Question of the week: It’s time for a refresher course for many of us, can you please explain how mortgage rates are determined?
Answer: This is a good week for our refresher on how mortgage rates come about since we have seen from last Wednesday to close Thursday the largest one week jump in mortgage rates since the first week of October 2008, when TARP was announced and $750 billion pledged to save the credit markets (my weekly update for 10/10/08 here ). What causes mortgage rates to go up and down? It is a very complex and complicated market, I will try to strip it down to basic principals and give an overview rather than detailed commentary:
Short version: How are mortgage rates determined? By supply and demand setting prices, the higher the prices the lower the rates; demand is determined by investors expectations of what will happen in the economy in the future. If investors think there will be inflation they will require a higher rate of return, demand will shrink and rates will go up.
Longer version (for those interested in the nitty-gritty. For those who are not skip down further for rates and update): Mortgages are like any other commodity or service, their price depends on supply, demand and competition (I will leave government intervention out of the equation for ease of understanding—though it is significant). When a mortgage is funded for a homeowner the lender has an investment, the value of the investment is determined by the rate of return, or interest, collected. Lenders, for the most part, do not keep their mortgages but rather bundle them into huge pools of $25 million or $50 million worth of mortgages and sell them to Fannie Mae or Freddie Mac for conventional mortgages, or Ginnie Mae for FHA or VA mortgages.
By selling the mortgages the lender reloads on cash, which they then use to fund more mortgages. Fannie/Freddie/Ginnie meanwhile take the bundled mortgages and invite investors to participate by selling what are known as Mortgage Backed Securities (MBS). The MBS has a stated rate of return and investors purchase the securities as they would a stock or United States Treasury Bill. The more investors that want to purchase MBS at a certain rate of return the higher the price for MBS, the fewer investors that want to purchase MBS the lower the price.
It is important to note here that the higher the price on bond type investments which pay consistent rates of return in interest, like mortgages, the higher the price the lower the yield or interest rate; conversely lower prices mean higher rates. Like any investment or commodity or service, low prices attract more buyers, more buyers means increased demand, increased demand leads to higher prices—higher prices mean lower rates.
Bond investors and MBS investors tend to be the same group looking for the same result: guaranteed rate of return fixed for a long period of time. I invest $10 million today in a MBS with a rate of return of 5% for the next 30 years, granted most of that will be paid off as mortgages pay off, but I am committed to locking up my investment for a long period of time. So to invest in bonds or mortgages one is looking for a steady long term return on the investment and the money is not subject to the daily ups and downs of the markets.
So what drives the demand for the MBS market? Like any other investment those putting in their money desire a return, they are willing to forego some profit for the stability of the investment, but like any investor they put their money in depending on their best guess as to what will happen in the future and how they can maximize their return. If you are convinced that Dennis Corp is going to lose its business in December you would not buy stock in October; conversely if you are convinced Dennis Corp is going to bust out with growth and income in January and the market for the stock has been flat you would buy up shares looking for a nice profit once the company does what you expect. Bond investors look long term and try to determine what will be happening in the economy and therefore the returns they are getting for their investments. Based on their estimates they determine how much they are willing to pay for MBS.
Bond investors hate inflation. Inflation erodes the value of the dollar in the future, a dollar today is worth only ninety-five cents in one year if there is 5% inflation. Inflation erodes the purchasing power of your paycheck and the purchasing power of your savings. If you save $100 to purchase a Nintendo for your child at Christmas and inflation raises the price of the toy to $105 you do not have enough money saved due to inflation.
If you are invested in bonds with a 5% rate of return and inflation is at 5% your effective return on investment will be zero—the funds you earn will be worth less due to inflation eroding the purchasing power of the interest revenue. So if a bond investor thinks there will be inflation in the future he will require a greater yield, or return, on the investment to ensure inflation will not wipe out his investment gains.
This past week we had the head of the biggest investment company talking about inflation and degrading the bond ratings for U.S. Treasury bills, we had a major investor on Bloomberg saying he felt inflation in the United States would be “Zimbabwe-like” (over 200%), and we had the U.S. Government dumping several hundred billion dollars of treasury bonds onto the market.
The first two events created perception and anticipation of inflation, causing bond investors to demand a higher return on any investments—which pushes rates higher. The third event by the Treasury flooding the market with bonds created an excess of supply to demand; whenever supply exceeds demand prices must drop; as stated at the beginning of this missive prices drop and rates go up.
Have a question for me? Ask me!
Against the backdrop of the four previous days of rising rates we have seen prices climb on MBS today—which you just learned means rates drop. As I write this just before noon on Friday we have gained back almost three-quarters of Wednesday’s losses, a huge comeback in a short time frame.
I rarely say this, given the technical aspects of the Mortgage Backed Securities market I look to float any locks into early next week to see if we can greater gains in rates. We’ll see if last Wednesday signaled the end of the bottom or if we will see rates get back down to below 4.75% on conventional mortgages.
Rates jumped this week—Wednesday was the biggest one day move in several months, and the four day trading period of last Thursday, Friday, Tuesday (market closed for Memorial Day Monday) and Wednesday was the biggest four day sell off I can remember. It was nice to see some profit taking hit the market yesterday and more investing today in MBS. Monday should be interesting! If I had posted the rates for today on opening they would read a lot differently than they do now—good market day!
FIXED RATE MORTGAGES AT COST OF 1 POINT*
30 year conventional 5.00% UP 0.125%
30 year conforming-jumbo 5.5% UP 0.125%
30 year FHA 5.375% UP 0.125%
30 year FHA jumbo 6.00% NEW Quote added!
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.
We are around all weekend doing normal activities, if you need my assistance please call and if you miss me I will get back to you as soon as I can.
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.
Question of the week: Last week you explained how the bridge loan using $8000 tax credit for first time homebuyers may work, this week can you explain what happened to the loans?
Answer: This past week I fielded many questions following my update last week where I addressed the announcement by HUD Secretary Donovan to allow lenders and non-profit entities to make loans to FHA borrowers collateralized by the $8000 tax credit available to first time buyers in 2009. The number one question from borrowers, agents and even a reporter with the Orange County Register was: Is there such a loan program or not?
The answer is: NOT. There is no loan program and as I explained in my response to OC Register reporter Marilyn Kalfus, this was a case of senior HUD leadership conceiving a plan to expand homeownership without consulting others in their department who understand how FHA loan work and what their policies are. As a result Secretary Donovan made and announcement and HUD posted a Mortgagee Letter, for a program that is not allowed under FHA guidelines.
Why the kerfuffle? Once HUD posts a Mortgagee Letter on its website it is official HUD policy. Lenders who are approved to originate and fund FHA mortgages monitor the HUD website daily to keep up with guideline changes that affect the underwriting and funding of FHA mortgages. HUD posted a Mortgagee Letter stating HUD would allow lenders and non-profit entities to provide “bridge-loans” for FHA applicants pledging their tax “credits” of up to $8000 for qualified first time buyers. Not too long after I wrote my weekly update last Friday HUD pulled the Mortgagee Letter off the website---ooops! Sorry about that folks, never mind!
It is very rare for a Mortgagee Letter to be rescinded or pulled off the site. The official word has been that the approval of bridge loans has not been rescinded, and yet it is not in effect either. It appears that HUD leadership needs better communication with its own Department as to policies and guidelines before sending the Secretary out with a new policy that are against its current guidelines, and oh by the way lenders are unable to fulfill.
Sorry folks, no bridge loans. Please note however that FHA, which has a maximum loan amount of $729,750 at this point, does allow gift funds from relatives for down payment and closing costs. And if you qualify you can receive $8000 from the Federal Government to spend how you wish, or to repay any debt, after closing. Get it?
A diverse range of economic news this week. Unemployment continues to climb, which usually helps mortgage rates. Minutes from the Federal Reserve Open Market Committee meeting were released and it looks like the Fed will purchase an additional $500 billion in mortgage backed securities (MBS)when they finish with their currently in process purchase of $1.3 Trillion (I think Trillion should always be capitalized when preceded by a $ sign) which usually helps mortgage rates. The stock market had a few hits this week which usually helps mortgage rates.
All was looking good for rates until yesterday when MBS fell through two levels of support when Britain had some negative news. The negative slide continued today and we had a net loss for the week with rates higher than last Friday. Much of the drop in MBS, in my opinion was profit taking and investors moving into cash in front of the long Memorial Day weekend. Today trading was light so any trade had an exacerbated impact on the market—in the end there was more selling than buying.
Home sales in California were 80% greater in April 2009 than in April 2008. Don’t we know it, mortgage applications in the industry were the highest for any month in almost six years as the start of the traditional home buying season—spurred by IRS filings—and constant low rates propelled home buyers and owners into escrows. Because of this we have seen some lengthening of turn times throughout the process, combined with the new HVCC I maintain my counsel of patience.
Regarding the Home Value Code of Conduct (HVCC) I posted on my website some information from the National Association of Mortgage Brokers. They are collecting stories from real estate agents, mortgage originators and the public if they are adversely affected because of having to go through the HVCC process as opposed to the traditional process where local appraisers are used. If you have a story to tell please send it in, the more stories collected the greater the chance our allies in Congress can get the HVCC overturned.
Read all your mail! Credit card companies have a habit of using innocuous looking envelopes for important announcements; I am guilty of tossing a few in the past. With President Obama’s signing today the credit card reform bill we can expect changes from our credit card companies. One major change I have been hearing is charging interest on all charges from the moment of purchase as opposed to just charging interest on balances that carry over from one month to the next. It is estimated that the new law will cost credit card companies over $100 billion, they will be looking to replace that lost revenue from somewhere and the easiest place is from their best customers. So keep an eye on your mail and read your credit card agreements for changes that may impact you.
Rates jumped this week—almost all of it occurring on Thursday with a little encouragement today for them to stay up. Looking at the chart we are at the high end of our 60-day ranges on all products.
30 year conventional 4.875% UP 0.25%
30 year conforming-jumbo 5.375% UP 0.375%
30 year FHA 5.25% UP 0.25%
A friend of mine sent this link today, Memorial Day: More Than Just A Day Off Work written by a member of the United States Air Force. It gives a nice history of the holiday and reminds us of what we are celebrating: the lives of those who have died protecting our freedoms and liberties. God bless them and their families, not just this weekend and this holiday, but every weekend and every day.
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Have you or a client experienced problems, financial hardship, cancelled purchase transactions or otherwise been negatively affected because of a poor appraisal under the new Home Value Code of Conduct (HVCC)? If so I encourage you to tell the National Association of Mortgage Brokers (NAMB) the details at hvcc@namb.org.
From NAMB:
Please let your stories and impact be told so we can get this policy overturned and get our excellent appraisers back into our transactions.
Higher loan limits are back in qualifying counties: $729,750
Question of the week: Can you explain how the $8,000 tax credit advance from the Federal Government will work?
Answer: No. Next question? Okay I'll try....On Tuesday HUD Secretary Shaun Donovan announced at a meeting of the National Association of Realtors that HUD would allow lenders and other entities to provide short term loan to FHA mortgage applicants so they can use all or part of their $8000 tax credit for down payment and closing costs. Earlier this year it was announced that new homeowners eligible for the $8000 Tax Credit Assistance Program (TCAP) could apply to receive the funds in the current year rather than wait until tax returns are filed for 2009. Now with the announcement that HUD will all FHA applicants to receive loans against their TCAP funds more applicants will be able to take advantage of the credit to actually purchase a new home.
How will the new program(s) work? I have no idea and neither does anyone else at this point. With the announcement that HUD will allow bridge loans against TCAP loans from non-profit entities and FHA lenders came some guidelines that must be followed for the loans. Now lenders and non-profits must configure programs and qualifying guidelines for the loans in order to get them to mortgage applicants. It will take a few weeks probably for lenders to come out with their guidelines and programs to meet the bridge loan criteria that must be met for HUD eligibility, patience is counseled.
It is important to note that this announcement only applies to FHA mortgages and not Fannie Mae or Freddie Mac mortgages. Further, not all home buyers will qualify, to be eligible you must be a first time buyer, you cannot earn over $75,000 per year as an individual or $150,000 as a married couple and the credit is for up to 10% of the purchase price not to exceed $8000 (easily obtained in California).
Also very important to note are the terms of the TCAP bridge loans that will be offered through various non-profit entities and banks. Before rushing to sign up for one of the loans I caution applicants to carefully research the terms of the loan and the repayment costs and terms.
Finally, keep in mind that FHA allows for gift funds from family members for all applicants. While the donor will sign a gift letter announcing no expectation of repayment it is impossible for anyone to prevent repayment of the gift at a later date…say when a tax credit is received. Gifts can be so much simpler than loans.
In the meantime, just as when higher loan limits were announced, the announcement is far ahead of implementation; until the news is converted to programs we have no ability to direct anyone where to get there TCAP loans. It is an important announcement as it is expected that 50-55% of families buying homes in 2009 will be first time buyers, most of whom will qualify for the TCAP.
Yesterday we had some up and down news, after encouraging labor market numbers last week showing a slowing in initial jobless claims (this used to be called unemployment but we are in a kinder more gentler place), this week showed a jump in applications which is good news for bonds and mortgage rates. Not so good for mortgage rates was the announcement that the Producer Price Index (inflation index) rose higher than expected in April, up 0.3% (or 3.6% annually) which is higher than the prime rate. As you know bond investors are allergic to inflation and any whiff of it can make them sneeze—and sell off bonds causing rates to rise.
Looking forward as we head to summer we will most likely see a steady rate market remaining within the range we have established over the past several months with conforming rates holding below 5% and FHA rates hovering at or just above 5%. The biggest factor that can impact mortgage rates is when and how will the Federal Reserve stop buying mortgage backed securities. Currently the Fed is propping up the mortgage markets and keeping rates depressed to current levels with massive buying of MBS from Fannie Mae and Freddie Mac. If this buying effort stops abruptly, or before the capital markets are ready to purchase MBS investments we will see a spike in rates.
Until the Fed pulls out of MBS markets our rates will be subject to economic information and data displaying where we are in terms of the recession bottoming out or recovery beginning. As always keep your eyes on inflation first and foremost. With the closing of up to 1500 auto dealers nationwide and now government funds being poured into major insurance companies that are not AIG we can expect rates to remain stable as investors see a continued weak economy.
A drop in conforming and hi-balance conforming for the week as a result of both the Fed’s buying activities and the economic data of job losses, car dealers closing down and some teetering of major insurance companies. We have broken through a key level of resistance heading into trading today, this morning the market opened up reversing prior gains so we will see if the lower rates stick.
30 year conventional 4.625% Down 0.125%
30 year conforming-jumbo 5.00% Down 0.375%
30 year FHA 5.00% FLAT
I will be unavailable much of the afternoon today as I barbecue about 30 pounds of tri-tip and then bring them over to the Patrick Henry Elementary School Carnival where they will be for sale to raise money for our PTA. A day of smoke and sauce and kids—I love it! Come on by and have a sandwich!
Finally, if you are like me and like to visit the poll to vote instead of sitting on my couch and punching an absent ballot, I encourage you to vote No on all the Propositions on the ballot on Tuesday. California’s government has doubled in size in the past ten years while cutting services for its citizens. We cannot give our Legislature and Governor more money to spend on expanding the government, we need to put a stop to it. My motto has become: Quit enabling Sacramento while disabling our schools and communities, vote NO! My thoughts expanded here for those interested.
Do you Facebook? If so “friend” me, I’m listed as Dennis C. Smith!
Question of the week: In order to get pre-approved you want to run a credit report—doesn’t that hurt my credit score?
Answer: First, if you are serious about getting pre-qualified or pre-approved for a mortgage you must expect your credit report to be run; personally I will not sign or issue and letter of qualification or approval without a credit report I have obtained for the borrower(s). Second, no it will not lower your score to have me run your credit report, unless you have had several reports run over the past several weeks from several vendors/lenders. The credit scoring model takes into account that a consumer may speak with more than one lender to find who they want to work with (it is my hope obviously that those calls begin and end with me, but I am conscious of the reality that more calls may be made!) and as such more than one credit report may be run on a borrower. If a borrower has two or three, possibly four, reports run in a short time frame of a few weeks all from within the mortgage industry there should be no impact on the borrower’s scores. If however during the same period there are inquiries from credit car companies, auto dealers, mobile phone providers, it is apparent the individual is applying for credit all over the place—this will impact a score negatively.
When getting prepared for qualifying and getting credit approval for a mortgage please have ready name, addresses (two years), dates of birth, social security numbers, income information (amount, how paid, employer—2 years) and asset information (bank/investment/retirement accounts, numbers and amount in the institutions—as well bring up any large deposits not part of normal income); have this information for all borrowers. Be prepared to provide pay stubs, most recent year W2s, most recent year Federal Tax returns (all schedules not just first or first two pages—note we do not need the state tax return), and asset statements from the past two months or quarter.
Alert One item that we have constantly been battling as long as I have been in the industry is the bank statement. We need all pages, regardless of what is on the pages. If a statement says “Page 1 of 5” we need all five pages; if page five has no account information on it but is merely the legal language of the bank, if it says “Page 5 of 5” on it we need it. As well, some banks or investment houses print on two sides—we need both sides. Verification of funds is one of the number one delays we have in the industry, much of it because we are unable to get the full statements in a timely fashion.
Helpful Suggestion: Do not like to keep paystubs, bank statements, etc. but thinking about buying a home? Get a pendaflex or other file or box. Until you close escrow on your new home, whether one month or six, put in the box every financial document you receive during the period. Do not try to determine if it may be necessary or not, just throw it in the box. When the time comes I will be happy to sort through your box and pick out exactly what we will need. When escrow closes you can shred the contents—or bring it by my office and we will put in our shredder bin. If it has your income or assets on it save it until you close.
Thank you everyone who has contacted me with questions about the HVCC, and other issues, this past week. Earlier in the week a few members of Congress were carrying an amendment to another housing bill that would eliminate the HVCC requirement. The industry was hoping it would get dropped before last Friday but obviously it was not, our hopes now rest on members of Congress using the legislative process to amend a bill rescinding the Code. I will keep you informed.
Believe it or not, many don’t, we had some more positive, or at least less than negative news this week on the economy. First, while the economy is still shedding jobs it is doing so at a slower rate—not good news if you are the sheddee but from a national perspective good news that the trend is slowing. Second, while the “stress” test for the banks evidently shows some are still in need of shoring up, most banks are actually doing pretty well and recovering. I don’t much trust the test since it was easy to establish a criteria that determined the desired result, which creates and excuse for Federal ownership of some banks. Third, Chrysler may finally be out of our Treasury, perhaps GM is next and perhaps that will stop the run on taxpayer funds propping up private industry…perhaps. All this data led our mortgage investors into sell mode and we saw large losses yesterday. Thankfully the sell off was after a positive early part of the week and more Fed investment in the mortgage markets.
For the week we see a slight dip in conforming rates as a result of a good early part of the week holding back yesterday’s losses. Hi-balance conforming and FHA remain flat.
30 year conventional 4.75% Down 0.125%
30 year conforming-jumbo 5.375% FLAT
Happy Mother’s Day to the moms! I am lucky enough to live with the best mom around and know all the love, happiness and wisdom she brings to our home and our children. My mom was not a fan of Mother’s Day, “I shouldn’t have to have a special day, every day should be Mother’s Day” she would tell us. Mom was right!
Question of the week: How will the now in effect Home Valuation Code of Conduct (HVCC) affect me as a mortgage applicant?
Answer: On Wednesday I provided a rather detailed explanation of the HVCC process to real estate professionals and posted it on my mortgage blog so I will avoid the process description here—the only amendment I will make to those comments is as we move into the requirement for HVCC some lenders are treating the ordering process differently than I described and allowing us to choose which national service we can order through. As well, as the industry begins to use the HVCC process and sees the flaws and bottlenecks I am sure there will be some changes in the processes and regulations.
From a borrowers perspective the HVCC requirement creates a couple of significant changes and impacts. First, be prepared to supply a credit card number and authorization at time of your application to order the appraisal service, or be contacted by the selected appraisal service further in the process for the information; the first option will speed up the process.
Second, do not sign any offer to purchase that does not have the Appraisal Contingency clause (item 2.J in the C.A.R. contract) unless the box, and only the box, checked is that the appraisal contingency is removed when the loan contingency is removed; or amend the section to state the appraisal contingency is not removed until xx days (I suggest 3-5) after borrower receives a copy of the appraisal. This is an important factor as the control of the timing of when the appraisal will be completed and delivered is now out of the control of the originator and in the hands of the appraiser—who we do not select, and the appraisal service—who in some cases we do not select.
Third, be prepared for escrows to lengthen beyond what has become an industry standard of thirty days as we await the appraisal with no control in contact appraiser to find status. This also impacts the time frames to lock in rates—instead of 30 days we may have an industry standard of 45 days. Until we go through several of the transactions over a month or two we will not be able to determine what will become the standard time frame. Note that there are only a handful of appraisal services nationwide that are approved by the lenders. Effective today they will be handling the processing of every appraisal in the nation for every Fannie Mae and Freddie Mac mortgage—how well prepared they are for the incredible volume they are about to be hit with is unknown.
Fourth, the accuracy and quality of the appraisals will not be of the standard many of us are used to given that we are no longer able to contact the experienced, professional and proven appraisers we have been working with for many years. This may involve appeals, re-certifications, etc.
My advice is this: This process was is in effect and until Congress changes it we will have to live with it. Many of us in the mortgage industry have written and contacted members of Congress (my letter to my Congressional “representatives” is here), I invite consumers and other real estate professionals to contact their representatives, particularly with stories where American home buyers or those looking to refinance have been adversely impacted because of HVCC. In the meantime we have to work with the process, it will take patience and communication between all parties to follow the process and be prepared so the best result can occur for you the borrower.
***It is very important to note that the HVCC does not apply to FHA mortgages but only to Fannie Mae and Freddie Mac mortgages. These rules apply on all Fannie/Freddie mortgages across the country regardless of who is the originator.
This week has seen a drop in prices for Mortgage Backed Securities (MBS), which many of you know means a hike in rates. Initially MBS prices rose, and rates dropped, on the news of the swine flu epidemic, the prices hit a hard level of resistance and bounced down. As this was happening we had economic news and Fed statements which all indicate the recession is weakening (strengthening?) and a bottom is becoming more apparent. Americans are saving money at a faster clip despite not earning as much, which is not great news for retailers today but good news for retailers in the future. The stock market had a good week which caused more investor funds to flow from mortgages to stocks.
As we look ahead I continue my stance of our being in the very bottom section of the bell curve, whether we are at the rate bottom yet, approaching it or even having passed it by, is not known and will not be until some time after we pass it. I do feel however that with the economic news we are getting heading into summer the length of time with rates consistently below 5% for conforming mortgages is getting shorter.
Rates for Fannie and Freddie climbed this week, especially the “high-balance” or conforming-jumbo as the Fed bought more MBS for mortgages below $417,000. As you can see on the chart the conforming-jumbo product still has not found the amount of stability we have seen in the “regular” conforming loan products—which may be a factor in the very limited products for true jumbo mortgages.
30 year conventional 4.875% UP 0.125%
I am pleased to say I am taking an afternoon off today. A few of us from Stratis Financial will be playing in a golf tournament benefiting the Coast Guard Auxiliary of Huntington Beach. A fun time for a good cause and some needed time away from the phone and keyboard. Any inquiries will be responded to on Saturday, thank you in advance for your patience and support of my mental refresher!
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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