Dennis' Mortgage Blog

Covered in this communication:

1)    New loan limits “black hole”

2)    4.5% interest rate?

3)    Rates at all time low

Question of the week:  I am being bombarded by calls from people who will get my property tax lowered, should I pay them?   Answer:  Not unless you pay someone to change light bulbs for you.  If you feel your current value is lower than your assess value you can visit the website of your County Assessor and see what the requirements are for your county to lower your assessed value and property taxes.  The LA County Assessor has said they his office is automatically reviewing the assessments of properties throughout the county that were purchased in 2005-2007; it this means you I would still go on-line and check the process and forms to complete.

If you have a question you would like me to answer send it to me!

New Loan Limits have us in limbo.  Some lenders are quoting prices and some are not on loans above $417,000.  While I have provided a quote below at this time unless a loan is in documents and ready to fund anything over $417,000 is probably not funding for a couple of weeks at the earliest according to our lenders.  If this status changes I will let you know.

“Dennis how can I get a 4.5% rate?”  Earlier this week the Treasury announced it is considering a proposal to drop mortgage rates to 4.5% for home buyers.   I think the proposal is idiotic but I will not delve into that this week, instead I will comment on the what is happening: nothing.  At this point it is a proposal that has effectively frozen the market in the short term as borrowers and buyers wait to see if they can score the lowest 30 year fixed rate on record.  By waiting borrowers may miss out on historic lows that occurred this week and should continue next week without any intervention from the Federal Government to artificially lower interest rates.  This morning following solid gains yesterday we were able to lock in 30 year fixed rate conforming purchase mortgages at 5.00% until about 10:00 when the market started tanking and rates shot up to close at 5.125% on the day.  Clients waiting for the 4.5% are at risk of waiting for something that may not arrive and miss out on what is already here:  historically low interest rates.

Our biggest issue in the market today is equity and property values.  If the government wants to have a significant impact on shoring up housing markets they should work with Fannie/Freddie and the mortgage insurance companies to offer tiered loan-to-values based on credit scores and debt-to-income ratios.  The higher your score and lower your DTI the higher loan to value they will insure.  That would help ease many homeowners payment situations and also open up the market to families with solid credit and income but lacking down payment ability.

Rates at all time low.  As I just mentioned this week we broke below the 50 year low of 5.375% recorded in 2003 and for the first time kissed just below 5.00% with a bit higher fee (1.45 points on Thursday afternoon).  Now is an incredible opportunity for those thinking about purchasing a home, prices are at two and three year lows in most markets and rates are at historic lows.  Sure they may drop lower, rates and prices, but at some point the market firms up and buyers start to exceed sellers, when that happens both go up.  As an example look at the chart below, buyers who wanted to wait for lower rates on conforming-jumbo loans in mid-September waiting for lower rates missed the boat, especially if their loan amount is over the new $625,000 that is coming. 

If you can afford the home and you like the home buy the home.  That is the advice I have given for two decades and there are hundreds of families who are glad they listened.  We do not know what the future holds, but we do know what today is offering us so take advantage of the market conditions today for you and your family.

Bank owned not a bargain  Lately I have seen several advertisements from agents implying that the bank owned properties they have listed are a bargain, from the inventory we have had go through the past several months I can say they are not a bargain.  While not a bargain the bank REOs (Real Estate Owned) are not bad deals necessarily, but neither are they the best (i.e. lowest) price or value on the market.  Banks have gotten a lot smarter than they were fifteen to twenty years ago at pricing and marketing their REOs with local real estate professionals.  From our experience if you have two identical properties, one bank owned and one privately owned the smoother transaction will be with the latter.  As a buyer, ignore who the owner is and focus on the price, the property condition, location, layout, etc. 

Weird week on the rates as we do not really have price on loans over $417,000; numbers below are for relative comparison and where the “new” conforming-jumbos should fall when pricing hits and FHA moved up while conforming moved down.  This is due to the announcement of the Fed getting involved in mortgage backed securities in the Fannie/Freddie markets, plus the Treasury proposal to force interest rates down—all the investing went to conforming securities in anticipation of higher prices in the future and FHA suffered as a result.

NOTE PRICING BELOW IS BASED ON 20% DOWN FOR CONFORMING, 3% FOR FHA, FULL DOC, AND FICOS OF 740 AND ABOVE (change from last Friday):

30 year conventional at 1 point 5.125%               ê 0.25%

30 year conforming-jumbo at 1 point 5.625%               ó 0.25%***

30 year FHA at 1 point 5.5%                                       é 0.25%

Have a great weekend, while running all over this weekend I am available to help you put together any transactions so please call if I can help you!

Dennis

Remember this update is posted weekly on My Blog at www.DennisCSmith.com , feel free to forward the link to family and friends who may be interested in past commentaries. 

Question of the week:  What will happen to mortgage rates in 2009?  Answer:  I wish I was able to accurately answer that question!    There will continue to be downward pressure on interest rates as long as there is bad economic data; however…the difficult question to answer is just how low can rates go?  The Fed is “all in” at 0% interest for overnight loans, which means they cannot go lower.  The banks and lenders need to have a spread between what they pay investors (depositors) and what they charge borrowers so there is not much more room for them for lower rates to be somewhat profitable.  We are in historic economic times with historic rates; I would not make any decision regarding a mortgage dependent on lower rates but would make that decision based on current rates.

If you have a question you would like me to answer send it to me!

It has been quite a year to say the least.   We have seen huge price changes in home values, parts of Los Angeles County (Glendale area) saw drops in values of only 5-6%, while parts of Los Angeles County (parts of Long Beach) have seen drops in excess of 20% in value from 2007.  There are pockets throughout Southern California where prices have held, or even gone up; there are pockets where price deterioration is calculated on a daily basis. 

Throughout the region one factor is constant, those looking to purchase homes are finding what should be terrific values in the long run.  Because of the low interest rates and reduced prices we are seeing significant sales volume as first time buyers are entering the market to take advantage of what it has to offer.  This activity is helping to sustain some markets and put some solid foundation in for the future.

One move that would help prices more than any other:  Congress needs to lift the loan limits for Southern California and other “high cost” areas to the limits that just expired: $719,000 for single family residences.  Lowering the limit to $625,500 has a very negative impact on much of our markets.  Call, email, fax or write your Congressional Representative or Senator and ask them to push to move the limits back to $719,000 to help our housing markets.

As is always the case on short weeks with major holidays in the middle we saw jerky trading with ups and downs.  As a result we end the week flat (conforming), slightly down (conforming jumbo) and slightly up (FHA).  Like Midwest weather, just wait a day or two and everything will probably change.

NOTE PRICING BELOW IS BASED ON 20% DOWN FOR CONFORMING, 3% FOR FHA, FULL DOC, AND FICOS OF 740 AND ABOVE (change from last Friday):

30 year conventional at 1 point 4.875%          ó 0.000%

30 year conforming-jumbo at 1 point 5.00%      ê 0.125%

30 year FHA at 1 point 5.25%                             é 0.25%

While it has been a most challenging year for us, 2008 provided me the opportunity to do what I enjoy:  help put families into their own homes.  Increasing homeownership is a driving passion for me; I know how much it improves the quality of life for families and also local neighborhoods and communities.  It has been my honor and privilege to once again be able to assist so many families with the opportunity to achieve homeownership; thank you to those who provided me that opportunity!

Best wishes as you ring in the New Year!

Dennis

Remember this update is posted weekly on My Blog at www.DennisCSmith.com ; feel free to forward the link to family and friends who may be interested in past commentaries. 

Question of the week:  Is mortgage insurance tax deductible?   Answer:  I preface this answer with: I am not a tax professional please consult with your own tax preparer regarding any tax deductions.  Okay, disclaimer in place.  According to IRS Publication 936 (2008) mortgage insurance may be deductible for the tax year 2008.  To qualify the mortgage insurance must be “in connection with home acquisition debt” meaning the mortgage used to purchase your home.  Check with your tax preparer if she/he considers a rate and term refinance of your purchase mortgage(s) to qualify as “in connection with home acquisition debt.”  If the mortgage insurance meets that criteria the second criteria is that deduction phases out starting at $100,000 in income for married couples ($50,000 for married filing separate or individual filers), deduction completely phased out after $110,000 in adjusted gross income ($55,000 individual filers).  Is your mortgage insurance deductible?  Maybe!  Thanks to CPA DJ for assistance on the answer to this question.

If you have a question you would like me to answer send it to me!

As you are aware from my email Tuesday the Federal Reserve slashed the Fed Funds Rate and the reduction spread through to the Prime Rate, immediately benefiting those with debt tied to Prime (mainly those with home equity lines of credit) which fell to 3.25%.  On Tuesday the mortgage market reacted very favorably and we saw rates drop significantly.  On Wednesday and Thursday we saw investors take profits out of mortgage backed securities and rates have climbed back up from their lows on Tuesday.  Long term readers of this weekly update know that for bonds, and mortgage securities, higher prices mean lower rates and lower prices mean higher rates.  When the rates dropped on Tuesday the price of the securities was climbing; investors like to buy low and sell high so after the spike in prices on Tuesday many investors sold their investments at the high prices and collected the profit.

I was asked this morning what my Crystal Ball says.  My CB is usually a bit cloudy and this morning is no exception.  Let’s take a look at some economic fundamentals and what they may portend for the end of 2008 and into 2009.  Underlying the commentary is that as a rule what is bad news for the general economy is good news for lower mortgage rates.  Interest rates are tied to inflation, or the threat of inflation; if investors fear inflation is coming they will react in a way that causes interest rates to rise.  Why? Because they know the Federal Reserve will raise rates to keep inflation at bay (see chart on My Blog showing increase in Prime Rate from 2004 into 2006 as economy was growing rapidly and Fed raising rates to allow growth without significant inflation).  Conversely when the economy is faltering or in recession the Fed will lower rates to stimulate borrowing and investment and generate economic activity (same chart shows cuts starting in 2000 for recession that continued through 9/11 and into 2002-2003). 

With the current economic news one expects lower rates to spur investment and economic activity.  One problem here is that the Fed is “all in” they have lowered their overnight discount rate to 0-0.25%; they cannot lower it any further.  So this puts the pressure on the private sector to lower rates and increase borrowing to stimulate investment and growth.  Problem is the private sector is not making a lot of loans at the moment—hence GM goes to Washington D.C. for a loan instead of Wall Street.  So the economics dictate lower rates, but what we do not know is if the markets will follow economic theory and produce lower rates. 

A lot of uncertainty exists for anyone predicting economic trends in the coming months to a year, mainly because we are seeing economic phenomena never before experienced.  Certain parallels and comparisons may be drawn to other economic times, but nothing quite matches the confluence of events we see today.  Playing into the scenarios is the incredible amount of money the Federal Government has put into the economy, by New Year’s Day the number will approach $2 Trillion (that deserves to be capitalized) by some estimates.  That much outside cash into the economy plus the incredibly low rates set up a perfect storm for rapid inflation as soon as any segment of the economy starts to experience confidence and traction to stability and growth. 

Keep in mind most of the losses experienced have not been cash.  When Washington Mutual posts losses of $3 billion and gets bought the $3 billion was not cash in its vaults, it was devaluation of assets against their mortgages which resulted in mortgages going unpaid.  Mortgages which were higher than the amount lent due to adjustable rates and negative amortization.  Most of our economy is “paper”, investments and profits moved around from one institution to another, one asset to another.  What the Federal Government has been doing is injecting huge amounts of cash into a system that has a lack of cash due to the bidding up of the “paper” with no tangible asset base to back it up.  Once the assets begin to stabilize and increase again in value the cash injected from Washington will have a big impact on rates.

So my Crystal Ball is telling me continued downward pressure on rates until some confidence enters the economy and jobs losses start to slow down, but, BUT (big but here) there is not too much lower rates can go, at some point there is a bottom and my belief is it cannot be too far from where we are today.

My advice to those looking to buy is not to wait for lower rates to buy.  Take advantage of the rates today, buy while you can. Rates and prices may in fact go lower, but if you miss the opportunity to buy today because you misjudged the timing of the bottom—and it is almost guaranteed you will unless you are lucky. 

My advice to those looking to lower their payments is if the math makes sense with today’s rates then don’t get greedy, take the lower payment and lock in your rate.  Also, give serious consideration to paying a half-point or point for an even lower rate.  Historically I have been against paying points for refinances, in this current rate environment however Fannie and Freddie are having serious price adjustments for no point mortgages, especially if proceeds are being used to pay off an equity line. 

Finally be patient!  The industry is getting flooded with refinance applications, this clogs a system that has downsized in personnel.  Be smart and look at 45 day transactions and locks instead of 30 day rate locks with increasing turn times in the process.

NOTE PRICING BELOW IS BASED ON 20% DOWN FOR CONFORMING, 3% FOR FHA, FULL DOC, AND FICOS OF 740 AND ABOVE (change from last Friday):

30 year conventional at 1 point 4.875%            é 0.125%

30 year conforming-jumbo at 1 point 5.125%            é 0.125%

30 year FHA at 1 point 5.00%                                    ó 0.000%

It is a great weekend to buy a home, the last weekend before Christmas!  We are doing our own running around this weekend and looking forward to special Sunday as Leslie is celebrating another anniversary of her 39^th birthday and we will see Blaire in the last of her four performances in The Nutcracker with the Long Beach Ballet.  If you need assistance give a call and I will get back as soon as I can.

Happy Hanukkah and Merry Christmas!

Dennis

Remember this update is posted weekly on My Blog at www.DennisCSmith.com , feel free to forward the link to family and friends who may be interested in past commentaries.  Also beginning 12-20-08 it will be posted on the Long Beach Post every week.

FEDERAL RESERVE DROPS DISCOUNT RATE

The Fed dropped the Fed Funds rate to 0.25% today and indicated rates will remain low for quite some time.  Following a report that the Consumer Price Index fell by 1.7% for the month of November (20.4% annualized) they feel the economy can get weaker and that the threat of inflation has eased “appreciably.”  Interest rates climb when the threat of inflation looms and drop in the absence of inflation.

Typically when we get news of cuts by the Fed our mortgage rates spike in the short term, not today as all markets reacted very favorably to the announcement, stocks and bonds rallied after the news.

What does this mean to consumers?  Well if you have a Home Equity Line of Credit your Interest rate just dropped as the Prime Rate is at 3.25%.  This is the lowest Prime has been since October 14, 1955 when it climbed to 3.5%--at the time the highest it has been since the inception of the Prime Rate in 1947.  Our current rate takes us well below our previous recent low of 4.00% in June 2003, which was the last of the post-9/11 rate cuts.

My advice to those with Home Equity Lines of Credit is to make dents into the principal now while the interest is low, what goes down must go up in economics and markets—It was only two and a half years ago that Prime was over 8%.

More on my Friday Rate and Market Update.  Enjoy the rest of the week!

Dennis