Wednesday, April 30, 2008
Fed Cuts don't necessarily lower mortgage rates
I thought it would be a good idea to post a link to my previous post which explains why Fed Rate cuts DO NOT lower mortgage rates. Here is a link to the article.
Rate Update April 30, 2008
The markets are eagerly awaiting the Fed’s announcement which is scheduled to be announced at 2:15PM EST. Analysts expect that the Fed will cut short term rates by an additional .25%. As we’ve mentioned throughout this rate cutting cycle the Fed’s rate cut in and of itself will not move the markets. What could drive the markets is the tone of the Fed’s statement following the announcement. Here is a summary of what to listen for:
*If the Fed stresses concern about inflation in their statement over economic recovery it is likely a sign that the Fed is done cutting rates in the near-term. Although concern over inflation is bad for mortgage rates because the Fed is indicating that that they’ll pause it could actually strengthen the US Dollar and help mortgage rates.
*If the Fed maintains the view that their concern for inflation is “balanced” with economic growth then they are likely leaving the door open for future Fed cuts. In this instance we do not believe mortgage rates would benefit because of inflationary pressures.
To give you an idea of the scrutiny that the Fed faces in crafting their language for their statement you may want to check out this article from Marketwatch. Maybe they should begin hiring English Majors instead of Economists for this task…..
Current Outlook: neutral
*If the Fed stresses concern about inflation in their statement over economic recovery it is likely a sign that the Fed is done cutting rates in the near-term. Although concern over inflation is bad for mortgage rates because the Fed is indicating that that they’ll pause it could actually strengthen the US Dollar and help mortgage rates.
*If the Fed maintains the view that their concern for inflation is “balanced” with economic growth then they are likely leaving the door open for future Fed cuts. In this instance we do not believe mortgage rates would benefit because of inflationary pressures.
To give you an idea of the scrutiny that the Fed faces in crafting their language for their statement you may want to check out this article from Marketwatch. Maybe they should begin hiring English Majors instead of Economists for this task…..
Current Outlook: neutral
Tuesday, April 29, 2008
Rate Update April 29, 2008
Mortgage-backed bonds are trading modestly higher this morning pushing 30 year rates slightly lower. Watch today’s you tube video to understand what we’ll be listening for in tomorrow’s Fed announcement.
From a technical standpoint mortgage-backed bonds are trading against a ceiling of resistance. This means that all else being equal we’d expect prices to fall (pushing rates higher in the next couple days). A strong Fed statement indicating that they feel inflation pressures will curb in the coming months could help us break this resistance pushing rates lower.
Current Outlook: neutral with locking bias
Monday, April 28, 2008
The Four "C"s of qualifying for a mortgage
In evaluating a loan application to determine wether or not an applicant qualifies for a mortgage lenders look at four areas. These four areas are known as the "Four C's" and stand for:
1) Credit
2) Capacity
3) Capital
4) Collateral
Here is a summary of each "C" and how they impact the loan approval process:
Credit:
Credit is arguably the most important factor of the 4 C’s. An applicant’s credit score taken from the credit report is the simplest measure of their credit strength. In determining an applicant’s credit score lenders will simply use the middle of the three credit scores reported by the three credit repositories (Transunion, Equifax, & Experian).
Credit scores are heavily influenced by a person’s payment history over the preceding 24 months. Other factors may include the proportion of revolving debt relative to the high credit limits, number of accounts, lack of credit depth, and many more.
Another factor that lenders may pay attention to in an applicant’s credit profile is their housing payment history over the preceding 12 months. This may be reflective in a previous mortgage on the credit report or by verifying rent payments if the applicant does not currently own a home.
Finally, bankruptcies, judgments, and foreclosures can all negatively impact the credit analysis for an applicant. Just because an applicant has these negative marks on their credit report doesn’t mean they cannot get approved for a mortgage. It simply means that they would have to show other compensating factors and/ or may have to accept higher rates and terms.
Capacity:
In addition to reviewing an applicant’s credit banks want to analyze their ability to repay the mortgage over time. The primary tool they use for this analysis is a debt-to-income ratio. Simply put, the debt-to-income ratio is the sum of all monthly payment obligations an applicant has (including the proposed housing payment) divided by their gross monthly income.
For example, here is a hypothetical debt-to-income calculation for John & Jane Doe
Obligations:
*Proposed housing payment (including real estate taxes and homeowner’s insurance): $2,000
*Car payments: $250
*Student loans: $150
*Minimum monthly payments on credit cards: $75
Income:
John’s monthly gross income: $5,000
Jane’s monthly gross income: $5,000
Debt-to-income calculation:
Total obligations: $2,000+$250+$150+$75= $2,475
Total income: $5,000+$5,000= $10,000
DTI=24.75%
In this case the debt-to-income ratio of 24.75% would likely be viewed upon favorably by the lender. In most cases banks will accept DTI’s as high as 45% and in some cases up to 50-65%.
Capital:
Does an applicant have a financial cushion to fall back on if their income is unexpectedly interrupted for a period of time? Has the applicant shown a pattern and habit of saving money over time? These are important questions to a lender and can be answered by reviewing an applicant’s capital accounts.
Capital accounts are any account with liquid assets that a borrower could access if need be. The most common forms of capital accounts on a loan application are checking, savings, money market, brokerage, IRA, and 401K accounts.
In most cases the bank will want to verify that an applicant has an amount equal to 2 months worth of their total housing payment (including real estate taxes and homeowner’s insurance) saved up in a capital account after they subtract any cash required for down-payment & settlement charges. If the mortgage is going to be secured by an investment property or second home the bank may want to see more capital for the applicant.
There are loan programs and lenders that do not require any capital or will allow capital to be gifted from family members.
Collateral:
The final piece of the mortgage application that the bank is interested in reviewing is the property itself. After all, if a borrower fails to make their monthly payments then the bank will take the house back and sell it in order to recoup the money that they loaned against it.
The value of a home will generally be determined by a professional appraiser’s appraisal report. Although, over the past few years automated and data base driven appraisals have become more common.
In reviewing the collateral for a property the bank will review two basic questions:
a) Does the appraiser’s determination of value for the subject property support the value that the applicant is buying (or refinancing) it for?
There are multiple methodologies for determining the value of a home. The two that show up in an appraisal report are the “cost approach” and the “sales comparison approach”.
The “cost approach” determines the value of a home based on the value to rebuild or replicate the property from scratch. This analysis will take into consideration the value of the land that the home is built on and add the cost to rebuild the improvements based on the square footage and amenities (i.e. basements, garages, etc.). The “cost approach” is less relevant to a bank because they never intend on rebuilding the property. However, they may review this in determining if the homeowner’s insurance policy provides enough coverage.
The “sales analysis approach” is the most relevant to lenders in determining the value of the collateral property. With this approach an appraiser will find what they consider to be the 3-6 most comparable properties that have sold near (usually within 1 mile) the subject property within the past 12 months.
The appraiser will then make adjustments to the value of the subject property by comparing various features of the home. Among the factors that can impact the adjustments are square footage, view, quality of construction, built in amenities/ upgrades, number of bedroom and bathrooms, heating cooling systems, etc.
The value as determined by the sales analysis approach is the most important in determining the value for the home in the lender’s perspective.
b) What is the ratio of the loan amount to the value of the property (LTV)?
The loan-to-value (LTV) ratio is also an important consideration for the bank. The LTV measures the amount of money the lender is lending against the value of the collateral.
All else being equal a greater LTV is riskier for the bank than the same loan application with a lower LTV. This is because in the event of foreclosure it is less probable that the lender will recoup the entire loan versus a loan with a higher LTV.
Important Thresholds
There are important thresholds in the underwriting guidelines of most banks which make it more or less likely that a loan will get approved or that a loan will be approved with more favorable or less favorable terms.
These are:
-LTV=
<70%- with an LTV of less than 70% the lender will generally feel very comfortable with the loan. This is because the borrower has a significant of “skin in the game” such that if they should fall behind on their payments they will likely do whatever they can to pay the loan current before foreclosures sets in. Lenders know this and therefore are less concerned about the other 3 C’s with these applications.
70-80%- In general lenders are also very comfortable with an LTV between 70% & 80%. This is because they know that if they had to foreclose on a property it is likely that they could recoup the loan with little risk.
80.01-90%- At 80-90% LTVs bank begin to look for other compensating factors in the file. They may begin looking closer at an applicant’s reserves, income, or source of down payment. It is likely that the bank may charge a premium to the interest rate of anywhere from 0%-.50% depending on the loan file.
Furthermore, if the applicant elects to do 1 loan they will require some form of mortgage insurance. Mortgage insurance is an insurance policy that the borrower usually pays for. The insurance would cover a portion of the lenders losses in the event that they had to foreclose on the property and they did not recoup the entire loan.
90.01%-95%- With less and less equity in the transaction a lender will certainly want to see other compensating factors at higher LTVs. This would include higher credit scores, greater reserves, employment stability, etc. The lender may impose a risk premium to the interest rate of .125%-1.00% Again, with one loan the lender will require the borrower purchase mortgage insurance in the event that they default on their payments.
95.01%-100%- With less than 5% equity into the transaction the lender will make sure that the borrower has ample reserves and solid credit. At these levels the lender is at the most amount of risk because in the event that the borrower defaults and forecloses on the home in the initial couple years it is almost guaranteed that the lender will incur a loss. Borrowers will typically pay a .25%-2.00% premium to their interest rate for this type of approach.
1) Credit
2) Capacity
3) Capital
4) Collateral
Here is a summary of each "C" and how they impact the loan approval process:
Credit:
Credit is arguably the most important factor of the 4 C’s. An applicant’s credit score taken from the credit report is the simplest measure of their credit strength. In determining an applicant’s credit score lenders will simply use the middle of the three credit scores reported by the three credit repositories (Transunion, Equifax, & Experian).
Credit scores are heavily influenced by a person’s payment history over the preceding 24 months. Other factors may include the proportion of revolving debt relative to the high credit limits, number of accounts, lack of credit depth, and many more.
Another factor that lenders may pay attention to in an applicant’s credit profile is their housing payment history over the preceding 12 months. This may be reflective in a previous mortgage on the credit report or by verifying rent payments if the applicant does not currently own a home.
Finally, bankruptcies, judgments, and foreclosures can all negatively impact the credit analysis for an applicant. Just because an applicant has these negative marks on their credit report doesn’t mean they cannot get approved for a mortgage. It simply means that they would have to show other compensating factors and/ or may have to accept higher rates and terms.
Capacity:
In addition to reviewing an applicant’s credit banks want to analyze their ability to repay the mortgage over time. The primary tool they use for this analysis is a debt-to-income ratio. Simply put, the debt-to-income ratio is the sum of all monthly payment obligations an applicant has (including the proposed housing payment) divided by their gross monthly income.
For example, here is a hypothetical debt-to-income calculation for John & Jane Doe
Obligations:
*Proposed housing payment (including real estate taxes and homeowner’s insurance): $2,000
*Car payments: $250
*Student loans: $150
*Minimum monthly payments on credit cards: $75
Income:
John’s monthly gross income: $5,000
Jane’s monthly gross income: $5,000
Debt-to-income calculation:
Total obligations: $2,000+$250+$150+$75= $2,475
Total income: $5,000+$5,000= $10,000
DTI=24.75%
In this case the debt-to-income ratio of 24.75% would likely be viewed upon favorably by the lender. In most cases banks will accept DTI’s as high as 45% and in some cases up to 50-65%.
Capital:
Does an applicant have a financial cushion to fall back on if their income is unexpectedly interrupted for a period of time? Has the applicant shown a pattern and habit of saving money over time? These are important questions to a lender and can be answered by reviewing an applicant’s capital accounts.
Capital accounts are any account with liquid assets that a borrower could access if need be. The most common forms of capital accounts on a loan application are checking, savings, money market, brokerage, IRA, and 401K accounts.
In most cases the bank will want to verify that an applicant has an amount equal to 2 months worth of their total housing payment (including real estate taxes and homeowner’s insurance) saved up in a capital account after they subtract any cash required for down-payment & settlement charges. If the mortgage is going to be secured by an investment property or second home the bank may want to see more capital for the applicant.
There are loan programs and lenders that do not require any capital or will allow capital to be gifted from family members.
Collateral:
The final piece of the mortgage application that the bank is interested in reviewing is the property itself. After all, if a borrower fails to make their monthly payments then the bank will take the house back and sell it in order to recoup the money that they loaned against it.
The value of a home will generally be determined by a professional appraiser’s appraisal report. Although, over the past few years automated and data base driven appraisals have become more common.
In reviewing the collateral for a property the bank will review two basic questions:
a) Does the appraiser’s determination of value for the subject property support the value that the applicant is buying (or refinancing) it for?
There are multiple methodologies for determining the value of a home. The two that show up in an appraisal report are the “cost approach” and the “sales comparison approach”.
The “cost approach” determines the value of a home based on the value to rebuild or replicate the property from scratch. This analysis will take into consideration the value of the land that the home is built on and add the cost to rebuild the improvements based on the square footage and amenities (i.e. basements, garages, etc.). The “cost approach” is less relevant to a bank because they never intend on rebuilding the property. However, they may review this in determining if the homeowner’s insurance policy provides enough coverage.
The “sales analysis approach” is the most relevant to lenders in determining the value of the collateral property. With this approach an appraiser will find what they consider to be the 3-6 most comparable properties that have sold near (usually within 1 mile) the subject property within the past 12 months.
The appraiser will then make adjustments to the value of the subject property by comparing various features of the home. Among the factors that can impact the adjustments are square footage, view, quality of construction, built in amenities/ upgrades, number of bedroom and bathrooms, heating cooling systems, etc.
The value as determined by the sales analysis approach is the most important in determining the value for the home in the lender’s perspective.
b) What is the ratio of the loan amount to the value of the property (LTV)?
The loan-to-value (LTV) ratio is also an important consideration for the bank. The LTV measures the amount of money the lender is lending against the value of the collateral.
All else being equal a greater LTV is riskier for the bank than the same loan application with a lower LTV. This is because in the event of foreclosure it is less probable that the lender will recoup the entire loan versus a loan with a higher LTV.
Important Thresholds
There are important thresholds in the underwriting guidelines of most banks which make it more or less likely that a loan will get approved or that a loan will be approved with more favorable or less favorable terms.
These are:
-LTV=
<70%- with an LTV of less than 70% the lender will generally feel very comfortable with the loan. This is because the borrower has a significant of “skin in the game” such that if they should fall behind on their payments they will likely do whatever they can to pay the loan current before foreclosures sets in. Lenders know this and therefore are less concerned about the other 3 C’s with these applications.
70-80%- In general lenders are also very comfortable with an LTV between 70% & 80%. This is because they know that if they had to foreclose on a property it is likely that they could recoup the loan with little risk.
80.01-90%- At 80-90% LTVs bank begin to look for other compensating factors in the file. They may begin looking closer at an applicant’s reserves, income, or source of down payment. It is likely that the bank may charge a premium to the interest rate of anywhere from 0%-.50% depending on the loan file.
Furthermore, if the applicant elects to do 1 loan they will require some form of mortgage insurance. Mortgage insurance is an insurance policy that the borrower usually pays for. The insurance would cover a portion of the lenders losses in the event that they had to foreclose on the property and they did not recoup the entire loan.
90.01%-95%- With less and less equity in the transaction a lender will certainly want to see other compensating factors at higher LTVs. This would include higher credit scores, greater reserves, employment stability, etc. The lender may impose a risk premium to the interest rate of .125%-1.00% Again, with one loan the lender will require the borrower purchase mortgage insurance in the event that they default on their payments.
95.01%-100%- With less than 5% equity into the transaction the lender will make sure that the borrower has ample reserves and solid credit. At these levels the lender is at the most amount of risk because in the event that the borrower defaults and forecloses on the home in the initial couple years it is almost guaranteed that the lender will incur a loss. Borrowers will typically pay a .25%-2.00% premium to their interest rate for this type of approach.
Rate Update April 28, 2008
We don’t expect a lot of volatility until tomorrow afternoon when traders begin to position their portfolios ahead of an action-packed Wednesday, Thursday, & Friday. Watch today’s you tube video to find out what is on the schedule that could impact mortgage rates this week.
Current Outlook: neutral
Friday, April 18, 2008
Rate Update April 18, 2008
Mortgage rates continue to increase thanks to momentum in the stock market. Mortgage rates have increase .25%-.50% across the board this week because of better than expected earnings reports. We’ve explained in the past on ‘rate update’ that mortgage rates often suffer from a rally in the stock market because fund managers have to sell bonds in order to create capital to buy into the stock market.
Today better than expected results out of Google & Citi Group are the culprits.
Current Outlook: locking
Today better than expected results out of Google & Citi Group are the culprits.
Current Outlook: locking
Thursday, April 17, 2008
Rate Update April 17, 2008
We thought that bond prices may hold at the 50-day moving average yesterday as they had the last four times that they tested this level. However, the stock market rally was too strong which pushed rates higher again. Here is a chart which shows pricing dropping below the 50-day moving average (black line):
From a technical perspective mortgage-backed bonds still have some room to drift lower so we might see rates move higher by another .125%-.25% before they stabilize. What could save the day? Merrill lynch reported weaker than expected earnings earlier today and Citi Bank is scheduled to release their earnings report tomorrow. Another weak report could help mortgage-backed bonds rebound and hopefully push rates lower.
Current Outlook: locking
From a technical perspective mortgage-backed bonds still have some room to drift lower so we might see rates move higher by another .125%-.25% before they stabilize. What could save the day? Merrill lynch reported weaker than expected earnings earlier today and Citi Bank is scheduled to release their earnings report tomorrow. Another weak report could help mortgage-backed bonds rebound and hopefully push rates lower.
Current Outlook: locking
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