Question of the week: What are some financial issues I should check annually?
Answer: I’m cheating this week as this was my first Question of the week from January 2, 2009; but the question is important enough to bring out again this year. As you start 2010 and get ready to have your taxes prepared a couple of financial areas I suggest you check in on:
· Retirement Did you alter your retirement withholding in 2009? Do you need to increase or decrease your deductions for your 401(k)? The maximum contribution in 2010 is the same as 2009, $16,500 for individuals under 50 and $22,000 for those over 50. With the S&P gaining over 25% in 2009 those who kept their contributions constant last year faired pretty well.
· Insurance Is your hazard insurance policy current and accurately reflecting the replacement value of your home? Is your life insurance coverage adequate?
· Estate Planning Do you have an estate plan? Is it current and reflective of your current assets and wishes? Do you own property but do not think you need any family planning because you are single? Everyone with assets should have an estate plan, especially if they own real estate in California (or any other state with inheritance taxes).
· Debt Have you increased your debt in the past twelve months? Do you have a plan to pay it down and off? Can you restructure your debt to lower the overall interest rates being charged or the monthly cash flow required to manage the debt and keep payments current?
· Mortgage Do you need a review of your current mortgage and options? Call me!
These are not fun or sexy issues for most people to be tackling, but like changing the batteries in your smoke detectors you need to regularly review and update these critical areas of your home economics. If you have any questions or looking for qualified professionals to assist you please do not hesitate to contact me.
Have a question for me? Ask me!
Welcome 2010! Happy New Year to everyone, I hope your holiday celebrations were fun and filled with as much family and friends as you desired—that amount can vary for all of us I know! We have a wonderful time seeing almost all of our immediate families on both sides of the aisle, including our annual sojourn to Marin County to stay a few days with my sister and brother in-law for some rest, relaxation and wonderful food and company. Hard to get into the first week of the year, but here we are one work week down in 2010 and 51 to go. So let’s go!
This morning I had the opportunity to address the Long Beach Commercial Real Estate group. In my address I said that the three keys to the real estate and mortgage industries in 2010 will be: Jobs, Rates and Regulation.
JOBS Currently over 4.9 million Americans on continuing unemployment, the number drops or stays constant not because of hiring but because of termination of benefits. Since the recession began in December 2007 over 7 million Americans have lost jobs. Unemployment is over 10% and it will take a while for the number to stabilize and reverse. I quoted one analyst we subscribe to (Barry Habib, Mortgage Market Guide) who figured out that to get unemployment down to 6% by 2015 over 225,000 jobs per month for 60 months need to be created. That number gets bigger the longer our economy keeps shedding jobs instead of adding them. Expect unemployment to be well over 8% for some time to come.
RATES The Federal Reserve Mortgage Purchase Program is slated to end March 31st after purchasing over $1.3 Trillion in mortgage backed securities. The estimates for mortgages written in 2009 is approximately $1.3 Trillion. When the Fed stops buying Mortgage Backed Securities who will fill the void? What price will need to be on those MBS to attract investors? The effect of the Fed’s purchasing program is thought to be about three-quarters of a percent (0.75%). Look at the rate chart below and move all the lines up about 1% and that is what mortgages should be without the Fed program.
With Congressional and Senatorial primaries coming in June in most states and general election in November it will be interesting to see what the Fed decides to do moving forward. Already there are discussion in their meetings about continuing the program. At the last meeting two Fed Governors were for continuing the program, one was against and the rest were silent on the issue.
Further affecting rates is the massive borrowing from the Treasury that is supporting Washington’s spending spree. The Treasury is sucking huge amounts of money from around the globe which over-burdens the investment markets with supply. As it continues there will be more upward pressure on mortgage rates as prices get depressed to attract investors.
Finally: inflation. In 2009 I said the economy would be bottoming out in late 3rd quarter /early 4th quarter of 2009. Some economic indicators suggest parts of the economy may have come close and be close to bottom. As the labor markets suggest there is a ways to go before growth hits the economy. With jobs lagging so severely the inflation factor is put off from what I the predicted to be sometime around the end of the 1st Quarter of 2010. I stand by my position that we are in for inflation, and I mean significant inflation over 4%, but changing my time frame to late 2nd Quarter to early 3rd Quarter because of the employment situation.
My prediction for 2010 is our ceiling of resistance at 6.25% for 30 year fixed rate conforming rates on purchases with 20% down and FICOs at 740 or greater at a cost of 1 point. For 2009 this ceiling was 5%, as can be seen on the chart below we were above 5% for 10 Fridays out of 52, most of the time was spent below the 5% mark. In the coming year we will spend more time above 5% and it could become our floor for the 1st Quarter; as 4.75% was in 2009 (we were below it for five Fridays). Later in the year our floor will most likely move up to 5.5%. Note that if the Fed continues its mortgage purchase program this prediction is rescinded—floor at 4.75%-5.00% and ceiling at 5.5-5.75%
REGULATION Our industry has had some of the most dramatic changes in policies and process in its history in the past twelve months; with the two biggest changes effective September 1, 2009 and January 1, 2010. The government has dived into the mortgage industry, passed credit card reform, has been struggling with health care reform and is beginning hearings and meetings for major reform of the financial services industries. Investors hate uncertainty. Regulatory reform talks and hearings and an environment that lends itself to more extension of powers and regulations of government agencies creates tremendous uncertainty as no one knows what the rules will be.
As they await those rules investors, company CEOs and boards, small business owners and individual Americans hold off on spending, investment and expansion. This hoarding of cash and capital slows job growth, economic recovery and investment. If and when Congress and the Administration signal an end to major reforms of so many sectors of our economy we will then see an increase in engagement in the economy. With the political turmoil just ramping up ahead of the mid-term elections, watching Congress as those facing re-election start to look at the polling numbers in among their constituents will give us an idea of what the legislative and regulatory outlook for the rest of the year and into 2011 will be.
Three hours and three Tylenol later we have finished yet another meeting on the new Good Faith Estimate, dubbed GFE2010. The form is very complicated to fill out, with seller fees like transfer tax, pest control and title insurance showing on the borrower’s estimate and to use lender rebates for cost credits we must first show a charge to the broker as a fee to the borrower before applying the credit to the borrower. The theory behind the form is strong, the purpose of the form is strong, the execution of the form is very weak. As such I, and my fellow loan originators across the country doing it right, will be doing a lot of education of borrowers, escrow officers and agents until everyone is familiar with the form—or it is scrapped. Any loan applications taken after 01/01/10 require the form, and every lender is still trying to figure out how to be 100% in compliance and more importantly how to explain the form to our clients. Patience everyone, myself at the top of the list!
Mortgages did not fair too well the last two weeks. A combination of short work weeks, light trading, investors cashing out profits for portfolios and some economic news shoved interest rates to their highest levels since August last week. The economic data and market fundamentals caused some rallying this week for the Mortgage Backed Securities market, pushed today by unemployment news.
Rates slightly improved from last week. Slightly
Rates for Friday January 8, 2010:
FIXED RATE MORTGAGES AT COST OF 1 POINT*
30 year conventional 5.00% Down 0.125%
30 year conforming-jumbo 5.25% Down 0.125
30 year FHA 4.875% Down 0.25
30 year FHA jumbo 5.25% Down 0.125
Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, and period rate is locked (i.e 45 days instead of 30 days).
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.
Was it tough for you to get back to the routine this week? Did you keep your routine or have you mixed it up with the New Year?
Have a great weekend and a terrific 2010!
Dennis
Follow me on Twitter for market updates throughout the day.
Question of the week: Courtesy of Marilyn Kalfus of the Orange County Register; her daily blog Huntington Homes is very informative for all, but especially for those in the Huntington Beach market. Her question: Are you seeing more owner carry-backs and how do they affect transactions?
Answer: We are seeing a rise in owner carry-backs. They are not on a significant number of our purchase transactions, but they are on the rise. An owner carry-back is when a seller takes a portion of their equity in the form of a second trust deed, deferring payment of that equity until a later date and collecting interest payments from the buyer.
“Back in the day…” owner carry-backs were not that uncommon. If a seller had significant equity, there was a strong rate attached to the note they were carrying and the buyer had a solid financial profile it was not unusual for a seller to carry back a 2nd trust deed in the transaction. With the advent of institutional 2nds, primarily Home Equity Lines of Credit (HELOCs) starting in the late 1990;s and exploding in supply in the early 2000’s the owner carry-back became a thing of the past.
Of course the explosion of institutional 2nds led to more competition among lenders and higher and higher loan to value products, until just about everyone had a HELOC that would go to 100% loan to value. When the credit markets turned and the housing market followed the losses to lenders with extensive portfolios of high loan to value home equity loans skyrocketed.
No more institutional 2nds. Some banks and credit unions offer them to customers, not many for purchases and most do so with much lower loan to values than they did three years ago. Hence, the renewal of the owner carry-back.
The guidelines for owner carry-backs are pretty simple.
FHA: First, they are not allowed on new FHA financing, however a seller with an existing FHA loan may sell to a buyer who assumes the existing FHA mortgage and the seller may carry back a portion of the remaining equity.
Conventional: Fannie Mae and Freddie Mac allow seller carry-back financing as part of a purchase transaction. The maximum combined loan to value can be up to 95% depending on FICO score, but many lenders put on an overlay reducing the maximum to 90%. The maximum first trust deed, or primary mortgage, from the lender cannot exceed 80% loan to value. So the typical transaction is 10% down, 10% seller carry-back and an 80% new primary mortgage.
The terms on the note to the seller must have a minimum monthly payment of interest only. The interest rate must be “consistent with the market”, i.e. no zero interest notes. The loan term must be for at least five years, if shorter the buyer must demonstrate ability to pay off the loan as part of the approval. For example if a seller carries back a $50,000 for three years, the buyer must show they will have at least $50,000 in liquid assets after the close of escrow. The note must be recorded through escrow as part of the transaction.
Benefits: To the buyer the benefit of an owner carry-back is the opportunity to avoid mortgage insurance without putting 20% down. Or if the buyer is anticipating a large amount of cash in the near future, perhaps the closing of another property, settlement of an estate, annual bonus, the buyer can pay off the note early and have a smaller remaining primary loan.
To the seller the benefits are supplemental income from the interest payment and/or securing a buyer for their property in a difficult market.
Risks: The biggest risk to the buyer is the balloon payment that is typical with seller carry-backs. Will you have the funds or ability to pay off the note when due in 5 years?
The obvious risk to the seller is the buyer not paying on the note and/or not being able to pay off the note when it comes due.
Owner carry-backs, while still rare, are becoming more prevalent in the market as they can facilitate some buyers and sellers coming together.
Thanks for the question Marilyn!
The big news this week was the formal announcement by the Federal Reserve Board of Governors that they would cease their Mortgage Backed Security (MBS) purchase program on March 31st as planned. By March 31st the Fed will have purchase $1.25 Trillion in MBS. The purpose of the program is to keep home mortgage rates low and help the housing markets. During the implementation of the program the Fed has purchased 80% of the MBS on the market.
What has been the impact? The Fed announced the program in November 2008. At the time the base rate I have used consistently for this weekly update was at 5.875%. The week after the announcement the rate dropped 0.25% to 5.625% and kept dropping until mortgage rates had dropped a full one percent in four weeks. At that time the Fed had not purchased any MBS but had merely made the announcement. As the purchase program got under way we saw the conforming fixed rate drop to 5% or below for all but nine of fifty-two weeks. Pretty strong impact.
What’s next? This is where some of the current debate begins. Because the Fed was buying almost all of the MBS on the market, can/will the void be filled by other investors when the Fed leaves the market? Will the unlimited funding provided by the Treasure for Fannie and Freddie make this a mute discussion as they will not need to put as many MBS on the market to remain capitalized? What is expected by most observers/pundits/47 year old econ majors is that rates will increase when the Fed stops buying MBS, and also in the days/weeks leading up to the program ending.
Today big news with announcement that the GDP for the 4th Quarter 2009 grew at 5.7%. That is very positive economic news. What is interesting is that the economy grew so much in the 4th quarter while millions of jobs were being lost. As many have been saying the recovery from this economic recession will be “jobless” as companies contract, find new efficiencies in technology vs. labor and increase per worker productivity before hiring new employees.
This week in rates continued to bounce between levels of resistance and support, unable to break through either way. A mid-morning rally today as funds flow out of stocks and into bonds and MBS has given us a slight gain from last Friday on most of our rate indices.
Rates for Friday January 22, 2010:
30 year conventional 4.75% Down 0.125%
30 year conforming-jumbo 5.000% Down 0.125%
30 year FHA 4.75% No Change
30 year FHA jumbo 5.000% Down 0.125%
We wrap up the first month of the new decade this weekend. What do you think of the decade so far?
Have a great weekend, let me know how I can be of service to you,
Question of the week: What changes are in for FHA this year?
Answer: There are quite a few changes in store for FHA this year, some have already come into effect from last January (meaning enacted in 2009) and FHA has announced more on the table for 2010.
Lender Liability Some of the policy changes last year affected lenders and who can approve and fund FHA loans, as well as who has the liability for those funded loans. FHA has stopped approving individual brokers for origination and instead approve lenders and let them determine who their business partners will be and then be liable for their performance. This transfer of liability, and therefore penalty, helps clean up some of the fraud that has been rampant in FHA financing over the years. This week FHA announced it was increasing enforcement of FHA lenders with several different actions.
Affecting consumers the most will be expanding the liability of lenders who underwrite and originate to be liable for all loans originated and underwritten with no indemnity. This will result in lenders creating their own overlays on FHA underwriting guidelines and stricter approval processes.
Mortgage Insurance On the consumer front 2009 saw an increase in the FHA upfront Mortgage Insurance Premium (MIP) from 1.5% of the loan amount to 1.75%; in plain math that means $1750 is added to every $100,000 of loan amount so borrower is financing $101,750 when borrowing $100,000. This week FHA announced that the MIP is being edged up to 2.25%, so starting later in the year $2250 will be added to every $100,000 borrowed.
The purpose of the MIP increase is to build FHA’s insurance reserves and meet the capitalization requirements mandated by Congress. This will increase the amount financed, monthly payment and total interest paid by borrowers over the life of the loan.
Note the upfront MIP is in addition to the monthly mortgage insurance (MMI) of 0.5% or 0.55% collected every month (lower monthly mortgage insurance on mortgages with loan to values of 95% or less).
Down Payment While the base down payment will remain at 3.5% for now, FHA is increasing the required down payment for borrowers with FICO scores below 580 to 10% down. With Fannie Mae and Freddie Mac pushing up their FICO requirements the past year it seems that FHA will follow suit and this increased down payment for lower FICO scores is the first step. I feel the position is moot given the increased liability on lenders for FHA mortgages that go into default; most will not be approving FHA mortgages for borrowers with FICO scores that low.
With the change in down payment requirements however, FHA is opening the door to future changes in minimum down payment. There have been rumors in the industry for the past several months that FHA is looking to increase the minimum down for all mortgages to 5%, could this be the first step to that move? I would not be surprised if FHA begins a more tiered MIP process with lower MIP required for higher down payments.
Seller Contributions FHA will be lowering the amount sellers can contribute to buyers’ closing costs from 6% of the sales price to 3% of the price. This brings the FHA regulation in line with Fannie Mae and Freddie Mac. While this may impact the methodology of some agents and FHA originators, I cannot see it impacting our local market tremendously—at least the markets where I work—as I have rarely seen in over twenty years any purchase agreement with the seller paying 6% for buyers costs on top of the other costs associated with selling their home.
Appraisals Effective February 1, 2010 FHA will follow the Fannie/Freddie guideline and require all appraisals be ordered through the HVCC process. I will not go further into this guideline as I wrote about it in my Weekly Rate and Market Update on December 4, 2009 and you can read more there if you wish.
Condos The guideline changes here will have a very big impact on real estate markets, particularly in condo heavy Southern California. For decades FHA has had an approval process for condominium Homeowner’s Associations (HOAs). Once an HOA received FHA approval any FHA sales or mortgages in the complex did not need to go through a full approval process with review of budgets, reserves, etc. For HOAs that did not have an approval, individual units could get approved for financing through the “spot approval” process. This process would be a somewhat limited review of the HOA compared to the full approval process and facilitated many FHA mortgage applicants in the purchase or refinance of their condo units.
While the deadline has been shifting for several months, it appears we finally have a firm deadline of mid-February for new guidelines to take effect that will impact FHA financing for condos. First, no more spot approvals of individual units.
Second, and very important for all condo owners and HOAs, all FHA approvals that are older than two years old will need to be recertified by FHA and go through the approval process. Further, approvals are only for two years so HOAs will need to resubmit bi-annually.
Third, FHA is changing the approval process as well. If a lender approves a complex for FHA financing it is liable for all future FHA mortgages funded under that approval if there is an issue with the complex or HOA. So if Wells Fargo approves the Sunnyside HOA in Long Beach and Bank of America funds a loan later that goes into default and it is discovered there was an issue with the HOA then Wells is on the hook for that defaulted loan.
Because of this liability extended to all loans in the future we are hearing from our wholesale lending partners they will not be approving HOAs for FHA financing. This means all approvals will need to go through FHA regional offices. We suspect the delay in implementing this new guideline has been to give HUD time to set up their regional offices so they can handle the incoming flood of condo approvals for FHA financing.
The effect of this guideline on consumers is to limit the number of condominium units available for FHA financing. With mortgage insurance companies pulling out of California, and those who remain reducing the coverages they will give condominiums, this guideline will serve to further soften the condo markets by limiting the number of qualified buyers due to higher down payment requirements for non-FHA mortgages.
If I owned a condominium I would investigate how long it has been since my HOA received FHA approval and if longer than two years would work to get my HOA board and management to cooperate to apply for FHA approval. With loan amounts up to $729,000, FHA is no longer financing for just the lower end of the market. The more buyers who are able to purchase your property, the more potential demand for your property, the more demand the more stable your prices and values.
This week had a some important economic news. The Producer Price Index (PPI) came in lower than last month and relatively flat. This is a gauge of future inflation and was a positive impact on rates. Housing starts came in lower than expectations, not unexpected given the weather in the Midwest and East, but housing permits—an indication of future housing starts—came in very high. The biggest news was yesterday with the initial jobless claims coming in at 482,000 Americans; essentially the same as if every resident in the City of Long Beach filed unemployment last week.
Jobs are now the focus. With healthcare reform taken off the stove, Congress and the White House will move job development, creation and retention to the front burner. How they will do this is what is the big question. In February Congress spent less than a week to pass a $782 billion stimulus package that has produced very few jobs thus far, with most of the funds going to states and local governments and not into the job creating private sector. There is talk of another $200 billion or so in “stimulus” coming from Washington. Will this make a difference? In the meantime, with each negative employment number our rates stay low.
The Fed may continue buying mortgage backed securities (MBS). With about $100 billion left of the $1.1 Trillion commitment to by MBS by the deadline of March 31st, some Fed governors are making noise that the program needs to continue to keep mortgage rates low. In addition to the $1+ Trillion from the Fed, the Treasury has lifted the debt caps for Fannie Mae and Freddie Mac, ostensibly to help with more loan modifications, but in reality allowing them to repurchase securities to also stave off higher mortgage rates.
With all this said, this week MBS did fight a resistance level to lower rates, as I mentioned last week. Finally breaking through yesterday, rates today have met another ceiling of resistance and are unable to push through. It looks like rates are at or near bottom for the current cycle/range. Depending on next week’s $100+ billion Treasury auctions (U.S. debt) and other economic and political news we could see rates start a new cycle higher.
This week in rates kept trying to break into lower territory without much success week over week. As mentioned above, technical factors of resistance and moving averages make it challenging for rates to break lower and begin a new cycle of lower rates. Moving forward anyone floating rates should do so very cautiously. Reminder, for day-to-day, throughout the day updates on the mortgage markets follow me on Twitter .
30 year conventional 4.875% No Change
30 year conforming-jumbo 5.125% No Change
30 year FHA jumbo 5.125% No Change
What a great weekend to look at homes! For those in Southern California thinking, “What are you nuts? It’s horrible weather!” Exactly! In Southern California the best time to view and inspect possible new homes is in the middle of winter storms because that is one of the few opportunities to see what water does to the home and property. Are there small or big leaks? Adequate drainage around the outside of the home? Does the street flood? Is there a river from your potential neighbor’s yard into yours? We can go seven or eight months without any rain and no answers to these questions. If you are thinking about buying a home in the near future do two things:
1) Call me!
2) Go look at homes when it wet and rainy
Question of the week: Can you explain the new paperwork in the mortgage package and why?
Answer: Our mortgage application packages have grown by about five pages effective January 1, 2010. The reason being the new HUD regulations and new Good Faith Estimate (known as GFE2010, or as we call it in our office the “Goofy-Ten”). I addressed, or let out frustration, over the new form in my Weekly Rate and Market Update 12-11-2009. Most particularly is all the work putting the form together to protect consumers and no method of acknowledging receipt.
Back to the question, three of the new pages are the GFE2010, one page is a list of “preferred providers” that we must issue to the borrower showing who we prefer to use for services that we select or control, pretty much limited to escrow and title on refinances—though borrowers can always select their own. And finally a “preferred providers relationship” disclosure where we disclose if there is any financial relationship between service providers, i.e. if Stratis owns any interest in the escrow company or are owned by the same company that owns the escrow or title company or other services (we aren’t).
The intent of HUD in creating the GFE2010 and service providers list and relationship are honorable: to protect the consumer from bait and switch tactics, last minute fees borrowers feel forced to pay or lose their mortgage, ability to shop for rates with knowledge what is being quoted is what will be closed; as well to inform borrowers if they are using a certain company that it could be adding to the profit margin of the lender or another company in the transaction (usually the realty company if broker owned lender and/or escrow).
However the intent and the implementation have not exactly met so we, you the consumer and me the loan originator, will have to struggle through as we get more accustomed to the forms and implementation. The challenge we have faced is if the GFE2010 is not properly completed we, the loan originator, may have to pay fees for the borrower which will go to principal reduction of the closed mortgage. Or if not properly completed the lender might reject the loan application before it gets underwritten.
How does the form work for borrowers? First the form states how long the origination fees quoted are good, and they must be honored by the provider of the form for at least ten days (not counting the date delivered, Sundays or holidays). So if a GFE2010 is provided today then all fees quoted for origination points, discount points, processing fees, underwriting fees, tax service, etc, plus estimates provided for escrow and title fees from preferred providers, must be honored until January 28, 2010. So long as the loan amount does not change and the loan does not change from unlocked to locked, the origination fees must remain the same if the consumer applies and acknowledges the fees.
This process will, should, prevent low-ball quotes to get applications in the door and then higher costs at closing. If due diligence is applied by lenders and underwriters on all originated loans, including those in-house, then very quickly quotes and closings will match, or come very close to matching, across the industry. This is good for the industry and good for the consumer.
Once the loan is locked the borrower is issued a new GFE2010 that states how long the rate is good for, i.e. the lock expiration date, and that the fees quoted are will remain the same throughout the lock period. If any origination fees exceed the quote on the GFE then the lender/originator will not be paid the fees, but rather will be charged the fees and they will be applied to the borrower’s loan balance. Further, if the fees on services we select vary by more than 10% we must also pay that amount into the borrower’s principal reduction of their mortgage.
What leads to confusion for us, and the borrower, is that we are required to disclose fees and costs for items that are traditionally sellers’ fees in California: pest inspection and clearance (i.e. termite), transfer taxes, seller’s title policy, homeowners association transfer fees are just a few. My speculation on this is that because the form is national these may be fees paid by the buyer in other parts of the country. California is one of only nine escrow states in the country, so our way of doing business is not the norm for HUD and lenders.
So the penalties for improper disclosure can be pretty steep. This, plus the newness and uncertainty of exactly how to complete the form, have had the industry on pause for the start of the year. Now that we have a few examples and trials under our belt we are ready to embrace the new form, albeit like the hug we give our crazy cousin at Christmas.
I hope this form, as onerous and confusing as it is for us today, does what it is intended to do: stop under quoting, bait and switch tactics and deceptive lending practices. Hopefully it will finish the job the market downturn started and get rid of those who never should have been in our industry.
Frequent and long time readers of the Weekly Rate and Market Update will recall past issues where I address the levels of support and resistance for markets; if so you may skip to next paragraph. As a refresher, every commodity has a high price and a low price and the market trades within those prices. For stocks and bonds these are called trading ranges. Prices move up and hit the high end of the range, called resistance, and usually bounce off, or prices will move down and hit the bottom price in the range, called support, and bounce off. The levels of resistance and support are often moving averages, 10, 25, 50, 100 day averages of the commodity’s price. If a price breaks through a level of support then usually prices will drop further until stabilizing and establishing a new range of trading at lower prices. Conversely if prices break through a level of resistance prices will typically go higher and a range of trading will evolve at higher prices.
This week levels of support and resistance have been converging for mortgage backed securities (MBS). The ten day moving average has been a level of support that bond prices have hit and rested on, and the twenty-five day moving average has been a level of resistance that mortgage prices have hit and bounced off and come back down. As a result we have had an up and down week as daily these two price levels converge, the ten day average rising and the twenty-five day level dropping. This technical factor creates a very unstable market with prices able to break either way.
With negative economic news yesterday of new unemployment claims higher than expectations at 447,000 claims, and retail sales in December a lot lower than expectations, mortgage backed securities looked like they would break clear of resistance and head higher. (Remember higher prices mean lower rates) As the market closed prices fell back below the level of resistance and it looked like we were heading into a down market.
This morning in early trading (6:00 a.m. Pacific) as I write this the 10 and 25 day moving averages are almost touching and tame news on inflation combined with some not exactly positive revenue news from Chase prices have broken above the 25 day moving average that has been capping prices and creating a floor for rates. Prices are on the next level of resistance (the 200 day moving average) and we will see if this holds, if so then the range shifts up, rates improve slightly for the coming week and we begin the cycles again.
Update 8:30 to show the volatility, consumer confidence numbers came in very weak this morning, pushing MBS over the 200 day moving average—creating an opportunity for a higher trading range and possible lower rates. “Opportunity,” “possible” are very key words. In the past few weeks we have seen early ups and late downs making timing the market very difficult and risky.
What does all this mean? The interest rate markets are volatile. Unless you are very risk averse, I suggest if you are in a position to consider locking a mortgage rate you consider doing so when you are able. Floating a rate in hopes of a “better deal” in this market is financially dangerous and many will find themselves with higher rates as a result of the gamble.
Further adding to the risk are the new guidelines from Fannie Mae capping income to debt ratios at 45% of gross income. An applicant on the edge of that number at 4.75% may no longer qualify at 5.00%. Trouble. With this in mind, note that whenever prequalifying applicants it is my practice to do so at about 0.25% (one quarter of one percent) above the current market rate to better ensure ability to qualify when in escrow.
This week in rates all the ups beat the downs. With the constant challenging of resistance levels the market was consistently, albeit incrementally, higher. As a result all rates improve slightly from last Friday. Which is two weeks in a row to start the year. Trend? I would not be willing to make that prediction at this time.
Rates for Friday January 15, 2010:
30 year conventional 4.875% Down 0.125%
30 year conforming-jumbo 5.125% Down 0.125
30 year FHA 4.75% Down 0.25
30 year FHA jumbo 5.125% Down 0.125
Monday is a national holiday in honor of one of America’s greatest citizens, Martin Luther King. America has made tremendous strides in overcoming bigotry and racism in the four decades since Dr. King’s “I Have A Dream” speech. There are still bigots and racists in our country, thankfully they are becoming fewer and farther between.
While many invoke the memory and desires of Dr. King, I like to at least once each year listen to his speech in Washington D.C. in August 1963. I you wish to do so here is a link to a site where you can choose to read the speech, listen to the speech or watch the speech that changed America. “I Have A Dream” As a father I have the same hope for my children that he had for his, that they be judged by the content of their character.
Have a great weekend.
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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