Dennis' Mortgage Blog

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 1^st 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.

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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