring Break signals Easter is also upon us, remember to learn your lesson on hiding eggs that my mom learned living in Tulsa. Count your eggs! Nothing like hiding eggs outside for the kids and having a few that went undetected until a few months later when the Tulsa heat has created a bit of a smelly mess to be discovered unintentionally. Stinky!

Happy Easter,


Posted by Dennis C. Smith on April 18th, 2014 9:47 AMPost a Comment (0)

April 11th, 2014 12:01 PM

Question of the week: In what instance would paying off a mortgage be a good idea vs keeping the mortgage? When is it better to put money in investments or savings or pay mortgage off and save a ton on interest?


Answer: Friend, and computer expert extraordinaire, Erik posed this question, and it is one we frequently answer for homeowners. As with many of our answers in the Weekly Rate & Market Update the answer is, “it depends.”


Erik raises the obvious positive result of paying off a mortgage early, “save a ton on interest.” But the opposite of that is that you could miss the opportunity to “make a ton on interest.”


There are three basic transactions we make, we spend money we earn, we save money we earn, and/or we borrow money to spend. This question involves balancing borrowing and saving. Does it make sense to save less in the short run to borrow less in the long run? Or does make sense to save more in the long run and pay your mortgage for a longer period?


Several questions have to be answered before you embark on decreasing your savings budget and increase your mortgage payment budget.


How much do you have in savings? Are you prepared for retirement and do not need to put more money in savings, investments and retirement accounts? Do you have a reliable stream of income from your retirement until you final breath? Do you have sufficient savings to ensure your spouse or partner is able to live comfortably if you pre-decease him/her? 


For me this is the primary question when it comes to paying off your mortgage. Most people today have mortgages at very low historical rates, lower than the historical return on investments. This means you are most likely borrowing money for your mortgage at a lower rate than you will over time earn in interest, dividend and value growth with any money you save or invest rather than use to pay down your mortgage. If you are not ready to support yourself with your savings and investments then you should probably not pay off your mortgage and instead put as much of your income as you can into retirement and investment accounts.


How long until you retire? Are you planning on retiring in ten years, fifteen years, twenty years? If your plan is to have your home paid off when you retire how much additional money will you need to pay monthly/yearly to make that happen? If you choose not to put additional money into paying off the mortgage between now and retirement what is the rate of return you will get on that money in a savings and/or investment account?


Several clients over the years have looked at this math problem with their low interest mortgages and determined they were better off putting the money into savings and investments with the plan that the funds would grow at a greater rate of return than the interest they are paying on their mortgage. When they reach retirement they have enough in the additional savings they made to pay off the balance at that time. If they choose. I have had a few clients who have just transferred their savings to their mortgage and paid it off—with some left over, and a few others on this plan who instead have begun using this account to continue making mortgage payments. In both cases the clients rode the interest rates down on their mortgage while continuing to make ever increasing deposits into their “pay off the mortgage account.”



Is it better to refinance to a shorter term loan? This option was one many clients used prior to the rate increases in May of last year, but still a very viable option for many homeowners looking to pay off their mortgage early. In most instances your monthly payment will increase as you move from a traditional 30 year mortgage to a 20, 15 or even 10 year mortgage, however you interest rate can drop considerably depending on your current mortgage. The same math applies however in calculating the additional payment on your lower rate mortgage versus your current mortgage and transferring what would be the additional principal reduction payment into a savings and/or investment account.


Should you make additional payments to principal and pay off your mortgage early? As I have always said when making these types of decisions, do the math and explore your options. Depending on the many variables involved in such a decision you will discover your best option for you and your family. If you are interested in exploring this option please call me and we can discuss the options available to you so you can make an informed decision.


Have a question? Ask me!  


Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.


Light on economic news this week, but what was released was significant. Oddly the Mortgage Backed Securities (MBS) and bond markets were non-reactionary to the news. On Wednesday the Federal Reserve Open Market Committee, the group that decides the policy on rates and monetary supply, released the minutes from its last meeting. The primary take aways were that the consensus is the economy is growing, but not that strong due to several factors weighing on growth, that the Fed will continue its “loose” policy (low rates) for a few more years, that the Fed will continue to taper its purchase of mortgages and US Treasury debt and that the members are still worried that inflation is too low. This news is beneficial for low mortgage rates.


Speaking of inflation, today the Producer Price Index was released for March and after contracting in February the index jumped 0.5% for the month, far beyond the expectations of a 0.1% increase. The factors mentioned for the increase were food, up 1.1% and services up 0.7% from February. Year over year PPI is up 1.4%, below the 2% target of the Fed for consumer prices which will be released on Tuesday. This news should put pressure on rates to increase as higher prices lead to higher interest rates.


The stunning number of the week was yesterday’s release of initial unemployment claim filings which came in at 300,000 claims, down 32,000 from the prior week. This is the biggest one week drop in claims in ten years. Analysts are debating if the large drop is seasonal or a real drop, either way the drop in the four week average to 316,250 is more than 15,000 below the four week average a month ago showing there is a slowing in initial claims for unemployment. This is good news for the economy, which usually means not so good news for mortgage rates.


Rates for Friday April 11, 2014: Reversing week’s trend of MBS prices drifting down all week until reversing on Friday, this week MBS prices have been climbing until taking a breather today. The net result is rates are down, conforming rates are at their lowest since the first of November when the hit these numbers on the way up. This week saw the return of the historical relationship between stock markets and mortgage markets as both dropped. With mortgage applications down significantly in the first quarter and home sales slowing lower rates should create more activity in both.



30 year conforming                               4.00%               Down 0.125%

30 year high-balance conforming           4.125%             Down 0.25%

30 year FHA                                         3.50%               Down 0.125%

30 year FHA high-balance                     3.75%               Down 0.125%


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 credits available for closing costs at these rates and higher.



Vrrooooom! The Indy Cars take to the streets of Long Beach this weekend for the 40th running of the Long Beach Grand Prix. If you have never experienced the Grand Prix this looks like a perfect time to head downtown and feel and hear the cars going almost 200 miles per hour on the straight-aways. If you go I suggest you plan a good park and ride route as parking and traffic are pretty challenging. I may take the girls down on the bus Sunday just to walk around outside the event to see the various vendors, exhibitions and of course the people walking around enjoying the race on a beautiful April day.


Have a great week,



Posted by Dennis C. Smith on April 11th, 2014 12:01 PMPost a Comment (0)

April 4th, 2014 12:17 PM

Question of the week
: Can you debunk the myth that VA loans are difficult and not worth a seller's time? We've been fighting listing agents left & right to accept our VA offers.


Answer: This week’s question from agent Richard who brings up a great issue and one I have touched on most recently in the June 28, 2013 Weekly Rate & Market Update.


There are several advantages for sellers to accept offers from buyers using VA financing, not the least of which is helping a veteran become a homeowner. Were I selling my home and had offers from a VA buyer, a FHA buyer and a conventional buyer and all were close to netting me the same cash at closing I would take the VA loan buyer. Unfortunately as Richard points out many real estate agents are unfamiliar with the changes to VA to make the program more competitive in the market place and their lack of knowledge has prevented many qualified veterans from getting the homes they want, and are able to purchase.


Here are some of the issues I brought up last year that can debunk the myth that VA loans are difficult, to use Richard’s words.


Seller paid closing fees. In the past sellers who accepted an offer with VA financing had to pay some of the buyer’s closing costs, what were termed “non-allowable,” meaning the veteran was not allowed by the VA regulations to pay these fees. This is no longer the case, if the lender chooses not to charge an origination fee then the buyer can pay these fees, most lenders including Stratis Financial waive the origination fee to accommodate this transaction. This doesn’t mean the seller cannot pay these fees, it just is not a requirement as it was in the past.


Appraisals are an issue. Not as much as they can be with other types of financing. There is no second underwriting by a mortgage insurance company and in our experience VA approved appraisers tend to be more seasoned and experienced providing us with higher quality appraisals. As I mentioned last June, VA buyers can also present “appraisal protection” if they have sufficient funds. Since the VA loan is available for the lesser of the sales price or appraised value, if an appraisal comes in lower than sales price the veteran can make up the difference and still close with less cash to close than a traditional or FHA offer. If an appraisal comes in low with a conventional or FHA offer the buyer needs to come in with down payment and possibly the difference between the sales price and appraised value or get the seller to lower the price or split the difference. If the appraisal comes in lower with a VA loan since the buyer has no down payment the total cash to close burden with a low appraisal is lower and enables the negotiations between buyer and seller to be easier. We have seen many VA offers where the appraisal contingency is waived, or a minimum value is put in the offer, upfront as the buyer has the funds to fill any potential gap between sales price and a low appraisal.


Time it takes to close. This is another concern for many in the industry that goes back a decade or more and is baseless in the current market. The Veterans Administration has done a good job in modernizing their systems so items that used to take quite a lot of time are now available via the internet, as a result most VA transactions take no longer than most conventional or FHA financed transactions. In many cases because there is no need for mortgage insurance underwriting or possible overlays to delay approval VA underwriting and approval is faster than conventional or FHA.


Sales prices are restricted in negotiations. Not really, today a qualified veteran in most Southern California markets (primarily the high cost designated areas which include the coastal counties) can purchase a property with no down payment up to $850,000. Compare that to a buyer trying to get a jumbo loan over the $625,500 Fannie Mae/Freddie Mac limit where there are many more underwriting restrictions than VA has. For sellers in this sales price it would greatly open up their range of prospective buyer if they were to market to veterans, many of who have retired or completed their service and are now very successful managers, executives and business owners.


For VA buyers the costs are considerably lower than FHA and low down conventional loans due to the lower mortgage insurance (called a funding fee for VA). Between the no down payment greatly reducing the amount of cash to close and lower version of mortgage insurance most veterans when we present the options find using their hard earned VA eligibility to purchase their new home as the best way to go.


If you are seller tell your real estate agent that you want to entertain, and encourage, VA offers. If you are a listing agent let your client know you will encourage VA offers as in many cases the veteran buyer using his VA benefits can provide the best opportunity for the seller to have a smooth closing, net the same amount at closing and lend a hand to a veteran looking to purchase a home for his or her family.


Our nation’s veterans have served to protect and defend our way of life, including home ownership and a free market place, they have earned their eligibility for a VA mortgage, let’s work together so they can use that eligibility and enjoy home ownership.


If you are a veteran thinking about purchasing a new home or refinancing your current home, or if you are a real estate agent with a client who is a veteran please contact me to discuss your options.


Have a question? Ask me!  


Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.


If it is the first week of the month it must be about jobs. A light week for economic news and Mortgage Backed Securities (MBS) drifted down (MBS prices down, rates up) all week heading into the monthly Labor Department employment data. Yesterday’s report for initial unemployment claims for the prior week saw an increase of about 15,000 filings to 326,000 individuals filing for first time benefits.


Non-farm payrolls were expected to show an increase of 206,000 jobs in the economy in March, the number released by the Labor Department was 192,000 new jobs. Bond and mortgage markets reacted to the less than expected number by opening higher (lower rates) and climbing in early trading as data was analyzed. The highlights of the March employment report is job growth continues to be a bit choppy and not quite the number needed to absorb new entrants to the labor market much less absorb large amounts of unemployed as well. Missing the mark of expectations was private payrolls which increased 192,000. Goods producing and manufacturing jobs increased less than in February by 16,000 fewer jobs. The greatest gains continue to be in private sector service-providing jobs which saw an increase of 167,000 jobs. The unemployment rate held steady at 6.7% and the labor participation rate climbed to 63.2%, a six month high.


None of the news is expected to alter the Federal Reserve’s course of winding down its asset purchasing program which will slowly lead to higher rates. The news does show however that while we are seeing improvement in the job markets and the economy in general, the improvement is still in small increments. As we approach the five year anniversary of the end of the Great Recession it feels like we are still in recovery instead of growth.


Rates for Friday April 4, 2014: As stated above, MBS trended down all week, opening lower each day then the prior day’s closing until today’s news. Today’s news was strong enough to see a slight drop in rates from last Friday for conforming loans. We are at the top of a trading range however and I will not be surprised to see rates trend up next week absent some news to cause money to flow into bonds and mortgages.



30 year conforming                               4.125%             Down 0.125%

30 year high-balance conforming           4.375%             Flat

30 year FHA                                         3.625%             Flat

30 year FHA high-balance                     3.875%             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 credits available for closing costs at these rates and higher.




Opening Day at Dodger Stadium today, perhaps the last one with the greatest announcer of all time, Vin Scully, at the microphone. Not a whole lot better ways to spend a summer afternoon or evening in my view that sitting in a ballpark with a hot dog and cold beverage watching a game of baseball. Many say that the NFL has become the official sport of America, supplanting baseball. Yet the Dodgers have already sold three million seats for the season, and eight teams surpassed that mark last year in Major League Baseball as over 74 million tickets were purchased. Parks across the country, from the Dodgers’ Chavez Ravine to the Tulsa Drillers OneOK field to the Bronx home of the Yankees, will be the choice for millions of American families to spend a few hours in the coming season.


Yes, take me out to the ballpark and buy me some peanuts and Cracker Jack, and let me hear Vin Scully on the radio, summer is almost here!


Have a great week,



Posted by Dennis C. Smith on April 4th, 2014 12:17 PMPost a Comment (0)

March 28th, 2014 1:01 PM

Question of the week: Several of your updates have spoken about the Federal Reserve raising their interest rates, how does this affect me?


Answer: The Federal Reserve directly controls two interest rates, the Fed funds rate and the discount rate. At its policy meetings the Fed Board of Governors set these rates.


Why does the Federal Reserve have two interest rates that it sets? The Fed is the central bank for the United States and controls our nation’s money supply. It was formed by Congress in 1913 and is formally charged with three objective: maximum employment, stable prices and moderate long term interest rates. Over time the role of the Fed has expanded to include regulation and oversight of U.S. banks, monetary policy and ensuring our banking system is stable.


Part of regulating banks is setting the reserve requirements, the amount of money banks must have on hand in cash in vaults or on deposit with the Federal Reserve, as a percentage of their deposits; i.e. the amount of loans a bank can have outstanding. For most banks in the United States the reserve requirement is 10% of deposits. So if you have a bank with $1 billion in deposits you must at all times have at least $100 million in cash or deposits with the Fed, in other words your outstanding loan balances cannot exceed $900 million.


What happens if a bank falls short of the 10% reserve requirement? For instance it makes a very large loan on the same day a customer with large amount of deposits switches to another institution. The bank then goes to the Federal Reserve and borrows enough money to covers its reserve shortages, either by borrowing from other banks who have excess reserves on deposit at the Fed or from the Fed directly through the “discount window.” Borrowing from the other institutions the bank is charged the Fed funds rate, borrowing from the discount window the bank is charged the discount rate.


So how is the average homeowner, and average American in general, affect by the Fed increasing the Fed funds rate and discount rate?


Most directly, if the Fed raises these rates it increases the costs to banks to borrow money, if it costs a bank more to borrow money it will either a) charge more to its customers for loans and/or b) loan less money to ensure it does not fall short on its reserve requirements. Both of these options result in higher interest rates on credit cards, auto loans, signature loans and home loans. It is a ripple effect, Fed raises rates, banks raise rates.


Separate from the Fed but directly impacted by it is the Prime rate, which is generally described as the rate banks charge their best and most credit worthy customers. The Prime rate is not set by any one body but is generally about 3% above the Fed fund rate. While every bank can, and does, set its own Prime rate, the most commonly accepted prime rate is the Wall Street Journal prime rate which is published using the corporate loan rate from 75% of the nation’s thirty largest banks.


How are homeowners affected if the Fed increases the Fed funds rate and discount rate?


Do you have a Home Equity Line of Credit? It is tied to the prime rate and either has a rate equal to the prime rate or is the prime rate plus a margin of some amount. If the prime rate is generally the funds rate plus 3%, if the Fed increases the funds rate by 1% then your interest rate on your HELOC increases 1%.


Do you have an adjustable rate mortgage, or a hybrid ARM that is, or was, fixed for a period of time and then will become adjustable, a 5/1 or 7/1 ARM? Because the rate to which  your loan is tied is a short term rate, usually the LIBOR, 11th District Cost of Funds or short term Treasury, it will increase as the Fed rates increase causing your monthly payments to rise.


What is the impact of higher rates on a HELOC or adjustable rate mortgage in real dollars?


Many people with ARMs, either for a primary mortgage or HELOC, have the option of paying interest only for a period of time and at some point the loan becomes fully amortizing for the remaining term as the rates can rise or fall.


If you have a $100,000 HELOC at prime the current rate is 3.25% and the interest payment is $271 per month, if the prime rate increases 1% to 4.25% your interest payment increases to $354 per month, an increase of $83 per month, or 31% of the payment. If the rate goes to 5.25% the payment is now $438 per month.


If you have an adjustable rate mortgage that is currently tied to the one year LIBOR plus 2.5% your current rate is 3.055%. If your mortgage balance is $400,000 your interest payment is $1,018 per month. If the LIBOR increases 1% your interest payment increases to $1352 per month and if it increases 2% your payment goes to $1685.


It is not a question of if the short term rates that affect credit cards, auto loans and most importantly for many of the readers of the Weekly Rate & Market Update, Home Equity Lines of Credit and Adjustable Rate Mortgages, will increase, but when and how fast those rates will increase.


If you have a first or second mortgage that is tied to an adjustable rate it is very advisable that you begin to pay down the principal balance as much as possible while rates are low so that when the rates that determine your interest costs do increase the impact is lessened by having a higher rate on a lower balance.


When and how much will rates increase? The when is most likely the end of 2015. The how much is likely in 0.25% to 0.50% increments depending on the economy at the time of the rate increases, mostly inflation.  As a basis for comparison, in mid-2007 when the economy was growing at about a 3.5-4% rate and just prior to the Great Recession, the prime rate was 7.75%, or more than double today’s rate. At some point in the future the prime rate will reach 7.75% again, the question is how soon?


If you have an ARM or HELOC and want to convert to a fixed rate mortgage while rates remain low please call me so we can discuss your options and analyze the short and long term costs and benefits of those options.


Have a question? Ask me!  


Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.



A busy week for economic news.  Most important for the housing markets was the release of February pending home sales data from the National Association of Realtors. Pending sales are sales under contract but not yet closed. February saw pending sales decline for the eighth straight month, down 0.8% from January and down 10.5% from February 2013. In California year over year pending sales dropped 12% from last February but month over month pending sales increased 14.2% from January. New home sales also declined in February after a spike in January. As the traditional spring buying season begins the expectation is for home sales to slowly increase. Over all the report is beneficial for mortgage rates as lower home sales nationally impact the economy negatively which leads to lower rates.


In other economic news consumer confidence in February was higher than expectations, primarily on expectations for future business conditions and future employment. Durable goods orders, an indicator of future economic growth, was very mixed with a strong overall number on the backs of a strong increase in orders for transportation orders, primarily aircraft. The third estimate for the 4th quarter of 2013 GDP was revised slightly upward to 2.6% growth, a neither here nor there number and significantly down from the 3rd quarter growth of 4.1%--which was the first quarter with new accounting methodology. Unemployment claims dropped again last week, this time to 311,000 filings for first time unemployment insurance. The decline in the four week average foretells positive employment data for March to be released next Friday. Overall this economic data was neither positive nor negative for mortgage rates.


The final news for the week which is often overlooked but I feel is the most important data for gauging economic strength was the release today of personal income and outlays for February. Both numbers were pretty flat, incomes growing 0.3% from January and 3.1% from last year and consumer spending also increasing 0.3% for the month 3.0% from last year. Meanwhile inflation for consumer goods was below 1% from last February. With prices flat and personal income increasing workers are able to purchase a bit more this February from last year per hour worked. This data shows a good foundation for stronger consumer spending and economic growth in the near future. The new is not positive for mortgage rates as stronger economic growth leads to higher rates.


Rates for Friday March 28, 2014: After a choppy week with Mortgage Backed Securities (MBS) slowly climbing all week (better rates) today MBS sold off on technical news and the personal income data losing many of the gains from the past few days. End result is what could have been a gain for the week is rates are flat from last Friday.



30 year conforming                               4.25%               Flat

30 year high-balance conforming           4.5%                Flat

30 year FHA                                         3.625%             Flat

30 year FHA high-balance                     3.875%             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 credits available for closing costs at these rates and higher.



How are your brackets? As usual the NCAA men’s basketball tournament has not disappointed, on excitement as it obviously disappoints the fans of every team but one, with exciting endings to many games. Warren Buffet’s Billion Dollar Challenge was a great PR stunt with the prize matching the risk. With a few first round games left to be played late on Friday every submitted bracket had been busted. Of the millions of entries (Quicken Loans which was the official sponsor would not release the totals) only three were left when the 25th of the 32 first round games started. When George Washington lost to Memphis all three were eliminated and Buffett’s billion dollars secure.


With UCLA and San Diego State knocked out in great games last night there are no West Coast teams remaining, the closest school still playing with loose ties to the area is Arizona from the Pac-12. Not sure what to do this Friday night? One of the biggest rivalries in college basketball will be on display as Louisville and Kentucky tip off in Indianapolis. The schools are two (Louisville) and three (Kentucky) hours away from the arena which should be packed with red and blue clad fans. A great game should be on display that even casual sports fans should enjoy.


Have a great week,



Posted by Dennis C. Smith on March 28th, 2014 1:01 PMPost a Comment (0)

March 21st, 2014 1:13 PM

Question of the week: I read an article you were quoted in about Congress shutting down Fannie Mae and Freddie Mac. Do you think it will happen and what will happen to mortgage market if it does?


Answer: Last week Marilyn Kalfus with the Orange County Register called me about a news story that the Senate was advancing a bill to close down Fannie and Freddie and wanted my reaction. (I would link article but OC Register is subscription only site.)  I had quite a few comments on the issue and will expand upon them here.


First, I believe if Congress does shut down Fannie and Freddie (known as the GSE’s for Government Sponsored Entity) such a move will have an extremely negative impact on the housing markets across the country. Second, I believe the result will also be to set back the mortgage industry three decades in how mortgages are processed, underwritten and approved.


A quick recap for new readers or those not familiar with the details of how the mortgage industry operates. Fannie and Freddie are two different organizations with very similar underwriting guidelines with some slight differences. Loans funded using their guidelines are known as “conventional” or “conforming” transactions.


Lenders will approve a loan using one of the GSE’s guidelines and then package many loans together in a bundle and sell that bundle to the GSE whose guidelines they use. This way the lender has more money available to make more loans.


Where do Fannie and Freddie get the money to buy the loans? From investors who purchase Mortgage Backed Securities (MBS), these investments are bonds that backed by Fannie and Freddie paid for with your mortgage payments.


The GSE’s are a secondary market for mortgages keeping money flowing so new loans can be made and through pooling mortgages together spreading out the risk for investors. Because of Fannie and Freddie more loans are able to be funded at lower interest rates because of the dilution of risk and availability of funds to lend.


There were several reasons for the housing market collapse that started in 2008, but one of them was the immediate tightening of lending guidelines by the GSE’s making mortgages more difficult to obtain, causing a slowdown in demand. At the same time foreclosures spiked across the country putting both Fannie and Freddie at risk of collapsing entirely and saturating the housing markets with inventories as upside down homeowners tried to get out of their homes, or lost them to lenders who put them on the market. Low demand, high inventory, a combination that results in a rapidly declining market.


Seeing the fatal impact the collapse of the GSE’s  would have on our economy already sinking into a large recession they were put into receivership by the federal government, essentially acting as the owner and making decisions without input from current stockholders. As part of the transaction the GSE’s gave senior preferred stock to the U.S. Treasury in exchange for about $187 billion in federal money to support their losses.


At this point all the money put out by the Treasury for its stock position has been repaid and the American taxpayers are now positive on the investment as all dividends from the companies flow into the Treasury. The bailout transaction worked, Fannie and Freddie remained solvent, funds put forth to ensure the solvency have been repaid and now profit is being made.  As well changes to guidelines for both GSE’s have ensured that all mortgages being underwritten under their guidelines for the past several years are quality mortgages with acceptable amounts of risk.


So what’s the problem? Why do many members of Congress want to shut down the GSE’s? Even though the recession ended in 2009 and housing prices have risen for twenty two straight months many politicians feel the need to “do something.” They state they do not want a repeat of what happened in 2008 and forward and their solution is to break what is working without a good plan to enable the housing and mortgage markets to continue to operate in an efficient fashion following the shutdown of Fannie and Freddie.


As described above Fannie and Freddie provide a crucial element to our national housing and mortgage industries, a market with liquidity and reduced risk. The issues that caused the foreclosures for so many were extremely loose guidelines from the GSE’s that enabled people to qualify for mortgages they could not really afford. As a result housing prices rose creating a bubble based on buyers who could not afford the prices they were paying. Over the past several years the market has self-corrected and Fannie and Freddie guidelines are essentially what they were in the 1980’s and early 1990’s. The result has been a healthy housing market based on affordable loans made to people who can afford to repay those loans.


Take away the secondary markets and uniform guidelines that the GSE’s provide and mortgage rates and costs will jump tremendously. Instead of pooling risk, like insurance companies do to ensure lower premiums, each mortgage will stand alone as a point of risk making it a riskier investment for the lender. The higher the risk the higher the return the lender will require. To lower the risk and to be rewarded for the risk being taken lending guidelines will get even tighter reducing the number of eligible borrowers and mortgage rates will rise, further reducing the size of the buyers’ side of the market. Lower demand means lower prices, result is a housing industry that has recovered from the crisis in most areas falling back into recession.


Another factor that I am not sure lawmakers supporting the bill the collapse Fannie and Freddie are even aware of is the role their Automated Underwriting Systems play in the industry. The overwhelming majority of loans nationwide, not all mortgages but over 90%, are submitted to either Fannie Mae’s Desktop Underwriter or Freddie Mac’s Loan Prospector for approval. Most loans are submitted by originators prior to offers being written for purchases or completing mortgage application packages to ensure the borrower can be approved. Underwriters rely on the results of the AUS for making their decisions and the results are mandatory for any loan submitted for purchase by a lender to Fannie and Freddie.


What happens to the AUS technology and infrastructure if Congress shuts down the GSE’s? Will the shutdowns require lenders to invest in recreating their own versions of the GSE AUS’s? What about brokers, will they need to submit borrowers’ loan packages electronically to each lenders’ system, whereas now the packages are submitted directly to Fannie or Freddie and then a lender able to be chosen?


It is my belief that the desire by some (many?) in Congress and the Obama Administration to collapse Fannie and Freddie is a knee-jerk reaction to the housing market collapse too many years after the fact. Had Congress provided the necessary oversight through the early to mid-2000’s of Fannie and Freddie and heeded the warnings by many in the industry, by other politicians and by many regulators, the housing collapse may have been averted, or not been as deep. Lacking that history of doing what was required when it was required many of those same members of Congress are now trying to show they are “on the ball” by over-reacting now to a problem that has come and gone and been resolved. As are result legislation that already runs over 400 pages is being crafted that in typical heavy-handedness by Congress will create a much bigger problem than the one they are trying to solve—and which has already been solved.


Yet another reason Congress has such a low approval rating and lack of respect among the  people of the United States.


Have a question? Ask me!  


Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.


A little long winded with our question of the week response today so will try to be short with economic update. Some data releases this week that impact rates and one announcement that really impacted them. First, Consumer Price Index for February was released that showed almost no increase in prices, rising 0.1% for the month and up only 1.1% year over year. Normally this news would cause rates to drop as it shows a lack of inflation and lifts concerns the Fed will raise short term rates any time soon. Yesterday jobless claims for the week before were released and increased 5,000 from the prior week to 320,000 unemployment filings, again news that would normally be neutral or positive for rates.


Most importantly for housing markets was the release yesterday of pending home sales which declined month over month by 0.4% in February, the sixth time in seven months the number of sales declined from the prior month. Year over year sales declined 7.1% which is the biggest drop since 2011. Not only were pending home sales down by Zillow reported that home price increases dropped as well in February to a gain of 0.2%. The 22nd month in a row of price increases but only barely. As we head into the spring and summer buying seasons home sales should increase again, if they don’t then there is concern on the recovery stalling.


All news took a backseat to the release of the Federal Reserve’s economic forecast, meeting announcement and Chair Janet Yellin’s press conference. The big bit of news was that the Fed is no longer tying its increase in the Fed Funds Rate (rate it charges member banks to borrow money) to the unemployment rate. Throughout prior Chair Ben Bernanke’s tenure through the recession as the Fed dropped its benchmark rate to near zero the Fed has indicated it would begin to raise rates after the national unemployment rate has dropped below 6.5%. Wednesday Yellin stated that there is no linkage between rate decisions and unemployment. Immediate reaction was a sell-off in all markets, including bonds which pushed MBS prices down—which means rates up.


Rates for Friday March 21, 2014: The week started with rates pushing up from last Friday’s close and then a spike of Wednesday with the Yellin comments. Improvement yesterday and so far today have made up some ground but not enough to prevent rates today being higher than last Friday.



30 year conforming                               4.25%               Up 0.125%

30 year high-balance conforming           4.5%                Up 0.125%

30 year FHA                                         3.625%             Up 0.125%

30 year FHA high-balance                     3.875%             Up 0.125%


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 credits available for closing costs at these rates and higher.



The best sporting of the year is underway, better in my book than the Super Bowl, World Series or any other championship—the NCAA basketball tournament, aka March Madness. So many games come down to the last possession, small schools like Mercer in Georgia knocking off historical powerhouses like Duke, the staggered starts and therefore finishes so fans can see exciting finish after exciting finish after exciting finish. Since college I have had a pool with the same core group of guys, that’s over thirty years. It keeps us together no matter where our lives have taken us and every year takes us back to our younger days sitting in dorm rooms watching tiny black and white televisions as small colleges knocked off major powerhouses. I love this tournament!


I’m sure you have heard of Warren Buffet’s Billion Dollar Challenge for anyone who submitted a completed bracket that has every game properly prognosticated. A good risk for him, I wonder if anyone will even make it to the final eight with a perfect bracket. One question I have posed is if you have a perfect bracket to the Final Four and only need three more of your picks to win so you get the billion dollars, and Buffet calls you and offers you $10 million after taxes to buy out your entry, do you take it? I think you would have to be some sort of major risk taker to say no to such an offer given the bounces, injuries and calls that can and do occur.


My picks are a Final Four of Florida, Michigan State, Arizona and Louisville with Florida beating Louisville on the night of April 7th.


Have a great week,



Posted by Dennis C. Smith on March 21st, 2014 1:13 PMPost a Comment (0)


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