December 2008

The Fed’s Parting Present for 2008 – Low Mortgage Rates

For its last move in an action-filled year, the Federal Reserve announced it will begin buying its pledged $500 billion in mortgage-backed securities next month.

For home buyers and mortgage rate shoppers, the timing couldn’t be better.

Because December 31 is one of Wall Street’s most thinly-traded days of the year, low volume is exaggerating the announcement’s impact on mortgage markets.

Mortgage rates are lower this morning.

However, you may not have much time to act. Few mortgage lenders permit after-hours rate locking and bond markets close at 2:00 PM ET for the holiday. If you miss today’s Fed-fueled low rates, markets re-open Friday for your second chance.

How To Shop For Mortgages In A "Vacation Week"

Mortgage markets are like any other market — in order for goods to change hands, a buyer and a seller must first reach an agreement to “trade” at a specific price point.

In general, the more buyers and sellers there are for a particular item, the easier it is to find that “fair value” and make the deal.

An abundant number of buyers and sellers often creates a liquid market in which assets — in this case, mortgage bonds — can be sold rapidly with minimal loss.

This week, though — with so many traders on vacation — the “liquid market” has gone illiquid. The treasury market posted just 41 percent of its normal, daily volume Monday, leading to erratic pricing in the mortgage bond market which, in turn, caused mortgage rates to follow.

For example, mortgage rates started the day lower yesterday before sprinting higher over a 30-minute, early-afternoon span. Markets were largely unprovoked by economic data, geopolitical developments, or technical factors. It just, kind of, “happened” and the move left mortgage rate shoppers in the dust.

That could happen a lot this week. So, if you’re in the market for a mortgage, be ready to lock quickly. With low liquidity, rates rarely sit still for long.

(Image courtesy: Purdue BCM)

Mortgage Markets in Review: December 29, 2008

Weekly Economic Releases for Dec. 28th

This week brings us the release of only two pieces of economic news that are relevant to mortgage rates. It is another holiday-shortened week with the New Years Day holiday Thursday, so the data may have a heavier impact on trading than usual if it varies from forecasts by much. The bond market will close early Tuesday and possibly Friday as they did last week. With that type of schedule, many traders will not be working Wednesday or Friday, so any unexpected news or data may lead to a larger than usual reaction in the markets.

There is no relevant news scheduled for tomorrow. Look for any significant changes in stocks to drive bond trading and mortgage rates. If the major stock indexes remain fairly calm, it is possible that bond prices and mortgage rates may follow suit. However, I still believe there is a possibility of seeing year-end weakness in bonds that may drive mortgage rates higher. Accordingly, I am still recommending to proceed with caution of still floating an interest rate.

The first important release comes late Tuesday morning when the Conference Board will post its Consumer Confidence Index (CCI) for December. This is a pretty important release because it measures consumer willingness to spend. If consumers are more confident in their personal financial situations, they are more apt to make large purchases. Since consumer spending makes up two-thirds of the U.S. economy, any related data is watched closely by market participants and can have a significant influence on mortgage rate direction. Current forecasts are calling for a minor increase confidence from November’s reading of 44.9. Analysts are expecting Tuesday’s release to show a reading of 45.2.

The financial markets will be closed Thursday in observance of the New Year’s Day holiday. They will reopen Friday morning with the release of the Institute for Supply Management’s (ISM) manufacturing index. This highly important index measures manufacturer sentiment. A reading below 50 means that more surveyed manufacturing executives felt that business worsened during the month than those who felt it had improved. Analysts are currently expecting to see a 35.4 reading in this month’s release, meaning that sentiment fell from November’s 36.2. A smaller reading will be good news for the bond market and mortgage shoppers while a higher than expected reading could lead to higher mortgage rates Friday morning.

Overall, I am still pessimistic towards mortgage rates, at least short-term. The week’s two reports are both considered important and can influence mortgage rates. If they report weaker than expected results, we could see rates close the week lower than last Friday’s closing levels. But, even if we get results that match forecasts, I suspect we will see selling in bonds and traders make year-end adjustments to their portfolios that could push mortgage rates higher for the week.

If I were considering financing/refinancing a home, I would…. Lock if my closing was taking place within 7 days… Lock if my closing was taking place between 8 and 20 days… Lock if my closing was taking place between 21 and 60 days… Float if my closing was taking place over 60 days from now… This is only my opinion of what I would do if I were financing a home. It is only an opinion and cannot be guaranteed to be in the best interest of all/any other borrowers.

For Real Estate Investors, Finding Good Loans Is Tougher Than Finding Good Deals

With home prices falling across most parts of the country, investors in real estate are finding good value in certain rental properties. Unfortunately, they’re also finding it harder to get approved for a home loan.

After getting stung by defaults, conforming mortgage standards for non-owner occupied home loans tightened dramatically last quarter.

One major change was the reduction in the total number of homes Fannie Mae or Freddie Mac will finance for any one borrower.

Prior to the chance, the number of financed properties could be as high as 10. Today, that number is 4, stinging investors with large real estate portfolios. Going forward, buying properties isn’t the problem; financing them with conforming mortgage money is.

Another guideline change mandates larger downpayments.

Versus early-2008, when a real estate investor could buy a home with 10 percent down, today’s investor is required to pay 15. But, as an added wrinkle, few private mortgage insurers write policies against rental homes anymore, rendering the 15 percent downpayment insufficient. The de facto requirement, therefore, is now 20 percent down.

And then came the fees.

As part of its “pay-for-risk” pricing model, Fannie Mae added mandatory fees to all of its investor property mortgages this year. Based on loan-to-value, the fees are:

• 75% LTV or less: 1.750 percent of the borrowed amount
• 75.01 – 80.00% LTV : 3.000 percent of the borrowed amount
• Greater than 80% LTV : 3.750 percent of the borrowed amount

So, if your personal plan includes the purchase of investment properties in 2009, consider the impact that tighter conforming guidelines, larger downpayments and higher fees will have on your bottom line.

All things considered, now may be a good time to make that rental property bid. Sure, prices may fall going forward, but increased acquisition costs may wipe out the long-term gains.

A Great Combination: Too Many Homes For Sale And Low Mortgage Rates

For the first time in over a year, the sales of “used homes” fell below the 5-million unit trendline, helping to push the total home inventory higher by 0.1 percent nationwide.

Based on the rate at which homes are selling nationwide, it would take 11.2 months for the existing housing supply to be exhausted.

For home buyers, this is an opportune time for negative news on housing.

First, sellers know that between now and the Super Bowl, housing activity will be light. The general scarcity of buyers may force a seller to accept a bid he wouldn’t have accepted otherwise.

Second, the economy is showing weakness and that, too, can concern a home seller. Buyers are less likely to extend themselves during times of economic uncertainty, further reducing the buyer pool and, again, putting pressure on the seller to “make a deal”.

And lastly, because the government has been trying to force mortgage rates down as a way to stimulate the economy, the weak housing data is actually making it cheaper to finance a home. This means that a well-qualified home buyer can better stay within budget.

Each 0.500 percent rate reduction saves $33 per $100,000 borrowed.

It is important to remember, though, that the U.S. housing market is not national — it’s highly localized. This is one reason why national real estate reports can be misleading. Just as figures from Phoenix have little to do with statistics from St. Paul, even data from neighboring ZIP codes can vary.

The universal truth, however, is that a home that is priced fairly will sell more quickly than a home that is not. And, until the Super Bowl passes in 45 days, expect fewer buyers to be out there competing for them.

(Image courtesy: The Wall Street Journal Online)

The Unexpected "Tax" That The Refi Boom Places On Borrowers

In late-November, the Federal Reserve pledged $600 billion to buy mortgage-backed securities. The announcement drove down mortgage rates and started the Refi Boom.

Then, the Federal Reserve made a second series of statements after its scheduled meeting last Tuesday, causing mortgage rates to plunge again. This started the Refi Boom’s second wave.

Because of the surge in refinance activity, mortgage lenders are “backed up”; initial file reviews are taking up to 12 business days in some cases.

Typically, this process takes 2 days.

Underwriting delays are problem for refinancing Americans because when a mortgage rate is locked, it’s most often locked for 30 calendar days — the standard Rate Lock Agreement contract length. If the mortgage doesn’t close within those 30 days, the applicant must either pay an “extension fee” to preserve the lock, or risk losing the rate altogether.

30 days may seem like a long time, but let’s consider a few external variables:

• December 24, 25, and 26 plus January 1 and 2 are lost to holiday
• December 27, 28 plus January 3, 4, 10, 11, 17, and 18 are lost to weekends
• January 19 is lost to federal holiday
• 3 days are lost to the Right To Cancel clause

This leaves 13 days to get from Application to Closing, and of those 13 days, 12 of them are being spent on the initial review. A 30-day rate lock, in other words, may be an inadequate agreement with some mortgage lenders. A 45-day agreement may be required instead.

Typically, 45-day rate locks carry higher rates or higher fees, versus their 30-day counterparts. This amounts to a “tax” on borrowers, a result of the nation’s rush to refinance en masse.

As always, the best way to preserve a rate lock is to be as responsive as possible to the process. Return paperwork when asked, schedule appraisals immediately, and arrange to signing closing paperwork on the first available day.

With mortgage rates low, application volume — and underwriting turntimes — should remain high into early-2009.

Mortgage Markets in Review: December 22, 2008

Mortgage markets improved last week for the second week in row. After the Federal Reserve said it would use “all available tools” to stimulate the economy, traders responded by driving mortgage rates to 50-year lows.

It didn’t last long, however.

After bottoming out early-Wednesday morning, mortgage rates trended higher all the way into Friday’s closing. It was the third time in 2008 that a sharp mortgage rate drop lasted less than one full day of trading.

Many Americans took advantage of the historically-low mortgage rates, locking in new home loans below 5 percent. And, in general, these homeowners shared 4 characteristics:

• Credit scores of at least 720
• At least 20 percent equity
• Relatively low debt versus household income
• Ongoing relationship with a loan officer

Now, the first 3 bullet points are easy-to-understand but it’s the fourth one that really mattered — it’s the trait that got people “real-time access” to low rates the moment they published.

After all, it wasn’t until Thursday morning that the press ran its stories about “4.5 percent mortgage rates” and, by that time, mortgage rates had already retreated — by as much as a full percentage point in some cases. Thursday morning’s news was a half-day too late.

Still, mortgage rates do remain low.

This week is trade-shortened and thick with data. In addition to two pieces of housing news and a consumer sentiment survey, we’ll get a look at the Federal Reserve’s preferred Cost of Living index. All four data points are expected to validate the recession, so don’t expect mortgage rates to move much.

Instead, the biggest threat to mortgage rates this week is momentum. If mortgage rates tick higher Monday and Tuesday, expect that to continue Wednesday into the 2:00 P.M. market close and then to resume again Friday.

Markets are closed Thursday for the federal holiday.

(Image courtesy: The Wall Street Journal Online)

Weekly Economic Releases for Dec. 21st

This significantly shortened trading week brings us the release of six monthly or quarterly economic reports and a fairly important Treasury auction. Most of the data being released is not considered to be of high importance to the markets, but with the Christmas holiday falling during the week we can expect very thin trading. This means that we may see a larger reaction than normal to some news because there will be fewer traders working and less transactions being made. We also may see profit-taking by some firms to capture the sizable gains in bonds this year as it winds down, so by no means can we be guaranteed a quiet week.

There is no relevant economic news scheduled for release tomorrow. Five of the week’s events are scheduled for Tuesday. The first is the final revision to the 3rd Quarter GDP. I don’t think this data will have an impact on mortgage rates unless it varies greatly from its expected reading. Last month’s first revision showed that the economy contracted at a 0.5% annual pace during the quarter and this month’s revision is expected to show the same.

The next two are November’s Existing and New Home Sales reports. The Existing Home Sales release will come from the National Association of Realtors while the New Home Sales data is a Commerce Department report. Both give us a measurement of housing sector strength and mortgage credit demand, however, neither are considered to be of high importance. Both of the reports are expected to show a drop in sales.

The fourth report of the day also comes late morning when the revised University of Michigan Index of Consumer Sentiment for December is posted. Current forecasts are calling for a small downward revision from the preliminary reading of 59.1. This is important because rising consumer confidence indicates that consumers may be more apt to make large purchases in the near future. An unexpected upward revision could lead to higher mortga ge rates Tuesday.

The last event on Tuesday that is worth noting is the 5-year Treasury Note auction. If the sale is met with a decent demand from investors, we could see interest in other notes and bonds such as mortgage-related bonds increase during afternoon trading. But, a lackluster interest from investors may also lead to weakness in bonds and possible upward afternoon revisions to mortgage pricing.

The remaining two reports are scheduled for release Wednesday at 8:30 AM. This is when November’s Personal Income and Outlays data and Durable Goods Orders will be posted. The Income and Outlays report will give us an important measurement of consumer ability to spend and current spending habits. Since consumer spending makes up two-thirds of the U.S. economy, any related data usually has a fairly significant impact on the financial markets and mortgage rates. Current forecasts are calling for no change in income and a 0.8% decli ne in spending. If this report reveals weaker than expected readings, we should see the bond market improve and mortgage rates drop slightly Wednesday.

The last piece of data will be the Commerce Department’s Durable Goods Orders for November. This data gives us an important measurement of manufacturing sector strength by tracking orders for big-ticket items or products that are expected to last at least three years. Analysts are expecting the report to show a decline in the neighborhood of 3.1%. A larger decline would indicate that the manufacturing sector was weaker than many had thought. This would be good news for the bond market and should drive mortgage rates lower. However, a smaller than expected drop in orders could lead to mortgage rates moving higher early Wednesday morning.

Overall, I am expecting to see some movement in the markets and mortgage rates, but nothing drastic unless we get some surprising results from the week ‘s data. The bond market will close early Wednesday and Friday and be closed all day Thursday. This means that firms that trade bonds will likely be keeping only a skeleton staff most of the week. Still, my biggest fear between now and the end of the year will be selling bonds to capture profits from the significant rally of the past several weeks. That could lead to bonds falling and mortgage rates rising.

If I were considering financing/refinancing a home, I would…. Lock if my closing was taking place within 7 days… Lock if my closing was taking place between 8 and 20 days… Lock if my closing was taking place between 21 and 60 days… Float if my closing was taking place over 60 days from now… This is only my opinion of what I would do if I were financing a home. It is only an opinion and cannot be guaranteed to be in the best interest of all/any other borrowers.

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