Dennis' Mortgage Blog

Question of the week: What’s in it for me?  Answer:  This, or a variation of this, has been a question I have received several times the past year, more frequently the past month, and most frequently the past couple of days.  “It” referring to any mortgage restructuring policy that has been floated or enacted in the past year, and “IT” referring specifically to President Obama’s announcement on Wednesday when he announced his “Homeowner Affordability and Stability Plan” (HASP).  The very general theme of Obama’s HASP is to create mortgage products for homeowners who are having difficulties making their mortgage payments, or are unable to refinance to current lower rates due to having little, no, or negative equity in their properties.  What is in it for you is not yet known because the White House will not announce details of the plan until March 4^th.  Further what is not known is whether Obama can execute his HASP through Executive Order, or if it will have to pass through Congress.  As we just saw with the “American Recovery and Reinvestment Act” (ARRA), what the White House proposes and what Congress passes are not always the same things.  While the HASP announcement has filled many a newspaper column and talk radio segment, the bottom line is no one knows who it will work, how Fannie Mae, Freddie Mac and various lenders will be able to adopt the plan and what effect it will have on the market in general.  What we have seen is a creep towards full nationalization of Fannie Mae and Freddie Mac, and this creep has not been pleasing to the stock markets, nor necessarily the mortgage markets, as no one knows what will happen if/when the Federal Government takes full control of the Fannie and Freddie.  What’s in it for you?  I have no idea, and chances are no one else does at this time either.

If you have a question you would like me to answer send it to me!

With all the news this week from HASP and ARRA we have had a fairly active market all week.  I want to touch on four areas for my update this week: stocks, levels of resistance, risk based pricing affected by government action and mortgage insurance.  This week’s update is longer than usual, but I hope you find it informative and useful—as always!

Stocks have been down about 18% since January 1^st, the Dow Jones Industrial Average dropping from right about 9,000 points on the last day of trading in 2008 to about 7,400 points at closing today.  There are a few contributors to this drop: market concerns about formal nationalization of our banking industry (I say formal since the U.S. government now owns stocks in most major banks), market concerns about the ARRA and its $800 billion price tag today and estimated $3 trillion cost over the next decade, and perception of a better return and value in other investments—such as bonds, mortgages and precious metals.  Mortgage rates during this same time frame have spiked and fallen back down—and indication of investor flight from all investments for several weeks and holding assets in cash.  This past week we have seen a benefit in our market as investors sold off equities, or stocks, and purchased bonds and mortgage backed securities.  As we move forward if stocks continue to fall 2% per week we should see mortgage rates drop as well.

 Levels of resistance is a market phenomenon I have discussed in the past.  Every market has a range within which products are priced; neighborhoods have a high and low for prices, apples have a high and low price in a group of markets, stocks have a high and low price they will trade between for several days or weeks.  When an upper or lower level of the range is broken through then the market will try to seek a new range within which to transact exchanges.  Example:  Dennis Inc. stock has been closing every day for the past couple of weeks between $5 per share and $6 per share; but for the past several days it has spent some of the day at prices up to $6.25 but each days slips below $6.01 to close at or just below $6.00 per share.  One day it breaks through the $6 mark and closes at $6.10; the next day it closes at $6.12 after trading most of the day at $6.25.  It has broken the resistance level of $6 on the upper end in the next few days will find a new upper limit and lower limit of the range in which it will trade; say $5.50 to $6.30 per share. 

So what does this have to do with mortgages?  A lot.  Regular readers of the Weekly Update know that higher prices on mortgage bonds means lower interest rates.  This past week we have seen mortgage backed securities trading right up against a very strong level of resistance—a triple layer of resistance consisting of the 10, 25 and 50 day moving averages of the MBS prices.  We have not been able to break through this barrier and as a result several times this week mortgages have hit the resistance and prices have then dropped back down and rates inched back up with them.

The combination of stocks falling and mortgages pressuring the triple resistance layer indicates a possible strong shift in our mortgage rate range should this resistance be broken next week.   Keep an eye on the stock market, if prices continue to drop those resistance levels get a lot softer for mortgage rates to drop a bit lower.

Private mortgage insurance companies are over-reacting to the losses they are accumulating from past mortgages and are starting to punish new homeowners.  California has seen strong restrictions in place on condominium transactions, high balance conforming transactions and may soon see an evaporation of mortgage insurance available in the state.  What does this mean?  Either low down payment borrowers will have only FHA financing available or Fannie and Freddie will have to come to market with self-insured mortgage products (which I personally feel they should have always had to model the FHA programs).  For those looking to purchase in the future with less than 20% down I strongly suggest your pre-qualifications are under FHA qualifying guidelines.

This past year we have seen an increase in risk-based pricing; Fannie and Freddie have had “add-ons” to their rates and prices for loan to value, occupancy, FICO scores, a range of factors.  In the past because of the small price spread between each level of rate we have been able to absorb the add-ons with little impact to the borrower.  If a product had an add-on of half a point (0.5% of the loan amount) for non-owner occupancy the typical rate differential to make up the added fee was 0.125% in rate—moving a borrower from say 5.25% to 5.375%.  Currently the same half point add on in fee can take up to 0.75% in rate to accommodate the change due to lenders very adverse stance towards rebates paid out on mortgages; this is due not only to a dropping rate environment but even more so because of Federal officials, such as Senators and Presidents, giving speeches saying they are going to create low interest rate programs or mandate low interest rates for homeowners.  The banks do not want to pay out of pocket to purchase a mortgage only to see the borrower refinance the mortgage in twelve months because of HASP or some similar proposal that becomes national law.

Reaction to stocks, mortgage rates in decline, mortgage insurers pulling out of markets and government announcements, all have an impact on John and Maria who want to purchase a home—some positive and some negative.  Underlying all of this is that it is a great time to purchase a home given the prices and the rates, the affordability index in California (percentage of families who can purchase the median priced home) is at the highest it has been in almost a decade.

Rates dipped (conventional) and dropped (conforming-jumbo and FHA) this week:

FIXED RATE MORTGAGES AT COST OF 1 POINT*

30 year conventional at 1 point 4.875%                     Down 0.125%

30 year conforming-jumbo at 1 point 5.50%              Down 0.375%

30 year FHA at 1 point 5.00%                                    Down 0.500%

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.

I hope your week was as great as mine was.  We added Harrison, a six month old Smooth (short hair) Collie to our family on Monday and he has been making himself at home and on Thursday we celebrated my youngest daughter’s 7^th birthday—nothing makes a home more homier than little kids and puppy dogs!

Have a great weekend,

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.