I have moved my blog to a new address. Please visit me at the new link-
http://webhost.mortgagetrustinc.com/evanswanson/
Friday, July 25, 2008
Thursday, July 24, 2008
Rate Update for July 24, 2008
Mortgage rates have improved modestly today thanks to a weaker stock market and technical trading patterns.
The Dow Jones Industrial Average is currently off by over 100 points in response to weak earnings results out of Ford Motor Co. & slower than expected home sales. The weakness in stock is creating additional demand for bonds.
We can also credit the move lower to technical trading patterns. As the chart shows below, mortgage-backed bonds are “bouncing” higher off the recent low levels that they reached. This same pattern unfolded in the middle of June.
In real estate related news, I have posted a new article to my blog about key points in the housing bill expected to get signed into law in the next week. Here is a link to read it for yourself.
Wednesday, July 23, 2008
ACCESS loan for 0% down financing.
0% down financing is getting harder and harder to find these days. The most common approach of creating 0% down financing is through the FHA loophole which allows for a seller to contribute the 3% required down payment via a down payment assistance program such as Nehemiah and Ameridream. However, recent reports suggest that the Federal Government will eliminate this flexibility with the passage of the latest housing bill.
Once that is gone what will be next? I may have found the answer with the ACCESS program we offer in conjunction with National Homebuyer Fund. This program will provide a 2nd mortgage for a homebuyer who meets the qualifications up to 100% of the purchase price (the website states 105% but we can't get mortgage insurance beyond 100%). Here are a few key points of the program:
*The ACCESS 2nd mortgage cannot exceed 14.99% of the purchase price & cannot exceed 100% combined loan to value. The most common approach is to structure the 2nd mortgage as a 5% 2nd mortgage subordinated behind a 95% primary mortgage.
*The ACCESS 2nd mortgage is a 20 yr. mortgage with a fixed interest rate which will be 2.00% higher than the rate on the primary mortgage. It has principal and interest payments.
*The ACCESS 2nd mortgage can be used in combination with a variety of 1st mortgage products including 30 year fixed rates with interest-only payments.
*The ACCESS 2nd mortgage carries no prepayment penalty.
*In order to qualify for this program the applicant must have at least a 680 credit score & cannot have income which exceeds 140% of the median household income (In the Portland area the limit would be $86,800).
Give me a call today if you'd like to see is this program will work for you!
Once that is gone what will be next? I may have found the answer with the ACCESS program we offer in conjunction with National Homebuyer Fund. This program will provide a 2nd mortgage for a homebuyer who meets the qualifications up to 100% of the purchase price (the website states 105% but we can't get mortgage insurance beyond 100%). Here are a few key points of the program:
*The ACCESS 2nd mortgage cannot exceed 14.99% of the purchase price & cannot exceed 100% combined loan to value. The most common approach is to structure the 2nd mortgage as a 5% 2nd mortgage subordinated behind a 95% primary mortgage.
*The ACCESS 2nd mortgage is a 20 yr. mortgage with a fixed interest rate which will be 2.00% higher than the rate on the primary mortgage. It has principal and interest payments.
*The ACCESS 2nd mortgage can be used in combination with a variety of 1st mortgage products including 30 year fixed rates with interest-only payments.
*The ACCESS 2nd mortgage carries no prepayment penalty.
*In order to qualify for this program the applicant must have at least a 680 credit score & cannot have income which exceeds 140% of the median household income (In the Portland area the limit would be $86,800).
Give me a call today if you'd like to see is this program will work for you!
Rate Update for July 23, 2008
Mortgages backed-bond prices remain at the lowest level all year which means mortgage rates are also at the highest level. Looking ahead there is a mixed bag of news which could influence the direction of rates.
Working in favor of mortgage rates this morning are a couple items:
*Oil prices are now trading 16% lower from there highs back on July 11th. Lower energy prices should ease inflationary concerns.
*Because mortgage-backed bond prices are trading at multi-month lows there is considerable technical trading support which should help keep prices from dropping any lower.
However, there continue to be factors working against the prospect of lower mortgage rates:
*The stock market continues to rally from its low. Today the Dow Jones Industrial Average is up over 70 points. .
*Furthermore, the treasury is set to auction $31 billion in 2-year Notes today. The added supply of fixed income securities in the marketplace could push rates higher.
In real estate related news, I have posted a new article to my blog about key points in the housing bill expected to get signed into law in the next week. Here is a link to read it for yourself.
Summary of the housing bill expected to be signed into law.....
According to reports President Bush has dropped his opposition to the housing bill which is expected to be voted on today in the House of Reprsentatives. Now that the White House backs the legislation it is expected that this bill will come into law later this week or early next week.
After reviewing mutliple articles about the new law in the WSJ, NY Times, & Bloomberg I have recorded the video below which summarizes a few key points.
After reviewing mutliple articles about the new law in the WSJ, NY Times, & Bloomberg I have recorded the video below which summarizes a few key points.
Tuesday, July 22, 2008
Your Guide to Understanding Mortgage Insurance
When a home buyer takes out a new mortgage and has less than 20% down often times they will be required to provide mortgage insurance to the lender (exceptions exist when we're able to provide "combination loans" which are fairly uncommon these days).
Mortgage Insurance (also known as "mi" or "pmi') is insurance which covers the lender against a portion of their losses should the loan they make result in payment delinquency or foreclosure.
There are various forms of mortgage insurance which home buyers should be aware of. Here is a brief explanation of each:
Borrower-paid mortgage insurance (BPMI)- This is the most common form of mortgage insurance. The insurance premiums for this form are paid for by the borrower on a monthly basis and varies depending on the loan amount, loan-to-value, and credit score of the borrower. With this form of mortgage insurance the borrower can request that the mortgage insurance payment be removed from their monthly payment once they have established a 24-month clean payment record and can demonstrate that they have 20% equity in the property.
Example of monthly BPMI payment for $100,000 loan on 95% financing*: $65
Lender-paid mortgage insurance (LPMI or "No mi")- With this form of mortgage insurance the borrower accepts a modestly higher interest rate in exchange for not having to make a monthly mortgage insurance payment. Often times these plans create the lowest possible monthly payment and can be most tax efficient. However, as of late, this form of mortgage insurance is getting more and more difficult to qualify for. The other limitation with LPMI is that the increase a borrower accepts to their interest rate can never be removed even when they have achieved 20% equity in their home.
Example of additional monthly interest expense associated with LPMI for $100,000 loan on 95% financing: $33
One-time or "upfront" mortgage insurance- With this form of mortgage insurance the borrower makes a one-time mortgage insurance payment at the outset of taking the loan and then does not have to make any additional mortgage insurance payments for the duration of the loan. This option works best for a home buyer who is seeking to create the lowest possible monthly payment and has plenty of equity for down payment and settlement charges.
Example of upfront mortgage insurance for a $100,000 loan on 95% financing: $3,050
Split mortgage insurance- Split mortgage insurance combines aspects of the BPMI & the one-time mortgage insurance forms. With a split mortgage insurance structure the borrower pays an upfront or "one-time" mortgage insurance payment at closing & accepts a monthly BPMI payment as well. The most common form of this is with the FHA program. With a FHA loan the buyer finances an upfront mortgage insurance premium into the loan amount and makes a monthly mortgage insurance payment. These two amounts are less than if the borrower did the BPMI or one-time mortgage insurance exclusively.
Example of most common FHA split mortgage insurance form on a $100,000 loan on 95% financing: $1,425 upfront + $39.58 per month.
Mortgage Insurance (also known as "mi" or "pmi') is insurance which covers the lender against a portion of their losses should the loan they make result in payment delinquency or foreclosure.
There are various forms of mortgage insurance which home buyers should be aware of. Here is a brief explanation of each:
Borrower-paid mortgage insurance (BPMI)- This is the most common form of mortgage insurance. The insurance premiums for this form are paid for by the borrower on a monthly basis and varies depending on the loan amount, loan-to-value, and credit score of the borrower. With this form of mortgage insurance the borrower can request that the mortgage insurance payment be removed from their monthly payment once they have established a 24-month clean payment record and can demonstrate that they have 20% equity in the property.
Example of monthly BPMI payment for $100,000 loan on 95% financing*: $65
Lender-paid mortgage insurance (LPMI or "No mi")- With this form of mortgage insurance the borrower accepts a modestly higher interest rate in exchange for not having to make a monthly mortgage insurance payment. Often times these plans create the lowest possible monthly payment and can be most tax efficient. However, as of late, this form of mortgage insurance is getting more and more difficult to qualify for. The other limitation with LPMI is that the increase a borrower accepts to their interest rate can never be removed even when they have achieved 20% equity in their home.
Example of additional monthly interest expense associated with LPMI for $100,000 loan on 95% financing: $33
One-time or "upfront" mortgage insurance- With this form of mortgage insurance the borrower makes a one-time mortgage insurance payment at the outset of taking the loan and then does not have to make any additional mortgage insurance payments for the duration of the loan. This option works best for a home buyer who is seeking to create the lowest possible monthly payment and has plenty of equity for down payment and settlement charges.
Example of upfront mortgage insurance for a $100,000 loan on 95% financing: $3,050
Split mortgage insurance- Split mortgage insurance combines aspects of the BPMI & the one-time mortgage insurance forms. With a split mortgage insurance structure the borrower pays an upfront or "one-time" mortgage insurance payment at closing & accepts a monthly BPMI payment as well. The most common form of this is with the FHA program. With a FHA loan the buyer finances an upfront mortgage insurance premium into the loan amount and makes a monthly mortgage insurance payment. These two amounts are less than if the borrower did the BPMI or one-time mortgage insurance exclusively.
Example of most common FHA split mortgage insurance form on a $100,000 loan on 95% financing: $1,425 upfront + $39.58 per month.
More stories on Fannie Mae & Freddie Mac
Treasury Secratary Henry Paulson has been lobbying Congress & the American Public to support his plan to instill confidence back into Fannie & Freddie. Both the New York Times and Wall Street Journal carried stories this morning about his efforts.
Here is a link the the NY Times article.
Here is a link to the WSJ article.
Here is a link the the NY Times article.
Here is a link to the WSJ article.
Rate Update for July 22, 2008
Mortgages backed-bond prices are now at the lowest level we’ve seen all year which means mortgage rates are at the highest level.
Earlier in the morning it looked as if mortgage rates may benefit from a sell-off in the stock market following weaker than expected earnings outlooks from American Express, Apple, & Wachovia. In fact, Wachovia announced yesterday that they would discontinue their wholesale mortgage lending operations effective in August of this year.
However, stocks have reversed higher (pressuring bonds lower) following comments made by Philadelphia Fed President Charlie Plosser who said “inflation is too high” and that the Fed must “back up their words with action” by hiking short-term rates. The fact that the equity markets have risen on these comments is a clear signal that Wall Street is more concerned about inflation than economic growth.
We favor a floating stance at this point because we believe technical trading patterns will help mortgage rates move lower in the coming days. However, at some point inflation concerns may very well pressure rates higher in the long-term.
On a side note, I continue to update my blog with articles about the ongoing Fannie Mae and Freddie Mac story line. If you’re curious about these two companies and how important they are to our livelihood I would encourage you to read my first posting on the topic at this link.
Monday, July 21, 2008
NY Times article about Fannie and Freddie
The NYT did a great article about foreign participation of Fannie Mae and Freddie Mac mortgage-backed bonds on July 21st.
The article quantifies the involvement of foreign investors in buying mortgage-backed bonds (which helps keep bond yields/ interest rates low). The article suggests that in the past few years Fannie Mae and Freddie Mac officials were "selling" mortgage-backed bonds as investments to foreigners by describing them as securities which were implicitly backed by the US Government even though the US has no legal obligation to bail Fannie Mae and Freddie Mac out. However, based on Henry Paulson's recent comments it looks likes this may actually be the case.
Here is a link to read the article for yourself.
The article quantifies the involvement of foreign investors in buying mortgage-backed bonds (which helps keep bond yields/ interest rates low). The article suggests that in the past few years Fannie Mae and Freddie Mac officials were "selling" mortgage-backed bonds as investments to foreigners by describing them as securities which were implicitly backed by the US Government even though the US has no legal obligation to bail Fannie Mae and Freddie Mac out. However, based on Henry Paulson's recent comments it looks likes this may actually be the case.
Here is a link to read the article for yourself.
Rate Update for July 21, 2008
Mortgages rates have now reached multi-month highs.
Since Tuesday, July 15th the Dow Jones Industrial Average has rallied by over 6% as confidence in the financial sector has begun to return to investors’ psyche.
Watch today’s you tube video for a refresher on how the stock market impacts mortgage rates.
Friday, July 18, 2008
Rate Update for July 18, 2008
Mortgages rates are slightly higher for a 3rd straight day.
Since July 15th the stock market has rallied by over 4%. This rally has pressured mortgage-backed bond prices lower by 188 basis points. Below is a chart showing mortgage backed bond prices over the past 6 months.
Mortgage-backed bonds are currently trading at recent support levels which mean we may see some stabilization to prices and possibly even a reversal. We are shifting our outlook to a cautiously floating stance in the hopes that this layer of technical support will help rates move back down.
Thursday, July 17, 2008
Rate Update for July 17, 2008
Mortgages rates are slightly higher again this morning following yesterday’s rally in the stock market.
In case you missed it the equity markets rallied by the largest margin in over 3 months on Wednesday. Mortgage-backed bonds tend to trade inversely with the stock market. When the stock market rallies it pushes bonds prices lower, which in turn causes mortgage rates to rise.
The stock market started the day higher today but has since backed off. In the absence of significant economic data we will be watching the stock market for direction the next 2 days.
Current Outlook: locking
In case you missed it the equity markets rallied by the largest margin in over 3 months on Wednesday. Mortgage-backed bonds tend to trade inversely with the stock market. When the stock market rallies it pushes bonds prices lower, which in turn causes mortgage rates to rise.
The stock market started the day higher today but has since backed off. In the absence of significant economic data we will be watching the stock market for direction the next 2 days.
Current Outlook: locking
Wednesday, July 16, 2008
Rate Update for July 16, 2008
Mortgages rates are slightly higher this morning following worse than expected inflation data.
The Labor Department reported that the Consumer Price Index (CPI) soared by 5% on a year-over-year basis. This increase to consumer prices is the largest since May of 1991.
If you’ll remember back to yesterday’s rate update the PPI showed an increase of over 9% on a year-over-year basis which was the largest increase since 1981!
This double whammy of worse than expected inflation does not bode well for mortgage rates. For a detailed explanation as to why inflation causes mortgage rates to rise please view this link.
We are shifting our outlook to a locking stance in the near-term.
I also wanted to plug the article I wrote on my blog yesterday evening about Fannie Mae & Freddie Mac. Many of us have heard of these companies and may have a vague understanding of their role in the mortgage industry. This article is designed to help you gain a very clear understanding of their role & importance. To view click this link.
Current Outlook: locking
The Labor Department reported that the Consumer Price Index (CPI) soared by 5% on a year-over-year basis. This increase to consumer prices is the largest since May of 1991.
If you’ll remember back to yesterday’s rate update the PPI showed an increase of over 9% on a year-over-year basis which was the largest increase since 1981!
This double whammy of worse than expected inflation does not bode well for mortgage rates. For a detailed explanation as to why inflation causes mortgage rates to rise please view this link.
We are shifting our outlook to a locking stance in the near-term.
I also wanted to plug the article I wrote on my blog yesterday evening about Fannie Mae & Freddie Mac. Many of us have heard of these companies and may have a vague understanding of their role in the mortgage industry. This article is designed to help you gain a very clear understanding of their role & importance. To view click this link.
Current Outlook: locking
Tuesday, July 15, 2008
Fannie Mae & Freddie Mac in the news.....
Unless you live under a rock you are probably very familiar with the turmoil ongoing in the financial sector of our economy. This turmoil brought Indymac Bank to its knees last Friday when the Federal Government seized it's assets for failing to maintain adequate capitalization. This bank failure is the 2nd largest bank failure in US history. Their failure has brought increased concern over the financial well-being of mortgage industry titans FNMA (Fannie Mae) & FHLMC (Freddie Mac).
Most people have heard of Fannie Mae and Freddie Mac but may not understand much about them. The media has recently done a great job of generating fear and panic surrounding these two companies but has yet to explain the crucial roles that these two entities play in our economy. It is my objective with this blog posting to clear some of this up and answer the following questions:
To first understand who Fannie & Freddie are let's take a look at why they exist. Prior to these two entities (before 1938) the mortgage industry was fairly simple. A local or regional bank would collect money from individuals and businesses in the form of deposits and lend that money back out in the form of mortgages (or other types of loans).
This system worked pretty well for many years except for a couple limitations.
One problem with this system was that a bank was limited to lending out only a portion of the deposits they took in. Therefore, if a bank had $10 million in deposits they would have the ability to lend out only portion of those assets (say $9 million or 90% for example) depending on the prevailing reserve requirements. A reserve requirement is the minimum amount of deposits a bank must hold relative to the loans outstanding.
A second problem was that banks were typically limited to lending in the local area in which they were located.
Then came the national banks. These larger institutions had branch presence across the country. This gave them the ability to collect $10 million of deposits in New York City and redistribute these funds in the form of loans in another state (Illinois for example).
This system also worked fairly well for a number of years except during times of economic contraction when bank runs would occur. A bank run is when a large number of individuals withdraw their deposits from a bank for fear that the bank is going to fail.
This happened frequently following the Great Depression and stock market crash of 1929. The result was that when the economy needed monetary infusions to help boost growth the opposite would occur because banks would suffer huge declines in their reserves.
To rectify this problem, Franklin Delano Roosevelt founded the Federal National Mortgage Association (Fannie Mae) in 1938 as a government agency. This agency was to provide liquidity in the mortgage market by buying mortgages from banks which they then chopped up and securitized into mortgage-backed bonds (avid 'rate update' followers should know what these are) that were sold to investors.
From a banks perspective, they were now able to lend a borrower an amount of money for a mortgage, sell the mortgage to Fannie Mae (and book a small profit), then lend that same amount of money again, and again, and again. Conceivably, as long as investors were willing to buy the bond backed by the original mortgage there was an endless supply of liquidity available for mortgage lenders. With this financial invention "securitization" was born and the period of credit expansion in the US was underway.
Add Freddie Mac
In 1968 the Federal Government decided that they no longer wanted Fannie Mae on their Federal balance sheet so they privatised the company. So that Fannie Mae would not act as a monopoly they also chartered the Federal National Mortgage Association (Freddie Mac) to compete with them.
To this day both companies are in existence as publicly traded entities and continue to provide liquidity to the mortgage market through the same purchase & securitization process described above.
Why are they so important?
Virtually every bank and lender out there is running at or near the minimum reserve requirement ratio which is currently set at 3% (simply put). Therefore, if a bank has $100 billion in loans outstanding, they have to have at least $3 billion in capital as backing (the reason Indymac failed last Friday was because they fell below this 3% level).
What Fannie Mae & Freddie Mac allow banks to do is to continue to lend even if they are getting close to their reserve requirements because as soon as they lend the money on a mortgage (increasing their loans outstanding and decreasing their capital), they get the cash back from the sale of the mortgage (decreasing their loans outstanding and increasing their capital).
Why are they in the news?
Fannie Mae & Freddie Mac are currently in the news because they are experiencing financial difficulty.
The current problems at Fannie Mae & Freddie Mac are twofold.
First, their loan portfolios have gotten very large which has raised questions about their solvency. In fact, today, Fannie Mae boasts a loan portfolio of $5.3 trillion. However, they only have $84 billion in capital which means their reserves are only about 1.58% of their outstanding loans. If they were a bank then the Federal Government would have already shut them down.
Second, they are losing A LOT of money which is putting further pressure on their capitalization ratio. These companies lose money when mortgages perform poorly because they guarantee the principal and interest on the mortgage-backed securities that they issue even if the borrower defaults. Therefore, during periods of rising defaults, delinquencies, and foreclosures-as is currently the case- these companies incur huge losses. In fact, according to their last two quarterly reports, they've lost over $11 billion in operating income over the last 6 months. These large losses coupled with their already low capitalization rate has investors concerned over their long-term viability.
What would the failure of Fannie & Freddie mean to the mortgage market?
The bottom line is that such a failure would be devastating to the mortgage market. The void that the loss of these two institutions would create in terms of providing liquidity in the mortgage market would be irreplaceable by the private sector.
In the event that these two corporations failed at best we could count on mortgage offerings that mirror the "non-conforming" or "jumbo" mortgage market today. These are loans that are portfolioed or securitized by the private sector and typically have much more stringent qualifying guidelines & (say good-bye to low down payment and investor loans) higher interest rates (currently non-conforming fixed rates carry rates in the 7-8.5% range.
At worst, mortgage lending would seize to exist except for seller contracts and private "hard money" loans.
What next?
The fate of Fannie Mae and Freddie Mac will likely be impacted on the health of the housing market & the Federal Government's willingness to step in if need be.
Should we begin to see some stabilization in housing it would create incentive for borrowers to make their payments which would prevent foreclosures that cost these corporations billions. This could eventually allow Fannie Mae & Freddie Mac to return to profitability and hopefully rebuild their battered balance sheets.
However, should these two titans fail we believe the Federal Government will step in and nationalize these two entities to avoid an all out halt of mortgage lending in our economy. Of course, the longer-term problem with that is how the American taxpayer will pay for it.
Most people have heard of Fannie Mae and Freddie Mac but may not understand much about them. The media has recently done a great job of generating fear and panic surrounding these two companies but has yet to explain the crucial roles that these two entities play in our economy. It is my objective with this blog posting to clear some of this up and answer the following questions:
- Who are Fannie Mae & Freddie Mac?
- What exactly do they do?
- Why are they so important?
- Why are they currently in the news?
- And what would be the implication of their financial failure?
- What's next?
To first understand who Fannie & Freddie are let's take a look at why they exist. Prior to these two entities (before 1938) the mortgage industry was fairly simple. A local or regional bank would collect money from individuals and businesses in the form of deposits and lend that money back out in the form of mortgages (or other types of loans).
This system worked pretty well for many years except for a couple limitations.
One problem with this system was that a bank was limited to lending out only a portion of the deposits they took in. Therefore, if a bank had $10 million in deposits they would have the ability to lend out only portion of those assets (say $9 million or 90% for example) depending on the prevailing reserve requirements. A reserve requirement is the minimum amount of deposits a bank must hold relative to the loans outstanding.
A second problem was that banks were typically limited to lending in the local area in which they were located.
Then came the national banks. These larger institutions had branch presence across the country. This gave them the ability to collect $10 million of deposits in New York City and redistribute these funds in the form of loans in another state (Illinois for example).
This system also worked fairly well for a number of years except during times of economic contraction when bank runs would occur. A bank run is when a large number of individuals withdraw their deposits from a bank for fear that the bank is going to fail.
This happened frequently following the Great Depression and stock market crash of 1929. The result was that when the economy needed monetary infusions to help boost growth the opposite would occur because banks would suffer huge declines in their reserves.
To rectify this problem, Franklin Delano Roosevelt founded the Federal National Mortgage Association (Fannie Mae) in 1938 as a government agency. This agency was to provide liquidity in the mortgage market by buying mortgages from banks which they then chopped up and securitized into mortgage-backed bonds (avid 'rate update' followers should know what these are) that were sold to investors.
From a banks perspective, they were now able to lend a borrower an amount of money for a mortgage, sell the mortgage to Fannie Mae (and book a small profit), then lend that same amount of money again, and again, and again. Conceivably, as long as investors were willing to buy the bond backed by the original mortgage there was an endless supply of liquidity available for mortgage lenders. With this financial invention "securitization" was born and the period of credit expansion in the US was underway.
Add Freddie Mac
In 1968 the Federal Government decided that they no longer wanted Fannie Mae on their Federal balance sheet so they privatised the company. So that Fannie Mae would not act as a monopoly they also chartered the Federal National Mortgage Association (Freddie Mac) to compete with them.
To this day both companies are in existence as publicly traded entities and continue to provide liquidity to the mortgage market through the same purchase & securitization process described above.
Why are they so important?
Virtually every bank and lender out there is running at or near the minimum reserve requirement ratio which is currently set at 3% (simply put). Therefore, if a bank has $100 billion in loans outstanding, they have to have at least $3 billion in capital as backing (the reason Indymac failed last Friday was because they fell below this 3% level).
What Fannie Mae & Freddie Mac allow banks to do is to continue to lend even if they are getting close to their reserve requirements because as soon as they lend the money on a mortgage (increasing their loans outstanding and decreasing their capital), they get the cash back from the sale of the mortgage (decreasing their loans outstanding and increasing their capital).
Why are they in the news?
Fannie Mae & Freddie Mac are currently in the news because they are experiencing financial difficulty.
The current problems at Fannie Mae & Freddie Mac are twofold.
First, their loan portfolios have gotten very large which has raised questions about their solvency. In fact, today, Fannie Mae boasts a loan portfolio of $5.3 trillion. However, they only have $84 billion in capital which means their reserves are only about 1.58% of their outstanding loans. If they were a bank then the Federal Government would have already shut them down.
Second, they are losing A LOT of money which is putting further pressure on their capitalization ratio. These companies lose money when mortgages perform poorly because they guarantee the principal and interest on the mortgage-backed securities that they issue even if the borrower defaults. Therefore, during periods of rising defaults, delinquencies, and foreclosures-as is currently the case- these companies incur huge losses. In fact, according to their last two quarterly reports, they've lost over $11 billion in operating income over the last 6 months. These large losses coupled with their already low capitalization rate has investors concerned over their long-term viability.
What would the failure of Fannie & Freddie mean to the mortgage market?
The bottom line is that such a failure would be devastating to the mortgage market. The void that the loss of these two institutions would create in terms of providing liquidity in the mortgage market would be irreplaceable by the private sector.
In the event that these two corporations failed at best we could count on mortgage offerings that mirror the "non-conforming" or "jumbo" mortgage market today. These are loans that are portfolioed or securitized by the private sector and typically have much more stringent qualifying guidelines & (say good-bye to low down payment and investor loans) higher interest rates (currently non-conforming fixed rates carry rates in the 7-8.5% range.
At worst, mortgage lending would seize to exist except for seller contracts and private "hard money" loans.
What next?
The fate of Fannie Mae and Freddie Mac will likely be impacted on the health of the housing market & the Federal Government's willingness to step in if need be.
Should we begin to see some stabilization in housing it would create incentive for borrowers to make their payments which would prevent foreclosures that cost these corporations billions. This could eventually allow Fannie Mae & Freddie Mac to return to profitability and hopefully rebuild their battered balance sheets.
However, should these two titans fail we believe the Federal Government will step in and nationalize these two entities to avoid an all out halt of mortgage lending in our economy. Of course, the longer-term problem with that is how the American taxpayer will pay for it.
Rate Update for July 15, 2008
There are all sorts of things to talk about this morning.
First off, the stock market is trading lower this morning. The Dow Jones Industrial average is now down below 11,000. Fears over the financial sector continue to hurt stocks as confidence in the US Treasury’s plan to aid Fannie Mae and Freddie Mac is waning. Bad news for stocks is typically good news for mortgage rates. For an in depth look at the relationship between stocks and mortgage rates click here.
Despite the weakness in stocks mortgage rates may not benefit from the current financial environment. Inflation is showing its ugly head once again in today’s Producer Price Index Report (PPI). The PPI reports on inflation at the wholesale and manufacturing level of our economy. This morning’s report indicated that prices year-over-year increased by a whopping 9.2%, the most since June of 1981!
Furthermore, in testimony on Capitol Hill, Fed Chairman Ben Bernanke said the US Economy faces, “numerous difficulties” and gave an uncertain outlook on inflation.
All in all, the news isn’t pretty. We are going to recommend that our clients with near-term closing lock in if they haven’t already. Longer-term closing may be able to be patient and see lower rates in the next few weeks.
Current Outlook: mixed
First off, the stock market is trading lower this morning. The Dow Jones Industrial average is now down below 11,000. Fears over the financial sector continue to hurt stocks as confidence in the US Treasury’s plan to aid Fannie Mae and Freddie Mac is waning. Bad news for stocks is typically good news for mortgage rates. For an in depth look at the relationship between stocks and mortgage rates click here.
Despite the weakness in stocks mortgage rates may not benefit from the current financial environment. Inflation is showing its ugly head once again in today’s Producer Price Index Report (PPI). The PPI reports on inflation at the wholesale and manufacturing level of our economy. This morning’s report indicated that prices year-over-year increased by a whopping 9.2%, the most since June of 1981!
Furthermore, in testimony on Capitol Hill, Fed Chairman Ben Bernanke said the US Economy faces, “numerous difficulties” and gave an uncertain outlook on inflation.
All in all, the news isn’t pretty. We are going to recommend that our clients with near-term closing lock in if they haven’t already. Longer-term closing may be able to be patient and see lower rates in the next few weeks.
Current Outlook: mixed
Monday, July 14, 2008
New rules for the Mortgage Industry voted on today!
The Fed voted to add more regulations to the mortgage lending industry today. For an overview see this article on wsj.com.
Also, here is a link to the Federal Reserve website to read their announcement.
Also, here is a link to the Federal Reserve website to read their announcement.
Rate Update for July 14, 2008
The Federal Government had a busy weekend dealing with ailing financial firms. Fannie Mae & Freddie Mac saw there stock prices fall by over 50% last week as investors expressed concern over the two firms’ large mortgage portfolio. The Treasury pledged to back to two companies should investor confidence erode further. This is good news for mortgage rates in the long-term.
On Friday Federal Regulators seized the troubled financial thrift Indymac Bank in what is the 2nd largest bank failure in US history. The news renews fears over the financial system and may help mortgage rates in the near terms because of investor appetite for safety.
Watch today’s you tube video to learn what we’ll be watching for this week.
Thursday, July 10, 2008
Rate Update for July 10, 2008
Mortgage rates have come down by .25%-.375% over the past week. In the absence of any scheduled economic data our attention is focused on the stock market and technical trading patterns.
Watch today’s you tube video to get an understanding of how the technical trading patterns have shifted our near-term outlook for mortgage rates.
Current Outlook: locking bias
Wednesday, July 9, 2008
Rate Update for July 9, 2008
Mortgage-backed bonds did rally yesterday which has helped mortgage rates trend lower. In the absence of any significant economic data we will be watching the stock market & technical trading patterns.
The stock market is currently trading modestly lower. Traders are trying to weigh the positive earnings news out of Aluminum maker Alcoa yesterday against the rising tensions in the Middle East.
If you haven’t heard Iran tested nine long-range missiles yesterday raising tensions between them and Israel. When geo-political tension exists it commonly causes mortgage rates to move lower. However, because this involves an oil producing nation if this conflict escalates mortgage rates could suffer due to higher oil prices.
From a technical standpoint mortgage rates rallied yesterday and are now facing overhead resistance. We favor locking in yesterday’s gains.
Current Outlook: locking
The stock market is currently trading modestly lower. Traders are trying to weigh the positive earnings news out of Aluminum maker Alcoa yesterday against the rising tensions in the Middle East.
If you haven’t heard Iran tested nine long-range missiles yesterday raising tensions between them and Israel. When geo-political tension exists it commonly causes mortgage rates to move lower. However, because this involves an oil producing nation if this conflict escalates mortgage rates could suffer due to higher oil prices.
From a technical standpoint mortgage rates rallied yesterday and are now facing overhead resistance. We favor locking in yesterday’s gains.
Current Outlook: locking
Tuesday, July 8, 2008
Rate Update for July 8, 2008
In a surprising reversal stocks sank yesterday after starting the day in positive territory. The sell-off in the equity markets helped mortgage-backed bonds rally which is why mortgages rates are slightly better this morning.
Looking ahead there are a number of speeches today from key officials including Ben Bernanke and Henry Paulson. Their comments always have the ability to impact the markets so we’ll be listening for what they have to say.
Earnings season for stocks kicks off today. Publicly traded corporations report their earnings every 3 months following the completion of a quarter. The reason this is important for mortgage rates is because of the inverse relationship between the stock market and bond market. For more information about this dynamic visit this link.
The bottom line is if the stock market rallies it will likely hurt mortgage rates and vice versa.
Current Outlook: floating bias
Looking ahead there are a number of speeches today from key officials including Ben Bernanke and Henry Paulson. Their comments always have the ability to impact the markets so we’ll be listening for what they have to say.
Earnings season for stocks kicks off today. Publicly traded corporations report their earnings every 3 months following the completion of a quarter. The reason this is important for mortgage rates is because of the inverse relationship between the stock market and bond market. For more information about this dynamic visit this link.
The bottom line is if the stock market rallies it will likely hurt mortgage rates and vice versa.
Current Outlook: floating bias
Monday, July 7, 2008
2nd mortgage options
What is a 2nd mortgage/ home equity loan?
A 2nd mortgage is a loan that is originated and subordinated behind a first mortgage. 2nd mortgages are also referred to as home equity loans, junior liens, or combination loans. These loans can take on various forms. The two most popular 2nd mortgages are the Home Equity Line of Credit (HELOC) and the Fixed Rate Home Equity Loan.
HELOC’s
A HELOC is a line of credit much like a credit card that is secured against the equity in a home. These are most often originated after a person has owned a home but can also be originated as a part of a purchase transaction.
HELOC’s have extremely flexible terms and is an excellent financial tool for homeowner’s with a large equity position in their home. HELOC’s typically have a 10-year “draw” term. During this period a user may borrower up to the maximum amount of the line of credit and pay it back as many times as they wish. Due to the flexible nature of the draws HELOC’s have variable interest rates that are based on the prime index plus a fixed margin. Margins on HELOC’s can vary from -0%-3.00%. The margin is determined by the borrower’s credit and equity available in the home. During the draw period borrowers make a minimum of interest-only payments based on the average balance during a given billing period (much like a credit card). The borrower may make additional payments at any time which will go towards reducing the balance owed against the line of credit. In the event that a borrower does not use the HELOC they will not pay any interest. Some HELOC’s do have an annual service fee charged for the maintenance of the account.
Fixed Rate Home Equity Loan
The most common fixed rate home equity loan is a 30/15 balloon program. With this loan a borrower will take out a sum of money and make payments based on a 30-year amortization at a fixed rate. However, at the end of 15 years if the borrower still had this loan they would be forced to pay-off or refinance the remaining balance. Typically these loans do not carry any penalty to prepay them early.
When would a 2nd mortgage make sense?
We originate 2nd mortgages in many different cases. 2nd mortgages are used as combination loans in purchase transactions in order to allow the client to avoid paying for costly private mortgage insurance. 2nd mortgages are also used when a client needs to borrow a small sum of money for a short period of time to satisfy an unbudgeted obligation. Since 2nd mortgages are relatively inexpensive to originate often times they can be more cost effective than refinancing a larger primary mortgage.
A 2nd mortgage is a loan that is originated and subordinated behind a first mortgage. 2nd mortgages are also referred to as home equity loans, junior liens, or combination loans. These loans can take on various forms. The two most popular 2nd mortgages are the Home Equity Line of Credit (HELOC) and the Fixed Rate Home Equity Loan.
HELOC’s
A HELOC is a line of credit much like a credit card that is secured against the equity in a home. These are most often originated after a person has owned a home but can also be originated as a part of a purchase transaction.
HELOC’s have extremely flexible terms and is an excellent financial tool for homeowner’s with a large equity position in their home. HELOC’s typically have a 10-year “draw” term. During this period a user may borrower up to the maximum amount of the line of credit and pay it back as many times as they wish. Due to the flexible nature of the draws HELOC’s have variable interest rates that are based on the prime index plus a fixed margin. Margins on HELOC’s can vary from -0%-3.00%. The margin is determined by the borrower’s credit and equity available in the home. During the draw period borrowers make a minimum of interest-only payments based on the average balance during a given billing period (much like a credit card). The borrower may make additional payments at any time which will go towards reducing the balance owed against the line of credit. In the event that a borrower does not use the HELOC they will not pay any interest. Some HELOC’s do have an annual service fee charged for the maintenance of the account.
Fixed Rate Home Equity Loan
The most common fixed rate home equity loan is a 30/15 balloon program. With this loan a borrower will take out a sum of money and make payments based on a 30-year amortization at a fixed rate. However, at the end of 15 years if the borrower still had this loan they would be forced to pay-off or refinance the remaining balance. Typically these loans do not carry any penalty to prepay them early.
When would a 2nd mortgage make sense?
We originate 2nd mortgages in many different cases. 2nd mortgages are used as combination loans in purchase transactions in order to allow the client to avoid paying for costly private mortgage insurance. 2nd mortgages are also used when a client needs to borrow a small sum of money for a short period of time to satisfy an unbudgeted obligation. Since 2nd mortgages are relatively inexpensive to originate often times they can be more cost effective than refinancing a larger primary mortgage.
Rate Update July 7, 2008
Mortgage rates appear to be trending higher as economic uncertainty prevails over the financial markets. Friday’s jobs report indicated that the labor market remains very weak. June marked the 6th consecutive month that the US economy lost jobs.
However, higher commodity prices continue to raise concerns over inflationary pressures in our economy.
The Fed is in a difficult position because they are responsible for maintaining price stability (low inflation) & sustainable economic growth. Over the next two days three Fed officials are scheduled to speak, including Ben Bernanke tomorrow. The financial markets will be listening to their outlooks as to when the Fed may act to lower or raise short-term rates in the future. We believe mortgage rates would benefit from an indication that they will likely move to raise short-term rates because of the implications it would have on the US Dollar.
For now, we are going to recommend that our clients lock.
Current Outlook: locking
However, higher commodity prices continue to raise concerns over inflationary pressures in our economy.
The Fed is in a difficult position because they are responsible for maintaining price stability (low inflation) & sustainable economic growth. Over the next two days three Fed officials are scheduled to speak, including Ben Bernanke tomorrow. The financial markets will be listening to their outlooks as to when the Fed may act to lower or raise short-term rates in the future. We believe mortgage rates would benefit from an indication that they will likely move to raise short-term rates because of the implications it would have on the US Dollar.
For now, we are going to recommend that our clients lock.
Current Outlook: locking
Thursday, July 3, 2008
Rate Update July 3, 2008
This morning’s jobs report did show continued weakness in the jobs market. The report indicated that the US Economy lost 62,000 jobs last month. This marks the 6th straight month of contraction in the jobs market. As I explained in yesterday’s ‘rate update’, a weak jobs report is likely to help mortgage rates. However, the bond market has shown a muted reaction thus far. Why?
Working against mortgage rates are two other stories:
First, oil prices continue to move higher. Oil futures rose to almost $146 a barrel earlier today which is also raising inflationary concerns.
In addition, the European Central Bank (ECB) announced this morning that they were raising short-term interest rates in order to combat inflation pressures in the EU. This announcement is likely to put pressure on the US dollar in the future which could lead to additional inflation pressure.
Current Outlook: neutral
Working against mortgage rates are two other stories:
First, oil prices continue to move higher. Oil futures rose to almost $146 a barrel earlier today which is also raising inflationary concerns.
In addition, the European Central Bank (ECB) announced this morning that they were raising short-term interest rates in order to combat inflation pressures in the EU. This announcement is likely to put pressure on the US dollar in the future which could lead to additional inflation pressure.
Current Outlook: neutral
Wednesday, July 2, 2008
Rate Update July 2, 2008
Mortgage Rates rose modestly yesterday afternoon after the stock market rallied in the afternoon.
Attention is now focused on tomorrow’s monthly jobs report. I have posted a new article on my blog explaining the importance of the monthly jobs report which you can view at this link. The bottom line is that the monthly jobs report is an indicator of the economies health. When this report shows fewer jobs created than expected mortgage rates tend to go down and vice versa.
Watch today’s you tube video for our recommendation and why.
Current Outlook: floating into tomorrow's jobs report
Importance of the Employment Report on Mortgage Rates
We often stress the importance of the monthly "jobs report" in trying to forecast the direction of mortgage rates. The objective of this post is to provide an explanation of why this report is so important.
Let's first have a look at what information can be found in the monthly "jobs report". Here is a summary:
Employment Report
In the US, the employment report, also known as the labor report, is regarded as the most important among all economic indicators. The report provides the first comprehensive look at the economy, covering nine economic categories. Here are the three main components of the report:
1. Payroll Employment: Measures the change in number of workers in a given month and measures the number of jobs in more than 500 industries (ex-¬farming) in all states and 255 metropolitan areas. The employment estimates are based on a survey of larger businesses and counts the number of paid employees working part-time or full-time in the nation's business and government establishments. This release is the most closely watched indicator because of its timeliness, accuracy and its comprehensiveness. It is important to compare this figure to a monthly moving average (6 or 9 months) to capture a true perspective of the trend in labor market strength. Equally important are the frequent revisions for the prior months, which are often significant.
2. Unemployment Rate: The percentage of the civilian labor force actively looking for employment but unable to find jobs. Although it is a highly proclaimed figure (due to simplicity of the number and its political implications), the unemployment rate gets relatively less importance in the markets because it is known to be a lagging indicator -- it usually falls behind economic turns.
3. Average Hourly Earnings Growth: The growth rate between one month’s average hourly rate and another’s sheds light on wage growth and, hence, assesses the potential of wage-push inflation. The year-on-year rate is also important in capturing the longer-term trend.
And why is it important?
The employment data give the most comprehensive report on how many people are looking for jobs, how many have them, what they're getting paid and how many hours they are working. These numbers are the best way to gauge the current state and future direction of the economy. They also provide insight on wage trends and wage inflation. If wage inflation threatens, usually interest rates will rise, and bond and stock prices will fall. The Employment Report is scheduled for release at 8:30 (ET) on the first Friday of each month by the Bureau of Labor Statistics.
Let's first have a look at what information can be found in the monthly "jobs report". Here is a summary:
Employment Report
In the US, the employment report, also known as the labor report, is regarded as the most important among all economic indicators. The report provides the first comprehensive look at the economy, covering nine economic categories. Here are the three main components of the report:
1. Payroll Employment: Measures the change in number of workers in a given month and measures the number of jobs in more than 500 industries (ex-¬farming) in all states and 255 metropolitan areas. The employment estimates are based on a survey of larger businesses and counts the number of paid employees working part-time or full-time in the nation's business and government establishments. This release is the most closely watched indicator because of its timeliness, accuracy and its comprehensiveness. It is important to compare this figure to a monthly moving average (6 or 9 months) to capture a true perspective of the trend in labor market strength. Equally important are the frequent revisions for the prior months, which are often significant.
2. Unemployment Rate: The percentage of the civilian labor force actively looking for employment but unable to find jobs. Although it is a highly proclaimed figure (due to simplicity of the number and its political implications), the unemployment rate gets relatively less importance in the markets because it is known to be a lagging indicator -- it usually falls behind economic turns.
3. Average Hourly Earnings Growth: The growth rate between one month’s average hourly rate and another’s sheds light on wage growth and, hence, assesses the potential of wage-push inflation. The year-on-year rate is also important in capturing the longer-term trend.
And why is it important?
The employment data give the most comprehensive report on how many people are looking for jobs, how many have them, what they're getting paid and how many hours they are working. These numbers are the best way to gauge the current state and future direction of the economy. They also provide insight on wage trends and wage inflation. If wage inflation threatens, usually interest rates will rise, and bond and stock prices will fall. The Employment Report is scheduled for release at 8:30 (ET) on the first Friday of each month by the Bureau of Labor Statistics.
Tuesday, July 1, 2008
Rate Update July 1, 2008
Over the past two weeks the Dow Jones Industrial Average has lost approximately $316 Billion (yes with a ‘B’) in market capitalization. This weakness in the stock market has caused 30 year fixed rates to fall by .375%. If you have not yet read this blog posting on how the stock market impacts mortgage rates it would be timely now.
From a technical standpoint mortgage-backed bonds continue to take direction from stocks. However, I wanted to point out the graph below. The first circle at the bottom left shows the lows that mortgage backed bond prices hit at the beginning of March (during this time 30 yr rates hit 6.375-6.50%). From that low bond prices rallied over the next few days and rates dropped by .50%. Two weeks ago we also hit this low in bond prices (30-yr rates also hit 6.375%-6.50%). It looks like we are trying to rally back from these levels so we are going to maintain a floating position for now.
From a technical standpoint mortgage-backed bonds continue to take direction from stocks. However, I wanted to point out the graph below. The first circle at the bottom left shows the lows that mortgage backed bond prices hit at the beginning of March (during this time 30 yr rates hit 6.375-6.50%). From that low bond prices rallied over the next few days and rates dropped by .50%. Two weeks ago we also hit this low in bond prices (30-yr rates also hit 6.375%-6.50%). It looks like we are trying to rally back from these levels so we are going to maintain a floating position for now.
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