Dennis' Mortgage Blog

August 28th, 2015 12:18 PM


Question of the week: Why do rates go down when the stock markets go down?

 

Answer: Because investors are choosing “quality” or low risk instead of higher risk.

 

The prime subject of many conversations around office water coolers and coffee shops has been the sudden and sharp drop in the stock markets for the five trading days starting last Wednesday August 19th through this past Tuesday August 25th. During this period the Dow Jones dropped 10.5%, during which time the Fannie Mae 3.5% Mortgage Backed Securities prices increased by 78 basis points (increased in price, i.e. basis points, for bonds means lower interest rates).  Since Tuesday the Dow Jones has risen 6% and the Fannie Mae 3.5% MBS has declined 44 basis points.

 

So stocks dropped, rates dropped and then stocks climbed and rates climbed. Why?

 

Investments that pay a fixed rate of return and are backed by a solid issuer are a haven for investment funds when there is turbulence in markets, nations and/or economies. The action of an investor selling positions in stock in individual companies (or a collection of companies as with mutual funds) and investing those funds into bonds and/or mortgages that exhibit minimal risk (such as U.S. Treasury bonds and Fannie Mae/Freddie Mac mortgages) is known as a “flight to quality.” Risk is greatly reduced or almost eliminated by selling out of corporate stocks that have dropped and may drop more and investing those funds in fixed income investments that have never, or almost never, have defaulted.

 

If there are more sellers than buyers then the price, or value, of the investment being sold drops, if the selling is widespread through a market or economy, as we saw in the last week, then the selling and price drops feed each other causing the large drop we saw in equity prices.

 

If there are more buyers than sellers then the price, or value, of the investment being bought increases; in the case of Mortgage  Backed Securities the increase in price reduces the yield on the investment—which means mortgage rates drop.

 

So as the news about the Chinese economy not doing so great, and possibly being in a recession, hit investors looking ahead saw their stock holdings as being at greater risk than they were willing to bear. Fearful of a global recession and large devaluation of stock prices they sold out of stocks, causing sharp drop in stock prices, and engaged in a flight to quality by purchasing fixed income investments like mortgages in the United States.

 

As the markets called down earlier in the week investors reversed their activity and started selling bonds and mortgages and started buying back into stocks. Hence the bounce in stock prices and drop in MBS prices—and a subsequent bounce back in interest rates.

 

Is the bounce back this week a “dead cat bounce” or have markets seen the correction that many have been calling for? (A “dead cat bounce” is when a market drops then sees prices increase for a day or two before starting to drop again.) From a mortgage rate perspective I think the bounce we have seen this week in  MBS prices should be short lived and rates should settle back down again in the coming week(s) as the economic news we have been receiving has not been that great outside of the housing industry news. Because of this rates should be within a tight range between 3.5% and 3.875% for conforming rates as quoted every Friday in the Weekly Rate & Market Update.

 

Have a question? Ask me!  

 

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

 

There was economic news beside stock prices this week. New home sales in July surged 5.4% after a lackluster June and year over year sales are up a whopping 26%. Durable goods orders in July were also healthy, up 2%--though year over year orders were down 19.6% from last July. We should expect durable goods orders to start to weaken with the devaluation of the Chinese yuan earlier in the month. We had the first revision to second quarter GDP and it was a strongly upward revision from 2.3% growth to 3.7% -- an unusually high adjustment. All of this news is slightly mortgage rate unfriendly, however against the backdrop of the stock markets falling the impact was negligible.

 

Rates for Friday August 28, 2015: The drop in MBS prices in the second half of the week was greater than the increase earlier in the week; hence rates bounce off their twelve week low from last Friday.

 

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS

30 year conforming                                            3.75%             Up 0.125%

30 year high-balance conforming                        3.875%            Up 0.25%

30 year FHA                                                       3.25%**         Flat  

30 year FHA high-balance                                  3.5%**           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

 

 

 

 

Very kind of summer to be ending with tropical weather; the high heat and humidity is welcomed by those of us without air conditioning. Last weekend of summer for our kids as school starts next week—I’m sure more than a bit of it will be spent cooling off in the pool!

 

Have a great week,

Dennis

 



Posted in:General
Posted by Dennis C. Smith on August 28th, 2015 12:18 PMLeave a Comment

August 21st, 2015 10:56 AM


Question of the week: Can I use my mortgage to finance putting solar panels on the home I am buying?

 

Answer: Well maybe, sort of. Depends….

 

In May I answered if it makes sense to add a bathroom and in June I answered a question about buying a home with solar panels, this week let’s look at what happens if you wish to do home remodeling or additions to your new home.

 

I am often asked by buyers who are looking at a purchasing a home that will need some, or a lot, of work after buying if they can use money from their new mortgage for home repairs.  Whether you are putting in solar panels, a new bathroom, painting or stuccoing your new home, after putting your savings into the purchase for down payment and closing costs very often there is little left in the bank to pay for any additional work.

 

Whether you can leverage your mortgage to provide you the cash for home improvements after you purchase depends on several factors, but primarily these, is there enough equity and do you qualify.

 

For instance you are buying a home for $525,000, are getting a mortgage for $420,000 and feel you will need about $50,000 to fix up your new home. You want to know if you can get a mortgage for $470,000. Essentially we are putting $50,000 less down so you have those funds available for home improvements after you move in.

 

In this case we have equity, with $470,000 in loan(s) against the property valued at $575,000 our loan-to-value is 89.5%, below the 90% threshold for high-balance conforming loans. So we can check the equity box.

 

Next is to look at two financing options. First is the traditional one loan with mortgage insurance for $470,000. This would raise your payment, assuming a 4% mortgage from $1998 on the original $420,000 mortgage to a total of $2506 for the mortgage payment plus the mortgage insurance ($2236 principal and interest, $270 mortgage insurance premium). So financing your home improvements for $50,000 increases your payment by $508 per month. After 24 consecutive on time payments and being able to show 20% equity you can have your mortgage insurance lifted lowering your monthly payment by $270 per month.

 

The second option is to keep the $420,000 mortgage and concurrently fund a Home Equity Line of Credit (HELOC) for $50,000 (actually I would suggest moving the numbers a bit and financing $417,000 for a conventional first and getting a $53,000 HELOC—but I’m nitpicking instead of explaining….). In this instance your primary mortgage still is $420,000 and your HELOC will be an adjustable rate mortgage based on the Prime Rate plus a margin. Unlike “the old days” most HELOCs these days have higher margins than pre-recession (the margin is the amount added to the Prime Rate to create your rate), the market seems to be around 2% for loans up to 90% loan to value. Take the Prime of 3.25% plus the 2% margin and your rate is 5.25% on the HELOC. Payment calculation is a bit tricky as most HELOCs only require an interest only payment for the first ten years, in this case your minimum payment is $219 per month.  In this case paying interest only your payment is about $300 less than if you get one loan and have mortgage insurance.

 

However, if you are getting a HELOC my very strong recommendation is that you pay principal every month and before getting it that you understand it is an adjustable tied to the Prime Rate, so when the Fed raises rates your rate will increase as well. So while your payment will be lower today versus getting one loan in the future you may well be, probably will be, paying more than if you had used traditional financing.

 

If your needs push your loan to value over 90% for a high-balance loan (loan amount over $417,000) or over 95% for a conventional loan (loan amount $417,000 or lower) then we need to look at FHA financing with a maximum LTV of 96.5%.

 

There are loans in the marketplace that allow for financing improvements and remodels, FHA has the 203(k) product; however I stopped working on those years ago for many reasons, primarily because they rarely closed due to all the moving parts and conditions that had to be met. Essentially two appraisals are required, one showing current value and another showing value after the work you intend to do is completed. The second appraisal is based on a detailed bid from a contractor showing the scope of work and cost. Not only is the contractor’s bid used for the appraisal but also underwriting as the work must be approved. If and when the loan is approved and funded the funds for the improvements are set aside in an escrow account controlled by the lender. After your contractor completes work he submits an invoice to the lender, the lender sends out an inspector to ensure the work was done and done properly, the lender then releases the invoiced funds to the contractor. This process repeats until the improvements are completed. The number of lenders who advertise 2013(k) mortgages seems to have diminished greatly over the years, and I cannot speak to their success rates.

 

Can you finance new solar panels or other significant improvements? Maybe, it depends on the overall financing scenario and total funds available to purchase the home and what you will have left if we can increase the loan amount so you have a lower down payment.

 

Call with your scenario to see how we might structure financing to accomplish your objective.

 

Have a question? Ask me!  

 

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

 

Plenty of news impacting rates this week. Early in the week the Consumer Price Index for July was released and it showed only 0.1% growth in prices for the month, and only 0.2% increase in prices from July 2014. Later in the day the minutes from the Federal Reserve Open Market Committee were released, and immediately discounted due to news that has occurred since that meeting. The minutes supported those who feel a September rate hike by the Fed is in order, except that the concerns expressed by the “doves” bore out in the past few weeks with first the Chinese devaluation of the yuan and then the CPI news. The CPI data is very friendly for lower mortgage rates and would seem to support any Fed rate hike moving to later in the year, or perhaps early 2016.

 

Existing home sales were as hot as the weather in July. Up 2% from June and up 10.3% nationwide from July 2014. Supply is thin pushing prices up with the national median home price up 5.6% nationwide. Locally the news shows even stronger growth with Los Angeles County showing a 14.2% year over year increase in sales and a 5.4% increase in the median price to $486,310. Orange County posted sales gains of 21.3% from July 2014 and the median price has climbed to $722,170, up 3.9% from last July. This news is mortgage rate unfriendly as it shows strong consumer demand for housing, which usually indicates a strengthening economy.

 

You may have noticed that the equity markets are down pretty heavy the past few days—over 700 points for the Dow Jones as I type this, a loss of 4% since Wednesday. China once again has our markets in a bearish mode as economic data is showing a strong slow-down in its economy. Data released by the Chinese government is usually suspect as the assumption is the numbers are padded to show their economy is performing better than it is, so when negative economic data is released is causes even greater concern begging the question just how bad is it? The news has been very favorable for lower mortgage rates as investors sell stocks and move into safe investments like U.S. Treasury bonds and mortgages.

 

Rates for Friday August 21, 2015: Conforming rates drops to lowest levels since May on the combined news this week—and it feels like lenders are hanging on to some of the market, meaning they perhaps should be a bit lower. Momentum is down for the time being on rates.

 

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS

30 year conforming                                            3.625%           Down 0.125%

30 year high-balance conforming                        3.75%              Down 0.25%

30 year FHA                                                       3.25%**         Flat  

30 year FHA high-balance                                  3.5%**           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

 

 

 

 

One more week of summer vacation left for our kids and others in Long Beach, we’re headed to San Diego this weekend for one last summer experience. Hope your summer has been wonderful!

 

Have a great week,

Dennis



Posted in:General
Posted by Dennis C. Smith on August 21st, 2015 10:56 AMLeave a Comment

August 14th, 2015 8:23 AM


Question of the week: I have heard a lot about the Chinese currency this week, is whatever is happening impacting mortgage rates?

 

Answer: Yes it is. On Tuesday the Chinese government devalued its currency, the yuan, surprising markets around the globe and immediately impacting markets. On Wednesday they devalued once again and on Thursday let the currency continue to slide in value against other currencies.

 

When a currency is devalued its goods are cheaper to other nations, and those nations good are more expensive to them. If a currency drops 3% in value then what it once sold to another country for $100 is now sold for $97 and conversely what it purchased for $100 now costs $103. Put a bunch of commas and zeroes behind those numbers and you see the impact on the government of the nation with the debatable first or second biggest economy in the world reducing the costs of the goods it manufactures and sells abroad.

 

China is America’s second largest trading partner, and by far the nation whose goods we import the most (can you guess our number one trading partner? Answer below). By devaluing its currency the  approximate $500 billion in goods we import from China every year are now valued at $485 billion, saving American consumers $15 billion per year purchasing those items.

 

Of course this means the more than $100 billion in goods we ship to China are more expensive to the Chinese consumers.

 

It does not take an advanced degree in economics to see that the result will most likely result in more Chinese goods being bought in America and fewer American goods being purchased in China. Now extrapolate this around the globe and what the Chinese government has done is artificially increase the demand for the goods its country produces, as more goods are produced and sold then the demand should increase the prices of those goods and the currency should increase again.

 

Should.

 

The underlying concern in regards to the devaluation is why it occurred. For some time there has been concern about the Chinese economy slowing. The government has stated its economic growth is around 7% per year, but being a communist country where every aspect of the nation’s political, economic and social actions are controlled the economic numbers are naturally suspect.

 

A slowing Chinese economy is troublesome for the global economy, a Chinese economy in recession is very capable, and likely, to drag the economies around the world into recession. The most obvious answer as to why the Chinese government devalued the yuan is to try to increase cash flow into China, boost manufacturing and jobs and pull China out of a recession.

 

The move by China may, or may not, reverse its slowing economy, but will result in harming its trading partners in the short term, perhaps enough to slow or reverse economic growth and cause recessions. Domestically American companies that compete with Chinese companies are now at a disadvantage vis-à-vis price. Markets that have a significant portion of their market that is Chinese buyers will see lower sales—think of the all cash purchases of commercial real estate throughout the country, sales of luxury watches, cars, purses, yachts.

 

 

From America’s stand point China is the number one nation whose goods we import and the number three nation to buy our exports, they are the number one foreign nation holding U.S. Treasury debt holding between 7-8% of our federal debt obligations. It is now more expensive for the Chinese to purchase investments in the United States, having the holder/buyer of 7-8% of our debt supply slow down its purchase of the bonds and notes needed to finance our debt in a perfect vacuum would cause the prices on those issues to drop and rates to rise. (There are those who feel this is the reason the Chinese devalued, to increase the value of their almost $2 trillion in Treasury debt.)

 

We are not in a perfect vacuum however and as China’s demand decreases other nations and investors will move investments to America to put their funds in a “safe harbor.” This one its own can hold rates steady.

 

However, the move by China and the potential repercussions of recessions, or strong slow-downs in economic growth, has changed speculation with investors. First is the speculation that the Fed will increase interest rates in September; if the U.S. economy experience’s negative effects on economic growth, inflation and employment as a result of the yuan’s value deflating then the Fed will hold off on rate hikes. Second is the speculation that the U.S. economy, and those of Europe, will indeed head toward recession as a result of the devaluation which causes investors to purchase relatively safe fixed rate investments in the United States, which includes not only Treasury bonds but also mortgages.

 

That was a long answer to the question, but it is a complicated issue. We will see how the devaluation of the yuan impacts our economy and mortgage rates, however the immediate answer is that the impact should be lower interest rates.

 

Discussion of the potential, and probable, repercussions of the Chinese devaluing its currency can go on for pages and pages—and if you wish to look on-line you can see many opportunities to delve deeper into the topic. It is something that will be written about and discussed in economic circles for some time as the effect of the devaluation is seen in the United States and other markets.

 

Trivia answer: Our number one trading partner is Canada, number three is Mexico.

 

Have a question? Ask me!  

 

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

 

Meanwhile in the United States….some important economic data was released this week. Primarily was the report on retail sales in July, showing a pretty strong increase for the month with sales increasing 0.6% for the month, led by auto sales spiking 1.4% after dropping 1.5% in June. Not only were July sales positive but the report revised the 0.3% drop in sales in June was reversed to show no growth or decline in June retail sales. The data reflects increased consumer spending in July, which is good news for a growing economy and is a negative for lower mortgage rates.

 

Prices paid by producers increased only 0.2% in July, less than expected and a drop from the 0.4% increase in June. Year over year the Producer Price Index has dropped 0.8%. This news is not a positive for economic growth, and coming on the heels of the devaluation of the yuan, which will decrease PPI in the future. A dropping PPI leads to drop in consumer inflation which puts pressure on lower interest rates.

 

Rates for Friday August 14, 2015: After a jump in Mortgage Backed Security (MBS) prices early in the week (lower rates) on the currency move by China the market saw profit taking on Thursday and further decline in prices this morning as the Chinese government has announced it will take actions to control large fluctuations in yuan prices. Market moves yesterday and this morning have taken away gains from earlier in the week and we enter the weekend with rates flat from last Friday.

 

 

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS

30 year conforming                                            3.75%             Flat

30 year high-balance conforming                        4.00%              Flat

30 year FHA                                                       3.25%             Flat  

30 year FHA high-balance                                  3.5%               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

 

 

Mixed emotions this week. Glad to be home from our great trip through Bluegrass and Bourbon country but miss the adventures and experiences we enjoyed every day. I will say I do appreciate putting out the Weekly Rate and Market Update on a laptop instead of a Kindle!

 

Looks like a very hot weekend for Southern California, stay cool and stay hydrated. The evenings should be perfect however for a refreshing summer cocktail or two!

 

Have a great week,

Dennis



Posted in:General
Posted by Dennis C. Smith on August 14th, 2015 8:23 AMLeave a Comment

July 24th, 2015 10:33 AM



Question of the week:  Can we really afford this?

 

Answer: With a growing purchase market we have more first time buyers we need to walk through the qualification and buying process—something I enjoy as much or more than any part of our business. The question of the week is not uncommon for many first time buyers used to paying rent, and not having a tax deduction for home owernship.

 

When answering this question I have a statement I use, and I have written about it before in the Weekly Rate & Market Update. I say, these numbers are based on my almost thirty years’ experience in the industry. That said keep in mind these three things: 1) I’m never going to live  in the home you buy 2) I’m not using any of my savings for your down payment and 3) I’m not going to make any of your payments.

 

Essentially, while I think you can afford the monthly payment for your new home at the price and loan amount we are discussing, what matters is that you feel confident you can afford the payment we are discussing. Analyze the payment, the net savings from homeownership that should lead to increased take home pay, your current spending habits and what you conservatively project your future income and expenses to be.

 

When pre-qualifying buyers my first run through the numbers is usually below the industry accepted guidelines. With Fannie or Freddie we can sometimes approach a 50% total debt-to-income ratio  depending on several factors (50% of your total gross income is used for your total new housing payment inclusive of taxes and insurance plus your monthly obligations from your credit report). For most buyers however I start their qualification at 40% of their gross income, and most often that fits in their comfort range or perhaps pushes it just a bit.

 

I do this for a few reasons, primarily because a not small percentage of clients after getting prequalified at say $450,000 find the home they love at say $485,000. Secondly because I personally feel that buying a home without very strong extenuating circumstances at 50% of your gross income being obligated for debt is too high for most buyers; especially first time buyers without the history and experience of managing a household budget for not only payments but repairs and maintenance.

 

With the regional rental market being very tight for the past several years and looking to continue being so into the future, rents have been rising and will continue to rise. By purchasing a home today at a payment that is affordable, though perhaps initially uncomfortable, means you are locking in your housing costs for up to 30 years. Waiting to buy until your income increases even 5% can see your housing costs increase through higher home prices and higher interest rates. So the house that today has a payment of 35% of your gross income could cost you 38% or more of your gross income in the not too distant future.

 

Can you really afford the payment I am giving you? If everything you told is correct and you have presented all your income and expenses, then yes you should be able to afford the payment. That said, you are the one making it not me so your input as to where  you are comfortable is critical and we will work together to find the payment you are comfortable with, that can help you purchase a home you are comfortable with and for which you qualify.

 

Call me, let’s see what mortgage payment you can afford for your new home.

 

Have a question? Ask me!  

 

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

 

A very light week on economic news. The biggest news was the existing home sales data which showed a strong increase in June, up 3.2% nationally—showing a market experiencing its largest gains since February 2007. Sales are up 9.6% from last June and the median price of $236,400 is a record high for the number. Driving up sales and prices are a lack of inventory and distressed sales. Not driving the sales are first time buyers who made up on 30% of buyers in June. If first time buyers enter the market in force then the sales will really gain momentum.

 

Is this activity “bubble-ish?” Some feel that it is since we have reached growth and price points of the month before the bubble burst in 2007. However the fundamentals of the current market are completely different. First, the buyers for the current homes are exceptionally well qualified over all for their home purchases, no speculative buying hoping to refinance lower, very few adjustable rate mortgages, so home buyers are purchasing homes they can afford and will be able to retain as long as their income continues to support payments. Second the growth has been much slower and steadier than the bubble run up which was very quick and sustained on non-qualifying loans for purchases and borrowers pulling out trillions in equity.

 

Rates for Friday July 24, 2015: Overall the home sale news should be pushing rates up. A healthy home resale market usually indicates a healthy economy and strong consumer sentiment. However that has not been the case the week as Mortgage Backed Securities continue their slow assent (lower rates). The assent has been slow and lenders are holding back a bit on rates anticipating a possible correction in the near term. Overall rates are flat from last Friday.

 

 

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS

30 year conforming                                            3.875%           Flat

30 year high-balance conforming                        4.00%              Flat

30 year FHA                                                       3.25%             Flat  

30 year FHA high-balance                                  3.5%               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

 

 

 

Crazy weather last weekend as we had the most rain in July in decades. For home seekers it was a perfect opportunity to see if your potential new home has any leaks and if the property slopes in any manner to create pooling around your foundation. I have always said if you get the chance to shop for a home while it is raining in Southern California you should!

 

Last Sunday Leslie and I visited the Ronald Reagan Presidential Library in Simi Valley. If you have never been put it on your list. Beautiful location and the step back in history is fascinating. What made me chuckle was the “high-tech” equipment on the Air Force One at the time.

 

Have a great week,

 

Dennis 



Posted in:General
Posted by Dennis C. Smith on July 24th, 2015 10:33 AMLeave a Comment

July 17th, 2015 10:38 AM


Question of the week:  Federal Reserve Chair Janet Yellen said this week the Fed will probably raise rates later this year, what impact will that have on mortgage rates?

 

Answer: As will all answers in the Weekly Rate & Market Update this is my opinion and not fact—though as pointed out in the movie “Inside Out” often people mix the two up and others accept the mix up.

 

If the Fed raises rates between now and December 31st the impact on mortgage rates should be nil, nothing, zip, zero. The primary reason is that there has been so much speculation as to when the Fed will increase the federal discount rate that investors in bonds and Mortgage Backed Securities (MBS) have already priced into the market an increase of 0.25% so when it actually occurs it will be met with a shrug.

 

What will impact mortgage rates is if immediately following the initial rate increase the Fed announces when and how much the next increase will occur—at which point the markets will begin to price that increase into their decisions to purchase MBS.

 

Here is a quick review of what the Fed controls and what determines our mortgage rates. First and foremost we must know that the Federal Reserve only directly controls one interest rate—the federal discount rate. Mortgage rates are not controlled by the Fed, they are determined by investors bidding on the purchase of Mortgage Backed Securities for most mortgages, and reactions to those markets for mortgages that are held by banks and lenders and not sold on the secondary markets such as Fannie Mae or Freddie Mac.

 

The federal discount rate is the rate that the Federal Reserve charges its member banks to borrow money from the Fed to meet their reserve requirements. Similar but different is the fed funds rate which is what member banks charge each other to borrow money overnight to meet their reserve requirements if one bank has a surplus and the other bank has a deficiency. The Fed sets the discount rate and the funds rate reacts to that rate.

 

By setting the discount rate the Fed starts a domino effect the ripples through the banking system as banks alter the rates they charge customers. First to change is the Prime Rate. While not standardized across the banking system most banks quickly align so their Prime Rate is in line with other banks. The Prime Rate is the rate provided to most qualified borrowers.

 

The Prime Rate is often the basis for many other loans made by banks, from lines of credit, commercial loans, auto loans and credit card rates all can increase or decrease depending on whether the Prime Rate is raised or lowered.

 

Outside of the banking system are the vast majority of residential mortgages. If you have a conventional, FHA or VA mortgage the rate and cost are primarily determined by the secondary markets where residential mortgages are sold to investors as Mortgage Backed Securities (MBS). The price investors are willing to pay for the MBS depends on where they predict interest rates will go in the future, if they believe rates will be higher then they will bid low for current mortgages that offer a rate lower than they investor might get by waiting a week, month or more. This behavior causes mortgage rates to increase.

 

Here is an example:  You purchase a new home with a $400,000 30 year fixed rate mortgage at 4.00%. Your lender packages that loan with 50 other mortgages to get a “pool” of $25 million 30 year fixed rate mortgages and sells them to Fannie Mae for say $25.25 million. Fannie Mae then bundles the mortgages into bonds, labelled Mortgage Backed Securities, and sells them on the open market. Investors bid on the bonds and the price paid determines what price Fannie will purchase mortgages from lenders in the immediate future.

 

Our rates change daily depending on the pricing in the secondary markets for Mortgage Backed Securities. While the actions of the investors can be influenced by what the Fed may do, of greater influence is what is happening in the economy—domestic and foreign—as investors try to predict where rates will be in the future. The current MBS market has a Fed increase priced into what investors are willing to bid so when the Fed raises rates we should see little, if any, impact on mortgage rates—depending on the economic conditions at that time.

 

This is not to discount the importance on the Fed in our mortgage markets. Our economy is impacted by decisions made by the Fed governors, however the impact on mortgage rates is generally as a result of the ripples rather than a direct correlation since the Fed does not control mortgage rates.

 

Have a question? Ask me!  

 

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

 

Now that Greece is settled, for this year at least….we look to domestic economic news that impacts our mortgage rates, and we had some very important pieces of data this week. Tuesday Retail Sales for June were released and the data was a big surprise—to the downside. Total retail sales dropped 0.3% and May’s sales data were adjusted down to only 1% growth. Retail sales are a direct reflection of consumer confidence and a major impact on our economy since consumer spending is 65-70% of our economy. Belying consumer confidence polls that have shown stronger confidence the retail sales show that while the average consumer may have more confidence in the economy s/he is not willing to spend more hard earned income. One strong gauge that usually ties confidence to spending is restaurant sales, which dropped 0.2% for June, a month that typically has large sales due to graduations, father’s day and weddings. The news is very friendly for lower interest rates.

 

Both Producer and Consumer Price Indices showed increases in June, with PPI up 0.4% and PPI increasing 0.3%. Both of these figures beat expectations and raised year over year prices from May’s (producer prices are now down 0.7% from June 2014 and consumer prices are up 0.1%). Consumer price increases were driven by gasoline and egg prices going up in the month.  The news is mortgage rate unfriendly, but the markets seemed to have shrugged off the numbers this week.

 

Rates for Friday July 17, 2015: Mortgage Backed Securities spent most of the week climbing (lower rates) despite the deal made with Greece and its creditors and the positive numbers for prices. Of stronger influence are the clouds forming around China’s economy and recession that could become global and the retail sales figures outweighing the other domestic news. Net result is that rates are down after being flat Friday to Friday for the past 3 weeks.

 

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS

30 year conforming                                            3.875%           Down 0.125%

30 year high-balance conforming                        4.00%              Down 0.125%

30 year FHA                                                       3.25%             Down 0.25%

30 year FHA high-balance                                  3.5%               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 oeln 20% down (3.5% for FHA) with 740 FICO score for purchase mortgages. ***FHA rates have no points and credit towards closing costs

 

 

 

It’s that time of year when Leslie and I are empty nesters as the girls are at Camp Birchwood for the next four weeks. While the house is quieter and we get to pick the television shows we want to watch, we are glad for the quietness as we know the girls are having a great time and will come home a bit more mature, knowledgeable and filled with memories for a lifetime.  It’s like practice for when they go away to college!

 

Have a great week,

 

Dennis 



Posted in:General
Posted by Dennis C. Smith on July 17th, 2015 10:38 AMLeave a Comment

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