Dennis' Mortgage Blog

February 5th, 2016 1:40 PM

Question of the week: We are thinking of buying a vacation home, what is different than buying our primary home?

Answer: It’s more enjoyable?

There are a few differences in qualifying for a mortgage for a vacation, or as we in the biz call it a “second”, home and buying your primary residence, but not many.

Second home mortgages are considered to be owner-occupied and not investment properties for underwriting, as such most of the same guidelines apply. There are some guidelines however that are different (all guidelines below are for conforming loans, “jumbo” or non-conforming mortgages have different guidelines, call if considering):

• Maximum loan to value is 90%

• Property must be geographically distant from primary residence, or “make sense” that it will be a second home

• Some lenders require the second home be located in an area known to be “resort” or “vacation” destination

• Borrower must occupy the property for some portion of the year

• Restricted to single family unit (attached, detached, condo, single family residence)

• Borrower must have exclusive control over the property, no time shares or rental agreements on the property

• Cannot be subject to any agreements giving a management company control over occupancy, i.e. engage short term rentals

In other words to be a duck (second home) it has to look like a duck, walk like a duck, quack like a duck and smell like a duck. (Or taste like one cooked and served with a nice orange sauce)

Over the years we have had many families purchase second homes that eventually become their retirement homes, selling their primary residence when the time comes giving them a free and clear home at retirement; and in the meantime having the enjoyment of a vacation home in the desert, mountains or seaside community.

If considering an early purchase of a retirement home now is a great time to do so with rates low and home prices, though higher than a year ago possibly lower than when you are thinking about retiring.

Considering a vacation home? Give me a call to discuss your options and opportunities!

Important note for Southern Californians: Many vacation homes, or condos, are purchased in Riverside (Palm Springs/Desert), San Bernardino (Big Bear/Lake Arrowhead), San Diego, Ventura or Mono (Mammoth) Counties; these counties have lower loan limits than Los Angeles and Orange County. Making it doubly wise to check in with your knowledgeable mortgage professional (me!) to get pre-approved for the right loan amount and right guidelines before you start to look for your vacation home.

Have a question? Ask me!

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

Being the first week of the month we received a lot of data on the economy from January. Leading off was personal income and spending for December. Total personal income was up 0.3% in January from December, a nice increase but it was tempered by only 0.2% increase in wages and salaries and a reduction in manufacturing income. Pulling up personal income was rental income and income from proprietorships (sole proprietorships and partnerships—many small businesses fall into this category). Overall consumers made more, but they did not spend more in December with consumer spending flat from November to December, which is not very good news for the overall economy since consumer spending is 65-70% of economic activity. The result of higher income and lower spending is an increase in the savings rate, which climbed to 5.5% in December, the highest in four years. Higher income, lower spending and higher savings also means lower consumer debt. This news taken in total is net neutral for mortgage rates.

Prices in December matched income, with the PCE price index (Personal Consumption Expenditures, i.e. what you and I buy) flat for the for the “core” rate (absent food and energy) and down 0.1% for the month. Year over year the core rate is up only 1.4%, well below the Fed target of 2.0%. The news is paradoxical for mortgage rates. On the one hand the slow price growth encourages lower rates as they portend a slow economy, on the other hand it supports higher rates from the Fed as their inflation target is a ways off.

News for the labor markets for January was not great. Weekly unemployment filings have been climbing for the past several weeks and continuing claims are also climbing indicating those who have lost their jobs are taking longer to get a new one. Today we received the payroll report for January and the economy added 151,000 jobs for the month, well below December’s 292,000 new jobs and the consensus of 188,000 jobs for the month. A bit of good news in the report was the labor participation rate ticked up and the unemployment rate ticked lower to 4.9%, as well the average workweek increased by 6 minutes to 34.6 hours per week. The news is somewhat mortgage rate friendly

Rates for Friday February 5, 2016: Mortgage Backed Securities (MBS), from which our rates are derived (as seen in The Big Short), had a very choppy week and moved mostly sideways. The MBS market is a bit unstable and looking to either break out above the trading range (lower rates) or fall below (higher rates) and not giving clear indication which is more likely. My advice is to lock in when you can to avoid the volatile market conditions. Through the volatility rates are flat from last Friday—and where they were the first Friday of last February.

30 year conforming 3.5% Down 0.125%
30 year high-balance conforming 3.75% Flat
30 year FHA 3.25% *** 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 no points and credit towards closing costs, recent rate change reduces credits

It’s time for the unofficial national holiday known as the Super Bowl. A great story line this year as the very popular, and aging, Peyton Manning plays in what will probably be his last game goes against the upcoming, or arrived, superstar Cam Newton. I have a business interest involved in rooting for the Panthers but wouldn’t be terribly disappointed to see Peyton join his boss John Elway in winning his last game and hoisting the Vince Lombardi Trophy.

More people bet on the Super Bowl than any other game in any other sport in America (the World Cup dwarfs the Super Bowl). The total in Vegas last year was $119 million, the most by more than 20% of any other year. And that figure is estimated to be about one-third of the total amount gambled on the game. Consider the squares pool you are in, say $25 per square, 100 squares, for total of $2500. That is one game in one office, now multiply that by hundreds of thousands, millions, or offices around the country.

Here are some of the more interesting “prop” bets this year:

He has been criticized by many for his “dabbing” but he will dab, but how much? The over and under is Cam will dab 10 times. I would bet the over on this.

You get 10 to 1 odds betting there will be an earthquake during the game. I bet no.

How many times will the Golden Gate be shown during the broadcast, the over/under is 0.5 (over means they show it once, under not at all). I bet yes.

You can bet on what color will be the liquid poured on the winning coach, and choose from six colors and clear, the highest probability is orange (5/4 odds). I bet blue as the odds are better (3/1).

There are plenty more from what song Cold Play will start their set with to what color Beyonce’s shoes will be to the team to score first to the player to score first.

And of course my favorite, will the coin toss be heads or tails. I always take tails.

Enjoy the game…or the commercials!

Have a great week,


Posted in:General
Posted by Dennis C. Smith on February 5th, 2016 1:40 PMLeave a Comment

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January 29th, 2016 10:00 AM
Question of the week: We had a short sale on a previous home, can we get a new loan?

Answer: Yes, but it is not “if” you can get a new mortgage but “when.”

Provided you otherwise qualify for the mortgage with income, credit and asset verification, a prior short sale does not preclude you from obtaining a new mortgage. However the time frame to obtain a new mortgage has changed.

For conforming loans (Fannie Mae and Freddie Mac) the time from the resolution of your short sale on a prior mortgage to obtaining a new one used to be tiered depending on your down payment or equity. The guidelines have been simplified so that it is a blanket four years since the final disposition of your prior mortgage.

The time frame can be shortened if the cause of the short-sale was “extenuating circumstances,” which is a small hole to thread. Essentially you have to prove job loss prior to the short sale, job transfer to a geographic distant location or other circumstance that was unavoidable and unforeseeable.

If you had a foreclosure the guideline is seven years must have passed before you can obtain a new conventional mortgage.

For jumbo loans (over conforming loan limits, $625,500 for most of Southern California) a prior short sale is a no-go with almost all programs.

For FHA loans the guidelines are a bit looser though tighter than they were in the past. Three years from disposition of the short-sale or a foreclosure is the requirement to obtain a new FHA mortgage. One year is the time frame if there were extenuating circumstances involved.

As with all guidelines have your particular circumstance checked out as regulators are constantly changing guidelines and different properties may have different time limits, for instance second home, investment property, units.

Have a question? Ask me!

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

Not a lot of economic news this week, but what news we had was pretty important. Wednesday the Fed Open Market Committee meeting announcement was released and to the surprise of no one no change was made to the Fed Funds rate. There is concern of global economic activity and its impact on our economy, and the view of the economy seems to have pulled back a bit from December when it hiked the Fed Funds rate from zero to 0.25%. No impact was had on mortgage rates from the news.

Supporting my comments last week that our economy is being lifted, or supported, by housing markets, new home sales surged with an increase of 10.8% to an annualized rate of 544,000 sales, up almost 55,00 from the prior month. Ordinarily this would be a downer for mortgage rates, meaning higher rates, but the financial markets activity dampened any increase.

A major concern to economic growth has been orders for durable goods. The sector did not end well in 2015 with contraction in November of 0.5% and initial estimates for December showing a fall of 5.1% against an expectation of a gain of 0.2%. America’s manufacturing output has been on a continual decline for several decades, however contraction seems to be occurring at a faster pace in recent years and this sharp drop in orders does not bode well for economic output in 2016. The news is very friendly for mortgage rates.

The big data release for the week was the Gross Domestic Product for the final quarter of 2015. Following a 2% gain in the third quarter GDP rose a scant 0.7% in the 4th quarter. Our economy is very much consumer driven, consisting of 65-70% of economic activity, and consumer spending it slowed as 2015 closed out. Holding back economic growth was business activity, particular domestic companies engaged in foreign trade and markets. Prices were lax, showing the smallest increase for the year. The news is somewhat rate neutral, however taken in context of the international markets and foreign economic issues it becomes a positive for lower rates.

Rates for Friday January 29, 2016: Conforming rates drop to end the week on the GDP news, compounded by slim chance the Fed will raise rates again in March. The 30 year fixed conforming has dropped 0.375% from the beginning of the year and at its lowest since the final Friday in April 2015.

30 year conforming 3.5% Down 0.125%
30 year high-balance conforming 3.75% Flat
30 year FHA 3.25% *** 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 no points and credit towards closing costs, recent rate change reduces credits

We are going whale watching tomorrow with the Rotary Club of Long Beach. I have lived in Long Beach for over 30 years and have never been on a whale watching cruise and looking forward to our adventure.

I asked the question today of what experience/attraction have people not done in their immediate area? Now that whale watching is off my list my next nearby attraction that I have never seen where I would like to take the family is the Grammy Museum. If I cut a demo while I am there I will be sure to share!

Have a great week,


Posted in:General
Posted by Dennis C. Smith on January 29th, 2016 10:00 AMLeave a Comment

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January 22nd, 2016 12:38 PM

Question of the week: I read we are approaching another housing bubble, is this true?

Answer: It seems a recent fad amongst financial reporters is to dissect the rise in home prices and explain why bubble conditions are in effect similar to 2008, especially in areas like Orange County where the median price is just below the all-time high of the summer of 2007.

There was an email circulating in our office from a business writer whose premise is that another housing crisis is “just around the corner” and a few clients have forwarded me other columns and articles they have received with similar content. And of course there is “The Big Short” showing at a cinema near you.

The premise for the potential large drop in housing prices is that home prices have been climbing fairly steadily for the past several years, that Fannie Mae has come out with a new program this is essentially a FHA look alike for low income and minority borrowers, and that, well we need something to write about.

My response has been that while we may experience a market correction—which in much of California can be defined as the market being flat or prices declining—any correction will be somewhat soft, not prolonged and not for the reasons many of those calling for a “crisis” are using for their prediction. (By the way if there is any correction those calling for a crisis will be out with I-told-you-so columns.)

A quick look back at the housing market collapse that started in February 2007: The initial problems began in the sub-prime mortgage market, which at the time was about 10% of the total mortgage market. As the sub-prime lenders had issues getting capitalized on Wall Street, i.e. could not sell their mortgages to investors, they began to fail. At first it appeared that the issue would be confined to the sub-prime market and lenders, but then investors began taking a closer look at non sub-prime jumbo loans and then conforming loans being sold by Fannie Mae and Freddie Mac. What the investigations showed was that many of these loans were approved and funded under the same guidelines, or lack thereof, being used by the sub-prime lenders. The big exception being that the loans, and the securities that we sold that consisted of those loans, were being sold to investors as prime investments, getting high ratings from the agencies.

Loans that were up to 80% of the value of a property, with no mortgage insurance but a second on the property taking the loan to value to 100% of the property value, were being approved and funded by Fannie and Freddie with no income verification, no funds needed to close and often no appraisal being required. Rated at A++ were mortgages with a credit report showing a score over 680, a place of work and stated income.

With millions of homebuyers purchasing new homes with conforming mortgages using very lax underwriting standards, and millions of homeowners taking out equity using those same standards, the housing market was being financed by a wink and a nudge. This created a larger market of loan eligible homebuyers such that buyers far exceeded sellers and market conditions reacted as expected with skyrocketing home prices.

Once the bottom card was jiggled the entire house of cards fell down.

Fast forward to our current market and state of the industry. Since 2008 the mortgage industry has retrenched such that underwriting guidelines today strongly resemble those of 1988, except a bit stricter due to unmovable criteria. The similarities to 30 years ago and today: if you want a mortgage you have to prove you have the income to support the housing payment plus your other debt. The dissimilarities: we now have FICO scores that provide no-go barriers for getting a loan if your score is too low (as well as tiered pricing so the lower your eligible score the higher your rate), prior to FICO underwriters would grade the reports and determine if a borrower’s past transgressions were excusable and approvable for a mortgage. Funds to close are now scrutinized more than ever, no more bringing cash into the bank, converting to a cashier’s check and bringing that to escrow; today all funds for a transaction have to be meticulously accounted for and traced. Appraisals are no longer performed by the local professional the mortgage originator knew, coached the Little League team with or sat behind in church; today mortgage originators are prevented from having any direct contact with an appraiser, all orders must go through an approved Appraisal Management Company and their selection of an appraiser is random from their pool.

So in most respects the criteria for getting a home loan are tougher today than they were before automated underwriting and the expansion of Fannie Mae and Freddie Mac.

This is important when it comes to predicting the future of the housing markets and whether or not we will see a repeat of 2008 because it means the quality of risk for homeowners who have mortgages is much higher than those who obtained loans in the years preceding the market meltdown. Since 2008 every borrower has shown the ability to pay for their mortgage and debts, has “skin in the game” with down payment funds from themselves or a relative and have higher credit scores.

Because of the quality of qualifications of those who have obtained loans in the past seven to eight years the risk of foreclosure is mostly employment risk. As long as borrowers have their jobs they are going to be making their payments. Sure some will over extend themselves with other credit, but if their income is the same as it was when they obtained their mortgage they should be able to continue to pay the mortgage and put their other credit at risk.

The other risk that is still present from the pre-collapse era is interest rate and payment risk to those with adjustable rate mortgages, either a first mortgage that is an ARM or was a hybrid-ARM (3, 5, 7 year fixed rate then adjustable) or those with large equity lines. As rates increase these homeowners may face difficulty making payments if their incomes have been stagnant.

Should a homeowner have financial difficulty because of rising prices they have equity in their homes, making it possible for them to sell or refinance to a lower and more manageable payment.

Finally, most homeowners learned painful lessons from the 2007 to 2009/10 period. Many had homes upside down or saw neighbors, friends and family members lose their homes. With those memories still fresh mortgage applicants we have spoken to are almost solely looking for 30 or 15 year fixed mortgages and buying homes with payments they can afford on their current incomes.

Will the housing market continue to grow as it has the past few years? Probably not, at some point we will see a slow-down, and perhaps a bit of correction—more in some regions than others. Will we see a collapse of the housing market that we experienced less than a decade ago? In my opinion no, the fundamentals of the underlying mortgages supporting the housing market are too strong to enable a free fall similar to what we experienced.

I mentioned it a few weeks ago, if you have the opportunity go see “The Big Short.” Based on a book by Michael Lewis, the movie provides a very accurate look at the back-side of the mortgage industry and how the bubble that burst was created. As well it is extremely well made with great writing and acting.

Have a question? Ask me!

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

Our rates this week have been impacted by three major factors: stocks, prices and homes. Stocks continued their slide early in the week, hitting lows on Wednesday, that began as we turned the calendar to 2016. Push down by investors selling equities based on falling oil prices and continued concerns about China, funds in stocks have been moving to bonds, and mortgages, resulting in softer rates.

Following last week’s Producer Price Index we received the Consumer Price Index numbers for December. The CPI for all goods and services dropped 0.1% while prices rose 0.7% if food and energy are stripped from the data. Year over year total CPI is up a scant 0.1% and the core rate minus energy and food rose 2.1%. The impact of lower energy costs is impacting the economy, and helping consumers home finances as we pay less for gas and in the other parts of the country heating oil. Even without the lower energy costs however prices are not quite in range of the Fed’s target inflation rate which provides support for the Fed not engaging in another rate increase for quite some time.

The economic expansion experienced before the recession was very much driven by the housing markets. It appears that our current economic stability and avoidance of even slower growth may be due to housing as well. Existing home sales in December were 5.46 million annualized sales, the most in one month since 2006. The increase from November was 14.7%, a record month to month increase. The huge increase from November was mainly due to a lag in closings created by new mortgage regulations that took effect in October slowing the industry, but also contributed was unseasonably warm weather in much of the country. Year over year existing home sales are up 7.7%. Of concern in the report is lack of inventory, with supply at 3.9 months. If supply continues to remain tight and rates low we can expect to see more price appreciation into 2016. The news is mortgage rate unfriendly and is a cause for higher rates.

Rates for Friday January 22, 2016:
Rates remain flat from last Friday, blipping back up a bit today on the housing news and rebounding stocks after blipping down a bit earlier in the week. Rates should be stable within 0.125% of their current levels for the next few weeks.

30 year conforming 3.625% Flat
30 year high-balance conforming 3.875% Flat
30 year FHA 3.25% *** 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 no points and credit towards closing costs, recent rate change reduces credits

It appears Southern California is getting the possible El Nino weather. Most of the rain storms have been going north to the Central Coast and Northern California which is where we need it for our water supply, while we have been dry. Will it continue? I wouldn’t mind more rain just because I like it!

With the rainy weather we have had and will have more of in the future it is a great time to look at homes to buy. For decades I have told potential buyers to go out and look during inclement weather so you can see if a roof has issues, where water puddles on a property that may cause damage, how drainage is and generally discover potential issues that you won’t notice from about March until October or November in normal years. It may rain tomorrow, put on your galoshes, grab and umbrella and go house hunting.

But before you do call me to get pre-approved!

Have a great week,


Posted in:General
Posted by Dennis C. Smith on January 22nd, 2016 12:38 PMLeave a Comment

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January 15th, 2016 12:42 PM
Question of the week: We are thinking of remodeling our home…

Answer: Okay this is a statement and not a question, but the conversation came up from a client last week and it is one that comes up from time to time. You have owned your home for a while and it is too small, doesn’t have enough bathrooms, another bedroom is needed, etc. You call me and inquire as to how to finance a major remodel; use a cash-out refinance, a home equity line? And my answer:

As part of your remodel process you have a very good idea of what additions, upgrades you wish to make to your home. You may have gotten a preliminary bid or idea of the total cost and now you are investigating where to get the money for the project.

At this point my suggestion is to weigh the costs and benefits of building what you want versus buying what you want.

Are you looking at spending $100,000 to add a third bedroom and a second bath onto your existing home? What is the cost of three bedroom, two bath homes in your neighborhood, is it more cost effective and emotionally effective to sell your current home and buy a three bedroom, two bath home than to remodel your own?

Whatever your intended remodel project is, if it is major some factors you need to consider:

• New financing whether cash-out or an equity line most likely will not be better than purchase money financing for a new home; if you use an equity line are you comfortable with higher rates in the future on the loan?

• If you do not have enough equity to borrow enough to cover the construction costs, building in extra funds for cost overruns, then you will need to come up with cash to cover the difference. How does this impact your reserves, retirement accounts, etc?

• Do you like sharing your morning paper and coffee with your contractor and his workers? Most contractors start work very early in the morning and leave in the afternoon. While you are getting ready for work, your kids getting ready for school you will be joined by a crew of workers in your home. How disruptive are you willing to have your daily routine for several months? This can be avoided by moving out during the remodel, but can you afford the costs to store/move your belongings twice plus the rent on another home?

• How does the math work out between financing and paying cash for your remodel versus selling your current home and buying a new one? What is the tolerance you are willing to put into the equation?
o For instance if you are looking at financing $100,000 and it will cover your project the current minimum payment is interest only on a HELOC at say Prime + 0.5% for a rate of 4%. That payment is only $333 per month—but you are not making any payments to knock down the loan. If you amortize it for 20 years the payment is $605 per month.
o Presume you can sell your home for $550,000 and you have a $375,000 loan balance that has a payment of $2100 per month. A new home with the extra bedroom/bath, etc can be purchased for $625,000 in the same neighborhood. Your sell your home and have net proceeds of $130,000; you buy the new home with 20% down ($135,000) and have a new loan of $500,000 with a payment of $2385 per month. Basically new home for less than the cost of remodeling your own home.

These are made up numbers and happen to work out perfectly but you get the idea, it may be possible to purchase the home you want with less headaches, hassles and costs than going through a major remodel of the home you currently have.

Considering a remodel? Give me a call and let’s go through the math to see what would be a comparable price for your situation then you can see if that home is on the market or likely to be in the near future.

Otherwise be ready to share your sports page and Fruit Loops…

Have a question? Ask me!

Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.
Until today there was little major economic news this week. Today however a trio of major economic reports were released, none of them positive. The Producer Price Index for December was down 0.2% and year over year is down 0.1%; extracting energy and food and the numbers are positive 0.1% and 0.3% respectively; which highlights the impact of dropping oil costs on the broad economy. Dropping and stagnating wholesale prices feeds into consumer prices and with several months of a declining PPI show a lack of inflation that runs counter to the move made by the Fed in dropping rates last month. This report is positive for lower mortgage rates.

December prices not only dropped but so did industrial production. Both production and manufacturing contracted in December for the second straight month. Contracting industrial production is worrisome for employment markets and the economy in general. This news is also positive for lower mortgage rates.

The big news in the trio of reports was the retail sales figures for December. Total retail sales dropped 0.1% and taking out auto sales there was still a 0.1% decline from November. For 2015 retail sales rose 2.1%, the smallest annual gain since 2009, when the recession ended, and significantly lower than 2014’s 3.9% increase. Auto sales drove much of the annual increase, stripping out cars retail sales grew only 0.9% for the year. Contractions in sales of apparel, general merchandise, electronics and appliances occurred in December. The month did see increases in restaurants, not unusual for December, and also home furnishings and furniture, not unusual with increasing home sales. Overall the report shows a consumer not spending a lot during the busiest shopping month of the year, a display of weak confidence that could portend disappointing numbers for 4th quarter GDP. The retail sales news is very positive for lower mortgage rates.

Rates for Friday January 8, 2016: Quite a week for markets. With no major economic news this week, until today, investors made moves based on moving away from equities (stocks) and into the safety of bonds, which includes mortgages, for a several reasons, primarily China and plunge in oil prices. The result has been a drop in stock prices for the week are down about 3% and rates have dropped as well. Investors will be looking for a reason to sell and take profits making rates a bit unstable, but any spike results in still very low rates—in fact a three month low for conforming rates.

30 year conforming 3.625% Down 0.125%
30 year high-balance conforming 3.875% Down 0.125%
30 year FHA 3.25% *** Flat
30 year FHA high-balance 3.25% *** Down 0.25%

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 no points and credit towards closing costs, recent rate change reduces credits

Our second holiday of the year on Monday and it will only be the 18th of the month, at that rate of a work holiday every nine days we should have forty of them this year!

Every year on this Friday before Martin Luther King Day I provide a link to his “I Have A Dream” speech from August 28, 1963. It is truly one of the greatest orations of all time and to see it drives that home. After some hesitancy and seeming to be nervous, Dr. King then hits his rhythm and it is mesmerizing to listen to his words.

Sometime over the next few days block off seventeen minutes and listen to this piece of American, make that world, history.

I Have A Dream

Have a great week,


Posted in:General
Posted by Dennis C. Smith on January 15th, 2016 12:42 PMLeave a Comment

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January 8th, 2016 11:56 AM

Question of the week: What do you think will happen to interest rates this year?

Answer: Before looking forward a look back. As you can see from the chart below in 2015 the benchmark 30 year fixed rate started the year at 3.625% and ended the year only 0.25% higher at 3.875%, the same increase as the Fed rate hike in December. Between the first and last Fridays of the year the rate reached low of 3.375% at the end of January and a high of 4.00% for three weeks at the end of June and early July. For the last two months of 2015 the conforming rate drifted between 3.75% and 3.875%.

After a steady climb from below 3.50% in April to the high in late June-early July rates stayed within a 0.25% range.

The stability seen in the second half of 2015 should continue into 2016, absent extraordinary external events (see below for such an event) that could push rates lower. Forces that could push rates higher appear to be absent from the economy for the foreseeable future.

What forces cause higher rates? Robust, or even more than modest, economic growth, strong growth in employment and high consumer confidence are all factors that lead to higher interest rates. While 2015 had better economic activity since the recovery began in June 2009, the activity was not what would be considered more than moderate. Had the economic and employment growth been stronger the Fed would have raised rates sooner and mortgage rates would have continued to increase through 2015, and not peaking mid-year before dropping in the second half of the year.

What was absent in 2015 does not appear to be readily present in 2016. Manufacturing continues to be weak, international markets are weakening with Europe facing economic pressures from millions of refugees and China’s long predicted economic slowdown gaining enough momentum that the government can no longer create data to mask it.

Like in most years there will be a spike in rates at some point in the year, probably in the middle of the year as last year, however unless it is accompanied by strong economic growth rates should settle back down.

While it is only an opinion, mine is that rates for 2016 for 30 year conforming fixed rates should not climb above 4.25% and spend most of the year below 4.00%.

We’ll check back in twelve months to see if my opinion had any merit.

Have a question? Ask me! Click the Contact Us button above.

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

The most significant data for the U.S. economy released this week was the employment report for December. It showed an unexpectedly large increase in new jobs, 292,000 of which 275,000 were in the private sector. Wages were flat from November but up 2.5% from December 2014. While the total number of new jobs showed strength, within the number some concerns are that a not insignificant number of the new jobs were seasonal and temporary. Ordinarily this report would result in a spike in interest rates, however with the situation in China and its markets this report had no impact on rates.

So what is with China? Chinese stocks have been having an exciting week, with trading stopped twice when its primary market dropped 7% each day. The losses in China spilled around the globe and stocks prices fell through much of the week. The result was beneficial for U.S. interest rates as investors engaged in the traditional “flight to quality” by selling riskier stocks and buying safer bonds and fixed rate instruments such as mortgages. Adding to the China concerns were the devaluations through the week of the yuan, China’s currency, by its Central Bank. Trying to make its exports cheaper the devaluations spook investors who are concerned that the economy that is 17% of the global economy is not as sound as the 7% growth the Chinese government says is occurring. Overall the China syndrome has been very positive for lower rates.

Interesting side note….China’s stock market has over 200 million retail investors, i.e. people. Many treat the stock market like a casino, instead of betting on red however they bet on concrete, steel or car tires. Comparatively there are almost 320 million people in the United States, so it would be as if two out of every three people in the U.S. had active stock accounts they traded. Volatility is not unusual in the Chinese market because of the composite of investors, and not many foreign investors are active in the market due to the volatility and lack of fundamentals in trading practices.

Rates for Friday January 8, 2016: Rates increased Christmas week and then remained steady through New Year’. This week however rates did move down and are where they were just before the Christmas/New Year’s holidays.

30 year conforming 3.75% Down 0.125%
30 year high-balance conforming 4.00% Down 0.125%
30 year FHA 3.25% *** Flat
30 year FHA high-balance 3.50% *** 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 no points and credit towards closing costs, recent rate change reduces credits

I hope everyone had a good year end. The Smith family did, we took what has become an annual sojourn right after Christmas to spend a week in Scottsdale just doing not much. One activity we enjoy is catching up on the holiday movie releases. One of the movies that we saw that I highly recommend is The Big Short about the mortgage markets and how they were built up and the subsequent collapse. It is very well done and gives you a look behind the curtain. Many long time readers of the Weekly Rate & Market Update know I talk about Mortgage Backed Securities and how they dictate our rates, this movie goes into some detail about that market and its role in the meltdown. Great writing, acting and a must see.

Have a great week, keep those resolutions going for one more week!


Posted in:General
Posted by Dennis C. Smith on January 8th, 2016 11:56 AMLeave a Comment

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