Question of the week: Can you give me a refresher on the mortgage market and why up is good?
Answer: For those who have been loyal readers of the Weekly Rate and Market Update you may wish to skip to the weekly market update part below, or stay as we go through a quick refresher on how bond markets and interest rates work. While it gets more detailed and technical than this, here is a simplified version of Bonds/Mortgages 101:
Mortgages are backed by Mortgage Backed Securities (MBS), which are essentially bonds and trade as bonds and compete with other bonds for investment dollars.
Investors like to make money. When making an investment they want to buy low and sell high, but being human they do not know exactly when the bottom of a market hits to buy or the top hits to sell. They decide to buy or sell based upon their best judgment as to what is going to happen next in a market. If stock in the DCS Corp is selling at $10 and you think the company will have a great 2010 and see the stock rise 20% to $12 you will buy; if you hold DCS Corp and it is selling at $10 and you think the CEO’s decisions will harm the company and the stock will drop 20% to $8 you will sell.
Decisions to buy or sell investments are most generally made based on information that leads investors to believe the value of the investment will go up or down in the future. If a lot of investors feel the price of an investment will go up then they will all bid for the investment and create high demand. High demand raises prices. If a lot of investors feel an investment will decline in value then they will all put their investment up for sale and create high supply. High supply lowers prices.
So supply and demand based upon investors predictions of what will happen in a market determine whether prices today on an investment go up or down.
Mortgage Backed Securities have a yield, a return on the investment, that is an interest rate. If you have a 30 year mortgage at 5%, when you pay the 5% interest payment that becomes a 5% rate of return for someone’s investment.
Now comes a bit of math that has given some people problems, including me in “Bonds and Finance” week one with Professor Botwin. Bonds and MBS have a price, a face value and a stated yield. A U.S. Treasury bond has a face value of $100.00 and pays 5% per year; if you hold the bond the U.S. Treasury will send you $5 every year. What if you can get 6% at your local bank? Why pay $100 to get $5 back when you can get $6, 20% more, from your bank? You would not, so instead of paying $100 for that bond you would offer someone $83 so the $5 annual interest payment is a 6% return. You pay a lower price to get a higher return: price is down, interest rate is up.
Suppose it went the other way? Suppose the local bank is paying 4% interest? No one will sell you a $100 bond paying a 5% return, they would be losing money. So to be competitive with the 4% return the bond will sell for $125, now the $5 annual interest payment is only 4% of the price of the bond. You pay a higher price to get a lower return: price is up, interest rate is down.
Simplified: A playground teeter-totter. On one side Jack Price on the other Joy Rate, as Price goes up Rate goes down. As Price goes down, Rate goes up.
Predicting the future of the investment is the tricky part, and why some guys on Wall Street have collected hundreds of millions in bonuses, if you are dealing with a $100 million portfolio one-tenth of one percent (0.001) is $100,000; now juggle several such portfolios at one time. That decimal point on $1 billion is $1 million (ask Congress about the decimal point on one trillion). Predict correctly and move that decimal point higher and you profit handsomely, incorrectly and the decimal point drops and you lost money on your investment.
In predicting bonds and MBS there are few lone rangers. The simple version is if there is good economic news today, or probably tomorrow, then bond and MBS price will go down—and rates up. If there is bad economic news today, or probably tomorrow, then prices will go up—and rates down.
Good economic news generally means higher rates; bad economic news generally means lower rates. If you wake up and the paper says unemployment went down and consumer spending went up, expect rates to be up. If you wake up and unemployment is higher and consumer spending is down, expect rates to be down.
Today the U.S. Bureau of Labor released the October Employment Situation summary, it was not good news.
Have a question for me? Ask me!
Update on First Time Homebuyer Tax Credit: The Senate and House have passed an extension of the homebuyer tax credit and extended it to non-first time buyers. The new law awaiting Obama’s signature:
· Maximum 1st time buyer credit of $8000, must sign purchase agreement on or before April 30, 2010 and close on or before June 30, 2010
· Maximum previous homeowner credit of $6500, to be eligible you must have owned your primary residence at least 5 years
· Phased out credits for individuals earning over $125,000 and couples earning over $250,000 adjusted gross income
If you have purchased in 2008 or 2009 and are eligible here are links for you, if the forms change for the new credit I will post them.
Click this link IRS Form 5405 for Frequently Asked Questions click here IRS FAQ
Thanks to Marilyn Kalfus of the Orange County Register for re-posting on her blog my comments last week about a the tax credit. She ran a poll in conjunction with my comments and over 650 readers voted with most of the votes being to either cancel the tax credit or extend it and expand it. Interesting polarization from her readers, it looks like the “Extend it and make it bigger!” voters (218) won.
The big news this week came this morning and it will be above the fold headlines and talking points one, two and three on the weekend news programs. Unemployment in October climbed over 10%. Some interesting factoids from the Department of Labor Release:
· Unemployment rate the highest since April 1983 when it was falling after a peak of 10.8% in December 1982
· Since the start of the recession in December 2007 unemployment has increased by 8.2 million people and rate has climbed 5.3 percentage points
· Currently there are 15.7 million unemployed
With the House voting on its health care reform bill tomorrow, Tuesday’s elections in Virginia, New Jersey, New York and California and the release and corrections of jobs created by the stimulus package in February this week the easiest job in American this November is being a talk show host.
After starting the week in the dumps MBS posted slight gains on Wednesday and Thursday. Today with the unemployment news (see question of the day regarding bad news and interest rates) the bond markets took off out of the gate. They have settled down some, but it of great interest that MBS have broken above resistance of the 25 day moving average. Loyal readers who remember the Bond Markets 201 tutorials in the past on support, resistance and trading ranges know this may mean a new trading range for MBS and possible lower rates in the future. Don’t get too excited, the market has been so tight that “lower rates” are possibly an eighth of a percent.
For economic and history buffs (I am both) I looked back through old rate charts and the 30 year conforming rate on the first Friday of November in 2006, 2007 and 2008 was 5.875%, over 1% above this November’s rate. (In 2005 it was 6.125%)
My mobile has been buzzing all morning with text alerts on the mortgage market, it is fast and furious trading as investors try to figure out where the future lies for mortgage backed securities. In less than 4 hours this morning trading has covered 60 basis points, essentially almost 0.125% in rate from top to bottom. Watching with great caution and willing to lock rates to take away down side risk.
Hi-balance rates drop from last Friday. Conforming 30 year fixed is a “tweener” as I write this Friday morning, by afternoon it should slip into 4.625% but so far the rates have not adjusted down so I’m posting a tweener rate for now.
Rates for Friday November 6, 2009:
FIXED RATE MORTGAGES AT COST OF 1 POINT*
30 year conventional 4.70% Down 0.05%
30 year conforming-jumbo 5.00% Down 0.125%
30 year FHA 4.75% FLAT
30 year FHA jumbo 5.00% Down 0.125%
Remember we have true, honest to goodness quality Jumbo rates again! Call for quotes as they vary depending on LTV, FICO and loan amount.
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.
For those of you in the Long Beach area, or close to it, come on up to our neck of the woods and celebrate First Fridays. Bring the kids, stroll Atlantic, make plans to eat dinner in one of the many great restaurants, window shop (and buy something?) the great shops and just hang out with a fun crowd on a fun night!
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.
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Question of the week: What is a “rescission period?”
Answer: To rescind is to revoke or annul; rescission is the act of rescinding. A rescission is when you cancel or revoke something. A rescission period is a time frame in which you may cancel an agreement or contract. In California homeowners who refinance have a three day rescission period in which to change their mind and rescind, or cancel, their refinance transaction. This rescission period only applies to owner occupied homes, including 2nd or vactions home, whether the refinance is merely a modification of interest rate (called a rate and term refinance) or if the transaction is “cash-out” (new mortgage results in funds being paid to the borrower at close of escrow or paid to another on behalf of the borrwer).
The eligible refinances cannot fund, no exceptions, until the three day rescission period has expired. The three days is counted starting the day after loan documents are signed, Sundays and holidays are not counted. So if loan documents are signed on Wednesday the soonest the refinance can fund is Monday; provided there are no holidays between the signing and the Monday (for example this week, refinance documents for primary residences signed on Wednesday cannot fund until Tuesday: Thursday did not count as it was a holiday, Friday day 1, Saturday day 2, Sunday exempt, Monday day 3, Tuesday rescission period ends).
This is important to know when locking in interest rates, on refinances paying off FHA mortgages where once a new month starts the interest for the entire month is do as part of the pay-off, and calculating when loan documents expire.
We are often asked by homeowners if they can waive the rescission period and the answer is “no.” State law requires the three day rescission period to give the homeowner time to evaluate the transaction, the final loan documents and closing statement and if not what they want or like they can cancel the transaction. When exercising their rescission option homeowners need not give a reason or cause, they can cancel for any reason during the three day period.
As part of every eligible refinance transaction the homeowner is giving a “Notice of Right To Rescind” as part of the loan documents, every signer on the loan is given his or her own copies of this document. To rescind the homeowner must deliver the cancellation to the mortgage broker/lender and/or escrow prior to the expiration of the three day period—the deadline is stated on the Right to Rescind. If you wish to rescind your refinance transaction it is suggested you deliver the signed Right to Rescind to both the closing agent (escrow officer) and your broker/lender.
Note that if you do exercise your right to rescind that mortgage transaction is cancelled and if you change your mind a day or two after you have rescinded the transaction you must start the entire process over with a new loan package, appraisal, etc. Also note that any fees incurred by the transaction are non-refundable.
While rescissions are rare with most lenders they do occur. To prevent the expense in funds, resources, time and energy for almost completing a refinance transaction that does not close make sure before you initiate the transaction that it meets our needs and objectives; that the rate and terms of the refinance are what you want and that you stay in touch with your broker/lender throughout the transaction. Most importantly, make sure you are given the rate and cost of the refinance not only at application when you get a Good Faith Estimate, Truth In Lending and Mortgage Loan Disclosure Statement (California only), but also confirm them when you lock in the rate and cost for the transaction.
Obviously if the terms on the loan docs are different than what you had agreed to then you have reason to rescind the transaction, before signing the loan documents and then rescinding however contact your loan originator and let them know what is different. A lot of hands touch a file and are involved in the submission, approval and loan document preparation process, along the way mistakes can be, and at times are, made. Usually they are easily correctable with a phone call and re-drawing loan docs, make sure that is the case before going through the rescission process.
Short week with Thanksgiving but nonetheless some very interesting numbers have been reported this week. First, the National Association of Realtors released a survey that said 94% of homebuyers eligible would have purchased their home even if there were no tax credit. Given credence that the tax credit is a huge cost with little benefit and that the housing market activity is due to low prices and rates. Second, it was reported that 23% of homeowners with a mortgage owe more than their home is worth. This is important because increasingly Americans are walking away from mortgages that are upside down, it is estimated that almost 600,000 homeowners went into default last year even though they could afford their mortgage payment. It should be noted that approximately 24 million homeowners have no mortgage, or approximately 32% of primary residences. Some quick math: 68% of homes have a mortgage, 23% of those are upside down, 16% of all primary residences in the United States have mortgages that exceed their value.
Short weeks mean light trading, light trading means big swings in prices as any move to buy or sell has a big impact on a small market. That was the case this week with light trading, and a beneficial Treasury auction of more U.S. debt, led to gains early in the week. On today’s abbreviated trading day stocks got hammered early and bonds benefited briefly on news that Dubai may default on $60 billion in debt. That used to be the U.S. deficit.
On the short and light trading week we saw a slight downtick in conforming rates and other products holding steady for the week with slight pricing improvements from last Friday.
Rates for Friday November 27, 2009:
30 year conventional 4.5% Down 0.125%
30 year conforming-jumbo 4.875% Unchanged
30 year FHA 4.5% Unchanged
30 year FHA jumbo 4.75% Down 0.125%
I hope you had a wonderful Thanksgiving and plenty of opportunity to count and state your blessings and all you have for which to be grateful. Now onto a hopefully lazy, restful and fun weekend with family and friends!
Until next Friday,
Question of the week: Can you please explain the new Good Faith regulations that take effect in January?
Answer: On January 1, 2010 the Department of Housing and Urban Development, HUD, new Real Estate Settlement and Procedures Act guidelines go into effect. The major impact of the new RESPA regulations will be the new Good Faith Estimate (GFE2010) that will have to be provided to all individuals inquiring about mortgages. What is interesting about GFE2010 is that to be in compliance with the new RESPA regulations the proper completion of the form puts the originator in violation of existing RESPA regulations that govern the Truth In Lending disclosure and also the Reg Z disclosures under the authority of the FDIC/Federal Reserve.
When the GFE2010 was rolled out then HUD Secretary Steve Preston hailed it as the form that would save consumers “nearly $700 at the closing table.” This premise is based on limiting the fees that could change from initial disclosure to closing, disclosure of which is part of the new form.
Another purpose of the GFE2010 is to “bring clarity” to the market “through a simpler and better understanding of their costs.” To do this HUD took the previous 1 page Good Faith Estimate that clearly delineates all charges and tailored perfectly into the HUD/RESPA required Truth In Lending disclosure (which discloses APR) and created a three page form that does not delineate any fees, lumps charges for non-related services together, separates out services required by the loan process from those the borrower can select and has not relation to the Truth In Lending disclosure or the Good Faith Estimate required under Reg Z by the Fed.
In going through training on how to complete the GFE2010, while also fulfilling the disclosure requirements of the Fed with the existing Good Faith Estimate and also the existing requirements from HUD for the Truth In Lending disclosure I kept hearing Ronald Reagan’s voice saying, "The nine most terrifying words in the English language are: 'I'm from the government and I'm here to help.'"
On the training conference call on Wednesday were originators from across the country who worked for direct lenders, brokers and banks. The common sentiment was that the consumer will in reality end up paying higher costs for loans as originators will not want to risk under-disclosing costs and fees, not just their own but those of escrow companies, title companies, appraisers, surveyors, etc, and be stuck with the tab.
Also impacting borrowers will be the inability to lock in loans early in the transaction as lenders must accept all fees and rates on the GFE2010 once they accept a loan. If the market has changed and the loan was not locked in, or the originator under-disclosed fees the lender will be on the hook for the lower fees. As a result we anticipate one of the fallouts of the new RESPA rules will be lenders not allowing mortgage rates and terms to be locked in until loan documents are being ordered. In a volatile or up rate market this can be costly to borrowers, and for those on the edge of qualifying it could result in their loss of loan approval between application and documents.
To demonstrate just some of the issues the new RESPA regulations have caused, when issued the Fed contacted HUD to say, “hey your new GFE2010 puts everyone in violation of our Reg Z.” To which HUD said, “so what.” What HUD probably does not realize if that the new RESPA regulations also puts those in compliance in violation of HUDs current RESPA regulations. The result is that it is impossible for any loan to not be in violation of any of the statutes and regulations that will be on the books on 1/1/2010.
Is this surprising? No, especially from current HUD Secretary Shaun Donovan, who earlier this year announced with great fanfare that he was allowing the First Time Homebuyer Tax Credit to be used for down payment on FHA loans; his plan was to allow non-profit agencies licensed by the states to loan borrowers the amount of the tax credit for down payment. Then a few days later had to rescind the announcement when told that HUD does not allow funds for down payment to be borrowed for FHA mortgages.
The Secretary was not aware of HUD guidelines then and evidently he is still unaware of them. So if you are an attorney GFE2010 may be a wonderful gift for you, if you are a consumer in the market for a mortgage in 2010 have some patience and be aware the government has just made your process have “more clarity.”
Oh, and if you are a cheat, liar or thief who has been operating in the mortgage industry taking advantage of consumers, you can probably carry on with business as usual since you never followed any of the past regulations I’m sure you won’t bother to follow the new ones. But hey, thanks for your effort in bringing these new disclosures to market.
Another change HUD has made that will impact consumers is the change to approving condominium associations for FHA mortgages. The implementation was supposed to begin this week but HUD has postponed it until the first week of December. Under the new policy we will no longer be able generate “spot approvals” for individual units for FHA financing. Once a complex is approved it must re-apply for approval every two years. Many complexes currently on the HUD approved list will be automatically dropped from the approved list depending on how long it has been since they were certified. And HUD will no longer approve condominium associations, they are requiring lenders approve the associations AND warrant them. So if the Dennis Condo HOA wants to have it units eligible for FHA financing and goes to say Chase, or BofA, or Wells, for such an approval then all future FHA loans funded in the association have some of their liability going back to which ever lender issued the HUD HOA approval. How many banks are willing to sign up for that? Exactly.
The impact of the new condo policy will be to effectively kill FHA financing for condominiums. With no mortgage insurers willing to insure 95% loan to value ratios on condos in California the move by HUD essentially pulls the rug out from the condo market; and not just in California but across the country.
Rumored to be next on HUD’s list will be an increase in the minimum down payment requirement, which has been in the 3-3.5% range my whole career (thankfully in the 1990s they went to a flat 3.5% from a complicated calculation we had to go through). The most rumored number is 5% as the minimum down payment and requiring a significant portion of the funds be from the borrower directly, i.e. limiting gift funds from parents or relatives.
And just to pile on more FHA info….FHA is in deep financial doo-doo (that is a technical term I learned in Prof Lehman’s International Trade class). Its reserves are almost at zero, about 3% below Congress’ requirement. And foreclosures are mounting in relation to the popularity FHA financing has found in the current housing market which will further decrease reserves. How to pay for the bad loans? Raise costs on good paying loans. FHA will probably raise further the fees for mortgage insurance in the first quarter of 2010. For those with existing FHA mortgages they cannot retroactively raise your premiums so breath a sigh of relief.
It is clear that FHA, once the loan for first time homebuyers, is moving away from that market; or is significantly raising the bar for millions of future first time homeowners. Unfortunately it appears the individual ultimately in charge of how and where that bar moves is woefully unaware of the policies and procedures of the Department he leads. We may find out very soon that Secretary Preston is to HUD what Director Brown was to FEMA.
Mortgage Backed Securities continued gains this week as the Fed bought another $13 billion or so of the market. While there has been some intraday volatility for the most part the MBS market moved gently upwards. With a slow week next week we don’t expect much to happen, but light trading can lead to big swings in prices. Patience may lead us through the long Thanksgiving weekend and better pricing on the back side. However…we have been near and keep bumping up against resistance, meaning there is a floor rates have not been able to consistently break below. Caution and prudence suggest taking advantage of the current market and cut future risk at the cost of possible future gains you may miss. Remember, rates typically go up like a rocket and float down like a feather.
For the moment the market has moved lower with FHA this morning at all time lows and conforming nearing the mark—for now.
Rates for Friday November 13, 2009:
30 year conventional 4.625% Unchanged
30 year FHA jumbo 4.875% Unchanged %
Thursday after a fun long day in the kitchen, and out by the grill where the bird will be slowly reaching hot, juicy perfection, I will sit with Leslie and the girls, her mother and her sister and her family. We will give thanks for each other, our friends and our blessings. I will also be giving thanks for the many tremendous people in the real estate industry who have supported my business and career with incredible effort and service. A special thanks will be given to all the families this past year, and every year, who have entrusted me with their mortgage transactions. I love my job and my industry and am so thankful to be able to work with families to achieve homeownership, or to save thousands of dollars in payments every year, or to properly leverage their assets to achieve their goals. Thank you to everyone who has enabled me to continue to work in such a great industry that provides for me and my family and for the fifteen pound bird that will be slow roasting on my barbecue!
Have a great weekend, enjoy the short week and Happy Thanksgiving!
Question of the week: Last week you presented “Mortgage 101” showing how bond and mortgage rates work. How about a Mortgage 2010 with a look into what may be ahead in the coming year?
Answer: To begin with our look into next year I want to share this link with you. Columnist George Will’s “A Gold Standard On Debt.” Will brings together much of what I have been writing for the past year regarding debt, bond financing, inflation and higher rates. I encourage you to read it as it is not just about interest rates but about our national economy.
Loyal readers know that regarding our 2010 mortgage market I have been predicting higher rates in 2010 for much of the year. The Federal Reserve just went over the $1 trillion mark in purchasing mortgage backed securities and will purchase another $250 billion by the end of March. Once they leave the market the artificial demand created by the Fed goes away, less demand means lower prices, lower prices mean higher rates. Read Mr. Will.
Regarding the mechanics of the mortgage industry, a few weeks ago I gave a review of how many of the different programs enacted this year have done. Today I will look at how the different changes will impact the industry and consumer in 2010.
Tighter lending criteria: FHA is losing money and its reserves are well below the level established by Congress. Fannie Mae and Freddie Mac are losing money and looking for additional funds to prop them up from Washington. Mortgage Insurance companies are losing money and some will leave the business.
FHA: The losses from FHA are on newer loans, an inordinate amount of refinances that were used by homeowners to get out of Interim or Option ARM programs. From 2000 to 2007 FHA mortgages as a percentage of overall mortgages funded dropped. In 2008 and 2009 the percentage of FHA mortgages funded leapt due to declining equity across the country, higher loan limits for FHA mortgages and lack of low down payment/equity financing. With unemployment breaking through 10% FHA defaults are being impacted. FHA is raising the bar on qualifying.
The biggest changes in FHA are going to be on the industry side. A major change is anticipated to be issued with a “Mortgagee Letter” in December that will reduce the number of companies able to originate FHA mortgages and shifting liability from FHA to lenders for originator oversight. What this means is that lenders will reduce the number of brokers who they will allow to originate FHA mortgages. This will result in many mortgage brokers to close up shop without the ability to fund FHA mortgages. (Not Stratis Financial as we have met the strictest criteria and standards and have assurances from our primary FHA sources they will continue our relationships.)
The tighter criteria for FHA in 2010 may include higher down payment requirements, higher mortgage insurance premiums, higher FICO score requirements and lower debt-to-income requirements. Also on the block could be non-occupant co-borrowers and gift funds for down payment and closing costs. Greatly impacting the FHA market will be FHA requiring the disastrous Home Valuation Code of Conduct, or HVCC, appraisal process for all FHA mortgages starting in January.
Conventional: Fannie Mae has already announced lower debt-to-income requirements and as the saying goes, as Fannie goes Freddie follows. The new limit is 45% for the back or bottom ratio for total debt to income. Fannie is also releasing a new version of its Desktop Underwriter software program that is used to approve mortgages (and in my opinion one of the most under-reported causes of the mortgage market meltdown). The new version of the program will have other “enhancements” that will further tighten down the underwriting criteria for consideration of non-employment income, reserve requirements for borrowers and credit.
Lenders: Many of the lenders still standing have already introduced “over-lays” on underwriting guidelines from FHA and Fannie/Freddie. These over-lays are stricter requirements than the agencies require and/or pricing add-ons to discourage the use of certain criteria. Lenders are insuring their portfolios will be purchases on the secondary market, are anticipating upcoming guideline changes from agencies and most importantly want to make sure they will not have foreclosures and defaults in the future. Using analytical programs they have been able to analyze all the criteria of defaults and foreclosures, spot patterns such as gifts for closing, co-signers, etc and target those underwriting standards. While defaults mount in 2010 more and more will be as a result of the current economic situation and less and less from the mortgages made in 2004/5-2007 heyday of no down, stated income programs.
Politics and Policies: Many of the major banks that are left have been working Barney Frank’s little committee in Congress very hard, their objective is to eliminate mortgage brokers. While this may sound paranoid since it is coming from a mortgage broker, those of us who been in the industry for as long as I have and who stay abreast of the politics and policies are aware of this intended goal. The biggest method of doing this is through changes to the Real Estate Settlement and Procedures Act, central to this is a new policy that banks have been pushing for years and that is not just disclosure of yield spread premiums paid to brokers (required in California by the way since mid-1990s) but requiring the borrower release such funds to the broker in writing at closing. This will essentially have the impact of killing no point mortgages from brokers, in the meantime banks will still be able to offer them through their retail branches, with less competition and higher rates.
While there have been almost no new regulations imposed on Wall Street traders at this point relative to derivatives, hedge funds and margins, our industry keeps seeing political over-reactions to “protect the consumer” that are creating more and more obstacles to homeownership. HVCC, MDIA, TILA, RESPA changes, GFE changes, HUD, the Fed, OTC, everyone wants to make new policies, increase disclosure, add forms, and evidently further confuse the consumer. Currently our application package in California runs over 25 pages for a conventional transaction (we crest 30 on FHA). With the new changes we look to add at least five more pages to do what our current forms already do.
For those out there who have an obsessive dislike of my industry and feel me and my fellow brokers are the scourge of the earth, I ask that you merely look at the banking landscape and who is gone, and why. Certainly there were, and are, plenty of bad guys in the mortgage brokering business, just as there were and are in the banking business, these new laws and regulations do little to change that. Liars will still lie and cheaters will still cheat, but now the honest and solid brokers such as those at Stratis Financial will have more obstacles to providing quality mortgages to our clients as we assist them in obtaining and maintaining homeownership.
Outlook for 2010? More regulations, more policies, more paperwork and fewer opportunities for borrowers. And at some point rates will break and stay above 5% and probably 5.5% before summer.
With little economic news this week Mortgages took their cues off of the Treasury auctions and the stock markets. Yesterday was a microcosm of the market recently with huge intraday swings up and down, the 3rd time in four days the Fannie Mae securities traded inside a range of 50 basis points or more. That is what happens when there is huge government intervention in capital markets; yesterday the mortgage market went from a pretty decent drop (in price) to a large gain when the Feds stepped in and started buying. By the time they were finished the Federal Reserve had crossed the $1 Trillion threshold of purchasing Mortgage Backed Securities in 2009.
Who can compete with a competitor that gets to print its own money to buy what it wants to buy? Keep this in mind when the health care debate reheats and you hear people speak of “competition for the insurance companies.” Right now the only competition for the Fed seems to be the Chinese government which has been stockpiling U.S. debt and dollars.
The little economic news we did have this week was weak. New claims up, consumer sentiment down (2nd month in a row) and the trade imbalance higher—not surprising with a weak dollar and an American consumer making do with the 2007 HD flatscreen for now.
I sense a creeping malaise in the economic data. Now that unemployment has officially topped 10% it is as if everyone is looking around say, “Huh? Now what?” Three-quarters of a trillion in passed stimulus funding was supposed to provide us millions of job, or save them. The only jobs that appear to be saved are those at GM and major recipients of TARP funds; jobs where the U.S. government now has an ownership interest. Since the overwhelming majority of Americans, albeit a shrinking overwhelming majority, do not work for companies being bought in whole or part by the government, a bunker like fiscal mentality is taking hold it seems.
Seeing, reading, hearing about deficits and growing debt in local and state governments Americans observe Federal pols argue over another One Trillion Dollars or more in spending for health care and wonder if they are saving enough. Every level of government to which they pay taxes is out of money, or in the case of Washington printing more of it, and the sneaking suspicion is they will have to pay more to bail them out. Hard to hock a new side-by-side GE Monogram refrigerator to pay for higher taxes, fees and premiums so why buy it?
Back to today and reality for tomorrow. We continue to see a mortgage market that is volatile during the day but gentle through the week. With the added buying from the Fed and more foreign investment our week has seen a gradual increase in prices the past six sessions. We may break through a resistance level that has held firm for several weeks, but every time tested during that period the level has held.
With the volatility I recommend locking rates early to take out any upside risk. The risk is you may lose out on a lower rate, but not much lower given the resistance levels that have held firm. The penalty for losing to a higher rate is far greater however than the benefit of your risk paying off with a lower rate. Be cautious, be prudent.
Mortgage Backs are moving higher this morning, but recent trends have been reversals after traders get back from lunch. As I post this around 10:00 a.m. the trend is higher for MBS, experience lately has said plan on a near flat finish. We’ll see next week if I was right.
30 year conventional 4.625% Down 0.075%
30 year conforming-jumbo 4.875% Down 0.125%
30 year FHA 4.5% Down 0.25%
30 year FHA jumbo 4.875% Down 0.125%
For those of you who experience triskaidekaphobia (thank goodness for spell check), good luck today.
Enjoy a great weekend, between the usual family activities I am available if you need me.
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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