Dennis' Mortgage Blog

Question of the week:  What about an Adjustable Rate Mortgage?

Answer:  An interesting question this week from a historical perspective.  At one point the leading collector of blame for the housing and credit market melt downs were ARMs.  Today those who have adjustable rate mortgages have incredibly low rates.  Today.  They are benefiting more than anyone from short term rates near 1% for a prolonged time.

But what about ARMs, either existing mortgages or new ones, looking forward?  As the housing bubble expanded from 2002 into 2007, so too has the bond bubble been expanding.  When and how will the bond bubble burst?  That is what should be considered for ARM holders, and applicants.

Applicants?

Yes, applicants.  For the past several months ARMs have been between 5-6% of mortgage applications nationwide.  With Hybrid ARM (mortgages with initial rate fixed for 3, 5, 7 or 10 years and then becoming an adjustable rate mortgages) rates as much as 1% or more below 30 year fixed rates the lower payment, or ability to accelerate principal reduction, attracts some mortgage applicants. 

Because of changes to qualification guidelines ARMs are not being used to leverage applicants’ qualifying into higher mortgage amounts.  Rather ARM applicants today tend to be financially astute and good money managers.  With more of a focus on the ability to pay down mortgages earlier, many ARM applicants realize the gains they can make leveraging the lower introductory rates not for higher qualifying to buy a bigger home, but rather to accelerate principal reduction on their mortgages before their rates adjust in three, five, seven or ten years.

All that said, ARMs only make up to five to six percent of the applications for mortgages.  Perhaps if they had only made up five to six percent of the market in 2005, 2006, 2007….

Have a question for me?  Ask me!

2.00%  That is the economic growth for the 3^rd Quarter according to the Commerce Department, while an improvement over the 1^st and 2^nd quarters the anemic growth combined with unemployment in the high 9% range, over 18% including under-employed, gives credence to those critical of the “stimulus” bill of February 2009.  By now the bulk of the almost trillion dollars in the bill was to have been put into the economy.  2%.

The GDP number helps rates remain low, but we could use some news that would push rates up.  News that economy is growing, jobs are returning to the private sector and families are ready to purchase and remodel homes.  Against the GDP back drop the Fed meets next week and is expected to announce a monthly $100 billion asset purchase program.  “Asset” defined as government debt.  So the Fed will be buying debt created by Congress that is operating with no budget in place.

Since December 2008 the Fed has cut overnight rates to essentially zero, purchased over $1.3 Trillion in mortgage and government debt and cranked up the printing presses pushing more currency into the economy.  Washington has expanded the Federal government and its spending to the tune of a national debt in excess of $13.5 Trillion ($124,000 for each of you paying taxes) and we have economic growth of 2%.

Money and rates are not the issue with economic recovery.  Consumer, business and bankers’ confidence are the barrier to economic recovery.  Cash is flush in the economy as personal savings has climbed monthly for the past two years.  Businesses are hoarding cash as they try to determine what future expenses they will have from new regulations.  Banks are reluctant to lend because they don’t have to, and if they do are concerned the Fed auditors will deem their balance sheets week and put them on watch lists. (They don’t have to lend because the overnight rates from the Fed are so low the banks can borrow the money at zero and re-lend it overnight themselves at 2%--the same rate of return in our economy.  Two percent of $100,000,000 is $2 million by the way.  Overnight.)

Confidence in the future is needed to get families to finally spend the money they have saved for a new oven or bathroom remodel.  Confidence is needed for employers so they know if they expand their marketing division (which for many businesses may be one person) they know they can afford the additional costs beyond wages.  Confidence is needed for community banks to make loans to small businesses looking to expand their operations, purchase their own building, borrow against accounts receivable.

Is confidence coming soon?  Perhaps.  I am of the opinion that the stock market has had some of its bounce from the polls showing the likeliness of a stalemated Washington starting in January.  It is pretty much a foregone conclusion that the checks and balances of the Constitution will be in full effect until at least January 2013 with a Republican House of Representatives, a split Senate and President Obama leading the Executive Branch.  There has been no indication from either side to work with the other given the complete opposite philosophies on government’s purpose. 

With the prospect of no major legislation that will impact business coming from Washington we may see some confidence return to business owners who will have a clearer idea of what the future holds, at least for the next two years.  I may be wrong, I certainly have been before such as when I predicted in late 2008 that economic recovery would be underway by now and interest rates near 6%. 

Rates for October 29, 2010:  Mortgage Backed Securities went into free fall for a few days, dropping heavily Friday, Monday, Tuesday and Wednesday and recovering some yesterday and today.  The daily movement through the week has resulted in another week of flat rates Friday to Friday.

FIXED RATE MORTGAGES AT COST OF 1 POINT*

30 year conventional                             3.875%             Flat

30 year conforming-jumbo                    4.25%               Flat  

30 year FHA                                         3.875%             Flat

30 year FHA jumbo                              4.000%             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. 

Please note that rates quoted are based on average of several lenders for a purchase transaction with 20% down payment with an impound account for taxes and insurance 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.

Look out for the wizards, ghosts, kung-fu fighters and ballerinas on Sunday if you are out and about. 

As for Tuesday, cast your ballot and please do your homework beforehand and don’t just follow the ads or mailers. 

Have a great week,

Dennis