Mortgage-backed bonds rallied on Friday helping rates move lower this morning. There is not much in the way of economic data out today so we will be watching the stock market to get a read on investor sentiment. Currently the major indexes are essentially trading flat on the day.
On Friday the monthly jobs report is scheduled to be released. For now we remain in a cautiously floating stance.
Current Outlook: Cautiously floating
Monday, March 31, 2008
Saturday, March 29, 2008
WSJ reports on "Paulson Plan"
The WSJ reported this morning that Treasury Secretary Hank Paulson will unveil an overhaul to the regulatory system for the financial markets on Monday. This should be very interesting. One of the provisions in the article calls for a Federal system for state monitored mortgage companies.
Here is the article:
Sweeping Changes in Paulson Plan
By DAMIAN PALETTA
March 29, 2008
WASHINGTON -- U.S. Treasury Secretary Henry Paulson plans on Monday to call for sweeping structural changes in the way the government monitors financial markets, capping a broad review aimed at revamping a system of regulatory oversight built piecemeal since the Civil War.
If all the changes get made, they would represent a complete reworking of the U.S. regulatory system for finance. Such an outcome would likely take years and would also require major compromises from an increasingly partisan Congress. The proposal, obtained by The Wall Street Journal, is likely to trigger messy feuds over turf at a time when confidence in government supervision is low.
Even so, the blueprint could be a guide for future action. Senior Democrats have expressed in recent weeks that they also believe the regulatory system should be overhauled, potentially paving the way for possible deals.
Mr. Paulson's plan will include merging some agencies, such as the Securities and Exchange Commission with the Commodity Futures Trading Commission, while broadening the authority of others, such as the Federal Reserve, which appears to be a winner under the proposal. Mr. Paulson is expected to recommend that the central bank play a greater role as a "market stability regulator," with broader authority over all financial market participants.
Mr. Paulson is also expected to call for the Office of Thrift Supervision, which regulates federal thrifts, to be phased out within two years and merged with the Office of the Comptroller of the Currency, which regulates national banks. One reason is that there is very little difference these days between federal thrifts and national banks.
The Treasury plan has been in the works since last year but has taken on greater prominence since the onset of the housing crisis and ensuing credit crunch. Critics have blamed lax regulation at both the state and federal level for exacerbating the crisis.
A key part of the blueprint is aimed at fixing lapses in mortgage oversight. Mr. Paulson plans to call for the creation of a new entity, called the Mortgage Origination Commission, according to an outline of the Treasury Department's plan, which was first reported by the New York Times. This new entity would create licensing standards for state mortgage companies. This commission, which would include representatives from the Fed and other agencies, would scrutinize the way states oversee mortgage origination.
Also related to mortgages, Mr. Paulson is expected to call for federal laws to be "clarified and enhanced," resolving any jurisdictional issues that exist between state or federal supervisors. Many of the problems in the housing market stemmed from loans offered by state-licensed companies. Federal regulators, too, were slow to create safeguards that could have banned some of these practices.
Mr. Paulson is expected to repeat his assertion that the Fed should have much more access to information from securities firms and investment banks that might borrow money from the central bank.
Presently, insurance is regulated on a state-by-state basis, but the Treasury review is expected to call for the creation of an optional federal insurance charter that would be overseen by a new Office of National Insurance. Such an idea has been floated for years but never directly endorsed by Treasury.
In addition to some of the short- and medium-term changes, Treasury officials have also designed what they believe to be an "optimal structure" of financial oversight. It would create a single class for federally insured banks and thrifts, rather than the multiple versions that now exist. It would also create a single class of federally regulated insurance companies and a federal financial-services provider for other types of financial institutions.
A market stability regulator, which would likely be the Fed, would have broad powers over all three types of companies. A new regulator, called the Prudential Financial Regulatory Agency, would oversee the financial regulation of the insurance and federally insured banks. Another regulator, the Business Regulatory Agency, would oversee business conduct at all the companies.
Here is the article:
Sweeping Changes in Paulson Plan
By DAMIAN PALETTA
March 29, 2008
WASHINGTON -- U.S. Treasury Secretary Henry Paulson plans on Monday to call for sweeping structural changes in the way the government monitors financial markets, capping a broad review aimed at revamping a system of regulatory oversight built piecemeal since the Civil War.
If all the changes get made, they would represent a complete reworking of the U.S. regulatory system for finance. Such an outcome would likely take years and would also require major compromises from an increasingly partisan Congress. The proposal, obtained by The Wall Street Journal, is likely to trigger messy feuds over turf at a time when confidence in government supervision is low.
Even so, the blueprint could be a guide for future action. Senior Democrats have expressed in recent weeks that they also believe the regulatory system should be overhauled, potentially paving the way for possible deals.
Mr. Paulson's plan will include merging some agencies, such as the Securities and Exchange Commission with the Commodity Futures Trading Commission, while broadening the authority of others, such as the Federal Reserve, which appears to be a winner under the proposal. Mr. Paulson is expected to recommend that the central bank play a greater role as a "market stability regulator," with broader authority over all financial market participants.
Mr. Paulson is also expected to call for the Office of Thrift Supervision, which regulates federal thrifts, to be phased out within two years and merged with the Office of the Comptroller of the Currency, which regulates national banks. One reason is that there is very little difference these days between federal thrifts and national banks.
The Treasury plan has been in the works since last year but has taken on greater prominence since the onset of the housing crisis and ensuing credit crunch. Critics have blamed lax regulation at both the state and federal level for exacerbating the crisis.
A key part of the blueprint is aimed at fixing lapses in mortgage oversight. Mr. Paulson plans to call for the creation of a new entity, called the Mortgage Origination Commission, according to an outline of the Treasury Department's plan, which was first reported by the New York Times. This new entity would create licensing standards for state mortgage companies. This commission, which would include representatives from the Fed and other agencies, would scrutinize the way states oversee mortgage origination.
Also related to mortgages, Mr. Paulson is expected to call for federal laws to be "clarified and enhanced," resolving any jurisdictional issues that exist between state or federal supervisors. Many of the problems in the housing market stemmed from loans offered by state-licensed companies. Federal regulators, too, were slow to create safeguards that could have banned some of these practices.
Mr. Paulson is expected to repeat his assertion that the Fed should have much more access to information from securities firms and investment banks that might borrow money from the central bank.
Presently, insurance is regulated on a state-by-state basis, but the Treasury review is expected to call for the creation of an optional federal insurance charter that would be overseen by a new Office of National Insurance. Such an idea has been floated for years but never directly endorsed by Treasury.
In addition to some of the short- and medium-term changes, Treasury officials have also designed what they believe to be an "optimal structure" of financial oversight. It would create a single class for federally insured banks and thrifts, rather than the multiple versions that now exist. It would also create a single class of federally regulated insurance companies and a federal financial-services provider for other types of financial institutions.
A market stability regulator, which would likely be the Fed, would have broad powers over all three types of companies. A new regulator, called the Prudential Financial Regulatory Agency, would oversee the financial regulation of the insurance and federally insured banks. Another regulator, the Business Regulatory Agency, would oversee business conduct at all the companies.
Friday, March 28, 2008
Rate Update March 28, 2008
Mortgage rates increased this morning following a sell-off of mortgage backed bonds yesterday afternoon. It looked as though mortgage-backed bonds may fall below the all-important 50-day moving average but thankfully this morning’s personal spending report helped support prices.
Watch today’s you tube video to find out how this report is helping mortgage rates…..
Current Outlook: Cautiously floating
Thursday, March 27, 2008
Rate Update March 27, 2008
Mortgage-backed bonds are testing the 50-day moving average again today. On Monday we hit the 50-day moving average and bounced higher which helped rates move modestly lower. If we can bounce higher again we should see rates improve. However, we remain concerned about the strength of the 50-day moving average as a support level. Should bonds manage to break through we could count on rate moving higher in the near term.
Current Outlook: neutral with bias towards locking.
Current Outlook: neutral with bias towards locking.
Wednesday, March 26, 2008
Spreads between treasuries & MBSs
This may be a little technical for most folks but this article explains that the curretn spreads between US treasury bonds & mortgage-backed bonds (MBSs) are extremely high. If we get some confidence back in the credit markets we should see this spread narrow which would send mortgage rates lower.
From WSJ.com:
Bond, Loan Markets Remain Wary
Despite Fed's Efforts,
Interest-Rate 'Spreads'
Reflect Big Fear of Risk
By LIZ RAPPAPORT
March 27, 2008
The Federal Reserve's efforts to heal broken credit markets have diminished worries about a big financial failure, but wariness about lending remains in bond and loan markets.
This wariness shows up in the movements of many interest rates and in a commonly watched measure of risk known as a spread. A bond's spread is the difference between its interest rate and the interest rate on a relatively risk-free investment, like a Treasury bond or a Federal Reserve loan. When spreads get bigger, as they have in recent months, it shows that investors are reluctant to own anything but the safest investments.
In many markets, spreads have improved since the Fed's actions of last week, but they remain elevated compared with a few months ago. Other measures of risk in credit markets, such as the cost of insuring bonds against default, have improved, particularly for bonds issued by financial institutions, but they aren't out of the woods yet.
"There are still a lot of challenges looming," says Kevin Flanagan, fixed-income strategist at Morgan Stanley.
Last week, the Fed helped to orchestrate the sale of Bear Stearns Cos. to J.P. Morgan Chase & Co. The Fed has also reduced its benchmark lending rate by three percentage points since September and created several borrowing facilities to address Wall Street's short-term financing needs. But the root causes of the credit crisis -- worries about mounting mortgage defaults and a desire among many investors and financial institutions to reduce their debt loads -- still hang over the market.
As worries reached a crescendo nearly two weeks ago, spreads on everything from mortgage debt to short-term money-market loans between banks shot higher.
Consider interest rates on mortgage securities backed by government sponsored entities Fannie Mae and Freddie Mac. These bonds' spreads relative to comparable Treasury bonds have narrowed after reaching 20-year highs March 6, a day after Carlyle Capital Corp., an investment fund, said it couldn't meet cash demand from some bankers.
Since March 6, the average spread on a 30-year mortgage bond has fallen by 0.76 percentage point to 2.17% over Treasury bonds. Still, that spread was 1.14% over comparable Treasury bonds last June.
"It's a start," says Michael Schultz, portfolio manager at Summit investment Partners, which invests in mortgage- and asset-backed securities. "Until we have hit bottom in the housing market, you're not going to get a major uptick."
Mortgage-market spreads have moved nearly in tandem with other measures of risk, says Hans Mikkelsen, credit strategist at Banc of America Securities: "At the root of all that happening is the housing market and banks' and brokers' exposure to the housing market."
In the derivatives market, where investors buy and sell protection against bond defaults, the cost of insuring against default by firms like Bear Stearns and Lehman Brothers has dropped since the Fed's actions.
Investors can buy protection against a Lehman default on $10 million of bonds for almost half of last week's price, at $231,543 annually from $447,515. The cost of such protection last year was just $29,261.
But this hasn't dramatically changed the reluctance of banks to lend to each other. In short-term funding markets, spreads show that firms are still reluctant to part with their cash.
The spread between three-month Libor, or the London interbank offered rate, and the expected federal-funds rate over the next three months remains elevated. This spread shows the difference between what firms charge each other for short-term cash and what they expected to pay in the relatively risk-free overnight fed-funds market. The spread widens when banks are worried about short-term risks.
The spread rose to 0.65 percentage point Tuesday from 0.59 point Monday. It peaked in December at more than one full point. In normal times, it rarely surpasses 0.10 point.
The trouble has spread to corporations. Spreads on junk bonds have gone from record lows last summer, about 2.4 percentage points over comparable Treasury bonds, to about eight percentage points over, even though the rate of default remains near historic lows, according to Standard & Poor's. While S&P believes defaults will rise to only 4.6% in 2008, others say the wide spreads in the junk-bond market reflect expectations for a deeper economic downturn.
From WSJ.com:
Bond, Loan Markets Remain Wary
Despite Fed's Efforts,
Interest-Rate 'Spreads'
Reflect Big Fear of Risk
By LIZ RAPPAPORT
March 27, 2008
The Federal Reserve's efforts to heal broken credit markets have diminished worries about a big financial failure, but wariness about lending remains in bond and loan markets.
This wariness shows up in the movements of many interest rates and in a commonly watched measure of risk known as a spread. A bond's spread is the difference between its interest rate and the interest rate on a relatively risk-free investment, like a Treasury bond or a Federal Reserve loan. When spreads get bigger, as they have in recent months, it shows that investors are reluctant to own anything but the safest investments.
In many markets, spreads have improved since the Fed's actions of last week, but they remain elevated compared with a few months ago. Other measures of risk in credit markets, such as the cost of insuring bonds against default, have improved, particularly for bonds issued by financial institutions, but they aren't out of the woods yet.
"There are still a lot of challenges looming," says Kevin Flanagan, fixed-income strategist at Morgan Stanley.
Last week, the Fed helped to orchestrate the sale of Bear Stearns Cos. to J.P. Morgan Chase & Co. The Fed has also reduced its benchmark lending rate by three percentage points since September and created several borrowing facilities to address Wall Street's short-term financing needs. But the root causes of the credit crisis -- worries about mounting mortgage defaults and a desire among many investors and financial institutions to reduce their debt loads -- still hang over the market.
As worries reached a crescendo nearly two weeks ago, spreads on everything from mortgage debt to short-term money-market loans between banks shot higher.
Consider interest rates on mortgage securities backed by government sponsored entities Fannie Mae and Freddie Mac. These bonds' spreads relative to comparable Treasury bonds have narrowed after reaching 20-year highs March 6, a day after Carlyle Capital Corp., an investment fund, said it couldn't meet cash demand from some bankers.
Since March 6, the average spread on a 30-year mortgage bond has fallen by 0.76 percentage point to 2.17% over Treasury bonds. Still, that spread was 1.14% over comparable Treasury bonds last June.
"It's a start," says Michael Schultz, portfolio manager at Summit investment Partners, which invests in mortgage- and asset-backed securities. "Until we have hit bottom in the housing market, you're not going to get a major uptick."
Mortgage-market spreads have moved nearly in tandem with other measures of risk, says Hans Mikkelsen, credit strategist at Banc of America Securities: "At the root of all that happening is the housing market and banks' and brokers' exposure to the housing market."
In the derivatives market, where investors buy and sell protection against bond defaults, the cost of insuring against default by firms like Bear Stearns and Lehman Brothers has dropped since the Fed's actions.
Investors can buy protection against a Lehman default on $10 million of bonds for almost half of last week's price, at $231,543 annually from $447,515. The cost of such protection last year was just $29,261.
But this hasn't dramatically changed the reluctance of banks to lend to each other. In short-term funding markets, spreads show that firms are still reluctant to part with their cash.
The spread between three-month Libor, or the London interbank offered rate, and the expected federal-funds rate over the next three months remains elevated. This spread shows the difference between what firms charge each other for short-term cash and what they expected to pay in the relatively risk-free overnight fed-funds market. The spread widens when banks are worried about short-term risks.
The spread rose to 0.65 percentage point Tuesday from 0.59 point Monday. It peaked in December at more than one full point. In normal times, it rarely surpasses 0.10 point.
The trouble has spread to corporations. Spreads on junk bonds have gone from record lows last summer, about 2.4 percentage points over comparable Treasury bonds, to about eight percentage points over, even though the rate of default remains near historic lows, according to Standard & Poor's. While S&P believes defaults will rise to only 4.6% in 2008, others say the wide spreads in the junk-bond market reflect expectations for a deeper economic downturn.
Thinking about refi'ing? Read this first....
The purpose of this article is to give consumers a guide for determining whether or not a proposed refinance makes financial sense for them. Through my interactions with many of my clients over the years I’ve found that much of the population is left confused when evaluating mortgage refinance options. I hope that I can shed some light through this article so that you can make better decisions about your own situation.
Because evaluating proposed refinance options is often confusing and overwhelming, many “rules” have been created over the years in an attempt to simplify the formula. Among the most common of these is the “1% rule” in which loan holders are to refinance ONLY if they can lock a rate 1% below their existing mortgage rate. Although I applaud the simplicity of such a rule I do not think it is effective in helping people make wise financial decisions.
The truth of the matter is that every single household’s situation is different and therefore there is no blanket rule that can apply to all people. We may advise two households differently even though they have the exact same mortgage balance and the exact same interest rate evaluating the exact same refinance proposals because each has different objectives.
So how do you decide whether or not a proposed refinance makes sense for you? Here is a methodology that we use with our clients:
The first step is to identify what your objectives are.
For most people the biggest consideration in deciding whether or not to refinance is cost. If they can replace their existing loan with a lower cost option then the refinance makes sense for them. For these people we’d like to remind them that costs can be expressed in a variety of ways such as closing costs, interest costs, opportunity costs, etc.
For other people the monthly payment or loan program may be their biggest consideration. For example, maybe someone is anticipating going back to school and wants to refinance into an interest-only loan to reduce their monthly payments. Or, maybe a person has an adjustable rate mortgage (ARM) that is scheduled to adjust in the coming months and they think that it would be a good time to lock in a fixed rate. These considerations may not be motivated by cost in the near term but instead by lifestyle changes.
The bottom line is that the objectives can vary depending on the person and the circumstance. It’s important that a person identifies what is important to them and communicates it to their mortgage professional.
The second step is to evaluate your options.
Once your mortgage professional understands what you’re after, they should be able to provide you with multiple refinance options based on those objectives. This is where the art of evaluation comes into play.
At the heart of evaluating a refinance proposal is a cost-benefit analysis. As a consumer you must weigh the cost associated with the refinance (as measured by the closing costs) against the proposed benefit (your objectives).
If your objective is anything other than cost the evaluation is much more subjective in nature. You will have decide if the closing costs you’ll incur for refinancing is worth whatever benefit you are seeking.
If cost is of most importance, then the cost-benefit analysis is relatively easy to complete. With this analysis we’ll evaluate the proposed cost of the refinance, in terms of closing costs, and weigh it against the proposed interest savings over time.
The cost-benefit analysis looks like this:
Proposed closing costs ($)/ Proposed Interest Savings ($ per month) = break even period: # of months in which it would take to recoup the closing costs and begin saving money
Once a person has calculated the length of time it would take for them to recoup their closing costs they can then decide if they expect to hold the loan long enough in order to experience significant savings.
In order to make sense of this concept lets evaluate a hypothetical situation:
Johnny Homeowner bought his home in January of 2006. At that time he took out a 30 year fixed rate mortgage @ 6.50% which he’s made standard payments on ever since. As of March of 2008 his loan balance is $296,067 and his monthly principal and interest (P & I) payment is $1,871.
He is currently evaluating a refinance proposal which would replace his existing mortgage with a new 30 year fixed rate mortgage @ 5.875%. The closing costs associated with the refinance are $3,000 which he has decided to include in the new loan so that he doesn’t have to pay them out of pocket. The new monthly payment would be $1,769 which represents a savings of $102.
Here is the analysis for him:
$3,000 (closing costs) / $102 (monthly interest savings)= 29 months.
What the analysis suggests is that he would have to maintain this mortgage for 29 months in order to recoup the initial closing costs he paid for the refinance. From that point forward he’s in better shape than he would have been had he not refinanced. So, for him to evaluate whether or not this makes sense he’d probably want to feel confident in the fact that he’ll have this loan for at least 30 more months.
The last step is to make your decision.
Since everyone is different there is no right or wrong answer when it comes to refinancing. We can help you best understand the implications of refinancing but ultimately it’s up to you to decide whether or not you should do so.
Typically we try to provide our clients with little to no closing cost refinance options because we believe there is less risk of making a bad decision when the break-even period is relatively soon. The tradeoff in that the borrower may not be locking an interest rate that is as low as they could get if they were willing to incur more costs.
If you decide that the refinance terms are not good enough to justify the cost then be sure and communicate that to your mortgage professional. Often times they can keep a lookout for you so that if/ when the opportunity does present itself they can pro-actively let you know.
In summary, deciding whether or not to refinance can be a difficult decision. In order to make sense out of it we’d first encourage you to identify what your motivation for refinancing is. Second, communicate that to your mortgage professional and have them work up some options for you to review. Evaluate these options using a cost-benefit analysis to decide whether or not the proposed benefit outweighs the cost of the loan. Finally, remember that there is no right or wrong answer. If you think that it makes sense then go for it and if not be sure to inform your mortgage professional what it is you’re looking for so that they can keep an eye out for you.
Because evaluating proposed refinance options is often confusing and overwhelming, many “rules” have been created over the years in an attempt to simplify the formula. Among the most common of these is the “1% rule” in which loan holders are to refinance ONLY if they can lock a rate 1% below their existing mortgage rate. Although I applaud the simplicity of such a rule I do not think it is effective in helping people make wise financial decisions.
The truth of the matter is that every single household’s situation is different and therefore there is no blanket rule that can apply to all people. We may advise two households differently even though they have the exact same mortgage balance and the exact same interest rate evaluating the exact same refinance proposals because each has different objectives.
So how do you decide whether or not a proposed refinance makes sense for you? Here is a methodology that we use with our clients:
The first step is to identify what your objectives are.
For most people the biggest consideration in deciding whether or not to refinance is cost. If they can replace their existing loan with a lower cost option then the refinance makes sense for them. For these people we’d like to remind them that costs can be expressed in a variety of ways such as closing costs, interest costs, opportunity costs, etc.
For other people the monthly payment or loan program may be their biggest consideration. For example, maybe someone is anticipating going back to school and wants to refinance into an interest-only loan to reduce their monthly payments. Or, maybe a person has an adjustable rate mortgage (ARM) that is scheduled to adjust in the coming months and they think that it would be a good time to lock in a fixed rate. These considerations may not be motivated by cost in the near term but instead by lifestyle changes.
The bottom line is that the objectives can vary depending on the person and the circumstance. It’s important that a person identifies what is important to them and communicates it to their mortgage professional.
The second step is to evaluate your options.
Once your mortgage professional understands what you’re after, they should be able to provide you with multiple refinance options based on those objectives. This is where the art of evaluation comes into play.
At the heart of evaluating a refinance proposal is a cost-benefit analysis. As a consumer you must weigh the cost associated with the refinance (as measured by the closing costs) against the proposed benefit (your objectives).
If your objective is anything other than cost the evaluation is much more subjective in nature. You will have decide if the closing costs you’ll incur for refinancing is worth whatever benefit you are seeking.
If cost is of most importance, then the cost-benefit analysis is relatively easy to complete. With this analysis we’ll evaluate the proposed cost of the refinance, in terms of closing costs, and weigh it against the proposed interest savings over time.
The cost-benefit analysis looks like this:
Proposed closing costs ($)/ Proposed Interest Savings ($ per month) = break even period: # of months in which it would take to recoup the closing costs and begin saving money
Once a person has calculated the length of time it would take for them to recoup their closing costs they can then decide if they expect to hold the loan long enough in order to experience significant savings.
In order to make sense of this concept lets evaluate a hypothetical situation:
Johnny Homeowner bought his home in January of 2006. At that time he took out a 30 year fixed rate mortgage @ 6.50% which he’s made standard payments on ever since. As of March of 2008 his loan balance is $296,067 and his monthly principal and interest (P & I) payment is $1,871.
He is currently evaluating a refinance proposal which would replace his existing mortgage with a new 30 year fixed rate mortgage @ 5.875%. The closing costs associated with the refinance are $3,000 which he has decided to include in the new loan so that he doesn’t have to pay them out of pocket. The new monthly payment would be $1,769 which represents a savings of $102.
Here is the analysis for him:
$3,000 (closing costs) / $102 (monthly interest savings)= 29 months.
What the analysis suggests is that he would have to maintain this mortgage for 29 months in order to recoup the initial closing costs he paid for the refinance. From that point forward he’s in better shape than he would have been had he not refinanced. So, for him to evaluate whether or not this makes sense he’d probably want to feel confident in the fact that he’ll have this loan for at least 30 more months.
The last step is to make your decision.
Since everyone is different there is no right or wrong answer when it comes to refinancing. We can help you best understand the implications of refinancing but ultimately it’s up to you to decide whether or not you should do so.
Typically we try to provide our clients with little to no closing cost refinance options because we believe there is less risk of making a bad decision when the break-even period is relatively soon. The tradeoff in that the borrower may not be locking an interest rate that is as low as they could get if they were willing to incur more costs.
If you decide that the refinance terms are not good enough to justify the cost then be sure and communicate that to your mortgage professional. Often times they can keep a lookout for you so that if/ when the opportunity does present itself they can pro-actively let you know.
In summary, deciding whether or not to refinance can be a difficult decision. In order to make sense out of it we’d first encourage you to identify what your motivation for refinancing is. Second, communicate that to your mortgage professional and have them work up some options for you to review. Evaluate these options using a cost-benefit analysis to decide whether or not the proposed benefit outweighs the cost of the loan. Finally, remember that there is no right or wrong answer. If you think that it makes sense then go for it and if not be sure to inform your mortgage professional what it is you’re looking for so that they can keep an eye out for you.
Rate Update March 26, 2008
More weak economic data and positive technical trading patterns have helped mortgage rates this morning.
The gain in mortgage rates may be short lived however as two prominent Fed officials are scheduled to speak later today. We know that inflation remains a primary concern for the Fed and any mention of inflation in their speeches could send rates higher.
Current Outlook: neutral
The gain in mortgage rates may be short lived however as two prominent Fed officials are scheduled to speak later today. We know that inflation remains a primary concern for the Fed and any mention of inflation in their speeches could send rates higher.
Current Outlook: neutral
Tuesday, March 25, 2008
100% financing will soon be dead........
I got the following email from one of our most pro-active lenders/ investors today indicating that ALL mortgage insurance companies are pulling back from insuring 100% loans beginning April 1st of this year-
After March 31st, no MI Company…. not MGIC, PMI, RMIC, Radian, UG or Triad… no MI Company will insure loans above 97% LTV. Many lenders have already pulled the trigger and implemented the changes…
If lenders are unable to get insurance to cover the loans then 100% financing will no longer exist. At this point it looks like 97% financing will be the maximum that we'll be able to offer after April 1st. If there are folks out there looking at buying a home that were planning on doing 100% financing I would recommend sharing this with them.
After March 31st, no MI Company…. not MGIC, PMI, RMIC, Radian, UG or Triad… no MI Company will insure loans above 97% LTV. Many lenders have already pulled the trigger and implemented the changes…
If lenders are unable to get insurance to cover the loans then 100% financing will no longer exist. At this point it looks like 97% financing will be the maximum that we'll be able to offer after April 1st. If there are folks out there looking at buying a home that were planning on doing 100% financing I would recommend sharing this with them.
Rate Update March 25, 2008
Weak economic data as well as technical support has helped stabilize mortgage rates this morning following yesterday’s increase.
Among the weak economic news was the Conference Board’s Consumer Confidence index which showed that consumers are less confident that previously thought. Furthermore, the S & P Cash-Shiller Home Price Index report showed price declines in all the 20 metropolitan markets that it follows including Portland & Seattle.
Watch today’s you tube video to better understand what technical trading patterns are in play……..
Current Outlook: neutral with a bias towards locking
Among the weak economic news was the Conference Board’s Consumer Confidence index which showed that consumers are less confident that previously thought. Furthermore, the S & P Cash-Shiller Home Price Index report showed price declines in all the 20 metropolitan markets that it follows including Portland & Seattle.
Watch today’s you tube video to better understand what technical trading patterns are in play……..
Current Outlook: neutral with a bias towards locking
Monday, March 24, 2008
No-Closing Cost refinances- How do they work?
For most of our clients, the idea of a “no closing cost” (NCC) refinance seems too good to be true. We think that these loans are great tools for helping our clients save money; but it is critical that our clients understand how they work. The purpose of this posting is to explain how we can offer NCC refinances and how we use them to help our clients manage their mortgages most effectively.
The first thing to understand when it comes to NCC refinances is how they are even possible. As a mortgage broker, there are two ways in which we can generate revenue for our work in originating a new mortgage. The first and most common way is by charging an origination fee to our clients, also known as “points”. The industry standard is to charge 1% point in addition to standard closing costs (lender, appraiser, title/ escrow, etc.).
The second way we can generate revenue is by selling the servicing rights of a loan we originate to a lender. In other words, lenders are willing to pay us a fee under certain circumstances for the right to service a mortgage while our clients pay interest on it. NCC refinances become possible when we can use these revenues to cover all of your closing costs that you’d ordinarily incur for refinancing with this revenue.
So what is the tradeoff? The tradeoff is that in order to generate enough revenue to make a NCC refinance feasible, we have to assign a premium to the interest rate above what a borrower could lock in if they were willing to pay their own closing costs.
As an example, for a $350,000 mortgage today we could lock in the following interest rates for 30 year fixed rates with the associated closing costs:
5.75% w/ $3,000 closing costs + 1% point ($3,500)= $6,500 closing costs
6.00% w/ $3,000 closing costs
6.125% w/ $0 closing costs(NCC)
For most of our clients it can be difficult to justify the standard closing costs associated with a refinance because the fixed rate being offered is only modestly better than their current situation. For example, for a client who has a current fixed rate of 6.375% the 5.75% would only create approximately $2,000 in annual interest savings & the 6.00% option only about half that. A borrower would need to hold the mortgage for over 3 years in order to save enough interest to recoup the closing costs associated with these options. For most people the “break-even” period is simply too far away to make the proposed refinance attractive.
However, this person could take advantage of our NCC refinance option @ 6.125% and immediately begin saving approximately $800 per year. This amount would not change their life but the fact that they incurred $0 closing costs to obtain the new rate would make it beneficial to them from day 1.
Here are some FAQ’s we’re commonly asked about NCC refinances:
Should we wait to see if rates go lower?
The best part about NCC refinances is that typically we can continue to provide them. If a borrower took advantage of the aforementioned 6.125% option and rates continued to decrease over the following months we could always provide another NCC refinance in the future. Since there is no cost to them there is no drawback in doing it multiple times, even within a short time period. We call this the “ratchet effect” because we effectively “ratchet” your mortgage rate lower as long as it makes sense but the rate will never move higher from the fixed point.
Will we have to bring any cash into closing?
It is likely that you’ll have to bring some money into closing. The amount will vary on a case-by-vase basis but lenders will essentially collect what equals to one mortgage payment because by refinancing you’ll skip your next one. For example, if you closed the NCC refinance on June 15th you’d be responsible for the interest on your current loan from the date of your last payment (June 1st) to the 15th (when the loan would be paid off). You would also be responsible for the interest that will accrue on the new mortgage from the close date, to the last day of the month (June 15th –June 30th). You WOULD NOT have to make a mortgage payment on July 1st.
Depending on whether or not you pay your real estate taxes & homeowner’s insurance with your monthly mortgage payment, the lender may also need to collect funds to re-establish a tax/ insurance reserve account. Often times these amounts can be included in your new loan amount so that you don’t have to fund this with cash out of your pocket. Keep in mind that when you pay-off your existing mortgage the lender will refund any amount that you currently have on deposit with them and therefore this amount that is collected is effectively a “wash”.
If you pay your real estate taxes and homeowner’s insurance separate from your mortgage payment then the lender may require that your current homeowner’s insurance be renewed (if it set to be renewed within the next few months) or any outstanding real estate tax liens be paid (depending on the time of year).
Will my loan amount change?
Some of our clients have asked us if when talking about a NCC refinance we are simply referring to “rolling” the cost of the loan into the new loan amount. We are not. This is truly a NO CLOSING COST refinance. If you’re comfortable paying your equivalent of one mortgage payment at closing and possibly any collected taxes and insurance then we can keep your loan amount exactly the same.
Does my 30-year term on my mortgage start over again?
It is true that with the new mortgage your term will start over again (there are some exceptions). However, if paying off your mortgage is most important to you then it would still be in your best interest to complete a NCC refinance. This is because if you used the monthly payment savings that you’ll get from the refinance to pay additional principal each month you’ll pay off your principal quicker than your current mortgage with a higher interest rate.
Are NCC refinances available to everyone?
NCC refinances are tougher to offer for borrowers who have loan amounts < $250,000.
The first thing to understand when it comes to NCC refinances is how they are even possible. As a mortgage broker, there are two ways in which we can generate revenue for our work in originating a new mortgage. The first and most common way is by charging an origination fee to our clients, also known as “points”. The industry standard is to charge 1% point in addition to standard closing costs (lender, appraiser, title/ escrow, etc.).
The second way we can generate revenue is by selling the servicing rights of a loan we originate to a lender. In other words, lenders are willing to pay us a fee under certain circumstances for the right to service a mortgage while our clients pay interest on it. NCC refinances become possible when we can use these revenues to cover all of your closing costs that you’d ordinarily incur for refinancing with this revenue.
So what is the tradeoff? The tradeoff is that in order to generate enough revenue to make a NCC refinance feasible, we have to assign a premium to the interest rate above what a borrower could lock in if they were willing to pay their own closing costs.
As an example, for a $350,000 mortgage today we could lock in the following interest rates for 30 year fixed rates with the associated closing costs:
5.75% w/ $3,000 closing costs + 1% point ($3,500)= $6,500 closing costs
6.00% w/ $3,000 closing costs
6.125% w/ $0 closing costs(NCC)
For most of our clients it can be difficult to justify the standard closing costs associated with a refinance because the fixed rate being offered is only modestly better than their current situation. For example, for a client who has a current fixed rate of 6.375% the 5.75% would only create approximately $2,000 in annual interest savings & the 6.00% option only about half that. A borrower would need to hold the mortgage for over 3 years in order to save enough interest to recoup the closing costs associated with these options. For most people the “break-even” period is simply too far away to make the proposed refinance attractive.
However, this person could take advantage of our NCC refinance option @ 6.125% and immediately begin saving approximately $800 per year. This amount would not change their life but the fact that they incurred $0 closing costs to obtain the new rate would make it beneficial to them from day 1.
Here are some FAQ’s we’re commonly asked about NCC refinances:
Should we wait to see if rates go lower?
The best part about NCC refinances is that typically we can continue to provide them. If a borrower took advantage of the aforementioned 6.125% option and rates continued to decrease over the following months we could always provide another NCC refinance in the future. Since there is no cost to them there is no drawback in doing it multiple times, even within a short time period. We call this the “ratchet effect” because we effectively “ratchet” your mortgage rate lower as long as it makes sense but the rate will never move higher from the fixed point.
Will we have to bring any cash into closing?
It is likely that you’ll have to bring some money into closing. The amount will vary on a case-by-vase basis but lenders will essentially collect what equals to one mortgage payment because by refinancing you’ll skip your next one. For example, if you closed the NCC refinance on June 15th you’d be responsible for the interest on your current loan from the date of your last payment (June 1st) to the 15th (when the loan would be paid off). You would also be responsible for the interest that will accrue on the new mortgage from the close date, to the last day of the month (June 15th –June 30th). You WOULD NOT have to make a mortgage payment on July 1st.
Depending on whether or not you pay your real estate taxes & homeowner’s insurance with your monthly mortgage payment, the lender may also need to collect funds to re-establish a tax/ insurance reserve account. Often times these amounts can be included in your new loan amount so that you don’t have to fund this with cash out of your pocket. Keep in mind that when you pay-off your existing mortgage the lender will refund any amount that you currently have on deposit with them and therefore this amount that is collected is effectively a “wash”.
If you pay your real estate taxes and homeowner’s insurance separate from your mortgage payment then the lender may require that your current homeowner’s insurance be renewed (if it set to be renewed within the next few months) or any outstanding real estate tax liens be paid (depending on the time of year).
Will my loan amount change?
Some of our clients have asked us if when talking about a NCC refinance we are simply referring to “rolling” the cost of the loan into the new loan amount. We are not. This is truly a NO CLOSING COST refinance. If you’re comfortable paying your equivalent of one mortgage payment at closing and possibly any collected taxes and insurance then we can keep your loan amount exactly the same.
Does my 30-year term on my mortgage start over again?
It is true that with the new mortgage your term will start over again (there are some exceptions). However, if paying off your mortgage is most important to you then it would still be in your best interest to complete a NCC refinance. This is because if you used the monthly payment savings that you’ll get from the refinance to pay additional principal each month you’ll pay off your principal quicker than your current mortgage with a higher interest rate.
Are NCC refinances available to everyone?
NCC refinances are tougher to offer for borrowers who have loan amounts < $250,000.
Rate Update March 24, 2008
Last Thursday we identified that mortgage-backed bonds were trading up against strong technical resistance and that we’d likely see mortgage rates move higher. Indeed that pattern is playing out this morning as mortgage-backed bonds fall under selling pressure.
Adding to the pressure is strength in the stock market after news broke that JP Morgan Chase will quintuple its offer price of railing investment bank Bear Sterns.
Current Outlook: Locking
Adding to the pressure is strength in the stock market after news broke that JP Morgan Chase will quintuple its offer price of railing investment bank Bear Sterns.
Current Outlook: Locking
Sunday, March 23, 2008
Economist has done an excellent job covering the credit crisis
The Economist has done an excellent job covering the credit crisis. In this weeks issue they have a 10-page briefing on various issues surrounding the credit markets, currency exchange, & central bank intervention. All of these issues stand to effect the direction of mortgage rates as well as credit tightening in our industry.
If you are so inclined I would highly recommend a peak- http://www.economist.com/finance/
If you are so inclined I would highly recommend a peak- http://www.economist.com/finance/
Good summary of credit crises in the Economist
If at first you don't succeed
Mar 13th 2008
From The Economist print edition
THIRD time lucky? The credit markets almost seized up in August, December and again this month and on each occasion the Federal Reserve has led a rescue attempt. Its latest effort led to a bout of euphoria on Wall Street, with the S&P 500 index managing its biggest one-day increase in over five years on March 11th. But every time the Fed has unblocked the drains somewhere in the credit markets, they have bunged up elsewhere. Sure enough, on March 13th panicky investors sent the dollar tumbling below ¥100 and pushed gold above $1,000 an ounce.
The fear is that the financial markets have entered a negative spiral, the obverse of the kind of euphoria that drove dotcom stocks to absurd valuations in 1999 and early 2000. Back then, investors scrambled to buy shares regardless of their price. This time round, they are being forced to sell bonds and loans, whether or not they believe the borrowers will eventually repay. The problems are exacerbated by the demise of the securitisation market, and fears about counterparty risk. Both those factors are making banks less willing to lend—even to worthy borrowers. They will become ever more cautious the deeper America's economy tips into recession.
Debt, such an exalted financing tool a little more than a year ago, is now a four-letter word. In the boom, banks were able to lend money via bonds and loans and then unload the debts in the form of structured products. Even when yield spreads narrowed, investors simply spiced up their portfolios with more debt to produce higher returns. But once the problems in the subprime market became clear, the appetite for structured products collapsed, and the process went into reverse.
Oddly enough, the problem is particularly intense in an area of the market that, in theory, should have been the safest; paper given AAA-like ratings by the agencies. There are no longer end buyers for this paper. The yields on such assets are too low to make them of interest except to geared investors. And there is scant lending available, even if investors wanted to gear up their portfolios in these volatile times.
Also, the investment banks that deal with hedge funds are tightening lending standards. This may involve higher margin payments or a bigger “haircut” shaved off the value of assets pledged as collateral. According to one banker, even government bonds pledged as collateral are facing haircuts for the first time in 15 years.
That may make sense for each individual bank, but at the systemic level it makes matters worse for everyone. Hedge funds are being forced to sell their best assets to meet their debts, adding to the air of crisis. A dramatic case is Carlyle Capital, a bond fund run by the Carlyle Group, a private-equity firm (see article). On March 12th it said it had defaulted on $16.6 billion of debt and expected to default on the rest, after failing to reach an agreement with its creditors. The fund used gearing of 32 times to buy AAA-rated paper and has had to sell assets to meet margin calls. Some of that debt was issued by Fannie Mae and Freddie Mac, the two quasi-governmental agencies that guarantee mortgage debt. As Carlyle sold, the prices of their debt fell, increasing concern about their finances. In early March the spread between yields on Fannie Mae debt and Treasury bonds was higher than at any time since 1986.
This helps explain why the new Fed facility allows primary dealers to pledge AAA-rated mortgage securities as collateral for borrowings. If confidence can be restored in that part of the market, perhaps the negative spiral can be broken.
Analysts were by no means convinced, however. Rob Carnell of ING described the measures as a “palliative to market fragility, rather than a cure.” Nor was the initial reaction in parts of the credit markets particularly encouraging. The cost of insuring against corporate-bond defaults did not fall sharply. Meanwhile, the interbank rate needed to borrow euros for three months hit 4.6%, the highest level since January and more than half a percentage point above official euro-zone rates. That indicated banks still preferred to hold cash rather than lend it.
The hoarding is a natural consequence of the breakdown of the securitisation market. Banks know that it will be more difficult to offload any new loans. They are also saddled with old loans, either because they have been unable to sell them, or because they have taken structured investment vehicles onto their balance sheets to protect their reputations.
When banks get more nervous about lending, that tends to have wider consequences. Companies will find it more difficult to borrow; weaker ones will accordingly get into trouble. According to Matt King, a credit strategist at Citigroup, the single biggest factor influencing corporate default rates is banks' willingness to extend credit—as measured by the lending surveys of the Fed and the European Central Bank. Nor is it likely that the full impact of tighter lending standards on consumer demand has been felt.
David Bowers of Absolute Strategy Research, a consultancy, reckons that the credit crisis has also undermined the willingness of foreigners to finance America's current-account deficit. Data show that overseas investors own some $1.5 trillion of asset-backed debt, investments that have gone badly wrong. They will not be willing to lend in the same way again.
And the effects of the crisis are showing up in some unexpected places. One of the latest casualties is the sewer system of Jefferson county, Alabama. The county, which includes the city of Birmingham, had agreed to interest-rate swaps worth a remarkable $5.4 billion in an attempt to limit its financing costs. But the rationale for the deal was undermined by the credit problems of the “monolines”, which insured the sewer system's bonds. The result was a sharp rise in financing costs. A group of banks led by JPMorgan Chase is asking it to put up a further $184m in collateral; the county is refusing.
As the dispute rumbles on, the sewer system's debt has been downgraded all the way to CCC by Standard & Poor's, a rating agency. One thing is certain. If the credit crunch continues, the residents of Jefferson County won't be the only ones holding their noses at the stink.
Mar 13th 2008
From The Economist print edition
THIRD time lucky? The credit markets almost seized up in August, December and again this month and on each occasion the Federal Reserve has led a rescue attempt. Its latest effort led to a bout of euphoria on Wall Street, with the S&P 500 index managing its biggest one-day increase in over five years on March 11th. But every time the Fed has unblocked the drains somewhere in the credit markets, they have bunged up elsewhere. Sure enough, on March 13th panicky investors sent the dollar tumbling below ¥100 and pushed gold above $1,000 an ounce.
The fear is that the financial markets have entered a negative spiral, the obverse of the kind of euphoria that drove dotcom stocks to absurd valuations in 1999 and early 2000. Back then, investors scrambled to buy shares regardless of their price. This time round, they are being forced to sell bonds and loans, whether or not they believe the borrowers will eventually repay. The problems are exacerbated by the demise of the securitisation market, and fears about counterparty risk. Both those factors are making banks less willing to lend—even to worthy borrowers. They will become ever more cautious the deeper America's economy tips into recession.
Debt, such an exalted financing tool a little more than a year ago, is now a four-letter word. In the boom, banks were able to lend money via bonds and loans and then unload the debts in the form of structured products. Even when yield spreads narrowed, investors simply spiced up their portfolios with more debt to produce higher returns. But once the problems in the subprime market became clear, the appetite for structured products collapsed, and the process went into reverse.
Oddly enough, the problem is particularly intense in an area of the market that, in theory, should have been the safest; paper given AAA-like ratings by the agencies. There are no longer end buyers for this paper. The yields on such assets are too low to make them of interest except to geared investors. And there is scant lending available, even if investors wanted to gear up their portfolios in these volatile times.
Also, the investment banks that deal with hedge funds are tightening lending standards. This may involve higher margin payments or a bigger “haircut” shaved off the value of assets pledged as collateral. According to one banker, even government bonds pledged as collateral are facing haircuts for the first time in 15 years.
That may make sense for each individual bank, but at the systemic level it makes matters worse for everyone. Hedge funds are being forced to sell their best assets to meet their debts, adding to the air of crisis. A dramatic case is Carlyle Capital, a bond fund run by the Carlyle Group, a private-equity firm (see article). On March 12th it said it had defaulted on $16.6 billion of debt and expected to default on the rest, after failing to reach an agreement with its creditors. The fund used gearing of 32 times to buy AAA-rated paper and has had to sell assets to meet margin calls. Some of that debt was issued by Fannie Mae and Freddie Mac, the two quasi-governmental agencies that guarantee mortgage debt. As Carlyle sold, the prices of their debt fell, increasing concern about their finances. In early March the spread between yields on Fannie Mae debt and Treasury bonds was higher than at any time since 1986.
This helps explain why the new Fed facility allows primary dealers to pledge AAA-rated mortgage securities as collateral for borrowings. If confidence can be restored in that part of the market, perhaps the negative spiral can be broken.
Analysts were by no means convinced, however. Rob Carnell of ING described the measures as a “palliative to market fragility, rather than a cure.” Nor was the initial reaction in parts of the credit markets particularly encouraging. The cost of insuring against corporate-bond defaults did not fall sharply. Meanwhile, the interbank rate needed to borrow euros for three months hit 4.6%, the highest level since January and more than half a percentage point above official euro-zone rates. That indicated banks still preferred to hold cash rather than lend it.
The hoarding is a natural consequence of the breakdown of the securitisation market. Banks know that it will be more difficult to offload any new loans. They are also saddled with old loans, either because they have been unable to sell them, or because they have taken structured investment vehicles onto their balance sheets to protect their reputations.
When banks get more nervous about lending, that tends to have wider consequences. Companies will find it more difficult to borrow; weaker ones will accordingly get into trouble. According to Matt King, a credit strategist at Citigroup, the single biggest factor influencing corporate default rates is banks' willingness to extend credit—as measured by the lending surveys of the Fed and the European Central Bank. Nor is it likely that the full impact of tighter lending standards on consumer demand has been felt.
David Bowers of Absolute Strategy Research, a consultancy, reckons that the credit crisis has also undermined the willingness of foreigners to finance America's current-account deficit. Data show that overseas investors own some $1.5 trillion of asset-backed debt, investments that have gone badly wrong. They will not be willing to lend in the same way again.
And the effects of the crisis are showing up in some unexpected places. One of the latest casualties is the sewer system of Jefferson county, Alabama. The county, which includes the city of Birmingham, had agreed to interest-rate swaps worth a remarkable $5.4 billion in an attempt to limit its financing costs. But the rationale for the deal was undermined by the credit problems of the “monolines”, which insured the sewer system's bonds. The result was a sharp rise in financing costs. A group of banks led by JPMorgan Chase is asking it to put up a further $184m in collateral; the county is refusing.
As the dispute rumbles on, the sewer system's debt has been downgraded all the way to CCC by Standard & Poor's, a rating agency. One thing is certain. If the credit crunch continues, the residents of Jefferson County won't be the only ones holding their noses at the stink.
Friday, March 21, 2008
Rate Update March 21, 2008
The financial markets are closed today for Good Friday.
Current Outlook: Locking
Current Outlook: Locking
Thursday, March 20, 2008
Rate Update March 20, 2008
Technical trading patterns have us concerned that we’ll see rates reverse higher over the coming days.
Since bouncing off the 200-day moving average (blue line) back on March 7th 30-year fixed rates have improved by about .50%.
However, the rally looks like it will be short lived. You’ll see in the chart below that the last time mortgage-backed bonds reached this level was January 22nd. Both times that bonds tried to break through this price levels they reversed lower which pushed mortgage rates higher.
Much like the 200-day moving average has been a very strong level of support this level is a very strong level of resistance. We are shifting to a locking position.
Current Outlook: Locking because of technical trading patterns in the bond market.
Wednesday, March 19, 2008
Good article in the WSJ...
A Fate Worse Than Debt:
Are You a Walking Junk Bond?
By JONATHAN CLEMENTS
March 19, 2008;
Banks are shaky. Bonds are suffering cuts in their credit ratings. Even bond insurers are hurting. Next up for a downgrade: people.
As the economy sputters and the housing market slumps, folks are struggling to pay their bills, and growing numbers are seeing their credit scores tumble. The result: Among Americans with credit histories, maybe a fifth are now akin to walking junk bonds, with lenders viewing them suspiciously and offering them credit only at steep rates.
Here is a look at what's happening -- and how you can avoid junk-bond status.
Unraveling Fast. To get a handle on the state of U.S. consumers, I turned to Equifax, the Atlanta-based credit bureau.
For every consumer with a credit history, the firm calculates an "Equifax risk score," which ranges from 280 to 850. The average credit-risk score for U.S. consumers climbed fairly steadily for much of this decade, in part because many Americans used home equity to keep their credit-card debt under control.
But over the past year, the average score has slipped slightly. More notably, there has been a 7% increase in consumers in the bottom category, those scoring below 580. These folks now account for 17% of the consumers tracked by Equifax.
"I think it's directly related to the subprime consumers who are behind on their mortgages," says Myra Hart, a senior vice president with Equifax. "They're late on their mortgages or even going into foreclosure."
As the economy slows, she says most consumers will maintain decent credit scores because they will hang on to their jobs. But among those unlucky enough to get laid off, we could see a further jump in rock-bottom credit scores as these folks struggle to pay their bills.
Indeed, for the unemployed, things could unravel fast. Ms. Hart notes that debt-service payments have jumped 39% over the past five years, outstripping the 25% rise in disposable income. On top of that, the annual savings rate this decade has ranged between a meager 0.4% and 2.4%, which suggests families don't have much of a financial cushion to fall back on.
Dodging Disaster. Don't want to end up as a subprime consumer? To maintain a top-notch credit score, the standard advice is to pay your bills promptly, avoid applying for credit too often and use only a small percentage of your available credit lines.
Such strategies are important -- but they aren't exactly a prescription for savvy money management. Instead, what you really need to do is shun the sort of foolishness that can put your family in peril. To that end, stick with these two guidelines:
Cap your core living expenses at half of your pretax income. We're talking here about things like groceries, car payments, mortgage or rent, utilities, student-loan payments and insurance premiums.
That will leave the other half of your income for savings, income taxes and fun stuff like vacations and eating out. If you lose your job, these other expenses should shrink sharply -- and you can live on half of your old income, says Michael Maloon, a financial planner in San Ramon, Calif.
"The key is to have enough savings to cover a minimum of six months of those core living expenses," he says. "Me and my clients, we don't take any risk. That money goes into a money-market fund."
Don't be short-term clever and long-term foolish. Since the early 1990s, there has been a gradual collapse in financial discipline, as Americans quit saving, spent home equity and, more recently, started raiding their 401(k) plans.
All this has been excused as perfectly rational. Not saving was okay, people believed, because stocks and homes were rising in value. Tapping home equity made sense because rates were low and the interest was usually tax-deductible. Taking a 401(k) loan was fine because you pay interest to yourself.
Indeed, with enough of these clever strategies, you could wreck your financial future. What if you lose your job, get hit with unexpected medical bills or decide you want to retire? Trust me: Things could be mighty rough if you haven't saved, your home is fully mortgaged and you've drained your 401(k).
Are You a Walking Junk Bond?
By JONATHAN CLEMENTS
March 19, 2008;
Banks are shaky. Bonds are suffering cuts in their credit ratings. Even bond insurers are hurting. Next up for a downgrade: people.
As the economy sputters and the housing market slumps, folks are struggling to pay their bills, and growing numbers are seeing their credit scores tumble. The result: Among Americans with credit histories, maybe a fifth are now akin to walking junk bonds, with lenders viewing them suspiciously and offering them credit only at steep rates.
Here is a look at what's happening -- and how you can avoid junk-bond status.
Unraveling Fast. To get a handle on the state of U.S. consumers, I turned to Equifax, the Atlanta-based credit bureau.
For every consumer with a credit history, the firm calculates an "Equifax risk score," which ranges from 280 to 850. The average credit-risk score for U.S. consumers climbed fairly steadily for much of this decade, in part because many Americans used home equity to keep their credit-card debt under control.
But over the past year, the average score has slipped slightly. More notably, there has been a 7% increase in consumers in the bottom category, those scoring below 580. These folks now account for 17% of the consumers tracked by Equifax.
"I think it's directly related to the subprime consumers who are behind on their mortgages," says Myra Hart, a senior vice president with Equifax. "They're late on their mortgages or even going into foreclosure."
As the economy slows, she says most consumers will maintain decent credit scores because they will hang on to their jobs. But among those unlucky enough to get laid off, we could see a further jump in rock-bottom credit scores as these folks struggle to pay their bills.
Indeed, for the unemployed, things could unravel fast. Ms. Hart notes that debt-service payments have jumped 39% over the past five years, outstripping the 25% rise in disposable income. On top of that, the annual savings rate this decade has ranged between a meager 0.4% and 2.4%, which suggests families don't have much of a financial cushion to fall back on.
Dodging Disaster. Don't want to end up as a subprime consumer? To maintain a top-notch credit score, the standard advice is to pay your bills promptly, avoid applying for credit too often and use only a small percentage of your available credit lines.
Such strategies are important -- but they aren't exactly a prescription for savvy money management. Instead, what you really need to do is shun the sort of foolishness that can put your family in peril. To that end, stick with these two guidelines:
Cap your core living expenses at half of your pretax income. We're talking here about things like groceries, car payments, mortgage or rent, utilities, student-loan payments and insurance premiums.
That will leave the other half of your income for savings, income taxes and fun stuff like vacations and eating out. If you lose your job, these other expenses should shrink sharply -- and you can live on half of your old income, says Michael Maloon, a financial planner in San Ramon, Calif.
"The key is to have enough savings to cover a minimum of six months of those core living expenses," he says. "Me and my clients, we don't take any risk. That money goes into a money-market fund."
Don't be short-term clever and long-term foolish. Since the early 1990s, there has been a gradual collapse in financial discipline, as Americans quit saving, spent home equity and, more recently, started raiding their 401(k) plans.
All this has been excused as perfectly rational. Not saving was okay, people believed, because stocks and homes were rising in value. Tapping home equity made sense because rates were low and the interest was usually tax-deductible. Taking a 401(k) loan was fine because you pay interest to yourself.
Indeed, with enough of these clever strategies, you could wreck your financial future. What if you lose your job, get hit with unexpected medical bills or decide you want to retire? Trust me: Things could be mighty rough if you haven't saved, your home is fully mortgaged and you've drained your 401(k).
Rate Update March 19, 2008
Mortgage rates rose .25% following the Fed rate cut of .75%. Why? First off, we already know that Fed rate cuts raise concerns about future inflation. In his post-announcement speech Chairman Ben Bernanke said:
"Inflation has been elevated, and some indicators of inflation expectations have risen. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook has increased. It will be necessary to continue to monitor inflation developments carefully."
In other words, “We’re concerned about future inflation.” His comments sparked a sell-off of mortgage-backed bonds which pushed mortgage rates higher by .25% yesterday afternoon.
However, in somewhat of a surprise move government regulators reduced capital requirements on Fannie Mae & Freddie Mac freeing up capital for them to invest into the mortgage-backed bond market. This is expected to bring upwards of $200 billion of demand into the bond market which is helping to bid up prices this morning. The rally in bonds has helped mortgage rates get .125% back from the .25% they lost yesterday.
Current Outlook: floating on Fannie & Freddie news
"Inflation has been elevated, and some indicators of inflation expectations have risen. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook has increased. It will be necessary to continue to monitor inflation developments carefully."
In other words, “We’re concerned about future inflation.” His comments sparked a sell-off of mortgage-backed bonds which pushed mortgage rates higher by .25% yesterday afternoon.
However, in somewhat of a surprise move government regulators reduced capital requirements on Fannie Mae & Freddie Mac freeing up capital for them to invest into the mortgage-backed bond market. This is expected to bring upwards of $200 billion of demand into the bond market which is helping to bid up prices this morning. The rally in bonds has helped mortgage rates get .125% back from the .25% they lost yesterday.
Current Outlook: floating on Fannie & Freddie news
Tuesday, March 18, 2008
Fed cuts .75%-WSJ.com article:
Fed Cuts by Three-Quarter Point
By BRIAN BLACKSTONE and HENRY J. PULIZZI
March 18, 2008 2:19 p.m.
WASHINGTON -- The Federal Reserve on Tuesday slashed its key interest rate to a three-year low and signaled more reductions are likely, unloading heavy artillery in its effort to keep the credit crunch from triggering a prolonged recession.
The three-quarter-percentage-point rate cut, though extremely aggressive by any historical measure, will disappoint many on Wall Street who thought a full percentage point was needed -- a sign of the severity of the crisis that already claimed Bear Stearns and forced Fed officials to use Depression-era tools to create new lending facilities for brokers.
The Federal Open Market Committee voted 8-2 to cut the fed funds rate at which banks lend to each other from 3% to 2.25%, its lowest level since December 2004. The Fed also eased by that amount in a rare intermeeting move two months ago, which was the largest reduction since officials started targeting fed funds in the early 1980s.
Philadelphia Fed President Charles Plosser and Dallas Fed President Richard Fisher dissented, preferring "less aggressive action."
The Fed also on Tuesday lowered the discount rate it charges banks and brokers that borrow directly from the Fed by 0.75 percentage point to 2.5%, leaving the spread over fed funds at a quarter percentage point.
"Recent information indicates that the outlook for economic activity has weakened further," the Fed said in a statement, citing weakness in consumer spending and labor markets. "Financial markets remain under considerable stress," the Fed added, and the "deepening" housing slump should weigh on the economy.
The Fed said growth risks remain and that it will act in a "timely" manner as needed, suggesting more rate cuts are probable barring an economic recovery.
As recently as a few days ago, economists had called for only a half-percentage-point reduction in the fed funds rate. Even that would have been an aggressive move coming just weeks after officials cut the funds rate by 1.25 percentage points over an eight-day period in January.
But as the financial market crisis worsened last week and economic data disappointed, investors steadily upped their rate-cut forecasts to as high as 0.75 percentage point by the end of last week.
And after the Fed on Sunday lowered the discount rate by one-quarter point, extended $30 billion in financing to J.P. Morgan to complete its takeover of Bear Stearns and announced new liquidity measures on top of others that could pump hundreds of billions of dollars into credit markets, many economists concluded that anything less than a full percentage point would disappoint markets and threaten a renewed downward spiral.
Many private-sector economists think the economy is already in a recession, albeit a mild one for the moment as consumer spending has yet to fall and exports remain supportive of overall growth.
But the signs are ominous for what Fed officials call an adverse "feedback loop" in which economic and market difficulties become self-feeding. Housing remains mired in a severe slump, as evidenced by a 16-year low reading Tuesday on homebuilding permits. Back-to-back declines in employment, weak retail sales and a surprisingly large drop in factory output suggest that housing weakness is spreading to other sectors.
Further freeing the Fed's hand was a surprisingly tame consumer price report last week that showed no change in prices both overall and when food and energy prices were excluded. Inflation will surely rebound this month on the back of record-high oil and gasoline prices. But with the economy slowing, Fed officials expect price pressures to moderate.
"Still, uncertainty about the inflation outlook has increased," the Fed said, and they will monitor it "carefully."
The smaller-than-expected rate cut may also signal that officials are growing uneasy about the U.S. dollar's decline against other major currencies, which has pushed up prices of commodities like oil that are priced in dollars.
A 0.75-percentage-point cut signals "that the Fed does not harbor benign neglect toward the dollar, as has been the impression of late," said Miller Tabak strategist Tony Crescenzi in a research note before the Fed announcement.
By BRIAN BLACKSTONE and HENRY J. PULIZZI
March 18, 2008 2:19 p.m.
WASHINGTON -- The Federal Reserve on Tuesday slashed its key interest rate to a three-year low and signaled more reductions are likely, unloading heavy artillery in its effort to keep the credit crunch from triggering a prolonged recession.
The three-quarter-percentage-point rate cut, though extremely aggressive by any historical measure, will disappoint many on Wall Street who thought a full percentage point was needed -- a sign of the severity of the crisis that already claimed Bear Stearns and forced Fed officials to use Depression-era tools to create new lending facilities for brokers.
The Federal Open Market Committee voted 8-2 to cut the fed funds rate at which banks lend to each other from 3% to 2.25%, its lowest level since December 2004. The Fed also eased by that amount in a rare intermeeting move two months ago, which was the largest reduction since officials started targeting fed funds in the early 1980s.
Philadelphia Fed President Charles Plosser and Dallas Fed President Richard Fisher dissented, preferring "less aggressive action."
The Fed also on Tuesday lowered the discount rate it charges banks and brokers that borrow directly from the Fed by 0.75 percentage point to 2.5%, leaving the spread over fed funds at a quarter percentage point.
"Recent information indicates that the outlook for economic activity has weakened further," the Fed said in a statement, citing weakness in consumer spending and labor markets. "Financial markets remain under considerable stress," the Fed added, and the "deepening" housing slump should weigh on the economy.
The Fed said growth risks remain and that it will act in a "timely" manner as needed, suggesting more rate cuts are probable barring an economic recovery.
As recently as a few days ago, economists had called for only a half-percentage-point reduction in the fed funds rate. Even that would have been an aggressive move coming just weeks after officials cut the funds rate by 1.25 percentage points over an eight-day period in January.
But as the financial market crisis worsened last week and economic data disappointed, investors steadily upped their rate-cut forecasts to as high as 0.75 percentage point by the end of last week.
And after the Fed on Sunday lowered the discount rate by one-quarter point, extended $30 billion in financing to J.P. Morgan to complete its takeover of Bear Stearns and announced new liquidity measures on top of others that could pump hundreds of billions of dollars into credit markets, many economists concluded that anything less than a full percentage point would disappoint markets and threaten a renewed downward spiral.
Many private-sector economists think the economy is already in a recession, albeit a mild one for the moment as consumer spending has yet to fall and exports remain supportive of overall growth.
But the signs are ominous for what Fed officials call an adverse "feedback loop" in which economic and market difficulties become self-feeding. Housing remains mired in a severe slump, as evidenced by a 16-year low reading Tuesday on homebuilding permits. Back-to-back declines in employment, weak retail sales and a surprisingly large drop in factory output suggest that housing weakness is spreading to other sectors.
Further freeing the Fed's hand was a surprisingly tame consumer price report last week that showed no change in prices both overall and when food and energy prices were excluded. Inflation will surely rebound this month on the back of record-high oil and gasoline prices. But with the economy slowing, Fed officials expect price pressures to moderate.
"Still, uncertainty about the inflation outlook has increased," the Fed said, and they will monitor it "carefully."
The smaller-than-expected rate cut may also signal that officials are growing uneasy about the U.S. dollar's decline against other major currencies, which has pushed up prices of commodities like oil that are priced in dollars.
A 0.75-percentage-point cut signals "that the Fed does not harbor benign neglect toward the dollar, as has been the impression of late," said Miller Tabak strategist Tony Crescenzi in a research note before the Fed announcement.
Rate Update March 18, 2008
Mortgage-backed bonds followed through on the rally yesterday pushing mortgage rates to their lowest levels since the beginning of February. Much of this momentum was created due to a “flight to quality” which is when investors sell stocks and reinvest the capital into the “safe-haven” of the bond market.
The big news of the day is the Fed. They are scheduled to announce their interest rate policy at 2:15 EST. Consensus thus far has been that the Fed will cut short-term rates by .75%. However, some analysts now believe we could see a 1.00% cut to the Federal Funds rate.
Our Fed strategy today:
Upon the announcement we may see mortgage-backed bonds “pop” on the news sending mortgage rates lower in the near-term. But, if you are an avid reader of ‘rate update’ you know why we think a rate cut will hurt mortgage rates in the long-term.
Current Outlook: neutral
The big news of the day is the Fed. They are scheduled to announce their interest rate policy at 2:15 EST. Consensus thus far has been that the Fed will cut short-term rates by .75%. However, some analysts now believe we could see a 1.00% cut to the Federal Funds rate.
Our Fed strategy today:
Upon the announcement we may see mortgage-backed bonds “pop” on the news sending mortgage rates lower in the near-term. But, if you are an avid reader of ‘rate update’ you know why we think a rate cut will hurt mortgage rates in the long-term.
Current Outlook: neutral
Monday, March 17, 2008
It's the end of an era......
Wells Fargo announced today that after March 28, 2008 they would no longer accept "stated income" applications. "Stated Income" loans grew popular over the past few years especially for applicants who were self-employed and reported large deductions on their tax returns. The program allowed applicants such as this to "state" their income on their application without documenting or proving this for the underwriter.
Wells Fargo was one of the last investors out there who was approving these loans but now it looks like this flexibility will be lost at least for the foreseeable future.
Wells Fargo was one of the last investors out there who was approving these loans but now it looks like this flexibility will be lost at least for the foreseeable future.
New "conforming" loan limits are not likely to help
The Fiscal Stimulus Package that was signed into law back in early February of this year included a provision that would temporarily allow the GSE’s (Fannie Mae & Freddie Mac) to buy loans which carried loan amounts higher than the current conforming loan limit ($417,000) under certain circumstances. The amounts have finally been released and it turns out that the provision will likely provide little help to homeowners for a few reasons.
The provision which was designed to help homeowner’s & lenders with mortgages that were considered “non-conforming” refinance or sell their loans has a few limitations. In the end, I don’t see this helping too many folks. Here’s why:
*Only applicable to “high-cost” areas: The provision allows the GSE’s to buy mortgages with loan amounts up to $417,000 except for areas where the median home price exceeds $333,600. In these so called “high-cost” areas the new conforming loan amounts are equal to 125% of that area’s median home price not to exceed $729,500. Here is a list of the only areas impacted in Oregon, Washington, & Idaho along with the new conforming loan limits:
Portland/ Vancouver/ Metro- $418,750
Bend, OR- $447,500
Medford, OR- $422,500
Seattle/ Tacoma, WA- $567,500
San Juan County, WA- $593,750
Teton, ID- $693,750
Valley, ID (Sun Valley)- $462,500
*Rates are not comparable to conforming loans: This next limitation may change over time as more lenders begin to originate the new loan amounts but for the time being rates on these new conforming loan limits > $417,000 are not the same as if the loan is $417,000 or less. I went onto one of my wholesale investor’s websites earlier this morning to check rates on a loan amount of $418,750 in the Portland area. It turns out that the new conforming loan limit carried a 30 year fixed rate of 7.875% whereas a loan amount of $417,000 could be locked @ 6.00%! Therefore, the new conforming loan limits do not necessarily represent expansion of the previous loan limits but instead creation of a new “Jumbo” loan option that carries rates significantly higher than conforming loans.
*The timeline: The provision currently only allows the GSE’s to buy these new loan amounts if they were originated between the dates of July 1, 2007-December 31, 2008. This timeline could be expanded I suppose if HUD deems it necessary.
In summary, at this point because of the limitations of the provision it doesn’t seem to me that this provision will help many folks.
In case you want to check the new conforming limits in another area here is the website to go to- https://entp.hud.gov/idapp/html/hicostlook.cfm
The provision which was designed to help homeowner’s & lenders with mortgages that were considered “non-conforming” refinance or sell their loans has a few limitations. In the end, I don’t see this helping too many folks. Here’s why:
*Only applicable to “high-cost” areas: The provision allows the GSE’s to buy mortgages with loan amounts up to $417,000 except for areas where the median home price exceeds $333,600. In these so called “high-cost” areas the new conforming loan amounts are equal to 125% of that area’s median home price not to exceed $729,500. Here is a list of the only areas impacted in Oregon, Washington, & Idaho along with the new conforming loan limits:
Portland/ Vancouver/ Metro- $418,750
Bend, OR- $447,500
Medford, OR- $422,500
Seattle/ Tacoma, WA- $567,500
San Juan County, WA- $593,750
Teton, ID- $693,750
Valley, ID (Sun Valley)- $462,500
*Rates are not comparable to conforming loans: This next limitation may change over time as more lenders begin to originate the new loan amounts but for the time being rates on these new conforming loan limits > $417,000 are not the same as if the loan is $417,000 or less. I went onto one of my wholesale investor’s websites earlier this morning to check rates on a loan amount of $418,750 in the Portland area. It turns out that the new conforming loan limit carried a 30 year fixed rate of 7.875% whereas a loan amount of $417,000 could be locked @ 6.00%! Therefore, the new conforming loan limits do not necessarily represent expansion of the previous loan limits but instead creation of a new “Jumbo” loan option that carries rates significantly higher than conforming loans.
*The timeline: The provision currently only allows the GSE’s to buy these new loan amounts if they were originated between the dates of July 1, 2007-December 31, 2008. This timeline could be expanded I suppose if HUD deems it necessary.
In summary, at this point because of the limitations of the provision it doesn’t seem to me that this provision will help many folks.
In case you want to check the new conforming limits in another area here is the website to go to- https://entp.hud.gov/idapp/html/hicostlook.cfm
Rate Update March 17, 2008
The beginning of this week is a busy one in terms of financial news. Here are the stories that we feel are of most importance to mortgage rates:
*Bear Sterns- The troubled investment bank agreed to be acquired by JP Morgan Chase yesterday for only $2 per share (the stocks 52-week stood @ $160). In today’s you tube video I discuss how this news is impacting mortgage rates.
*The Fed- In a curious move the Fed lowered the Discount Rate by .25% over the weekend. This was an interesting development in light of the fact that they have a rate announcement scheduled for tomorrow. The Fed is widely expected to cut short-term interest rates. If you are an avid reader of ‘rate update’ you know why we think a rate cut will hurt mortgage rates in the long-term.
Current Outlook: floating
Friday, March 14, 2008
Rate Update March 14, 2008
And the hits just keep on coming. The volatility and unpredictability of the markets are UNPRECEDENTED right now.
Yesterday afternoon we thought that the most important news for mortgage rates this morning would be the Consumer Price Index (CPI). This report was released and showed tame inflation numbers which is a good sign for mortgage rates.
However, the big news this morning surrounds Bear Sterns (BSC), one of the big five investment banks on Wall Street. Watch today’s you tube video to understand what the news is and how it could impact mortgage rates….
Current Outlook: neutral
Thursday, March 13, 2008
Rate Update March 13, 2008
Yesterday afternoon mortgage-backed bonds rallied pushing 30 year fixed rates down to 5.875% (.25% lower than where they started). However, mortgage backed bonds are trading lower after hitting the 40-day moving average. If you watched yesterday’s rate update then you know that mortgage-backed bonds have traded amazingly consistent with technical trading patterns over the past month.
In addition to technical trading pressure, more news about “margin calls” is pressuring mortgage rates higher. The Carlyle Group announced today that it would not be able to meet margin calls to lenders. In short, this announcement indicates the likelihood of greater supply of mortgage-backed bonds in the marketplace over the coming days. If you remember back to Economics 101, greater supply creates lower prices. In this case lower prices leads to higher rates.
If you’d like to read up on why margin calls leads to higher mortgage rates please read my blog posting from March 7th- "Margin Calls".
We still have reason to believe that once confidence is restored in mortgage-backed bonds that rates will move lower in the long-term.
Wednesday, March 12, 2008
Is the housing market good or bad right now?.....
I sat in on a real estate sales meeting Monday morning. In the meeting there was a discussion about buyer psychology and how it’s been battered with fear. One of the realtors brought up a great question to ask when prospective buyers mention that they’ve read/ heard the housing market is bad, “Bad for who (i.e. buyer or seller)?” The bottom line is that it’s a great time to be a buyer. Here are some of top headlines in the Real Estate Journal (WSJ’s real estate publication):
* “Supply of Homes for Sale Rises”
* “A Good Time to Buy a House if You can Afford One”
* “Open Season For Bargain Hunters”
Now you tell me, is the market good for buyers right now?
* “Supply of Homes for Sale Rises”
* “A Good Time to Buy a House if You can Afford One”
* “Open Season For Bargain Hunters”
Now you tell me, is the market good for buyers right now?
Rate Update March 12, 2008
Mortgage-backed bonds managed to rally yesterday afternoon bouncing off the 200-day moving average (blue line). This is good news for interest rates. The 30 year fixed rate is still hovering @ 6.125% but we may see that drop to 6.00% as more investors issue their morning rate sheets.
Watch today’s you tube video for a brief tutorial on how to interpret these charts…..
Current Outlook: neutral with a floating bias
Tuesday, March 11, 2008
Rate Update March 11, 2008
Continued uncertainty about the value of mortgage-backed bonds has pressured rates higher over the previous few days. This morning the Fed stepped in to provide additional liquidity for financial institutions to buy mortgage-backed securities by increasing their “Term Securities Lending Facility”. This was a good sign but may not be enough to save mortgage-backed bonds drifting below important technical support.
Mortgage-backed bonds have now been pushed back to the 200-day moving average. As we’ve talked about in recent days this level of technical support is critical in keeping rates around current levels. We’ll keep a close eye on the bond chart today. Should bonds dip below that 200-day moving average a locking position would be wise.
Current Outlook: very, very cautiously floating, ready to lock
Mortgage-backed bonds have now been pushed back to the 200-day moving average. As we’ve talked about in recent days this level of technical support is critical in keeping rates around current levels. We’ll keep a close eye on the bond chart today. Should bonds dip below that 200-day moving average a locking position would be wise.
Current Outlook: very, very cautiously floating, ready to lock
Monday, March 10, 2008
FHA increases loan limits to help housing market
Last week the Federal Housing Administration (FHA) increased the loan limits for FHA loan products. It's important to understand that this only applies to FHA loans and does not apply to conforming loan limits although the methodology for increasing FHA loan limits is the same. In either case the maximum loan limit is 125% of the area's median home price.
To find out what the new FHA loan limits are in your area FHA has provided the following website:
http://www.fhaoutreach.com/
For the Portland-Metro area the new maximum FHA loan for a single family residence is now $418,750 which is up about $100,000 from the previous limits.
Here is a link to the announcement on HUD's website:
http://portal.hud.gov/portal/page?_pageid=33,717234&_dad=portal&_schema=PORTAL
To find out what the new FHA loan limits are in your area FHA has provided the following website:
http://www.fhaoutreach.com/
For the Portland-Metro area the new maximum FHA loan for a single family residence is now $418,750 which is up about $100,000 from the previous limits.
Here is a link to the announcement on HUD's website:
http://portal.hud.gov/portal/page?_pageid=33,717234&_dad=portal&_schema=PORTAL
Rate Update March 10, 2008
Thankfully mortgage-backed bonds managed to close above the 200-day moving average on Friday afternoon. This morning mortgage-backed bonds have come under selling pressure. Watch today’s you tube video to find out what is impacting the bond market……
Search my February blog postings for an article-"Why Fed Rate Cuts Do Not Lower Mortgage Rates" for an explanation as to why a Fed rate cut will not necessarily push mortgage rates lower.
Current Outlook: very cautiously floating, ready to lock…
Friday, March 7, 2008
FNMA email on why rates are rising....
I got this email from an industry insider today. Although the email string doesn't indicate who wrote the email apparently it is from a Fannie Mae official who tracks the investment communities’ demand for mortgage-backed bonds. Why is this important? This email explains in detail who the typical buyers are for mortgage-backed bonds and why they aren’t buying right now. The lack of demand is ultimately the factor which is driving mortgage rates higher.
Here’s a copy of the email-
These are Fnma's comments on the selloff in MBS...
Bit long but addresses the questions:
1. Why aren’t mortgage rates better (i.e. why is the spread between treasuries and MBS the greatest since 1986)?
2. Why is FHA pricing so good?
3. What is likely to happen with jumbo pricing in the near term?
4. Why are arm rates so volatile right now?
Many of our client's will appreciate this info....
The Capital Markets Sales Desk has fielded a large number of calls from customers simply asking, what's going on? Why is the mortgage market trading lower every day? The following are reasons that could help explain why mortgages are struggling and why current market conditions are so volatile. The question is, why are mortgages widening or losing value vs other benchmarks like treasuries? Mortgages are widening for a number of reasons. First, there are no buyers. The dealer community is quite full and has no more balance sheet to hold mortgages. In addition, with the market so volatile, dealers don't want to own mortgages at this time. Another reason why dealers do not have an appetite for risk is quarter end. Most dealers are experiencing a quarter end in March and have become even more conservative. Banks are not buying either. They are more concerned with retaining capital to cover potential losses in other sectors. Banks and other securities firms have written down an astonishing amount of losses since the subprime mortgage market fell apart last summer. According to Bloomberg, as of February 8th, write-downs by banks and securities firms around the world had reached $120 billion. Therefore, banks remain defensive and prefer to either retain capital or put it to work in other AAA rated sectors. Asia has been noticeably absent as well. Asian banks generally buy on strength and its obvious there hasn't been any strength exhibited in the mortgage market recently. Also, Asia is generally more active at the end of the month so their absence this week is not a complete surprise.
Money managers and hedge funds aren't buying for the long term either. What they are doing is called momentum trading. They are buying at the wides (cheap) and selling at the tights (less cheap). Since they are buying and selling, they are not taking any production out of the market leaving the market to trade in a volatile fashion. The market is also trading very thin so exaggerated price movements occur when larger blocks are brought to market. Okay, we know that dealers, domestic banks, Asia, money managers and hedge funds are not buying. But, who is selling? Well, we know servicers have been selling. When the market sells off, the current coupon increases and servicers attempt to keep their hedges in the current coupon. Therefore, servicers need to sell lower coupons (longer duration coupons) and purchase higher coupons (shorter duration coupons). This is called moving up in coupon and is a form of shedding duration. However, in large market moves, servicers may need to sell without the corresponding purchase of the higher coupon. This is called outright selling. The outright selling and duration shedding from servicers has put extra downward pressure on mortgages. Originators are also selling. Although, with higher mortgage rates, originators aren't selling as much as they were a month ago, the amount they are selling remains significant.
Okay, servicers and originators were the two expected suspects, but are there any other sellers? Unfortunately there are, and this group of sellers is what brings fears to the market. Thornburg Mortgage, a mortgage REIT that specializes in Jumbo and Super Jumbo mortgages received a margin call from JP Morgan in late February. A margin call is a demand for cash on an under-collateralized loan. Thornburg was unable to meet a $28 million margin call and may be forced to liquidate its holdings. We are hearing talk of a $4.4 bln list of Non-Agency ARMs and pass-throughs out for the bid from Thornburg today. Another seller may be Carlyle Capital Corp, which is an investment bond fund located in Guernsey, UK. CCC missed four of seven margin calls totaling $37mln and another margin call notice is expected. According to Bloomberg, the fund raised $300mln in July and levered the money to purchase approximately $22bln in various forms of MBS. A portion of this $22bln is expected to be sold, and some market participants venture that a portion is being marketed today.
Although this is only two of the many accounts that participate in the MBS markets, their forced sales could have major repercussions. For example, let's say the bonds that are sold are sold at very low dollar prices. That may cause other market participants to mark their own portfolio down to current market levels. This may cause further write downs. The fear of further write-downs has banks on the defensive to a point where they want to preserve capital. If banks are preserving capital, then they are obviously not investing in MBS.
The few investors who do have available capital are putting their money to work in more profitable sectors. Municipal Bonds and certain classes of CMBS are yielding more than Agency MBS and have a AAA rating. Despite the inherent "cheapness" in the mortgage market, there are still other safe investment options that are more preferable at the moment.
In summation, we have more sellers than buyers. The selling bias puts pressure on mortgages, forcing mortgage prices lower and wider. The usual buyers of mortgages aren't buying or are buying other investments at cheaper prices.
Another trend we've noticed is a flight to quality within the mortgage market. Generally, when the market experiences a flight to quality, money is moving into US Treasuries. However, with treasury yields so low, market participants are buying the next best thing, GNMA MBS. GNMA MBS has the explicit guarantee of the US Government. Purchasing GNMAs allows an investor to enjoy the explicit guarantee while yielding considerably more than US Treasuries. In times like these, banks prefer to own GNMA MBS vs conventional MBS for a reason other than the explicit government guarantee. The reason is capital. Banks have to hold a certain amount of capital against their investments. However, they are required to hold significantly less capital against their GNMA holdings vs. their conventional MBS holdings. With the flight to quality within the mortgage market, and a preference by banks for GNMA MBS, it is no wonder why the GN/FN swap spreads have gapped out to astonishing levels. The current GN/FN 5.5% swap has gapped out from 18/32s from January 22nd, to its current level of 59/32s. Another thing to keep an eye on is ARM issuance. The yield curve has steepened in recent weeks (current difference in yield between the 2yr treasury and 10yr treasury is 208 bps). Generally, when the curve steepens, the difference in ARM rates and 30yr mortgage rates increases. Therefore, one may assume ARM issuance is likely to increase now that the curve has steepened. However, due to the lack of liquidity in the market, ARM MBS is trading extremely cheap. In other words, the correlation between a steep yield curve and lower ARM rates has decreased. Because lenders can't sell their current ARM production in the secondary market at respectable levels, they can't lower their offered rates. When liquidity improves, look for ARM issuance to increase.
Here’s a copy of the email-
These are Fnma's comments on the selloff in MBS...
Bit long but addresses the questions:
1. Why aren’t mortgage rates better (i.e. why is the spread between treasuries and MBS the greatest since 1986)?
2. Why is FHA pricing so good?
3. What is likely to happen with jumbo pricing in the near term?
4. Why are arm rates so volatile right now?
Many of our client's will appreciate this info....
The Capital Markets Sales Desk has fielded a large number of calls from customers simply asking, what's going on? Why is the mortgage market trading lower every day? The following are reasons that could help explain why mortgages are struggling and why current market conditions are so volatile. The question is, why are mortgages widening or losing value vs other benchmarks like treasuries? Mortgages are widening for a number of reasons. First, there are no buyers. The dealer community is quite full and has no more balance sheet to hold mortgages. In addition, with the market so volatile, dealers don't want to own mortgages at this time. Another reason why dealers do not have an appetite for risk is quarter end. Most dealers are experiencing a quarter end in March and have become even more conservative. Banks are not buying either. They are more concerned with retaining capital to cover potential losses in other sectors. Banks and other securities firms have written down an astonishing amount of losses since the subprime mortgage market fell apart last summer. According to Bloomberg, as of February 8th, write-downs by banks and securities firms around the world had reached $120 billion. Therefore, banks remain defensive and prefer to either retain capital or put it to work in other AAA rated sectors. Asia has been noticeably absent as well. Asian banks generally buy on strength and its obvious there hasn't been any strength exhibited in the mortgage market recently. Also, Asia is generally more active at the end of the month so their absence this week is not a complete surprise.
Money managers and hedge funds aren't buying for the long term either. What they are doing is called momentum trading. They are buying at the wides (cheap) and selling at the tights (less cheap). Since they are buying and selling, they are not taking any production out of the market leaving the market to trade in a volatile fashion. The market is also trading very thin so exaggerated price movements occur when larger blocks are brought to market. Okay, we know that dealers, domestic banks, Asia, money managers and hedge funds are not buying. But, who is selling? Well, we know servicers have been selling. When the market sells off, the current coupon increases and servicers attempt to keep their hedges in the current coupon. Therefore, servicers need to sell lower coupons (longer duration coupons) and purchase higher coupons (shorter duration coupons). This is called moving up in coupon and is a form of shedding duration. However, in large market moves, servicers may need to sell without the corresponding purchase of the higher coupon. This is called outright selling. The outright selling and duration shedding from servicers has put extra downward pressure on mortgages. Originators are also selling. Although, with higher mortgage rates, originators aren't selling as much as they were a month ago, the amount they are selling remains significant.
Okay, servicers and originators were the two expected suspects, but are there any other sellers? Unfortunately there are, and this group of sellers is what brings fears to the market. Thornburg Mortgage, a mortgage REIT that specializes in Jumbo and Super Jumbo mortgages received a margin call from JP Morgan in late February. A margin call is a demand for cash on an under-collateralized loan. Thornburg was unable to meet a $28 million margin call and may be forced to liquidate its holdings. We are hearing talk of a $4.4 bln list of Non-Agency ARMs and pass-throughs out for the bid from Thornburg today. Another seller may be Carlyle Capital Corp, which is an investment bond fund located in Guernsey, UK. CCC missed four of seven margin calls totaling $37mln and another margin call notice is expected. According to Bloomberg, the fund raised $300mln in July and levered the money to purchase approximately $22bln in various forms of MBS. A portion of this $22bln is expected to be sold, and some market participants venture that a portion is being marketed today.
Although this is only two of the many accounts that participate in the MBS markets, their forced sales could have major repercussions. For example, let's say the bonds that are sold are sold at very low dollar prices. That may cause other market participants to mark their own portfolio down to current market levels. This may cause further write downs. The fear of further write-downs has banks on the defensive to a point where they want to preserve capital. If banks are preserving capital, then they are obviously not investing in MBS.
The few investors who do have available capital are putting their money to work in more profitable sectors. Municipal Bonds and certain classes of CMBS are yielding more than Agency MBS and have a AAA rating. Despite the inherent "cheapness" in the mortgage market, there are still other safe investment options that are more preferable at the moment.
In summation, we have more sellers than buyers. The selling bias puts pressure on mortgages, forcing mortgage prices lower and wider. The usual buyers of mortgages aren't buying or are buying other investments at cheaper prices.
Another trend we've noticed is a flight to quality within the mortgage market. Generally, when the market experiences a flight to quality, money is moving into US Treasuries. However, with treasury yields so low, market participants are buying the next best thing, GNMA MBS. GNMA MBS has the explicit guarantee of the US Government. Purchasing GNMAs allows an investor to enjoy the explicit guarantee while yielding considerably more than US Treasuries. In times like these, banks prefer to own GNMA MBS vs conventional MBS for a reason other than the explicit government guarantee. The reason is capital. Banks have to hold a certain amount of capital against their investments. However, they are required to hold significantly less capital against their GNMA holdings vs. their conventional MBS holdings. With the flight to quality within the mortgage market, and a preference by banks for GNMA MBS, it is no wonder why the GN/FN swap spreads have gapped out to astonishing levels. The current GN/FN 5.5% swap has gapped out from 18/32s from January 22nd, to its current level of 59/32s. Another thing to keep an eye on is ARM issuance. The yield curve has steepened in recent weeks (current difference in yield between the 2yr treasury and 10yr treasury is 208 bps). Generally, when the curve steepens, the difference in ARM rates and 30yr mortgage rates increases. Therefore, one may assume ARM issuance is likely to increase now that the curve has steepened. However, due to the lack of liquidity in the market, ARM MBS is trading extremely cheap. In other words, the correlation between a steep yield curve and lower ARM rates has decreased. Because lenders can't sell their current ARM production in the secondary market at respectable levels, they can't lower their offered rates. When liquidity improves, look for ARM issuance to increase.
Rate Update March 7, 2008
The volatility in this marketplace continues to be unprecedented and makes it extremely difficult to predict what will happen moving forward.
Yesterday we recommended a floating position because we felt rates would improve due to mortgage-backed bonds possibly bouncing higher off the 200-day moving average & that the jobs report would be weak this morning.
Although half of our prediction proved correct rates actually increased.
This morning’s jobs report indicated JOB LOSSES of 63,000 in February. Analysts had expected JOB GROWTH of 25,000 jobs in our economy. The news is troubling for our economy but may help mortgage rates reverse lower.
The part of our prediction that did not hold true and the reason why rates increased is that the 200-day moving average was broken (see below). Yesterday mortgage-backed bonds broke below this level and resembled a “falling knife”.
What happened? The catalyst for this move was an influx in supply of mortgage-backed securities brought to market by the Carlyle Group & Thornburg Mortgage in response to “margin calls”. For more information on what “margin calls” are please read my blog posting, “Margin Calls”.
What’s next? Currently mortgage-backed bonds have managed to creep back above the 200-day moving average. IF they can close above this level it would be a GREAT sign for mortgage rates. If not, we may not see rates this low again for a few months…..
Current Outlook: neutral
Yesterday we recommended a floating position because we felt rates would improve due to mortgage-backed bonds possibly bouncing higher off the 200-day moving average & that the jobs report would be weak this morning.
Although half of our prediction proved correct rates actually increased.
This morning’s jobs report indicated JOB LOSSES of 63,000 in February. Analysts had expected JOB GROWTH of 25,000 jobs in our economy. The news is troubling for our economy but may help mortgage rates reverse lower.
The part of our prediction that did not hold true and the reason why rates increased is that the 200-day moving average was broken (see below). Yesterday mortgage-backed bonds broke below this level and resembled a “falling knife”.
What happened? The catalyst for this move was an influx in supply of mortgage-backed securities brought to market by the Carlyle Group & Thornburg Mortgage in response to “margin calls”. For more information on what “margin calls” are please read my blog posting, “Margin Calls”.
What’s next? Currently mortgage-backed bonds have managed to creep back above the 200-day moving average. IF they can close above this level it would be a GREAT sign for mortgage rates. If not, we may not see rates this low again for a few months…..
Current Outlook: neutral
"Margin Calls" are catalyst for rate increases
This is an excellent explanation of what a margin call is and why it caused rates to rise yesterday written by Barry Habib, CEO of Mortgage Market Guide:
So what happened yesterday? As we all know - only fools think that mortgage rates are based on the 10-year Note - many of them in the media. Yesterday's action simply underscores this fact. History shows us that Mortgage Bonds and the 10-year Treasury Note are only an exact match 1 trading day out of 100. So, watching the 10-year Note for mortgage pricing is the equivalent of using a broken watch to time your appointment.
Yesterday, losses from The Carlyle Capital Group and Thornburg Mortgage decreased their capital to the point where their financial backers had asked for cash back in the way of a "margin call". What does this mean? Imagine a home that received a loan with a 50% LTV...but a provision in the loan stated that under no circumstances could the equity fall below 50%. And the home would need to be appraised every day to evaluate this. If that home lost significant value, the lender would be entitled to an immediate repayment. And when the home actually decreased in value, the lender would make a call for capital to make sure their margin of LTV was intact...a margin call. If the homeowner had the cash to meet this call - all is fine. But if the homeowner did not have the cash, the only way to satisfy the lender would be a sale of the home. And that is what Carlyle Capital Group and Thornburg Mortgage had to do yesterday...they didn't have enough cash to meet their margin call, so they were forced to sell mortgage loans that they were holding. This flood of mortgage paper on the market, pushed Mortgage Bond prices lower...much lower. But this didn't have any impact on Treasuries, which were in fact higher on the day. As we have always said, these two securities trade independently.
So what happened yesterday? As we all know - only fools think that mortgage rates are based on the 10-year Note - many of them in the media. Yesterday's action simply underscores this fact. History shows us that Mortgage Bonds and the 10-year Treasury Note are only an exact match 1 trading day out of 100. So, watching the 10-year Note for mortgage pricing is the equivalent of using a broken watch to time your appointment.
Yesterday, losses from The Carlyle Capital Group and Thornburg Mortgage decreased their capital to the point where their financial backers had asked for cash back in the way of a "margin call". What does this mean? Imagine a home that received a loan with a 50% LTV...but a provision in the loan stated that under no circumstances could the equity fall below 50%. And the home would need to be appraised every day to evaluate this. If that home lost significant value, the lender would be entitled to an immediate repayment. And when the home actually decreased in value, the lender would make a call for capital to make sure their margin of LTV was intact...a margin call. If the homeowner had the cash to meet this call - all is fine. But if the homeowner did not have the cash, the only way to satisfy the lender would be a sale of the home. And that is what Carlyle Capital Group and Thornburg Mortgage had to do yesterday...they didn't have enough cash to meet their margin call, so they were forced to sell mortgage loans that they were holding. This flood of mortgage paper on the market, pushed Mortgage Bond prices lower...much lower. But this didn't have any impact on Treasuries, which were in fact higher on the day. As we have always said, these two securities trade independently.
Thursday, March 6, 2008
Seller paid closing costs
For those of us familiar with the real estate sales process we know that it is very common for buyers to request that the seller pay all or a portion of their settlement charges. This reduces the amount of cash they have to bring to closing. Especially for first-time homebuyers who often do not have a lot of cash this is an important flexibility to make deals work.
Countrywide, one of the nation’s largest mortgage lenders announced today that they would no longer accept addendums to sales contracts where the buyer and seller are increasing the sales price in order to include seller paid settlement charges. Their concern is that the increase in price & loan amount are not dully backed by the market value of the property and therefore leaves them exposed to equity that does not actually exist.
Here is an excerpt from their announcement on what is acceptable and unacceptable:
SELLER CONCESSIONS (Question & Answer ):
Q - Buyer and Seller are going back and forth counter-offering the purchase agreement. Initially the sales price offered was $300,000 w/no seller paid closing costs or prepaids. This amount was never agreed upon, but a counteroffer was made to a sales price of $303,000 w/the sellers paying $3000 in closing costs and prepaid. This is accepted by the seller and set as the terms of the transaction. I believe that this is an acceptable transaction.
A - Correct. And the closing costs paid by the seller must meet the 3, 6, or 9 percent limitations as usual.
Q - Buyer and Seller are going back and forth counter-offering the purchase agreement. Initially the sales price offered was $300,000 w/no seller paid closing costs or prepaids. This price is accepted by the sellers. Later the transaction is amended to request a change in the terms to a sales price of $303,000 w/the sellers paying $3000 in closing costs and prepaids which. This is accepted by the seller and set as the terms of the transaction. I believe under the CW policy this is NOT an acceptable transaction.
A - Generally correct. There may be times when the contract is final and then re-negotiated, e.g., a new home and additional upgrades being added, so that an increase in the price actually makes sense, there is a value add on both sides. In your example above, there doesn't appear to be a reason for the seller to raise the price other than to cover the costs, so the borrower is technically paying his own costs and potentially increasing his property tax liability for no apparent reason. This is particularly a problem if the contract is final, the appraisal comes in high and then there is a subsequent increase in the purchase price and agreement for the seller to pay closing costs or to pay more...it would appear they were gaming a bit and this is unacceptable.For now this guideline only exists with Countrywide. However, love them or hate them they are a bellwether in the mortgage industry and are probably only following the guidance that Wall Street is giving them. It is reasonable to assume that other lenders will likely follow in their lead over the next weeks/ months.
The lesson for guiding buyers and sellers through this is to ask buyers UPFRONT if they will need any seller paid settlement charges. This is another reason why we think it is important that your buyers meet with us PRIOR to going out and writing an offer on a home. We can sniff these needs out before it becomes an issue. Let us know if you have any scenarios or questions you’d like us to review.
Countrywide, one of the nation’s largest mortgage lenders announced today that they would no longer accept addendums to sales contracts where the buyer and seller are increasing the sales price in order to include seller paid settlement charges. Their concern is that the increase in price & loan amount are not dully backed by the market value of the property and therefore leaves them exposed to equity that does not actually exist.
Here is an excerpt from their announcement on what is acceptable and unacceptable:
SELLER CONCESSIONS (Question & Answer ):
Q - Buyer and Seller are going back and forth counter-offering the purchase agreement. Initially the sales price offered was $300,000 w/no seller paid closing costs or prepaids. This amount was never agreed upon, but a counteroffer was made to a sales price of $303,000 w/the sellers paying $3000 in closing costs and prepaid. This is accepted by the seller and set as the terms of the transaction. I believe that this is an acceptable transaction.
A - Correct. And the closing costs paid by the seller must meet the 3, 6, or 9 percent limitations as usual.
Q - Buyer and Seller are going back and forth counter-offering the purchase agreement. Initially the sales price offered was $300,000 w/no seller paid closing costs or prepaids. This price is accepted by the sellers. Later the transaction is amended to request a change in the terms to a sales price of $303,000 w/the sellers paying $3000 in closing costs and prepaids which. This is accepted by the seller and set as the terms of the transaction. I believe under the CW policy this is NOT an acceptable transaction.
A - Generally correct. There may be times when the contract is final and then re-negotiated, e.g., a new home and additional upgrades being added, so that an increase in the price actually makes sense, there is a value add on both sides. In your example above, there doesn't appear to be a reason for the seller to raise the price other than to cover the costs, so the borrower is technically paying his own costs and potentially increasing his property tax liability for no apparent reason. This is particularly a problem if the contract is final, the appraisal comes in high and then there is a subsequent increase in the purchase price and agreement for the seller to pay closing costs or to pay more...it would appear they were gaming a bit and this is unacceptable.For now this guideline only exists with Countrywide. However, love them or hate them they are a bellwether in the mortgage industry and are probably only following the guidance that Wall Street is giving them. It is reasonable to assume that other lenders will likely follow in their lead over the next weeks/ months.
The lesson for guiding buyers and sellers through this is to ask buyers UPFRONT if they will need any seller paid settlement charges. This is another reason why we think it is important that your buyers meet with us PRIOR to going out and writing an offer on a home. We can sniff these needs out before it becomes an issue. Let us know if you have any scenarios or questions you’d like us to review.
Rate Update March 6, 2008
We continue to track technical trading patterns today. After falling below the 100-day moving average mortgage backed bonds fell sharply to the 200-day moving average (indicated by the blue line) as we expected. If you’ll remember mortgage rates move inversely with the price of mortgage-backed bonds so as a result of the sell-off yesterday (indicated by the red lines at the end of the chart below) interest rates also increased sharply yesterday. So what to do from here?
We are recommending a floating position for two reasons. First, as you’ll see below on the chart the 200-day moving average has been a very strong layer of support over the past two years. Of the 8 times in which mortgage-backed bonds touched the 200-day moving average it only managed to break-through once in May of 2007. Every other times mortgage-backed bonds bounced higher and rates improved.
The second reason is because the monthly jobs report is due out tomorrow. As we’ve talked about previously in ‘rate update’ the monthly jobs report often drives the direction of mortgage rates for the 1-3 weeks following the release of the report. When the jobs report shows stronger than expected jobs growth it will put pressure on mortgage rates to move higher and vice versa. Given that most of the economic data out recently has been weak we think the jobs report may also fall short of expectations. This should help support bond prices and hopefully push mortgage rates lower.
The one bit of caution is that should bond prices move below the 200-day moving average we would see rates continue to move higher sharply. Last time this occurred bond prices took 5 months before they could break back above this level.
Current Outlook: floating
We are recommending a floating position for two reasons. First, as you’ll see below on the chart the 200-day moving average has been a very strong layer of support over the past two years. Of the 8 times in which mortgage-backed bonds touched the 200-day moving average it only managed to break-through once in May of 2007. Every other times mortgage-backed bonds bounced higher and rates improved.
The second reason is because the monthly jobs report is due out tomorrow. As we’ve talked about previously in ‘rate update’ the monthly jobs report often drives the direction of mortgage rates for the 1-3 weeks following the release of the report. When the jobs report shows stronger than expected jobs growth it will put pressure on mortgage rates to move higher and vice versa. Given that most of the economic data out recently has been weak we think the jobs report may also fall short of expectations. This should help support bond prices and hopefully push mortgage rates lower.
The one bit of caution is that should bond prices move below the 200-day moving average we would see rates continue to move higher sharply. Last time this occurred bond prices took 5 months before they could break back above this level.
Current Outlook: floating
Wednesday, March 5, 2008
Rate Update March 5, 2008
Technical trading patterns seem to be the major influencer of mortgage rates this morning. Watch today’s you tube video to understand how this may impact mortgage rates over the next couple days.
Tuesday, March 4, 2008
Rate Update March 4, 2008 w/ industry updates
There are a lot of important topics to cover this morning:
*The mortgage industry is going through another round of credit tightening that will further restrict our ability to provide 100% financing. This time the tightening is being initiated by mortgage insurers. Watch today’s you tube video to understand who will be impacted.
*Yesterday Fannie Mae & Freddie Mac reached agreement with the NY Attorney General on new appraisal rules. Watch today’s video to see what the rules say and what it might mean for the mortgage industry.
*Surprise comments out of Ben Bernanke this morning could have huge implications on the mortgage industry and interest rates. Watch today’s you tube video to find out what he said why it could negatively impact mortgage rates.
There are more Fed officials speaking later today. As investors show more concern over inflation these speeches get more attention and can have a larger impact on the market.
Current Outlook: locking
Monday, March 3, 2008
New appraisal rules to come?
This is pretty big news for our industry:
http://online.wsj.com/article/SB120456185094007821.html?mod=hps_us_whats_news
The article linked above indicates that we could see huge changes in the way property appraisals are conducted in the future. Essentially, Fannie Mae & Freddie Mac, who ultimately dictate guidelines for a majority of mortgage financing, are agreeing to change the way in which mortgages are ordered in our industry.
Currently, the loan originator who is compensated when the loan is originated and has no liability for the loan if it performs poorly, is the party who orders the appraisal. Furthermore, typically the appraiser is only compensated when a loan closes. Therefore, the incentive system currently in place leads to pressure on appraisers to come up with value to make deals work. Undoubtedly this has led to fraud and the "stretching" of values in certain instances over the past couple years.
However, the impact of this agreement could mean longer turn times for processing loans as well as higher costs to consumers. The reason? I'm not sure how Fannie and Freddie propose to create a clearing house for appraisers but I have to believe that centralizing such a task and maintaining efficiency will end up being a major challenge.
The timing of this agreement is not surprising. As I've mentioned in past posts regulation and rule changes always seem to commence when the "crapt hits the fan". As banks and investors count their losses for foolish loans made over the past couple years they answer by putting rules in place to restrict these practices in the future.
My answer to all of these problems would be something a little different. I think it would be best for banks and lenders to find a way to tie the loan originators compensation to the long-term performance of the loans they make.
http://online.wsj.com/article/SB120456185094007821.html?mod=hps_us_whats_news
The article linked above indicates that we could see huge changes in the way property appraisals are conducted in the future. Essentially, Fannie Mae & Freddie Mac, who ultimately dictate guidelines for a majority of mortgage financing, are agreeing to change the way in which mortgages are ordered in our industry.
Currently, the loan originator who is compensated when the loan is originated and has no liability for the loan if it performs poorly, is the party who orders the appraisal. Furthermore, typically the appraiser is only compensated when a loan closes. Therefore, the incentive system currently in place leads to pressure on appraisers to come up with value to make deals work. Undoubtedly this has led to fraud and the "stretching" of values in certain instances over the past couple years.
However, the impact of this agreement could mean longer turn times for processing loans as well as higher costs to consumers. The reason? I'm not sure how Fannie and Freddie propose to create a clearing house for appraisers but I have to believe that centralizing such a task and maintaining efficiency will end up being a major challenge.
The timing of this agreement is not surprising. As I've mentioned in past posts regulation and rule changes always seem to commence when the "crapt hits the fan". As banks and investors count their losses for foolish loans made over the past couple years they answer by putting rules in place to restrict these practices in the future.
My answer to all of these problems would be something a little different. I think it would be best for banks and lenders to find a way to tie the loan originators compensation to the long-term performance of the loans they make.
Rate Update March 3, 2008
We expect mortgage rates to drift higher this morning in response “Fed-speak”.
If you’ll remember back to the middle of February it was Richard Fisher (Fed official) who criticized the recent cycle of Fed cuts as being soft on inflation. His comments in a speech he made in Mexico City caused mortgage backed bonds to go on a huge sell-off which pushed mortgage rates higher by 1.00%.
This morning we got similar comments from Philadelphia Fed President Charlie Plosser. In his speech he suggested that the Fed was losing its credibility as an inflation fighter and that monetary policy "should be reversed quickly once the threat from financial markets abates".
He went on to comment, “One cannot and should not ignore other fundamental aspects of policy, especially the tendency for inflation to accelerate when policy is unduly easy..." and "Deviations (in monetary policy) should be temporary and limited and promptly reversed when conditions return to normal...to do otherwise risks eroding central bank credibility and unleashing inflation expectations."
We’ve said for sometime that the ultimate impact of the Fed’s rate cuts would be inflationary pressure. For now these comments have put inflation back in the spotlight and therefore we are in a locking position.
Current Outlook: locking
If you’ll remember back to the middle of February it was Richard Fisher (Fed official) who criticized the recent cycle of Fed cuts as being soft on inflation. His comments in a speech he made in Mexico City caused mortgage backed bonds to go on a huge sell-off which pushed mortgage rates higher by 1.00%.
This morning we got similar comments from Philadelphia Fed President Charlie Plosser. In his speech he suggested that the Fed was losing its credibility as an inflation fighter and that monetary policy "should be reversed quickly once the threat from financial markets abates".
He went on to comment, “One cannot and should not ignore other fundamental aspects of policy, especially the tendency for inflation to accelerate when policy is unduly easy..." and "Deviations (in monetary policy) should be temporary and limited and promptly reversed when conditions return to normal...to do otherwise risks eroding central bank credibility and unleashing inflation expectations."
We’ve said for sometime that the ultimate impact of the Fed’s rate cuts would be inflationary pressure. For now these comments have put inflation back in the spotlight and therefore we are in a locking position.
Current Outlook: locking
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