Friday the 13th hit a day early for me and my hard drive crashed yesterday. A new hard drive is being installed on my laptop this afternoon and then the painstaking process of reloading programs and data.
As a result my weekly update will be delayed this week until I have all my tools available hopefully later today, but possibly in the next couple of days.
Thank you,
Dennis
Question of the week: Why is my APR higher than my interest rate? And what is APR? Answer: APR stands for Annual Percentage Rate and it is derived by taking the transaction costs out of the loan amount and using the same monthly payment re-calculating for rate of interest. It can get complicated for those not adept at math, for those adept at math it gets confusing as well. Suppose you are borrowing $200,000 at 5% interest for a 30 year fixed rate mortgage; your monthly payment for principal and interest is roughly $1075 (okay $1073.64 exactly). Further suppose your transaction costs for fees and points, escrow, title, etc. add up to $5,000. To calculate your APR we keep your payment the same, roughly $1075, your loan term the same at 30 years, but instead of borrowing $200,000 we subtract the costs of $5000 and figure you are borrowing $195,000. The rate for a roughly $1075 monthly payment for a 30 year fixed rate loan of $195,000 is 5.224%--the transaction costs equate to about one-quarter of a percent in interest rate. APR is a useful tool when comparing apples to apples and oranges to oranges. From lender to lender some people do not always include all the items that should be included in APR calculations—oops is the response at times when discovered. As well I have seen Truth In Lending statements that do not include mortgage insurance in APR calculations when applicable, if there is mortgage insurance it should always be part of an APR calculation. When comparing APRs between lenders or brokers make sure you have a copy of the Truth In Lending and Good Faith Estimate documents so you can be sure the same items are being applied to the transaction and the APR calculation. One more aspect of APR, generally the lower your loan amount the higher the APR will be for the same loan terms. For example I am borrowing $200,000 at 5% and 1 point and you are borrowing $500,000 at 5% and 1 point. My APR will be higher than yours because the fixed costs associated transaction, such as the appraisal or escrow audit fees or title sub escrow fees, will be a higher percentage of my loan amount at $200,000 than your at $500,000. Again when comparing APRs it is only an accurate comparison if all the same fees are being compared for the same loan amounts.
Have a question for me? Ask me!
We have seen a break in the linkage between the stock markets and the bond markets the past few weeks. For most of the past year mortgage rates have followed stock prices—if stocks dropped several hundred points, mortgage rates dropped a tick or two. If stocks rallied then mortgage rates climbed. With the news this month of the Fed buying Fannie Mae and Freddie Mac mortgage backed securities, the Treasury finally unveiling what may be some semblance of an actual plan to relieve “toxic assets” (smelly loans?) from financial institutions, and a general feeling on Wall Street that there may actually be a stabilization of rules and guidelines and enforcement for them for the credit markets, everyone seems happy creating rising prices in stocks and bonds.
What can break the broken link? It will not take much for us to revert to the historical relationship between stocks and bonds where rates follow the DOW. A big one catalyst would be inflation, and it is The Big One. There are some signs of recovery, or at least decreasing recession, in some of the economic data which points to what I was writing you in January. We may see the bottom of the current economic cycle in the Fall or late 2009. As you recall the $850 billion “stimulus” bill passed last month has almost no funds hitting the economy until Fall 2009, with the bulk of it not entering the economy until late 2010 and early 2011. Combined with the Obama Administration’s $3+ trillion budget proposal that is sailing through Congressional committees and we will have over $4 trillion entering the economy in 2010. After the bottoming out of the recession. Add one more factor of a long period of very low interest rates for those borrowing and we find ourselves with what is known as a volatile situation.
Excess cash and really low rates are very inflationary. There is a ton of cash in our economy right now. Americans are saving at their highest rates in two decades. With a reduction in cash going out for loans and balance sheets flush with TARP funds credit institutions have quite a bit of cash on hand. The losses taken on foreclosures and short sales by mortgage holders are not losses in cash—in fact they are infusions of cash since they “spent” the funds when they made the mortgages. Sure they are reductions in asset values on their books but they are an increase in their cash positions. That cash gets converted when those calling the shots feel investment opportunities have reached price points that are considered bargains. Like when the Dow Jones Industrial Average hit 6600.
When that cash gets converted, while the economy begins its next growth cycle, while the Federal government is in the midst of a huge spending spree, inflation will be the result. And interest rates will rise and rise fairly quickly. Investors always trying to be at least one-tenth a step ahead (when dealing in hundreds of millions one-tenth is a pretty good margin) of everyone else, will start to bet—I mean invest—in anticipation of the markets reacting to inflation and cause rates to increase ahead of the strong inflation numbers.
What does this all mean? It is my opinion that the very low interest rate market we find ourselves in is creating our next high interest rate market and that next market will occur sometime in the fourth quarter of 2009 or the first quarter of 2010. Will we see a sudden jump to 8% mortgages? Probably not. But I do foresee mortgage rates climbing above 6%, possibly up to 7% by this time next year. For those with equity lines tied to the Prime Rate my current guess is by June 2010 the Prime Rate will be over 7% possibly 8% as the Fed tries to stem inflation. I may be off by a quarter or two, heck I could be off totally—but looking at the data I would not bet against me.
We see the High-Balance Conforming, aka conforming-jumbo, join the conventional rates drop; but as you can see the spread is still pretty wide indicating the effects of the Fed and other investors concentrating on conventional loans. As well the penalty on lenders for making high balance loans imposed by Fannie and Freddie are creating an artificially high rate for loans over $417,000. FHA continues to be steady for the same reason—investor funds propping up the conventional mortgages.
FIXED RATE MORTGAGES AT COST OF 1 POINT*
30 year conventional at 1 point 4.625% Down 0.125%
30 year conforming-jumbo at 1 point 5.00% Down 0.25%
30 year FHA at 1 point 5.00% Flat (3rd week in a row)
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.
Happy Birthday Dad! Pops turned the page on another year yesterday and it was another year where I received valuable advise and insight from him. I remember when I was in second or third grade and him trying to teach me how to read the stock quotes in the business section, in sixth or seventh grade and him trying to teach me how to use a Hewlitt-Packard (Stanford men like him) calculator, in high school in Brussels and him trying to teach me about geo-politics and the effects on the dollar and international trade, in college and learning about using credit and creating a budget (how many months was I without any money with only one beer in the fridge?!?), in my first job at Farmers and Merchants as a teller and then in the note department him trying to teach me about patience and taking the opportunity to learn everything I could from everyone around me. I remember last summer a day spent driving several hours across Colorado to visit and old friend of his and learning the values of friendship, mentors and family. Thanks Dad and Happy Birthday!
Do you Facebook? If so “friend” me, I’m listed as Dennis C. Smith!
Have a great weekend,
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.
Question of the week: What happened to you last week? Answer: I find it comforting that you care…seriously several people contacted me over the weekend wondering if I was okay as they did not get my weekly update last Friday, the first one I have missed in a very long time. I am fine, unfortunately my computer was not having blown a hard drive last Thursday morning. A new hard drive was installed late Thursday afternoon, it was configured on Friday, my data backup was reloaded on Friday and much of this week has been spent re-mapping programs to data and trying to catch up. While it was a major pain in the neck to go through the process I was comforted knowing my data was entirely secure and would be recovered.
Major recommendation: I receive no benefit whatsoever from this (unless you wish to put me in as referring source and I am not asking you to) but I highly recommend that you use Carbonite.com for backing up your computer data. I used to use an external hard drive that had an automatic backup schedule, provided I remembered to plug it in and/or I was in my office when it was scheduled to back up. With Carbonite your files are backed up automatically every time you have an internet connection and there is no impact on your ability to work normally. What is really great is you do not need to consciously do anything; every file is backed up when it is created and changed automatically! Carbonite is safe, secure, easy and incredibly affordable—if you want the peace of mind I experienced this past week after losing my hard drive sign up with Carbonite.com.
If you have a question you would like me to answer send it to me!
Big news this week with the Fed agreeing to buy more mortgage backed securities from Fannie Mae and Freddie Mac and also several hundred billion dollars of treasury bills (so as not to crash that market). This had an immediate impact on rates on Wednesday as they dropped throughout the day. There was a fair amount of give back yesterday and this morning as investors took profits from Wednesday investments and more importantly realized that the Fed actions are very inflationary—and we have covered before how much bond investors do not like inflation. End result is for the week we have broken slightly through our lowest rate levels, whether we will stay at this level and begin a new range of movement will not be known for about two weeks.
On a more general economic issue, confidence I feel strongly that the move yesterday by the House of Representatives to single out one particular group of income earners for a specific tax rate will hurt any economic recovery. While many politicians are feigning outrage (I say feigning because many of the most vocal have also been recipients of significant campaign contributions) over the AIG bonuses being paid, they are obscuring from the American people the whole picture; in doing so they have forced themselves into a position of having to make very bad legislation. By taxing the bonuses, contractually agreed to in 2007 before TARP even existed, paid to some of the AIG workforce at 90%, Congress has created the slippery slope of using tax policy for retribution and public lynching of industries with low esteem in the public opinion. What if Congress decided to increase the tax rate on all commissions earned by real estate agents in 2005 through 2007 because they were made on real estate sales for homes that have subsequently dropped in value? What if Congress decided to increase the tax rate on all individuals who did not have health insurance in 2008 to forward fund Medicare? What if Congress decided to retroactively impose a tax increase on all companies that signed contracts with the Federal government for work to be completed in 2009? None of this seems fair but given the actions of the House yesterday these scenarios and more are now feasible.
Congress has spent much of its current session writing legislation that allows contracts to be broken. Contracts are the foundation of our economic system. By allowing contracts to be broken or altered by Congressional decree at some later date confidence in the contract is non-existent. Why should a bank lend you money if later on a judge can completely re-write the terms of the agreement? Why should an individual agree to a salary structure if later on Congress can change the payment of that salary—after the work was done to earn it according to the contract? Without trust and confidence in contractual relationships business, and the economy, comes to a halt. With its actions yesterday Congress applied a lot of pressure to the brakes.
Rates down across the board as the Fed has agreed to purchase almost $1 trillion of mortgage and government debt this week—since FHA mortgages were not part of the plan rates remained unchanged.
30 year conventional at 1 point 4.75% Down 0.125%
30 year conforming-jumbo at 1 point 5.25% Down 0.125%
30 year FHA at 1 point 5.00% Flat
I sent the following today to my Congressional representatives, please contact your representatives as well, the more voices from voters and constituents the greater the chance our message will be heard.
March 10, 2009
Dear Congresswoman Richardson, Senator Boxer and Senator Feinstein,
As your constituent, and a member of the National Association of Mortgage Brokers (NAMB), I am writing to you concerning the recent announcement by Fannie Mae to increase fees for purchasing and securitizing mortgages. The increases, announced in Fannie Mae Announcement 08-38 on December 29, 2008, will undoubtedly force new and higher costs on current and future homebuyers searching for affordable mortgage financing. Imposing these fee increases on consumers during a time when mortgage affordability is needed most fails to protect the consumer and will hinder any efforts made to stimulate the housing market.
I have sent the following to real estate agents and clients in my database, many of whom are also your constituents in Long Beach, as well am posting on my websites for others to actively oppose these moves by the GSEs, I urge you to use your influence to help our housing market recovery in California to continue.
Here is some important information for real estate professionals in California that impacts our housing markets. Our professional associations, California Association of Mortgage Brokers (CAMB) and the National Association of Mortgage Brokers (NAMB) are very active in meeting with Congressional Representatives and Senators to rein in the burdensome requirements and fees Fannie Mae and Freddie Mac (GSEs) are imposing that are shutting down many markets just as they begin to heal.
• Home Valuation Code of Conduct HVCC -This Agreement will shift mortgage business primarily, if not exclusively, to banks, harming consumers by severely limiting competition. Increased appraisal costs will be charged, even though independent and staff appraisers will be paid less. Consumers will see borrowing options curtailed because they receive appraisals that are lower in quality and a less accurate valuation of their housing. The HVCC will require all appraisals be ordered through “national home valuation companies” starting May 1, 2009. I have personally had several transactions where a lender has required an HVCC and our client has been ill served each time. Currently the HVCC companies list of appraisers are those willing to work for 50% or less than what a professional fee for service appraiser charges in the market—you get what you pay for. As well the assignments are made from other areas of the country, so for Long Beach we can get an appraiser from Hacienda Heights or Pomona assigned to us—someone with no knowledge of the area. • Fannie Mae and Freddie Mac are charging unnecessary and excessive adverse market fees in certain areas of the country—including California. In addition, these federal government agencies are also charging additional risk-based pricing fees, which are freezing the mortgage market and preventing much-needed recovery. These fees negatively impact small business mortgage professionals and their consumers by increasing the overall costs of most loans. With these fees lenders are being penalized for having over 10% of their mortgages be for conforming loans over $417,000—in California the fees charged by the GSEs to certain lenders is limiting rate competition and driving down prices.• Another barrier created by the GSEs to a housing recovery are higher fees for investor-owned properties. The GSEs should encourage investor purchases, not punish them for helping to remove non-performing loans from the balance sheets of banks and lenders. In addition, the GSE’s are limiting how many properties they will finance for an investor. Such an arbitrary calculation is not justified and each mortgage should be addressed on its merits.• As you can see in the Fannie Mae Announcement a borrower with a 680 FICO, higher than the national average, buying a condo with 20% down will have an additional 2.25 points added to their loan fees; for a $350,000 condo this will add $6300 to their closing costs—not total but add to. This lessens demand and drops prices further, as well for most buyers in this price range will require the seller to pay the costs as part of the closing transaction, limiting individual sellers, as opposed to institutional sellers like banks, from having those funds for purchasing a new home. The new fees dampen prices and restrict move up buyers.
Here are the bullet points outlined by NAMB on the issues they are addressing with members of Congress in trying to get them to have the GSEs guidelines changed:
• Consumers will ultimately bear the burden of these increased fees. • Many first time buyers are excluded from home ownership, as these GSE fees make purchasing unaffordable. • Homeowners with existing mortgages are prevented from refinancing into more affordable fixed rate loans. • The GSEs did not provide adequate justification for these increases. • How were the “representative credit scores” determined?• How did the GSE’s determine the Loan-Level Price Adjustment Matrix (LLPA) used to calculate these increased fees? • The increase in fees inhibits mortgage affordability, contradicting the core mission of both Fannie Mae and Freddie Mac. • 100% loans were approved through the automated underwriting engines of both Fannie Mae & Freddie Mac with debt-to-income ratios as high as 65% based on gross monthly income before taxes. Credit scores in the mid-500 range were also in the equation. These loans were then granted final loan approval by the mortgage lenders’ underwriters (not brokers) and then sold in the secondary market. • The existing obstacles hindering housing market stimulation compound the fees charged by the GSEs. These include the GSEs not purchasing bond loans, lack of sufficient first time homebuyer programs, no 100% loans available to well qualified buyers, investor loans that are priced our of reach, and no jumbo loans available with favorable terms (no 30 year fixed rate products). I urge everyone with a stake in homeownership and the recovery of the housing market to contact their member(s) of Congress with this message: Make the GSEs reverse their HVCC requirement effective 5/1/09 and rescind the “Loan-Level Price Adjustments” that have either already been put into place or are scheduled to be implemented next month.
As I have been writing for the past few months, our real estate market is seeing a flattening at the entry level, first time buyer level, which will provide the foundation for recovery from the bottom up. The GSEs will kill this recovery with their proposals unless Congress does something about it. Please be active and contact your Congressional representatives today.
Dennis C. SmithStratis Financial Corporation562-243-6912Dennis@StratisFinancial.comwww.DennisCSmith.com
Don’t Forget Day Light Savings Time!! Set you clocks ahead before you go to sleep on Saturday (3/7/09) night!
Stratis Financial Corporation is one of just a few mortgage brokers in Southern California that has been approved by an established California bank to offer jumbo mortgages up to $5 million! Down payments as low as 20% for mortgages up to $2 million available!
Question of the week: What’s in it for me…again? Answer: We continue on the same WIFM theme this week with President Obama’s Homeowner Affordability and Sustainability Plan (HASP) to assist “responsible homeowners” with refinance assistance going into effect on Wednesday. The basics as we understand them are that HASP will use several billion dollars to back up mortgage servicers so they can offer lowered mortgage payments provided borrowers are a) current with their payments and b) their loan balances do not exceed 105% of the home value and c) their mortgage is a conventional Fannie Mae or Freddie Mac mortgage and d) they can qualify for the mortgage with full income and credit documentation. If all the criteria are met and the borrower’s mortgage company has signed up for the program (or received TARP funds) then lender may lower the payment to 38% of the verifiable income and then qualify for lowering payment to 31% of the borrower’s income with the Treasury paying half the difference to the mortgage company. This lowered payment is to be in effect for five years. What we do not know: 1) what is in the modified contract between borrower and lender as to what happens to the difference in the new payment and the old payment; i.e. if your payment is lowered from $2000 to $1500 per month, is the $500 per month for 5 years ($30,000) just forgiven? Added to the loan balance? 2) What is reported to the credit bureaus on modified loans that may impact future ability to obtain car loans, credit cards or a mortgage in the future 3) How long the process will take. Mortgage servicers who are charged with implementing HASP are not staffed to take and process the millions of applications from homeowners that the program is supposed to assist. The mortgage industry has lost over 40% of its workforce since 2007, it is anyone’s guess how long it will take a company to properly staff itself to efficiently handle the number of inquiries and applications that will flood into their customer service departments. What’s in it for you? Once again I have to answer: who knows? Having seen the lack of efficiency and ability of lenders to handle the sales of foreclosures and short-sales the past year I am not optimistic about their ability to handle HASP. For borrowers with equity and the ability to save on today’s rates I would suggest not waiting for your lender to assist you—use a mortgage broker, like me!
With the stock markets tanking again this week we have seen mortgage rates fall again as investors fled blue chips and bought bonds and mortgage backed securities. Since election day stocks are down about 35% and since January 1st the total is approaching 20%--a strong indication that Wall Street investors are not feeling very positive about what has been occurring in Washington D.C. and throughout the economy.
The mortgage market keeps bumping up against resistance preventing a break through to even lower rates, as you will notice on the graph today we are down to the 4.875% level that we have broken through just briefly back in December after our intial long run down in rates. Since the beginning of the year despite the Dow’s precipitous drop, there has not been a corresponding drop in mortgage rates. A betting man might wager we are near the bottom for mortgage rates having rested on or bounced off this level for seven of the past twelve Fridays.
Great news! Besides Stratis Financial being approved to offer quality jumbo mortgage products, California home sales doubled in January 2009 from 2008 with over 600,000 units transferring. While the median prices continue to drop, the number of units sold shows positive activity in the real estate markets throughout the state on the lower end of the price spectrum. This is where the recovery for the housing market begins, and it has begun before any of your tax dollars have been spent on incentives or foreclosure bailouts.
On a couple of different industry blogs I have been attacked and disparaged for my positive outlook for the California housing market, I just reply that I am reading the numbers and speaking to families that desire to own their own homes. The prices have dropped to levels that accompanied by historically low rates have made homeownership affordable for hundreds of thousands of families. And the 625,000 homes transacted in January 2009 in California were purchased with down payments, with full income disclosure and qualifying and for the most part solid credit histories. In other words the mortgages being funded today are the strongest I have seen in my over twenty years in the industry. I believe my positive outlook for California housing is warranted and this spring and summer we could see record numbers of units being purchased if we continue to see rates below 6%.
Rates down across the board as investors shifted their focus from inflation to stock values and poured money into mortgage backed securities and bonds.
30 year conventional at 1 point 4.875% Down 0.25%
30 year conforming-jumbo at 1 point 5.375% Down 0.375%
30 year FHA at 1 point 5.00% Down 0.375%
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
Contact Us | Testimonials | Dennis' Bio | Truth-In-Lending Disclosure Explained | New Good Faith Estimate | Purchase After Short-Sale | Tell a Friend | Home | Loan App Checklist | Site Map | Loan Application | Mortgage Calculators | Customer Login | Are You Pre-Approved? | Daily Rate Lock Advisory | My Blog
Copyright © 2010 Stratis Financial CorporationPortions Copyright © 2010 a la mode, inc.Another XSite by a la mode, inc. | Admin Login| Terms of Use| Site Map
