Dennis' Mortgage Blog

Question of the week:  If the Federal Reserve is going to keep interest rates extremely low through the end of 2014 why should I refinance my current mortgage now, why not wait?

Answer:  This question arose from the Fed’s announcement on Wednesday that it would maintain extremely low interest rates through at least the end of 2014 due to the pace of economic recovery.  (For a quick [2 minute] look at the impact of a statement on markets click on this video link showing the dramatic reaction in the Mortgage Backed Securities market when the announcement was made.)  For the past few years the Fed has maintained the Federal Funds Rate at near zero percent, a level that is somewhat controversial as to who benefits.  With this announcement the Fed is saying it will hold this rate for three more years as it feels the near zero rate is necessary to keep the economy moving.  One group that will most definitely benefit from this policy are current holders of Home Equity Lines of Credit (HELOC) who will see the Prime Rate remain very low enabling them to repay their HELOCs at low rates.

One reason you may want to wait is because you may have to depending on your equity position in your home and your ability to refinance.  If you feel that mortgage rates will remain very low while your home regains lost equity to enable you to refinance to a more beneficial loan program then you can wait.

Some may want to wait as they feel rates may drop even further with the Fed holding rates and hold off on current rates to see if they can gain a little bit more in savings with any rate drops. This waiting game becomes a game of risk and depending on the result could add years to your potential savings.  A simple math problem with this approach.

Dennis has a current mortgage at 4.75% for $400,000 and a payment of $2087 per month.  Assuming he could refinance today at 4.00%* his payment would drop to $1910 per month, a savings of $177 per month, or 8.5%.

Dennis wants to wait because he thinks the rates will drop further and he will be able to refinance under the same terms at 3.75% which will give him a payment of $1852 per month, a savings of $58 per month more than if he had refinanced at 4.00%.

For every month Dennis waits to refinance at the lower rate he is losing $177 in savings he could have today, for every month he waits it will take him three months ($177 divided by $58) to make up for every month of lost present day savings.  Confused?  If Dennis needs to wait 10 months to refinance to his desired rate of 3.75%, waiting those 10 months has already cost him $1770 in lost savings.  When he does refinance at 3.75% he will not be benefiting beyond his lost savings for another 30 months when he has finally repaid himself the lost savings by waiting.

Dennis’s strategy is also based upon the fact that while the Federal Reserve may keep short term interest rates low that does not mean the long term interest rates, such as mortgage rates, will remain low.  Mortgage rates are determined not by the Federal Reserve but by the open market and investors decisions as to whether to buy or sell Mortgage Backed Securities.  These decisions are based upon macroeconomic factors, return options for other investments and determination of risk versus return.  It is not unlikely that while the Fed looks to keep rates low for short term rates, investors feel higher rates of return are required for longer term rates.

As evidence of this look at the twelve month mortgage rate chart below, during this twelve month period the Fed never moved short term rates but since January 2011 we have seen the base conforming 30 year fixed rate as high as 4.875%.

I enjoy going to Las Vegas and playing some cards, something I haven’t done for quite some time but enjoy nonetheless.  A little recreational gambling can be fun, exciting and perhaps profitable, but when I do go I do not take my mortgage payment with me.  Gamble and take high percentage risks with money you can afford to lose; don’t gamble your house payment against a market that is oft fickle and always unpredictable.

Have a question?  Ask me!

Good week for headline writers.  We had the State of the Union, Republicans cannibalizing each other in debates, housing news, employment news, consumer spending news, the Fed announcement and finally 4^th Quarter Gross Domestic Product news.  I’ll run through what impacts mortgage and housing markets.

About three sentences of several hundred were devoted to mortgages and housing in President Obama’s State of the Union message.  In full campaign mode Obama had a proposal for a refinance proposal that would allow every American homeowner to save three thousand dollars a year.  No details and I’m not really sure how this would work while ensuring banks and lenders remain solvent and the $165 billion owed to the Treasury from Fannie Mae and Freddie Mac does not double or treble in size.  That is if he could get any such proposal through a Republican controlled House of Representatives also in campaign mode since they face re-election every two years and are becoming more and more hardened to new spending and increasing the deficit.

Housing data continues to offer no sign of imminent recovery.  Report to report there is some good news of higher sales or lower sales, higher prices or lower prices.  Depending on who is reporting and what area or region the bulk of their data is coming from reports on housing can seem somewhat optimistic or same-old-same-old stagnant housing.  What is clear is that foreclosures and bank owned properties coming to market will most likely be greater in 2012 than 2011 due to resolution of the “robo-signing” issues and pent up inventory held by lenders.  Depending on how this inventory is relieved will be critical to market prices.

Not helping housing has been the lack of a central plan that is agreed to by all the stakeholders: lenders, Congress, White House, Federal regulators.  Not long ago the Federal Reserve Chairman, governors and staff were practically unanimous in stating that housing is the most serious risk to the economy.  Congress mandates Fannie and Freddie raise costs to borrowers for ten years to pay for a two month payroll tax cut that is not needed.  Federal regulators continue to increase the requirements, reporting and costs from top to bottom of the mortgage industry.  A new bureaucracy is up and running that by-passes Congress for any oversight or regulation that has announced its intention to further increase costs and disclosure burdens for lending.  Federally controlled Fannie and Freddie continue to aggressively demand lender buyback mortgages funded to underwriting standards for the slightest errors or tolerances.  It seems the only consensus from the government to deal with the housing market recovery is to make it more difficult.  No wonder the Fed has a bleak outlook for sustained economic growth for the next three years.

After several weeks of declining filings for unemployment insurance the number jumped up again this week.  As I have stated in prior weeks this should not come as a surprise with the decline in seasonal jobs that boost hiring from Halloween through New Year’s, however the media again acts with some surprise at the increase.  Until unemployment filings are consistently below 325,000 per week and private sector employment grows by more than 200,000 per month our national employment crisis will continue to be a major factor in housing recovery.

Half empty or half full?  Today the Commerce Department released the 4^th Quarter GDP numbers announcing the economy grew 2.8% from October through December.  This is was the fastest growth since early 2010, but what is seemingly good news was met by markets as not so good news and reinforced the Fed’s outlook earlier in the week.  The reason for the unenthusiastic reception of the news is the breakdown of what occurred in the 4^th Quarter and the expectations for a number of 3.0% or greater following the positive retail shopping numbers from November and December.

Dissecting the report we learn that taking out businesses restocking inventory they had let decline for two quarters left the GDP growth at only 0.8% for the quarter.  That is one revision away from zero growth in private consumption for the quarter.  For the year the economy grew at 1.7% after a federal deficit pumped $1.5 trillion more into the economy than it took out (about 8% of GDP) and the Federal Reserve through its Quantitative Easing pushed approximately another trillion into the economy (about 5.3% of GDP).  With only 1.8%  growth in an economy that saw over 13% of its size added to it there is cause to be unenthusiastic about the GDP numbers.  Back to my Vegas analogy of not taking your mortgage payment to the blackjack tables, I wouldn’t bet it on robust economic growth in 2012 either.

Rates for Friday January 27, 2012: It is rare we see mortgage rates respond by dropping lower after a Fed announcement but that was the case on Wednesday.  With the jump in Mortgage Backed Security prices on Wednesday we see rates drop this week.  Reminder that the FHA rates have been at the same rate for so long due to the coupon rates from Ginnie Mae, while the rates are the same we have from week to week varying amount of credit we make to closing costs for the selected rate—call for details and credit available for your situation.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS

30 year conforming                               3.625%             Down 0.125%

30 year high-balance conforming           3.875%             Down 0.125%

30 year FHA*                                       3.75%               Flat

30 year FHA high-balance*                   3.75%               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.

* Current rates include credit towards closing costs, call for quote on rate and credit.

We will be around enjoying the spring-like weather in Southern California this weekend and available most of Saturday to assist you with any questions or numbers you may want run.  Sunday there is evidently a movement afoot to take the Metro down to Olvera Street after church.  If you see any pictures of me posted on the internet dressed as Pancho Villa in sombrero and poncho don’t be surprised!

Have a great week,

Dennis