Question of the week: What is the primary determination of my mortgage rate?
Answer: There is not one primary determining factor for the interest rate on a mortgage. Each week I quote a standard rate that has three major components that determine the rate: 1) It is a purchase 2) the loan to value is 80% 3) the borrowers FICO score is 740 or greater. For conforming mortgages these are the primary factors: purchase or refinance (and then if there is cash out or a 2nd or equity line being paid off), loan to value and credit score.
The biggest adjust we have seen in pricing for mortgages has been the tiered scoring for FICO scores. In our prior loosy-goosy market most lenders had the same price for all scores over 680. Now Fannie Mae and Freddie Mac are tiering pricing based on credit scores and many lenders are adding additional price costs or incentives. As your score gets into higher tiers you can expect better pricing from 680 to 720, from 720 to 740, from 740 to 780 and some have even better pricing if the middle credit score is over 800.
The “best” pricing is on low loan to value purchase transactions with very high FICO scores—this group of borrowers also represents the smallest group of transactions.
Have a question for me? Ask me!
We continue to see stability in the mortgage market, primarily because the Fed is still buying mortgage backed securities (bonds from Fannie Mae and Freddie Mac). For those interested in the technical aspects, the Fed is buying coupons in the 4% to 5.5% range keeping our current floor on conforming in the 4.75% range; if they decide to buy coupons below 4% we will see rates soften and drop—I don’t think they will be in the market for the coupons below 3% so other factors will impact mortgages.
The economy is continuing to provide some bright spots. One such spot of brightness believe it or not comes from the auto sector as Ford, who did not take any government money like GM and Chrysler, is showing a smaller loss than anticipated and is predicting profitability in 2011 if its plan continues to hold. What do you know, they restructured internally, forced themselves and their vendors to renegotiate contracts, and did not take on Congress and the White House as partners to tell them what kind of cars they have to make and they are getting their footing back. Hmmm, ‘magine that.
Looking ahead the Treasure is going to flood the market next week, generally not good news for interest rates. I’m going to use that “I” word again; the Treasury continues to act in a manner that increases the chances for strong inflation once the economy bottoms out. Their action next week will add to the dynamics already in place for a run up in prices in the not too distant future. Anticipation of inflation for bond investors is the same as actual inflation. For those waiting for a “better” or lower rate, next week could set you back several weeks or month or more.
Rates were flat for the week with the exception of Conforming Jumbo rates which declined on a round of Fed purchases. Still no movement on government loans as the Fed concentrates on Fannie and Freddie.
FIXED RATE MORTGAGES AT COST OF 1 POINT*
30 year conventional 4.75% FLAT
30 year conforming-jumbo 5.00% Down 0.25%
30 year FHA 5.00% FLAT
Please note that rates quoted are based on average of several lenders for a purchase transaction with 20% down payment and a minimum FICO score of 740; APR is not quoted as it is dependent upon specific loan amounts, lenders and services selected. Numbers provided are for comparative purposes only.
Looks like our summer weather locally has broken back into Spring—thank goodness I do much better in 60-65 degrees than 95-100! (Which is why we are headed to Scottsdale at the end of June). I found out at Open House last night on the first grade calendar that there is only 34 more days of school for Long Beach Unified, spring weather, summer approaching—time to buy a house!
Have a great weekend,
Dennis
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The following is the content of an email I sent to agents in my database on April 29, 2009 regarding the Home Valuation Code of Conduct and the impact it will have on real estate transactions:
Friday is May 1st. Friday our industry changes dramatically, because the “Home Value Code of Conduct”, aka The Code, goes into effect for all Fannie Mae and Freddie Mac mortgages. I have written about the HVCC in some of my weekly newsletters and also on My Blog; essentially what the HVCC does is takes the appraisal process out of the hands of the originating entity, i.e. the loan originator, and puts it into the hands of….well no one. In this communication I will not go into how we have come to this point with the HVCC but rather will describe the process that will affect all conventional mortgages nationwide and what impact it will have on real estate transactions in California.
First, the HVCC is a requirement for all loans that are being funded by Fannie Mae and Freddie Mac, no exceptions. Under the rules of the HVCC any person or company that collects a commission as part of the mortgage transaction may not have any contact with the appraiser, including ordering the service.
Starting with all transactions with applications dated after May 1, 2009 the originating entity, me, must order any appraisals through the funding entity (lender) who must use an “adverse selection” process to select a national appraisal company. When the appraisal is ordered the fee for the appraisal must be paid in full through credit card transaction; the borrower will need to provide this information for the transaction to move forward. The national appraisal company upon receiving the order will then contact an appraiser in the area or region of the subject property and place an order for the appraisal.
The appraiser will contact the appropriate person for access to the property and complete the appraisal. He will then send the appraisal electronically to the national appraisal company who will review the appraisal and send it electronically to the underwriting unit of the lender. The underwriter will review the appraisal and if acceptable will post it on the company website and notify the borrower.
Attention! It gets interesting here. Under the HVCC policy the borrower must receive a copy of the appraisal at least three days before “closing”. I put closing in quotes because in some states closing and loan documents are the same time—this occurs in non-escrow states. In states such as California where we order loan documents and then close after they are signed an reviewed most lenders are requiring that the borrower receive the appraisal at least 3 days prior to drawing loan documents. In short, loan documents will not be drawn until 3 days after the borrower has received a copy of the appraisal. And that copy must come directly from the lender.
This process will take several weeks to flush out but in California the most obvious problem is the appraisal contingency that is part of all CAR contracts—expect a revision in the near future as the HVCC becomes better understood by the CAR attorneys—since no one intimately involved in the transaction has any contact or control over the process from selecting the national appraisal company to selecting the appraiser, no one involved in the process can say for certain when an appraisal will be delivered so all aspects are known.
It is my opinion and advice that for all real estate purchase contracts written from May 1, 2009 forward that the agent revise the appraisal contingency to read “due to the Home Valuation Code of Conduct the buyer shall have xx days from receipt of the appraisal from the lender to remove the appraisal contingency” or something to this effect—check with your broker and/or attorney for appropriate language.
There are other impacts of this process on the borrower. My first thought is the time frame to lock in the rate and terms for the borrowers. In our early experience with the HVCC process we have had some transactions that have had appraisals completed in a very good ten day time frame, and others that have dragged on for weeks through appeals and re-inspections. It is a crap shoot as to the quality of the appraiser we will have and his ability to respond to our needs—especially since we may not contact directly. Do I lock for 30 days at the start of the transaction and hope the HVCC goes smoothly? Or do I lock for longer at a higher price? Or do I float the borrower’s rate until we have the appraisal and hope rates are the same or better?
Unfortunately the “geniuses” in Congress who passed this legislation have zero understanding of how it will impact home sales and the real estate industry throughout the United States. Taking a small problem, a very small problem, and trying to fix they have in fact created an onerous process that benefit no one in the transaction from borrower to agent to seller to broker to lender to appraisers---well the national appraisal companies will benefit from increased revenues.
The HVCC is for ALL Fannie Mae and Freddie Mac loans regardless of who is originating them, there is no way around this process. Because of that we will need to ensure we have patience as each transaction is decided by the spin of a wheel determining which appraisal company will get the order and another spin of the wheel deciding which appraisal will be sent the order.
I am giving you a heads up so you can prepare your buyers, your sellers and your fellow agents—this is effective will all loans with applications taken after Thursday April 30, 2009 so be ready.
If you have any questions please do not hesitate to contact me. As always, if anything changes or there are any updates I will let you know. As always, I want to acknowledge that I am providing you, the real estate professional, with quality information, advice and insight to the mortgage industry that benefits you and your clients. Please keep this in mind the next time you are referring a client to a lender—refer them to someone knowledgeable and experienced to ensure an efficient and smooth transaction at very competitive rates and fees…me!
Thank you for your referrals,
Dennis C Smith
Broker/Co-Owner
Stratis Financial
Question of the week: Did you pat yourself on the back?
Answer: If I could reach my back I might have. For several months I have been addressing the high activity in the real estate market and its concentration in the first time buyer price ranges. Noting that year over year home sales have been increasing in the number of units, while at the same time the median price have been decreasing I have explained these numbers indicate what our company has been experiencing: significant activity in the entry level price ranges. Since median price is not average price the combined data of increase in units sold and decline in median price indicate where the buyers were. Yesterday you were able to read in many Southern California papers, most notably the Los Angeles Times (which for some reason still holds the reputation for many that it is not news unless the LAT reports it), that the median price for homes in the six county Southern California region have remained flat at $250,000 since January. Three months in a row with prices at the same level tells me we are probably seeing the bottom of the market, at least for the bottom of the market. Higher price ranges will take some time to sort themselves out but it all has to start with the entry level condos and single family houses.
A couple of things may upset the apple cart and lead to some more slippage in prices: 1) higher rates will decrease buying power and therefore demand, which is currently high 2) implementation of the Home Valuation Code of Conduct forcing lenders to use national appraisal services rather than local, experienced appraisers (click here for my comments earlier) 3) the May 29, 2009 expiration of the 90 day moratorium on foreclosures in California could see banks rushing to market the homes that should have been put on the market during the 90 day period; this dramatic increase in supply could create another glut and price drop.
So while it is good news that prices appear to have stabilized at one end of the market, there are some potential pitfalls that could see a temporary set back to the stabilization.
With rates staying flat for the week we appear to have a new range of rates for rates with our today’s rates being the floor of the range. We have seen some temporary one or half day dips below the line, hit with luck in timing and impossible to predict, but three out of four weeks is a pretty good trend. Our technical factors in the mortgaged backed securities markets are showing us bouncing off the 25 day moving average time and time again and a pretty good drop to the next level of resistance at the 50 day moving average. “Dennis, what the heck?”
Long time readers of the Weekly Rate and Market Update know, or should know!, that rates rise and fall within a certain range for a period of time, when rates spend several days above or below the range then we see a new range of higher, or lower rates. For example looking at the chart below for conforming rates, from the end of December to the middle of March rates landed on 4.875% eight out of thirteen weeks. That was solid floor of the rate range, when that range was broken on the low side on March 24th we saw a new range of rates with the floor now being 4.75%. This is the new floor to our rate range that rates have hit and bounced off of several times—it has been tested occasionally with a day or half-day dip below the number, but over all this has been our floor.
Because there is much more “softness” above the current rate level than there is below it, in fact there is much “hardness” below the number. This creates a sentiment among investors that there is more likeliness of higher rates than lower rates in the future, if they feel this way they will invest this way. Barring some as yet unknown economic, political or geopolitical news or data, rates will continue to see more likeliness to go up than down in the near future.
Please summarize. Prices have reached some sense of stability with that stability coming from the bottom prices ranges and rising higher. Rates are bouncing off a new low established just a few weeks ago. Wells Fargo announced big profits last week, this week other financial stocks announced earning better than expected, unemployment numbers while bad were better than expected, and taking out dropping energy prices the inflation numbers were not reflective of a recessionary economy. Summary: I think we are in the orange section in the bell curve below; for rates, and prices and the economy as a whole.
Rates were flat for the week. And yes we continue the old trend of improvements on Monday and Tuesday, flat Wednesday and losses on Thursday and Friday for the third week in a row.
30 year conforming-jumbo 5.25% FLAT
We have had our first tragedy with Harrison, our 8 month old smooth coated Collie “puppy” (in quotes because he is not about 40 inches long and about 60 pounds!). He figured out that when one of us is sitting on the couch with the white thingy in our hands looking at the noisy box with the moving pictures on it he is not the center of attention. Therefore the white thingy with all the buttons must go! We have a little yard in back of the house next to the pool where he early on liked to go with his stuff and chew it. More than once we have found socks, his rope toy, “Buster” his stuffed dog he likes to carry, pencils, the starter button for my barbecue, and chased him back there when he grabbed the white thingy.
Tuesday he was successful in his quest to destroy the evil white thingy that creates something other than him as the center of attention and we lost our beloved DirecTV remote control. Thankfully DirecTv has great customer service and responsiveness and after a quick on-line order Wednesday we have a new evil white thingy to torment poor Harrison. How long will it survive?
One of the many joys of homeownership is the ease of pet ownership without having to get landlord permission—well that and kids! J
Question of the week: What is the Homeowner Affordability and Stability Plan?
Answer: I wrote a month or so ago about the Obama Administration’s proposal to make it easier for many homeowners to refinance their properties, and the Homeowner Affordability and Stability Plan was established. The plan works through the GSEs (government sponsored entities: i.e. Fannie Mae and Freddie Mac) and allows those with mortgages held by either of the GSEs to refinance under the HASP program if their loan on their current 1st Trust Deed is between 80% and 105% of the value of their property; if you home value is $400,000 and your mortgage is between $320,000 and $420,000 you are eligible for the program. Note that if you have a 2nd deed of trust (including HELOC) you will not be eligible for the program unless the holder of the 2nd is willing to subordinate their loan behind the new refinanced mortgage. There are several other factors, but for many people who purchased or refinanced between 2000 and 2007 with less than 20% equity chances are a piggy-back 2nd was part of the transaction.
As you can imagine Stratis Financial, and Dennis C Smith, are receiving many phone calls and emails regarding eligibility under the program. If you feel you are eligible I ask that you call and email me, and please have some patience on a response as priority is made to respond to those purchasing their homes first. When you call have ready your information regarding your loan balance, interest rate and payment, and be prepared to complete a loan application over the phone so we can get you in line as soon as possible. Note I am no longer able to lock in rates and terms until I have a signed application package in my office.
This program will help many homeowners, it is also going to create some backlogs in the pipelines from beginning to end, as such we are recommending all locks for the program be taken on a 40 day basis to account for slower processing, appraisals, underwriting, drawing of docs and funding.
Special thanks to John Willett for pointing out to me my math mistake last week, two points on $300,000 is $6,000 not $8000 as I wrote. This is why John is a financial advisor and I am merely a mortgage broker who is calculator dependent (and failed to use it last week!).
I told you so. There I said it, now I feel better. For the past couple of weeks I have commented on how much cash is sitting in banks and investment houses. As well, early in the year I wrote how the recession would be bottoming out sometime in the fall, possible early winter 2009. Yesterday we learned that Wells Fargo earned $3 billion in the first quarter of 2009—a record amount for the bank in the middle of a recession. In reporting on the earnings the Associated Press said, “banks are sitting on piles of cash.”
Surely one kernel does not make and ear of corn, and one bank reporting huge profits does not make the end of a recession, but it is a start. Wells’ reporting shows there is some financial health returning to the credit and financial sectors. Combined with the growth in the stock market since Treasury Secretary Geithner announced some concrete policies and procedures the Treasury would be taking in purchasing mortgage backed securities and other maneuvers, the financial sector is beginning to put cash into the economy. Or at least getting ready to begin to put money into the economy.
All this news causes me to stick by my statement of a few weeks ago that very soon our national economic concern will not be the recession but rather inflation. Inflation means higher prices for commodities and services (and houses) and higher interest rates on credit cards, automobiles and mortgages.
Rates flattened for the week returning to a familiar pattern from last year of a dip early in the week and then a spike a bit later for Friday to Friday flat. Bond markets were closed today for Good Friday so a lot of traders sold off yesterday in front of the long weekend. FHA mortgages were the exception and we saw positive movement for FHA rates.
30 year FHA 5.00% Down 0.25%
A quick Easter story for those still reading; my sister, brother and I were born in Tulsa, Oklahoma and spent our early childhoods there. Our Mom loved to have us decorate eggs and ideally hide them in our yard outside if the crazy Spring weather was cooperating. As you may be aware Tulsa has very hot summers. I can remember one summer when we were playing fort or cowboys and Indians or some game and there was a horrible smell. Naturally all the boys blamed the other for the rather ghastly smell. Then we discovered an egg that had been rotting in the 100 plus degree Tulsa heat for several weeks. Of course this led to a new Easter egg hunt and a couple of more rotten, but not quite as smelly, eggs were found. Moral to the parents: count the number of eggs you hide and make sure the number of eggs found equals the number of eggs hidden. If you need help Mr. Willett can do the math!
I hope everyone has a great Easter!
Question of the week: What are points and what is the difference between discount points and origination points? Answer: Last week I addressed “What is APR”, this week I will address the biggest component of APR: points. When quoting interest rates there are two numbers, the rate and the fee; the rate is stated as a percentage the fee is generally stated as points. The rate is the interest rate charged for the life of the loan and determines the monthly payment. The points are the upfront cost of the loan and represent a percentage of the loan amount. On a $300,000 mortgage one point is one percent of the loan amount, $3,000; one and a half points (1.5 points) is equal to 1.5% of the loan, $4,500; and so on two points equals $8000.
Discount points on a transaction are the cost of the money at the wholesale level, before mark up for the originating entity. A loan at “par” is one with no points charged to the originating entity. A loan with a rebate, or premium, or yield spread premium, is a loan where the lender or bank pays a fee to the originating entity. Whether a loan is at a discount, par or a premium depends on the rate. Think of a teeter-totter, as the points go down the rate goes up and vice-versa; so a $300,000 loan may have a cost of 2 points at 4.75%, 1 point at 5.125% and perhaps no points at 5.5%---the higher the rate the lower the points. Since no one works for free, not even the clergy, the higher rate indicates a rebate is being paid to the originating entity.
If I have a client with a $300,000 I look at a lenders rate sheet and it may say that at 4.75% if will cost me, before any client charges, 1 point—this is a discount fee or point, on the Good Faith Estimate I would indicate this by have 1.00 in the line item for discount points, a $3,000 fee. In addition I need to get paid for my services so I would have an additional fee of say 1 point as an origination fee. In this fictional scenario the Good Faith Estimate would include 1 point for discount and 1 point for origination—I would quote a 2 point loan as all the points total 2 points; I have seen/heard of others who do not quote the origination fee of 1 point but only the discount point. When getting a loan quote make sure the discount and any origination fees or points are all quoted.
If we have a loan at “par” pricing there are no discount points quoted on the Good Faith Estimate and any points should be on the line for origination fees. Similarly, if a loan has a high enough rate there would be no points on the discount point line nor the origination fee line.
When getting rate quotes it is very important to compare apples to apples, many a client has gone to sign loan documents that have fees and costs that were not properly disclosed. Keep in mind the axiom “if it looks to good to be true it probably is” if one lender is quoting a lot lower than others in rate and or in points get more detail—after all no body works for free.
With the G20 Summit in London not solving any problems but adding even more
Government funds to the world economies inflation concerns continue to dog the mortgage and bond markets. As a result we have seen a pop in rates the past two days, particularly in the hi-balance conforming and FHA rates.
Part of the increase in rates is a reaction to the global, and national, economy; a bigger part is the continuing dominance of the Mortgage Backed Securities market by conforming mortgages of the non-hi-balance variety; i.e. those under $417,000. This market continues to attract investors knowing the U.S. government is active in purchasing these bonds which keeps prices artificially high—and rates low.
What I do not know, well that is an open ended statement as there is a lot I don’t know, is whether our recent uptick in rates is the very beginning of a long term trend to find a new trading range for mortgages, and therefore rates, or if it is a short term tick as investors take profits for their portfolios. One thing that is apparent the past few weeks is that investors are liking U.S. stocks. As I mentioned last week there is a ton of cash in banks and investor accounts and for the time being they can move significant amounts of that cash into both stocks and bonds and cause both markets to go up. This trend cannot continue for too long however as at some point the cash will begin to get a bit more scarce and investors will have to make the decision between fixed asset investing—bonds; or equity purchases—stocks.
After four weeks of dropping or flat rates for conforming rates we see an uptick this Friday. Because of the larger attraction of the “regular” conforming mortgages as compared to the ‘Hi-Balance” or jumbo-conforming mortgages the spread between the two has once again hit one-half of one percent, of greater significance is a similar separation between the conforming and FHA rates this week.
30 year conventional 4.75% Up 0.125%
30 year conforming-jumbo 5.25% Up 0.25%
30 year FHA 5.25% Up 0.25%
Any dog lovers out there who are in need of a wonderful pet I have a lead for you. One of the sisters of our puppy, in age since he is almost 8 months but in size he is not very puppy-sized, is available. Charlotte is, like our Harrison, a sable colored smooth coated Collie (short hair, not long like Lassie) and unfortunately the family that purchased her from the breeder lost their home back East and gave Charlotte back to the breeder. They would like to find a good home for her, and Harrison would probably like to have one of his sisters local! If you are interested or know someone who is please contact me and I can send you a picture of Harrison so you can see what the family looks like and also put you in touch with the breeder. The breeder is a husband and wife who are registered by the AKC and very active and involved in the Collie Association—they are very legitimate. If Charlotte is like Harrison she is great with kids and a family, sweet, loving and wanting to meet people and other dogs—truly a great pet.
Dennis C. Smith, California Dept. of Real Estate Broker #00966315 Stratis Financial Corporation, California Dept. of Real Estate Broker #01269597
Dennis C. Smith, California Dept. of Real Estate Broker #00966315
Stratis Financial Corporation, California Dept. of Real Estate Broker #01269597
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