Dennis' Mortgage Blog

September 30th, 2016 11:04 AM


Question: Why would someone use an app for something as important as a mortgage?

Answer: Great question from a 9th grader sitting on the couch when an ad came on the television. It was prefaced with, “when I first saw this ad I thought, ‘this company could put dad out of business. Then I thought, ‘why would someone use an app for something as important as mortgage?’”

There is most likely some environmental bias having spent her 14 years listening to Dad talk about mortgages, but it is still a great question, why would someone entrust something as important as their most expensive financial obligation to a computer program and some unknown person or people perhaps in some foreign company?

The personal computer revolution has commoditized many segments of the economy and combined with the advent of big box stores has brought to the forefront for most consumers the instinct to get something for less. But what have we sacrificed in doing so? Quality? Service? Accountability?

Airline tickets, groceries, books, ratchet sets, cabinet fixtures, beds and more can be purchased and delivered to you without ever speaking to anyone or actually seeing or touching the product—in the case of books without ever touching the book. Even medical and legal advice can be had with the click of a mouse. And of course mortgages are also available in the click-click economy.

But is diagnosing a skin rash that could be skin cancer, setting up a trust for your estate or financing your home on a similar level of importance as getting a flight to and a hotel in Nashville or a set of high ball glasses for your brother’s birthday?

When someone uses an on-line app or large call center for their mortgage this is what they miss:

Personal service: When we speak with clients about their mortgage, whether purchasing a first home, investment property, refinancing or whatever their need is, we engage in a conversation that is more than how much do you owe, how much do you make. What is the purpose of the mortgage? What are your long term plans? Would it make sense to pay bit more and get a lower rate or increase your payment a little and save on costs? Are there special considerations regarding your income, employment, credit, source of funds to close, property with unpermitted rooms? In essence much like a doctor reviews your medical history during an examination before completing a diagnosis and suggesting treatment a good mortgage professional will also engage in a thorough examination before presenting mortgage options. My Samsung Galaxy cannot do that.

Accountability: You can touch us, come into our office and shake hands, have a cup of coffee or other beverage and talk about what you need, or what problems may or have cropped up. Should something go wrong or need immediate attention you have our phone numbers that are direct dial and not through a myriad of push 1 push 5 push 3 then hold. There is only one point person for your mortgage and it is the same person you initially spoke to when discussing ability to qualify and mortgage options through the application and collection of supporting items through ordering and signing loan documents through closing and for any questions you may have for as long as you need after your loan is funded—be it five days or five years. Every step of the way we are accountable to you for ensuring you are informed on what is happening and why, when the current step in the process will be completed and when the next is expected to start and be completed. Because our business is solely referral based we go the extra step to make sure everything occurs as planned with you, we know if it doesn’t then we not only failed you but also failed to possibly secure future business.

Knowledge:
Yesterday was the 17th anniversary of Stratis Financial, next year will mark 30 years since I received my license from the Department of Real Estate and began in the mortgage industry (sidebar real estate licenses are chronological, mine is 00966315, today licenses being issued are above 01999980—that means over one million licenses have been issued since I received mine). Our company has hundreds of years of experience in the industry between our originators and staff. We have funded thousands of loans at Stratis Financial and tens of thousands of loans if counting the totality of our careers. There are very few circumstances we have not encountered before, and if we do come across an issue or problem we personally have not seen the depth of experience we can draw upon for solutions is as deep as any mortgage company in the region, much state or country.

Value: I tell clients you can get on the phone or internet and always find someone marketing a “cheaper” loan. But there is a big gap between marketing and closing, and between closing when and how intended and just getting it done when it gets done. Do some companies have lower rates, fees, costs? Most likely. Are we competitive with the market? Absolutely. And when you add in the support, service, ability to minimize the amount of time and resources you need to expend to get your loan closed then we are perhaps the best value in the market. Not saying we are comparable in regards to the big picture of life, but your shelter and biggest financial commitment is a pretty big deal, that said would your shop the cost of doctors and hospitals if you or someone in your family needed an very delicate operation? Most likely not. The advantage we provide is our ability is akin to the top surgeons in any field but the rates and costs we provide are closer to your family doctor than the best surgeon. (That’s probably a poor analogy but I hope you get my meaning.)

Relationship: As mentioned above, once we fund your loan you are not a file number, you are a client for as long as you choose to be one. We have clients that we first met decades ago, worked together on several home purchase and refinances and now working with their children on their mortgages. This is because we care, if we did not care all of our transactions would be one and done and looking for the next one---in which case we would be spending significant money on media advertising, on-line presence and marketing to capture that one phone call or on-line application for another client we will never speak to again. That is not us. You will not hear our ads on the radio or television. You will not see pop up ads when you go on-line. You will not receive telemarketing calls. Because the business we want, the business we get and the business we do very, very well is referred to us from clients and business partners. And they refer us because we are very good at what we do, we provide tremendous service and personalize that service and we succeed at funding the mortgages you need.

Why use an app? I use one to get Dodger tickets, but when it comes to my home and biggest check I write every month I’d rather have someone I trust to speak with and work with through the process.

Have a question? Ask me!

Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.

A bit of positive news for the economy this week as the second revision for 2nd quarter Gross Domestic Product up GDP growth to 1.4% from its prior estimate of 1.1% and the estimate for 3rd quarter growth is 2.5-3%. The news is slightly mortgage rate unfriendly, especially if the estimates for 3rd quarter growth are accurate.

Not as positive was data released today for personal income and spending. Since consumer spending is 65-70% of our economy future economic growth is very dependent on people buying goods and services, and to do that they need to earn money. Personal income in August just 0.2% in August and spending for the month was flat, as in 0.0% growth. Prices inched up 0.2%, negating income comes and year over year prices are up 1.0%, though the core price index (strip out food and energy) rose to 1.7% annualized approaching the Fed’s 2.0% inflation target. The news is mostly mortgage rate friendly.

Rates for Friday September 30, 2016: Rates remain unchanged from last week and we remain in our tight little band where rates have been for several months. Technical factors are pointing to a possible drop in Mortgage Backed Security prices in the near future which could lead to higher rates. My advice remains to lock in your mortgage rate when you can through the end of your escrow period.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS
30 year conforming 3.25% Flat
30 year high-balance conforming 3.50% Flat
30 year FHA 3.00% *** Flat
30 year FHA high-balance 3.25% *** Flat

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down (3.5% for FHA) with 740 FICO score for purchase mortgages. ***FHA rates have may have no points and credit towards closing costs, changes daily.



Tomorrow kicks off the best month of the year for sports fans as all four major sports are underway. Baseball playoffs and World Series, professional and college football seasons enter there midpoints, the NHL and NBA start their seasons. Before cable my friends and I would spend many a weekend with two or three televisions stacked up in a dorm room or someone’s apartment constantly changing which game was on the color t.v. and moving antennas to get clearer pictures. I still wonder why our grades tended to dip a bit in October….

Summer is still clinging to us this weekend, I am ready for it to let go and give us the cool, crisp mornings and afternoons.

Have a great week,

Dennis

Missed a Weekly Rate & Market Update? You can catch up as all the updates are posted on my website at http://www.denniscsmith.com/MyBlog .


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Posted by Dennis C. Smith on September 30th, 2016 11:04 AMLeave a Comment

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September 23rd, 2016 11:51 AM


Question: Why shouldn’t I get 20% discount from retailer to apply for a credit card?

Answer: This question came up in a backdoor sort of manner with a client who has a blemish on his credit report from a credit card company that mismanaged his account. The reason he had the account was he received a discount from a retailer when he applied for the card as he was paying for his purchase.

Stores are starting to put up Christmas decorations (remember when they waited for Thanksgiving, and then they at least waited until after Halloween?) and that means many of us will be wandering the malls looking for that perfect reindeer and Santa sweater for Aunt Nellie and the moose slippers for Uncle Burt. Once we reach the register the dutifully trained sales associates will inquire if we want 10% off our purchase by applying for a credit card, with possible additional incentives of higher discounts for first five purchases, etc.

Instincts tell most people to say “sure!” because who doesn’t want to save 10% off?

My advice has always been, and will continue to be, say no to the new card. This is for several reasons.

First, most of the sales associates you see in stores at the holidays are temporary hires. While many of them are outstanding people, some are not as upstanding and it is easy for them to take your personal information you are giving them for the credit card application to use on their own in the future—social security number, address, driver’s license number, etc. It happens and you do not want to be a victim of identity theft.

Second, if you charge your items on your new card at point of purchase the bill will come in several weeks with a nice option to make the minimum payment due, or make no payment until after the holidays.

When the bill come you think, “Hey, it’s the holidays, I’ll make the minimum payment now and catch up and payoff the remainder of the balance in January.” Next thing you know you carried the balance until you receive you tax refunds in April, while paying 21% interest on the items you saved 10% on at the register.

Third, the inquiries that have the biggest impact on your credit score are inquiries for credit cards and department store cards—auto loan and mortgage inquiries have no to minimal impact. That 10% savings on some sweaters, scented candles and slippers may knock down your credit score below a threshold that kicks in a higher interest rate on your new mortgage or auto loan. That higher interest rate over time can cost you more over time than the 10% savings on your purchase.

Finally, 10% sounds like a lot but if you break it down the savings is often not that great. I have stood behind people at the register getting their 10% off of a total bill of $80, saving $8.00. How much are you really saving?

Faithful readers of the Weekly Rate & Market Update know that retail sales have been a bit sluggish this year, up only about 1.5% in 2016 and about the same form August 2015 to August of this year. Since Christmas is approximately 20% of most retailers sales for the years they need to move inventory between now and the end of the year. With retail sales having been somewhat flat it stands to reason that there could be some significant discounts this holiday season. Take advantage of the discounts being offered on the shelves and do not apply for that point of purchase credit card to save a few dollars more.

And didn’t you get Uncle Burt moose slippers last year, maybe a Rams sweatshirt this year?

Have a question? Ask me!

Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.

Weeks were we get any Fed news any other economic news is usually ignored until the Fed speaks. This week was no exception. There was a data release however that is important to the mortgage and real estate industries and that was the existing home sale figures for August released by the National Association of Realtors. For the second month in a row sales of existing home sales dropped nationally. The slowdown is primarily caused by higher prices and limited inventory. Existing, or previously owned, home sales are about 90% of the market nationally and earlier this year reached the highest since 2007. Sales are up 0.8% from last August and the median price is 5.1% higher nationally. In the Los Angeles Metropolitan Area sales are up 3.8% from July and 6.2% from August 2015 with the median price on a single family residence up to $473,950—6.1% higher than last August. Overall the news is mortgage rate neutral. Home sales have driven the economy the last few years and a slowdown could have far reaching impact on the economy but since the slowdown appears to be price and inventory driven investors ignored the data.

Not ignored by investors is any word from the Federal Reserve. On Wednesday the Federal Reserve Open Market Committee announced it was leaving its Fed Funds Rate unchanged for now. The vote for no change has narrowed however with the vote this week being 7-3 as opposed to prior meetings when the vote was 9-1. The statement in the release was somewhat mixed with most of the economic assessment the same as July. The statement gives no real reason for the Fed to increase rates in December but the consensus is growing that there will be a rate hike at that time. The immediate reaction was a bump in Mortgage Backed Security (MBS) prices causing a bit of a dip in rates, but not much as MBS trading has maintained its tight range we have seen for the past few months.

Rates for Friday September 23, 2016: Conforming rate slipped back down after spending the last two weeks above its seven week bottom on the Fed speak, while high balance has remained flat for ten consecutive Fridays. I continue my advice of locking through your escrow period to protect these incredibly low rates from any sudden increases.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS
30 year conforming 3.25% Down 0.25%
30 year high-balance conforming 3.50% Flat
30 year FHA 3.00% *** Flat
30 year FHA high-balance 3.25% *** Flat

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down (3.5% for FHA) with 740 FICO score for purchase mortgages. ***FHA rates have may have no points and credit towards closing costs, changes daily.



My favorite season is upon us. I love autumn with the cooler days and nights but still plenty of sunny days. Having grown up in different regions that experienced all four seasons, unlike Southern California where we have summer and not summer, I have always enjoyed Fall and all that comes with it, from the leaves and weather turning to the start of football season and the baseball playoffs. I am hoping this autumn we have many crisp days and nights!


Have a great week,

Dennis



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Posted by Dennis C. Smith on September 23rd, 2016 11:51 AMLeave a Comment

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September 16th, 2016 7:49 AM

Question of the week: Who pays who when I buy a home and when?

Answer: Who pays who how much and when in a real estate transaction is always negotiable between buyer and seller and those involved. In theory this can happen, in our local Southern California markets here is who customarily pays what to who and when:

Real estate agent(s): Once or twice a year after we go through the amount of money they will need to close on their new home for down payment and closing costs a first time homebuyer will ask me, “when and how much do I have to pay my real estate agent?”

The answer is nothing. Well sort of nothing.

The real estate agents are paid by the seller when the transaction closes. A seller will sign a listing agreement with an agent to represent them in the marketing and sale of their home. The agent will put the listing on the Multiple Listing Service (MLS) and will let the other agents know the amount, as a percentage of sales price, that the agent representing the buyer will be paid.

As a buyer you do pay the commission to the agents, just not directly. The commissions to the agents are paid out of the seller’s proceeds, however the amount of those proceeds is paid by you the buyer in the sales price. This is why when we assist with transactions with one party buying another off of title, for instance in a divorce or partnership split up or one sibling buying out another from the family home after parents have passed away, we discount the market value by the amount of real estate commissions. Since there are no commissions being paid then the sales price should reflect the lack of commissions.

So when you are buying a home you do not need the funds to pay the real estate agent, s/he will be paid by the seller as part of your sales price.

Loan originator/lender: Like real estate agents we get paid when the transaction is completed. In the third of my four part series that was a semi-mortgage 101 course I discussed the relationship between cash to close and interest-payment. When it comes to paying for your loan and the services of the lender you can either pay higher closing costs for points and get a lower rate, or pay lower points and closing costs and have a higher rate. Should you choose the higher interest rate and lower fees then the lender funding the loan will pay the origination costs to your loan originator after the loan is funded.

Escrow:
Everyone in the industry loves escrow because they are the ones who disperse the funds to everyone for commissions, fees, etc after the transaction closes—including themselves. Escrow fees are typically split evenly between the buyer and seller, though if one side has more work done, such as drawing multiple deeds or paying off multiple accounts or liens their cost may be higher. The standard purchase contract has a clause to which the buyer and seller agree to split the escrow fee.

Title company: Buyer and seller have separate costs for title insurance. The buyer pays a lower cost for the coverage required by the lender to insure the position of their lien on title and the seller pays a higher fee for insurance that the title being transferred to the buyer is clean, or not clouded—i.e. when you buy the home you are the owner and no one can come along later and claim ownership, if they do and are correct the title company will pay to correct the claim.

The title insurance company is also paid when the transaction closes.
The two services that the buyer commonly pays for outside of escrow and before the transaction are for a physical inspection of the property and the appraisal.

All fees are negotiable as to who pays, as I mentioned at the top, but it usually depends on overall market conditions. When properties are slow to sell and it is a buyer’s market it is not unusual for us to see purchase agreements where the seller agrees to pay closing costs for the buyer. In a market as we have now in Southern California with multiple offers on many properties a buyer cannot expect to have a seller agree to pay their closing costs.

As a buyer when you meet with us and we show you the fee worksheet for the purchase of your new home you will have listed all the costs you will pay, with the exception of the home inspection. The bottom line of funds needed to close is what you need to close, no additional funds for escrow or title—as those fees are included in our worksheet; no additional loan fees-as those are included in our worksheet; no fees for real estate commissions as those are included in your sales price and paid by the seller.

Have a question? Ask me!

Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.

Not a lot of positive economic news on Thursday. Both retail sales and the Producer Price Index data for August were released. Retail sales in August dropped 0.3%, since a lot of back to school shopping typically done in August this makes the news a bit troubling. Since consumer spending is 65-70% of our economy a drop in retails sales does not support a growing economy. Another gauge of a growing economy is rising prices, which is not what the PPI data showed for August. Producers’ prices were flat in August, after dropping in July, and flat from August 2015. The combination of dropping retail sales and flat prices for producers is positive for low interest rates.

Friday provided some positive data. This morning’s release of Consumer Price Index data showed some life as prices increased 0.3% in August from July and are up 1.1% from last August. While under the Fed’s target range for inflation the price growth is positive for the economy and somewhat negative for interest rates.

At this point investors are holding tight waiting for next Wednesday when the Federal Reserve Open Market Committee will announce if there they decided to increase the Fed Funds rate. The consensus is that they will not for a myriad of reasons, even political, but the basic reason there is no reason to push up the rate is that the economic data does not show any substantive reason for higher rates.

Rates for Friday September 16, 2016: Rates are flat from last Friday. Mortgage Backed Securities spent the week jumping around on rumor, innuendo and speculation about the Fed’s move next week but in the end the trading was confined to a tight range and we see no change in our rates. My advice remains eliminate any upside risk as there is not much to gain with lower rates and lock when you can.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS
30 year conforming 3.375% Flat
30 year high-balance conforming 3.50% Flat
30 year FHA 3.00% *** Flat
30 year FHA high-balance 3.25% *** Flat

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down (3.5% for FHA) with 740 FICO score for purchase mortgages. ***FHA rates have may have no points and credit towards closing costs, changes daily.



Five friends and I have had the same football pool format for over twenty-five years. Before fantasy sports became popular and everyone from the science teacher to the church administrator were picking players for their fantasy my friends and I drafted teams at the beginning of each season and through a complicated formula of weekly wins, losing to undrafted teams and playoff performances have had the same pool going for a few decades plus. There are three of us in Southern California and one player each in Washington, Oregon and Florida.

This weekend we are getting together for the first time in five or six years, gathering in Denver for a guys’ sports weekend going to the Rockies baseball game on Saturday night and the Broncos and Colts game on Sunday.

So if my return phone call or email is a bit delayed through the weekend you now know why!


Have a great week,

Dennis

P.S. For those wondering what five teams I drafted this year: Green Bay, Indianapolis, Oakland, Chicago and Philadelphia.

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Posted by Dennis C. Smith on September 16th, 2016 7:49 AMLeave a Comment

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September 9th, 2016 12:11 PM


Question of the week: Why should I pay more than the seller is asking?

Answer: Because you want the home.

We are currently in a sellers’ market in most Southern California housing markets. Buyers are writing offers on homes and being told by their agents that there are multiple offers on the property, which could mean you and someone else offer or ten others with offers on the property. It is not unusual for us to send several pre-approval packages out for clients as they write offer after offer trying to get one accepted.

Which brings up the question of the week: why should you pay more than the seller is asking? In many markets that is what it takes to get your offer accepted.

Here are some common scenarios:

Seller has multiple offers and listing agent lets agents with buyers know. One, or more, of the offers comes in 2, 3, 5% over listed price from very well qualified buyer who has the funds to close the transaction even if appraisal comes in at original list price.

Seller has multiple offers and sends counter out to all qualified bidders to send in “best and final” offer. This leads to multiple offers over listed price from which the seller can choose that which is highest of the best qualified.

Seller has multiple offers and send counter offer out to one or two they like best for price over the list price. If buyer turns down counter then seller sends same counter to next buyer on their list.

This begs the question, if homes are going over list price why are sellers not listing their homes for higher prices to start? Because they would get fewer offers and less competition is one reason. Home in neighborhood that prices out very solidly at $500,000—recent sales of $495,000, $505,000, $490,000. Agent puts house on market for $499,999 and five or so offers come in. Buyers up their offers and house enters escrow at $510,000. This is a real scenario that we had a buyer go through last week and was the “winner” of the bidding.

Why should I pay more than the seller is asking, that does not sound like much of a deal. Let’s take the scenario above where our client paid $10,000, or 2%, over the seller’s asking price. First, we anticipate the appraisal to come in very close to the sales price, meaning an independent valuation determines the price paid is market price. Second, if property values average 2% growth in the neighborhood for the next ten years the home will be worth approximately $620,000, your gross profit is $110,000. Does that seem like a good “deal” to you?

“But if I had bought it for $500,000 then I my profit would be $120,000.” Yes, “if” you bought it for that price but you could not buy the property for $500,000 as it took $510,000 to buy it.

A “deal” in the current market may be buying a home, while it may be higher than what the seller was asking, it is probably less then what it will be worth in the future.

The Weekly Rate & Market Update of August 8th touched a little on the issue of future value and the potential cost of waiting to buy. The reasoning in August also applies to our question of the week in September.

If you are in a market with multiple offers on every home for sale that is in your price range, neighborhoods you desire and condition you are willing to accept then be prepared to outbid your competition, which may mean buying your new home for more the list price when it went to market.

Have a question? Ask me!

Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.

Not a lot of data this week to move interest rates. Mortgage Backed Securities (MBS) spent the early part of the week drifting up (higher price = lower rates, for those who missed my series on how mortgages work go to my blog page and read entries for last four weeks, 8/12, 8/19, 8/26 and 9/2). Yesterday afternoon and through this morning however we saw a reversal and MBS prices started falling (lower price = higher rates).

The primary causes for the decline in MBS prices are demand in bond market and Fed officials speaking. the Japanese taking a break from buying U.S. Treasuries ( lower demand leads to lower prices, lower prices = higher rates) and some speculating that other foreign nations may also slow their purchase of our debt. This morning one of the Federal Reserve bigwigs said in a speech that he thinks there is no reason the Fed should not raise its discount rate later this month, causing investors to quickly sell off bonds, including their MBS holdings, anticipating a rate bump. Later another voter for the rate hikes said there is no reason to raise the rate and the markets calmed down. The markets are not moving on data it seems but on speeches, this means the market is in flux and could be ready to break out of the nice steady range we have had for the past three months and begin to trend higher. “Could be…”

Rates for Friday September 9, 2016: The drop in MBS prices yesterday and today puts prices at the bottom of the trading range we have enjoyed for the past three months causing conforming rate to go up a bit from last Friday. After seven weeks in a row of flat rates it is not surprising we finally see a change, nor that the change is to the higher.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS
30 year conforming 3.375% Up 0.125%
30 year high-balance conforming 3.50% Flat
30 year FHA 3.00% *** Flat
30 year FHA high-balance 3.25% *** Flat

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down (3.5% for FHA) with 740 FICO score for purchase mortgages. ***FHA rates have may have no points and credit towards closing costs, changes daily.



It is hard to believe that it has been fifteen years since the tragic events of 9/11 that changed our country, and world, forever. I am torn annually when the anniversary of the terror attacks are front and center in the news. On the one hand I do not want to remember how I felt that morning standing in our kitchen watching the news. Leslie was watching with me as the first tower collapsed and her emotional reaction was so deep I was concerned for our baby as she was several months pregnant at the time while at the same time horrified by what I was watching.
On the other hand I know we need to revisit that day to not only remember those who lost their lives in the attacks and immediate aftermath, and subsequently the many first responders who died from effects of their responding, but also to stay reminded that unfortunately evil still exists in the world and there are those who wish to destroy us for our freedom and the liberties we all enjoy on a daily basis.

Growing up I remember knowing it was Pearl Harbor Day every December 7th, but it never really resonated with me as I did not experience it. My grandchildren may have the same reaction to 9/11, and I am hopeful that they do and that they never have to experience their own national tragedy as we have.

This year 9/11 falls on the Sunday that is will be the first game of the NFL season for almost all of the teams and stadiums will be full of cheering fans. Those cheering fans gathered together show those who would bring us harm that we are winning in the war of good versus evil and will continue to win.

Have a great week,

Dennis

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Posted by Dennis C. Smith on September 9th, 2016 12:11 PMLeave a Comment

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September 2nd, 2016 10:28 AM


Question of the week: How come when the market is bad rates drop and when market is good rates rise?

Answer: Last week we looked at the relationship between the price of a mortgage and the mortgage’s interest rate. Using a teeter-totter we saw that the lower the interest rate the higher the price and vice-versa. This week we look at another inverse relationship, that between the economy and investment markets and interest rates.

Most people know that when the economy is going well stock markets rise. Your retirement account through your employer increases in value and the news is peppered with higher earnings, higher profits and record numbers for the major indexes—the Dow Jones, NASDAQ and S&P. Correspondingly when the economy is doing poorly, as in a recession, stock markets drop, your 401(k) or other retirement account decline in value and business news talks about missed earnings and declining or negative profits.

This makes sense, if the economy is strong people are spending money, companies are selling more and more of their goods and services so they have higher profits which makes the companies more valuable, which is reflected in stock prices.

So why is it when there is good economic news and the economy is improving bond** prices drop and when there is bad economic news and/or the economy is improving bond prices rise?

**Mortgages are traded as Mortgage Backed Securities as discussed two weeks ago, MBS prices move up and down with bonds such as U.S. Treasury and large corporate bonds.

Think of our teeter-totter, when prices drop rates increase, when prices rise rates drop. So why do bond, and therefore mortgage, prices drop when stock prices increase? And vice-versa when stock prices drop mortgage prices increase?

The greater the risk the greater the return, perhaps the most basic axiom for finances and investing. Less known is the term flight to safety.

Flight to safety is one reason why interest rates drop when there is bad economic news and uncertainty for the future. Investors flee the more risky investments like stocks and purchase safer investments, like bonds, and mortgages, which pay fixed rates of interest rather than risk sudden drop in prices should they leave their money in stocks, or equities.

Another reason for interest rates dropping when there is not so good economic news is investors purchase bonds. Investors not only are motivated by the flight to quality principle, but also because the long term expectation is for interest rates to drop due to other investors buying bonds but also in anticipation of moves by central banks lowering rates to stimulate borrowing to stimulate the economy.

As investors move into bonds prices go up with the increase in demand. Increased demand in a market generally causes higher prices, higher prices in bonds means lower interest rates.

When the prospect is for a growing economy investors sell their bond holdings and purchase stocks. This causes the price for bonds to drop and interest rates to rise.

As a general rule if stock prices are increasing then interest rates are as well, if stock prices are dropping then so are interest rates. That is the general rule which has been broken in our post-recession economy as rates have dropped and remained historically low despite the sharp increase in stock prices. This is primarily due to the tremendous amount of money put into the economy by the Federal Reserve during and in the years after the recession, the Fed retaining ultra-low interest rates for the seven plus years since the recession ended, and an economy that while not in recession has grown slower than any post-war economy following a recession. In the meantime corporations have increased profits by reducing labor costs and the cheap access to capital caused by the low rates.

When our economy ends its current cycle and begins the next it will be interesting to see how interest rates react. If they historical tie between higher rates with higher stock prices returns or if the two remain somewhat disconnected as they have been for the past decade.

This wraps up our four week discussion of mortgages and what they are and how they work, I hope you have enjoyed it and I was able to increase your understanding.

For those just catching up here is the series on mortgages from the past few weeks:

8/12/16: I have a Fannie Mae loan, why am I not making my payment to Fannie Mae?

8/19/16: What are Fannie Mae, Freddie Mac and Ginnie Mae?

8/26/16: Why are there different prices for the same loan?


Have a question? Ask me!

Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.

Employment and income dominate the economic news this week. On Monday Personal Income and Outlays for July showed incomes grew 0.4% from June and spending rose 0.3% from the prior month. Spending growth slowed from June which is of some concern since consumer spending is 65-70% of our economy. Personal savings grew in the month, again not a strong positive for the economy. Prices were flat for the month giving no price side reasoning for the Fed to raise rates. Overall the data was neutral for mortgage rates.

Of bigger impact was the monthly jobs report. Being the first Friday of the month the Labor Department released the numbers for employment in August—and the news is not great. After adding 275,000 job in July the economy added only 155,000 in August, of which only 126,000 were in the private sector. August jobs reports are a bit quirky with summer employment and auto manufacturers flexing employment to retool for new models, even with the quirkiness however the news is not positive. Since the Fed has repeatedly indicated they are focused on employment for their rate decisions the data supports no move on rates by the Fed later this month.

Under-reported but having a tremendous impact on the economy is the bankruptcy of the Hanjin shipping line. Hanjin is a South Korean shipping company that is one of the major players in the Ports of Los Angeles and Long Beach. Hanjin ships carry approximately 5% of all ocean trade. Ocean shipping is 90% of global movement of goods so Hanjin impact global trade. Right now millions of containers containing billions of dollars of goods are sitting on ships in ports and harbors around the world because ports are not off-loading or on-loading Hanjin ships. Goods meant for American retailers for the Christmas season are in many of those containers. There is a ripple effect of goods not moving for one ocean line that impacts a port and causes delays for other lines containers being moved, immediately there has been a tremendous increase in shipping costs of containers on sea and land If the ripple effect multiplies it could cause some damage to not only our economy but others globally. Keep an eye on this issue.

Rates for Friday September 2, 2016: I need to do some research, but I cannot recall a time when conforming fixed rates were flat for seven straight weeks and the same for nine out of ten. It shows that there is no major news to impact investors, which means no significant good or bad news. I maintain my advice to take advantage of these rates and lock in when you can.


FIXED RATE MORTGAGES AT COST OF 1.25 POINTS
30 year conforming 3.25% Flat
30 year high-balance conforming 3.50% Flat
30 year FHA 3.00% *** Flat
30 year FHA high-balance 3.25% *** Flat

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down (3.5% for FHA) with 740 FICO score for purchase mortgages. ***FHA rates have may have no points and credit towards closing costs, changes daily.



Have a great Labor Day weekend. It will special in the Smith household as Leslie and I celebrate our twenty-second anniversary on Sunday—I celebrate every day that this wonderful woman is my wife, but glad she celebrates at least once a year!

Have a great week,

Dennis

Posted in:General
Posted by Dennis C. Smith on September 2nd, 2016 10:28 AMLeave a Comment

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