Locked In

FHA MORTGAGE INSURANCE PREMIUMS TO CHANGE STARTING IN OCTOBER

2010-08-13T19:22:00.000-07:00

On Aug. 13th President Obama signed H.R. 5981, which allows the Department of Housing and Urban Development more flexibility in raising the mortgage insurance premiums for certain loans insured by the FHA. FHA announced that beginning with loans originated after Oct. 4, there will be two major changes to the FHA Mortgage Insurance program.

The monthly mortgage insurance factor will be increased from .50% - .55% to .85% - .90%. They will also be decreasing the Up Front Mortgage Insurance Premium from 2.25% to 1.00% of the loan amount.How do these changes affect a FHA buyer starting in October?

Using a $500,000 mortgage as an example, the upfront MIP would go from $11,250 to $5,000, resulting in an immediate savings of $6,250. However, the monthly MI would go from $229 to $375 per month. The borrower would see an increase of $130/month. For a borrower who is stretching to qualify, this increase can have an impact on qualifying.

On average, the decrease in purchasing power for a FHA borrower under the new rules is about 3.25%. So, the borrower who could qualify for a home valued at $575,000 can now only qualify for a home valued at $555,000.

This change could also have an impact on borrowers wanting to take advantage of the FHA Streamline refinance program. The new increase in the monthly MI will make it more difficult to achieve the minimum net tangible benefit (5% drop in payment) as required by FHA.

Even with all these changes FHA remains the loan of preference for borrowers with a down payment of less than 5%. Those borrowers should expect the FHA to continue to refine the guidelines that will have an impact on the loan amount that borrower's can qualify for.

Jabba the Economy

2010-04-05T10:32:00.000-07:00

I have taken to imagining the economy to be an odd, corpulent, Jabba-the-Hut type of monster, sitting in all its majesty among psychophants and various job applicants. Throw Jabba some good news and he giggles and belches and convinces the analysts that things have turned around at last. Meanwhie, the stock market indices climb, the dollar gains a bit in value, and interest rates edge a bit higher on general confidence that the economy is turning.
But if the food is not forthcoming, then suddenly the economy shakes and moans, and there is a growing certainty among the analysts that Jabba’s health is threatened; stock market indices decline, the dollar declines, and interest rates edge down.

Last week was a climbing-interest rate sort of week. With nourishing good news in its craw, the economy was looking fatter and healthier. The HSH & Assoc. average of all 30-year fixed mortgages being written climbed from 5.33% the preceding Friday to last Friday’s 5.47%. The Freddie Mac average climbed from 4.99% to preceding Thursday to 5.08% last Thursday.
The DJIA, meantime, climbed from 10895.86—the Friday close for the preceding week—to last Friday’s 10927.07 close. And the current buzz is that perhaps we’ll see an 11000 Dow before the week is out.

We have still more good news with which to feed Jabba…for the moment, at least. Today (Monday April 5), we are finally seeing the effects of the $8,000 and $6,500 tax credits for home buyers. According to the February Pending Home Sales Index of the National Association of Realtors?, the number of sales that should close in the coming weeks and months should be up by 8.2%. Now, I would love to be more excited by this finding than I am. Home sales have been groveling at the bottom like a starving mudsucker for months. Lawrence Thun, NAR’s chief economist, said the improving numbers may signal the coming spring surge brought on by the conclusion of the tax credit program. “Surge” may be a rather optimistic word. So far, Jabba has probably gulped down the news in one quick bite. And we remain with a significant worry: If the real estate market has been this slow to improve when buyers have to put together signed purchase agreements by April 30, what will happen after April 30 passes?

Nonetheless, last week provided yet more good news. One piece of news was of the it-didn’t-explode variety, and the jury is still out on how this market will act in coming months—but it was heartening to see that the credit markets barely reacted to the long-awaited day when the Federal Reserve ceased its program of buying up mortgage-backed securities. The idea had been that, with so many securities being created, the Fed would create a market for them, making sure their value remained high and their yields (and mortgage rates in general) relatively low. The big question now, of course, is whether the private markets can take up the slack left by the Fed. The answer? We don’t yet know. But…so far, so good.
And reports last Thursday indicated gratifying growth in manufacturing—not just in the U.S., whose manufacturing index reached its highest level since 2004, but throughout the world. It’s a big, positive wave and, as was mentioned last week, companies like FedEx are surfing it.

Lastly, the March employment report, showing a gain of 162,000 payroll jobs and a relatively benign stability of the unemployment rate at 9.7%, gave the impression that the season of job declines is ending. Still, it takes about 250,000 new jobs just to keep up with the number of Americans normally moving into the jobs market each month. So this good news, like the rest, seems only to satisfy Jabba for the moment, leaving us waiting for the next good news—or prepared to duck under cover when some bad economic news arrives.

So it is in a nearly trendless economy.

by: Bill Fisher

Economic Update 3/23

2010-03-23T07:28:00.000-07:00

Unchanged early this morning in the bond and mortgage markets. No real driving news overnight and at 10:00 Feb existing home sales on tap. The stock index trading at 8:30 had the three key indexes unchanged. At 9:00 the DJIA +15, 10 yr note unchanged and mortgage prices +1/32 (.03 bp)---still very flat. At 9:30 the DJIA opened +20, the 10 yr note unchanged and mortgages +1/32 (.03 bp).

Here's yesterday's chart:

Pretty steady increase all day long with few dips. Rates have opened up better this morning for the lenders who didn't reprice yesterday afternoon.

Pres Obama is scheduled to sign the health care bill into law today at 11:15 this morning. And let the law suits start, 13 state attorney generals are filing law suits already, attempting to have the bill declared unconstitutional on the grounds that the bill mandates people to buy health care insurance. Under the health care bill, by 2014 most Americans would be required to have health insurance or pay a fine, with the exception of low-income Americans. Employers would also be required to provide coverage to their workers, or pay a fine of $2,000 per worker. Companies with fewer than 50 employees, however, are exempt from this rule. The mandated requirement had met with Republicans and independents declaring it unconstitutional when it was first proposed. How far in the court system will the suits travel; maybe to the Supreme Court? Any health care bill would have met with fear and concern, no matter the content, given that not many have any idea what the details in the 2000 pages have in them.

China may be feeling the heat of the global recession. Top Chinese officials have in recent days said trade numbers for March could show China imported more than it exported this month—which would mark its first monthly deficit since April 2004. The US and China have been jawing recently over China's unwillingness to devalue its currency, giving China an unfair trade advantage against the US and other exporting countries. Chinese officials counter by pointing out that their nation's trade surplus has declined sharply in the past year, and argued that China's large stimulus program helped it keep buying from the rest of the world, thereby supporting global economic growth. It is however, unlikely China will continue to run deficits and will likely have a surplus on an annual basis. On Apr 15th the Treasury Dept is scheduled to rep[ort its semi-annual report on currencies; many are pressing Treasury to declare China a currency manipulator. If this heats up look for Congress to push for legislation that may lead to a trade war. Congress is already moving down that slippery slope, Pres Obama must resist it; a trade war with China will be an economic calamity for the US.

At 10:00 the House Financial Services Committee will begin testimony on Fannie's and Freddie's future that will likely end eventually with the two agencies either gone or changed so no one will recognize them in their past condition. Sec of Treasury Geithner will testify, saying “Private gains can no longer be supported by the umbrella of public protection, capital standards must be higher and excessive risk-taking must be appropriately restrained.” Now that the Obama administration has its health care legislation it is past time to deal with the mortgage and housing industry, and lets not overlook the economy that has been pushed aside in favor of health care. Geithner will also say the Administration will not disrupt the market for Fannie Mae and Freddie Mac’s debt and mortgage-backed securities. He said investors should not doubt the U.S. government’s commitment to backstop the obligations of the two companies, which have been in conservatorship since 2008. Geithner will say that the government has “few viable alternatives” to its extensive support of Fannie Mae and Freddie Mac because the two companies are so central to the housing market. Private capital isn’t available in sufficient strength to fund the mortgage market and make credit widely available.

Feb existing home sales, expected to be down 1.0%, were down 0.6%. Not good however; the unsold inventory increased by 9.5% leaving an 8.6 month supply, in Jan the supply was 7.8 month and in Dec supply was at 7.2 months. The median sales price was $165,100, down 1.8% yr/yr. For all that talk that has been floating around and regurgitated by most every expert, the housing sector continues to deteriorate even with the homebuyers tax credit that will run out at the end of April. We don't want to be the town crier of bad news, but we have warned for months that the housing sector is nowhere near rebounding, and in the coming months there will be another binge of foreclosures hitting the inventories. Believe it or not; the equity market got a bounce higher off the housing data, because----the headline was expected to be down 1.0% but was only off 0.6%.

At 1:00 Treasury will auction $44B of 2 yr notes as it does each month at this time. The demand for US debt has been very strong and it is expected to remain strong even with the exploding federal deficits. The 2 yr always gets strong demand; it is the 5 yr tomorrow and the 7 yr note on Thursday that, although unlikely, if demand softens will spike interest rates higher.
At 3:00 this afternoon SF Pres Janet Yellen will be talking. Yellen is the front runner to fill the vice chairman's position at the Fed.

Weekly Market Update 2/19

2010-02-19T09:19:00.000-08:00

Fed Comments Push Mortgage Rates Higher

While investors began the week watching for fresh information about Greece and China, the Fed stole the spotlight on Wednesday with news that was unfavorable for mortgage markets, and mortgage rates ended the week moderately higher.

The Fed currently has significant influence on mortgage rates. Over the last year, the Fed pushed mortgage rates lower by purchasing over $1 trillion in mortgage-backed securities (MBS).

Wednesday, the Fed's Plosser suggested that the Fed should begin selling those MBS "sooner rather than later." Later that day, the Fed released the detailed minutes from the January 27 Fed meeting. The minutes revealed that "several" Fed officials favored starting the sale of the Fed's MBS portfolio "in the near future." Investors were not expecting that Fed MBS sales would begin any time soon. Quite simply, adding to the supply of MBS being sold means that yields would need to move higher to attract buyers. Since mortgage rates are largely determined by MBS yields, mortgage rates rose after the news.

Thursday, the Fed announced an increase in the discount rate, the emergency rate at which banks borrow money from the Fed. The Fed made clear that this in no way reflected a change in broader monetary policy or its economic outlook. This was simply a return to more normal levels for one Fed tool now that the financial crisis has eased. As a result, there was very little impact on mortgage rates. According to Fed officials, a move to begin to tighten overall monetary policy, which almost certainly would cause a significant reaction, is still expected to be at least several months away. The inflation data released this week continued to show low levels of current inflation, providing little pressure for the Fed to rush to take action.

Week Ahead

Next week, New Home Sales will be released on Wednesday. Durable Orders, an important indicator of economic activity, will come out on Thursday. Friday will be the biggest day for economic data with Existing Home Sales, Preliminary GDP, and the Chicago PMI manufacturing index. Consumer Sentiment and Consumer Confidence will round out the schedule. In addition, there will be Treasury auctions on Tuesday, Wednesday, and Thursday. Finally, Fed Chief Bernanke is scheduled to speak on Wednesday.

APR stupidity

2010-02-12T07:48:00.001-08:00

I wrote in a previous blog about why I think that APR is of little use to the mortgage shopper. Unfortunately, I don't have the millions of followers necessary to effectively change the perception that APR is a useful tool. Therefore APR, and how it is calculated, remains an important discussion in various legislation.

In various legislative proposals, APR is frequently used as a means to determine if a certain loan is considered to meet 'high-cost' thresholds that would put the loan into categories that require everything from additional disclosure to non-fundable.

For instance, in the proposed law HR1728, any loan that is 1.5% higher in APR than the Average Prime Offered Rate (APOR) as reported weekly by Freddie Mac in it's survey of major lenders is considered to be a 'high cost' loan and is treated with severe restrictions.

I am not against the spirit of this law. I am, however, shocked at the lack of understanding of what goes into the calculation.

First off, the APOR is reported as the average rate and average fees. However, the calculation in HR1728 and bills like it will attempt to calculate the difference in APOR and APR. APR includes all the fees, PMI, UFMIP, etc...that will naturally cause us to not compare apples to apples.

Secondly, professionals in the industry cannot agree on what fees are APR fees vs. non-APR affecting fees.

Lastly, with the new Good Faith Estimate for 2010, mortgage brokers are at an APR disadvantage to direct lenders. This doesn't mean that the loans that a consumer can get from a Broker are worse...it means that the APR is frequently higher. Confused yet??

Here's how it works:

Let's say I am a broker and I am offering the following loan to a client:

5.25% 0 pts, $2,500 in other APR fees (title/escrow, appraisal, etc..)

Then the client goes into Wells Fargo and gets the following quote

5.25% 1/2 point fee, plus the same $2,500 in other fees

My loan is clearly better. It's not even close. On a $400k loan, it's $2,000 better. One would think that would be reflected in the APR, correct?? Wrong, of course....

You see, the way that a broker now offers a 0 point loan to a consumer has changed.

A broker has access to the wholesale rate sheets of it's investors. These wholesale rate sheets will have various points and/or rebates associated with various rates that it offers to the brokers.
It may look something like this:

4.75% 1 pt
4.875% 0 pts
5% (1 pt rebate)
etc...

In this case, pre-2010, if we delivered a 5% rate to the investor, then they would pay us a 1 pt rebate. This 1 pt rebate would allow us to be able to deliver this lower wholesale rate to our clients without having to charge for our services since we are paid by the lender in the form of a rebate.

Now, the rebate (also called Yield spread premium, or YSP) is required to be credited to the borrower. We are now required to charge a fee for our services and credit any fee paid from the lender directly to the borrower.

The net effect on the borrower hasn't changed. They still get the wholesale rate with 0 points (well, they get charged 1 point and credited 1 point, so it's new 0 points).

Here's where is gets silly....

The YSP that is being credited to the borrower is not factored into the APR calculation!

This means that in my offer, I will have to actually factor in a 1% origination fee plus the $2,500 into the APR calculation, making my APR 5.1422%

Wells Fargo, who doesn't have to play the charge/credit game, will factor in a .50% 'buydown' fee plus the $2,500 and their APR would be 5.0986%

That's right...a lower APR when the fees are $2,000 more to the borrower.

Is there any wonder that people are leaving this industry??

Weekly Mortgage Report

2010-01-29T10:32:00.000-08:00

Fed To End MBS Purchase Program

There was major economic news on many fronts this week, with mixed results for mortgage markets. The Fed statement essentially followed the expected script, demand was strong for the Treasury auctions, and much of the economic data released during the week was stronger than expected. The net effect was a small increase in mortgage rates during the week.

As expected, the Fed made no change in the fed funds rate on Wednesday. The biggest surprise was that the Fed's Hoenig dissented from the decision, as he believes that economic conditions have improved enough that the Fed should begin to tighten policy. The Fed's outlook for the economy was slightly more positive than in the prior statement. The statement repeated that the mortgage-backed security (MBS) purchase program will be concluded by the end of March. Some investors were disappointed that the Fed didn't show more support for a possible expansion of the MBS purchase program, and mortgage rates rose after the news.

There is a wide range of expectations in the investment community about the impact of the end of the MBS purchase program on mortgage rates. The Fed has been purchasing roughly 75% of new MBS issuance, and a decline in demand from one source normally leads to higher yields to attract other buyers. One argument, however, is that the end of the program has been expected for quite a while, so mortgage rates already reflect the news, and there could be little reaction over coming months. Other analysts predict an increase in mortgage rates of as much as one percent. The Fed itself expects a small increase in mortgage rates as a result of the end of the program.

The new Good Faith Estimate is a joke

2010-01-26T23:53:00.000-08:00

I'm a firm believer that any law, no matter how logical it is, is a bad law if it is unenforceable.

An unenforceable law creates opportunities for the people who don't care about the law to circumvent it and the people who do care about the law to be at a disadvantage.

This is my biggest problem with the new Good Faith Estimate (GFE) that we had to start using on loan applications after Jan 1 of this year.

The intentions of the law are laudable: create a clearer disclosure of the fees involved in the mortgage transaction, hold originators to these fees with little or no tolerance for increases, and provide the ability for a consumer to easily shop around for the best mortgage.

Sounds great on paper, right?

In practice, not so much.

My first problem is that the whole point of the new GFE is to improve disclosure to the consumer, but HUD DOESN'T REQUIRE A BORROWER'S SIGNATURE!! THERE ISN'T EVEN A SIGNATURE LINE!

This creates an opportunity for loan originators (LO's) to not even have to prove to the person approving the loan that they ever even gave the GFE to the client!

The law abiding LO's will provide full disclosure to the client because that's what we do (even if we feel that the new GFE actually doesn't provide clear answers to important borrower questions) and other, less than forthcoming LO's will simply not give the borrower the GFE.

But that's not even the worst part.

The new GFE looks like it was created by people who have never sat down with a client and reviewed the important terms of their proposed loan.

Items that are missing on the new GFE:
Total borrower paid closing costs
Total seller paid closing costs
Total seller/agent/broker credits
Total cash to close
Loan Payment
Total prepaid items and a breakdown of these items
A breakdown of broker vs. lender fees
A breakdown of origination and discount points vs. other 'junk' fees (tax preparers are going to be pulling their hair out over this one)

Items that are on the GFE that make it really confusing:
Items paid for by the seller that have no relevance on the buyer (owner's title policy)

It really is a well intentioned, but poorly thought out form.

Additionally, the overdisclosure and masses of paperwork that every borrower needs to sign actually makes the disclosure process less effective.

When a borrower is signing paperwork 2 inches thick for an hour straight, where many of the forms look exactly the same, they eventually just stop reading and sign without contemplating.

The industry as a whole needs to do a better job of reducing the amount of relevant paperwork that goes into the loan process.

Imagine getting a loan where you only signed 5 or 6 documents. Every borrower would read every line to make sure that it was correct.

2010-01-26T23:52:00.000-08:00

Mortgage Rates Improve, Stocks Fall

While the economic data released this week had little impact, mortgage rates were heavily influenced by two big stories. One was an announcement that China will take steps to slow its economic growth and the other was President Obama's proposed new restrictions on the activities of financial institutions. Both measures are expected to lead to slower economic growth in the US, which hurt the stock market but helped fixed income markets. As a result, mortgage rates ended a little lower. During the week, China released a report showing that its Gross Domestic Product (GDP) grew at an 8.7% pace in 2009. Rapid growth generally leads to higher inflation. In an effort to slow its economy and prevent inflation, China announced that it is going to curb bank lending. China currently has the third largest economy and is responsible for a significant percentage of global economic growth, so the effects of a slowdown in China will be felt around the world.

In the US, President Obama proposed to limit the size and activities of large banks to reduce the risks to the financial system as a whole. If passed by Congress, this too would lead to slower growth for many large US financial services firms. The potential for slower economic growth and the resulting reduction in inflationary pressures was favorable for mortgage rates.

To build capital and reduce risk, the FHA announced that it will raise insurance rates and tighten credit score requirements. The major changes include increasing upfront premiums from 1.75% to 2.25%, reducing the maximum seller contribution from 6% to 3%, and increasing the level of FICO scores from 500 to 580 below which a down payment of 10% is required. At this point, the expected timing of the upfront premium increase will be in the spring, and the other changes will take place over the summer.

Also Notable: December Core PPI inflation increased just 0.9% from one year ago The Senate is expected to vote on Bernanke's reappointment next week The Treasury will auction $118 billion in 2-yr, 5-yr, and 7-yr securities next week The Fed purchased $12 billion in agency MBS during the week ending 1/20

What goes down must come up again...

2009-12-04T09:00:00.000-08:00

Employment Data Surprises

After several weeks of strong performance, it was a tough week for mortgage markets. Stronger than expected economic data and an improved economic outlook from the Fed increased concerns about future inflationary pressures. Rising inflation expectations result in higher yields, and mortgage rates increased during the week.

The big news this week was the Employment report. Against a consensus forecast for a loss of -125K jobs in November, the economy lost just -11K, and the figures from prior months were revised higher by 159K. This represented the strongest monthly data since December 2007. The Unemployment Rate unexpectedly dropped to 10.0% from 10.2% in October. While weakness remained in manufacturing and construction, the service sector added jobs. Average Hourly Earnings, an indicator of wage growth, rose slightly.

This week's housing data also exceeded expectations. October Pending Home Sales rose for the ninth consecutive month, increasing 4% to the highest level since March 2006. The index is up 32% from one year ago. Pending sales are based on contracts signed but not yet closed and are a leading indicator of housing market activity. The homebuyer tax credit again provided a lift.

Mortgage Weekly Update 11/25 - Happy Thanksgiving!!

2009-11-25T10:11:00.000-08:00

Home Sales Surge

A combination of factors helped mortgage rates improve yet again during the short Thanksgiving week. Strong demand for the Treasury auctions, low inflation, and a fragile economy were all positive for mortgage markets. As a result, mortgage rates dropped to the lowest levels since January.

The consensus economic outlook is for a gradual recovery with low inflation, and the economic data released during the week was consistent with this view. Economic growth during the third quarter of the year was revised lower, but both the Fed and private economists raised their forecasts for future growth. This week's economic reports indicated that some sectors of the economy are improving, such as the housing market, while others reflected weakness. Wednesday's data on Core PCE prices continued to show little inflationary pressure, which allows the Fed to keep rates low to assist the economic recovery.

This week's home sales data far exceeded expectations across the board. October Existing Home Sales jumped 10% from September. Inventories of unsold existing homes dropped to a 7.0-month supply, the lowest level since February 2007. October New Home Sales rose 6%, and inventories of new homes declined to the lowest level in decades. Extremely low mortgage rates, high affordability levels, and the first-time homebuyer tax credit boosted sales in October.

Weekly Mortgage Report November 13th, 2009

2009-11-13T09:29:00.000-08:00

Mortgage Rates Improve

Since the Fed meeting on Wednesday of last week, mortgage rates have improved a little each day. There was no major economic data released during the week, and even a weak 30-yr Treasury auction on Thursday failed to stall the rally in mortgage markets. As a result, mortgage rates ended the week moderately lower.

At their last meeting, the Fed indicated that monetary policy would remain on hold for quite a while. While the Fed acknowledged that it will eventually have to raise the fed funds rate, the message was clear that rate hikes are still a long way off. A series of Fed speakers this week elaborated upon their current thinking. A solid majority of Fed officials feel that the economy is still too fragile and the labor market is too weak to begin to raise rates. Confirmation that rate hikes are a long way off encouraged investors to purchase stocks and mortgage-backed securities (MBS), and both equity markets and mortgage markets have performed very well since the Fed's announcement.

On Friday of last week, President Obama signed into law an expanded Homebuyer Tax Credit bill, which extended the deadlines and added a new $6,500 credit. Several provisions in the bill became effective immediately. Homebuyers who owned their primary residence for five out of the last eight years can claim the $6,500 tax credit for purchases made after November 6th. In addition, the extended income limits in the bill are now applicable for both first-time homebuyers and repeat homebuyers. The extended income limit for couples filing jointly is now $225,000, with the credit phased out over the next $20,000 in income. These new limits cannot be applied retroactively to deals completed before November 7th.

Why APR is a flawed calculation

2009-11-02T14:32:00.000-08:00

APR is a nearly useless calculation with regard to shopping for a mortgage

Every time I go through a set of loan docs with a client, I review the Truth in Lending (TIL) disclosure with them. Part of the TIL is the disclosure of the Annual Percentage Rate (APR) for the loan. The APR is one of the most mis-understood pieces of information for most borrowers, so I have worked and worked on a good way to explain it in layman's terms.

At it's core, the APR is a number that accurately represents the 'total cost of credit' for the loan. A large portion of this total cost of credit number is the amount of interest that is paid over the life of the loan (especially on a 30 year mortgage, since the interest paid over 360 months dwarfs any upfront fees). It also accounts for what are called 'prepaid finance charges'. This includes all of the one time fees associated with obtaining the loan including points, title/escrow, appraisal, recording, etc...

For example, if a loan carries a 5.50% interest rate and has no points and no fees, the APR would be 5.50%. But, if the loan was at 5.50% with 1 point plus $3,000 in other one-time closing costs, the APR would have to include those upfront charges in the total cost of credit and the APR would be something like 5.65% (approximate...it depends on the loan amount).

The theory behind APR is to give consumers the ability to shop various rate and fee options with one consise number (APR). This all sounds great on paper.

Here comes the flaw:

In order for APR to be an accurate reflection of a borrower's best interest (excuse the pun), two assumptions must be true:

1. The borrower keeps the loan to full term and never pays the loan off early and never makes any principal reductions ahead of schedule (including selling the home, refinancing, or simply making extra principal payments to reduce the term).

and

2. The borrower is ambivilent about the cash flow impacts of paying fees upfront out of pocket.

The first assumption is usually the one that is the most flawed.

Statistics tell us that the average time in a home is just over 7 years. The average life of a loan is just under 5 years (between refinances and moving residences).

If we take the 5.50% example from above, I can show you how flawed this becomes when you apply break-even analysis.

The example of 5.50% with no points and no fees vs. the 5.50% with 1 point and $3,000 in fees has a pretty obvious conclusion (take the loan with no points and no fees with the same rate).

However, what if you had the option to take a 5.70% with no points and no fees (APR = 5.70%) vs the 5.50% with 1 point and $3,000 in closing costs (APR = 5.65%).

By strictly looking at APR, one would choose option 2 with the APR of 5.65%, but I could frequently make a case for the higher APR loan being the better option for most people.

What if you were planning on living in the home for 4 years?

Let's do the math:

On a $400,000 loan, the fees on the 5.50% loan work out to $7,000. For this $7,000 you save .20% on the rate every year (on a $400,000 loan that works out to $800/year or $66/month).

It would take 106 months at $66/month to add up to the $7,000 that was paid upfront. In this case, the borrower would have to be pretty sure that they were going to be in the home for almost 9 years for the 5.50% rate with the lower APR to be the correct decision.

But that's not all!

Even if they knew that they were going to be keeping the home for the long term, they still face the risk of rates going down in some time in the 9 years and refinancing before they were able to breakeven on the $7,000 in fees.

Either way, APR doesn't tell the whole story and it is a very flawed number when it comes to shopping for a mortgage.

APR is a lot better when looking at other types of installment credit including auto loans, personal loans, credit cards, and student loans. The reason that APR is better for these types of loans is that refinancing is uncommon and most people tend to keep these loans to full (or close to full) maturity, thus the APR calculation is more accurate.

If you have questions regarding financing (or refinancing) a home, feel free to call me directly.

2009-11-02T14:30:00.000-08:00

Record Auctions Produce Mixed Results

While daily volatility was high this week, mortgage rates ended just slightly lower than last week. The primary factors influencing mortgage rates were offsetting. The economic growth data released this week was stronger than expected, but inflation remained low. While the first two Treasury auctions produced impressive results, the final one was relatively weak.

Demand was extremely strong for this week's 2-yr and 5-yr Treasury auctions, but it slacked off considerably for the 7-yr securities. When demand is low, higher yields are required to attract investors. In addition, the Treasury is interested in shifting its issuance toward a greater percentage of longer-term securities relative to shorter-term securities to lock in currently low rates.

For mortgage markets, though, a move in this direction would add to the supply of competing investments. The Fed is already in the process of winding down its purchases of mortgage-backed securities, removing demand from the market. Higher supply of long-term investments and lower demand would pressure mortgage rates higher.

Government influence on mortgage markets has been substantial. It has pushed mortgage rates to historically low levels and has made credit available where it might not be otherwise. Two important programs, the first-time homebuyer tax credit and the extended conforming loan limits, were set to expire soon. Fortunately, both programs received strong support from lawmakers this week and are likely to be extended.

Weekly mortgage update - week of 10/23

2009-10-24T12:27:00.000-07:00

Existing Home Sales Surge

There were few major surprises in the economic news this week, and little change in the stock market. While there was a great deal of daily volatility, mortgage rates ended the week nearly unchanged.

A flood of housing market data was released during the week, and most of it reflected improvement in the sector. The biggest unexpected news came from the September Existing Home Sales report, which jumped 9% from August to the highest level since July 2007. Inventories of unsold existing homes dropped sharply to a 7.8-month supply from a 9.3-month supply in August. This marked the lowest inventory levels in two and one-half years. September Housing Starts remained at depressed levels, which removes pressure on future inventory levels. Building Permits, a leading indicator, also held at low levels. In short, home sales improved, while inventory levels moved lower with a relatively light supply of new homes in coming months.

If there is a note of caution, though, it's that much of the activity has been spurred by exceptionally low mortgage rates and the first-time homebuyer tax credit, and the future is uncertain on both fronts. The Fed is scaling back its purchases of mortgage-backed securities, which might push mortgage rates gradually higher, and lawmakers are currently debating whether to extend the first-time homebuyer tax credit.

The Mortgage Bankers Association (MBA) also released its forecasts for this year and next. According to the MBA projections, purchase originations will decline slightly in 2009, but will then increase by 12% in 2010. Similarly, the MBA forecasts that existing home sales will rise by 11% in 2010. The chief economist of the MBA suggested that the timing of the economic recovery and the level of mortgage rates are the biggest variables influencing the results for 2010.

How's the Market??

2009-10-21T17:06:00.000-07:00

My favorite question. I get it at least once a day, so I always have to have an answer ready. In a world of 30 second soundbites and 200 word yahoo.com stories and 240 character twitter posts (shameless plug, check me out on twitter @andrewsoss), everyone wants the quick and simple answer.

The quick and simple answer is that there isn't an easy answer to this question. I know it's not what people want to hear but it's true. Nevertheless, I am forced to dial back my own ego and boil down the market to 30 seconds, 200 words or 240 characters.

So here it is.

Client: How's the market?
Me: It really depends.

If I had to sum up the market in one word, it would be "Stratified". It's a very different market in the low end, middle end, and the high end.

The low end is insanely hot. Since May, I can't remember the last single family property under $500,000 that didn't have multiple offers and sell in less than 10 days. Many properties are being scooped up by all cash investors and first time homebuyers.

Many of the properties that cannot qualify for financing due to property condition are being scooped up by the cash investors. The ones that can qualify for financing are getting bid way up by buyers wishing to take advantage of the first time homebuyer credit.

The middle and high end of the market, in my opinion, still has some ways to fall. I think that it needs to come down by at least another 10% to be in line with rents and to get investors to stabilize the prices.

That being said, rates are still near historic lows and contrary to what people would tell you, we can still get financing pretty easily for qualified buyers.

Weekly Mortgage Report October 9, 2009

2009-10-09T21:41:00.000-07:00

With a light schedule of economic data, Treasury auctions and comments from Fed officials were the primary influences on mortgage rates this week. Strong auction results on Tuesday and Wednesday pushed mortgage rates to the lowest levels seen in months. The final auction on Thursday, however, saw much weaker demand. Reacting to this, along with hints of tighter monetary policy from Fed Chief Bernanke Thursday evening, mortgage rates gave back their improvement plus some and ended the week significantly higher (although still extremely low).

Investor demand was stronger than average for the 3-yr and 10-yr Treasury auctions, which made the weak results in the 30-yr auction a surprise. Longer-term Treasuries are comparable investments to mortgage-backed securities (MBS), which largely determine mortgage rates, so the results from 10-yr and 30-yr auctions are particularly important. To increase demand, yields must rise. This means that if weak demand for long-term Treasuries continues in future auctions, it would likely push mortgage rates higher as well.

Recently, Fed officials have sent mixed signals about how soon the Fed may need to begin to tighten monetary policy. Wednesday, the Fed's Hoenig said that the Fed should begin raising interest rates "sooner rather than later," and that this action wouldn't end the economic recovery. He explained that the Fed has a long way to go just to return to a neutral monetary stance and that it will take a while for the impact of rate hikes to be felt. Thursday evening, Bernanke held with the stated view that low rates will likely be justified for "an extended period", but he added that the Fed will be ready to remove stimulus as the economy recovers. When the Fed eventually indicates that it's ready to act, mortgage rates will be likely to move higher.

Weekly Mortgage Report July 3, 2009

2009-07-03T11:09:00.000-07:00

Mortgage Rates Hold Steady

There was very little daily movement in mortgage rates during the holiday-shortened week, and they ended the week nearly unchanged. The economic news during the week contained few surprises.

Following better than expected results for May, investors were closely watching the June Employment report for clues about the timing of any economic recovery. Thursday's data showed that the economy lost -467K jobs in June, and the Unemployment Rate rose to 9.5% from 9.4% in May. Average Hourly Earnings, a proxy for wage growth, rose at a slim 2.7% annual rate. High unemployment and slow wage growth have caused consumers to save more and spend less. Since consumer spending accounts for about 70% of economic activity, the slowdown in spending has had a large impact on economic growth. For mortgage rates, however, low wage inflation and slow economic growth are favorable.

While the Employment report may have captured the most attention, the week began with a significant announcement from Chinese officials. According to the head of China's central bank, there will be no sudden changes to China's foreign reserve policy, meaning that China will not pull back from buying US bonds. Over recent months, investors have been concerned that foreign central banks would decide to scale back their purchases of US bonds, so this was very welcome news. Recent Treasury auctions have confirmed that foreign demand remains strong.

Banks get greedy...take it in the shorts

2009-06-11T22:36:00.000-07:00

In a recent article in WSJ and detailed in this blog post, you can read about how a small securities firm out of Texas pulled a fast one on the likes of JP Morgan Chase, BofA, and RBS.

Here's how it went down.

Lehman Brothers purchased a bunch of loans and put them into a mortgage backed security in 2005. These were mainly Alt-A loans secured by properties in CA at the height of the market. Predictably, the $337 million pool is worth just a tiny bit less than that now. Between borrowers refinancing, selling, but mostly being foreclosed on, the principal balance of the pool was down to just $27m.

Lehman Brothers serviced the loans through their subsidiary, Aurora Loan Services. The actual owners of the pool were made up mainly of other institutions, namely Chase, BofA, and RBS.

Since these investors knew that the $27m was the outstanding balance of the principal, but that most of the loans were either already defaulting, in foreclosure, or were very likely to go to foreclosure, they valued the pool at something like $3m.

Thinking they were smart and wanting to hedge against the inevitable loss that they were going to take on the pool, they purchased a type of insurance called a Credit Default Swap.

The Credit Default Swap (CDS) insures them against the chance that the borrowers defaulted on the remaining loans.

They purchased these swaps from a small brokerage in Austin, TX called Amherst Holdings.

Amherst wasn't dumb and they knew that there was a very high chance that the borrowers would default and that the banks would cash in on their policy, so they charged through the nose for it.

They would charge the banks as much as 90 cents for every $1 of insurance. The banks obviously thought that more than 90% of the loans would default and they would collect their $1 and make a tidy little 10% profit on the remainder of this pool.

Follow so far....

Here's where it gets interesting.

Sicne the CDS market is unregulated, anyone can purchase a CDS on this particular security...WHETHER YOU ACTUALLY OWN IT OR NOT. It's similar to purchasing insurance on your neighbor's house.

The Banks thought, well this is about as gauranteed as it gets, so they loaded up on these contracts.

Amherst ended up selling over $130 million worth of insurance on $27 million worth of loans. Sicne they were charging up to 90 cents on the dollar, they collected over $100 million in premiums for this insurance.

They then simply took $27 million of it paid off the loans.

So the banks now have their $27m back, but they paid for $100 million in premiums.

Whoopsie.

Weekly Mortgage Report

2009-06-08T09:31:00.000-07:00

Upside Surprise in Jobs Data

Investors have been concerned for quite a while about the coming supply of new debt needed to pay for all the government stimulus programs. On top of that, the economic outlook has been improving sooner than expected. The combination of these two potentially inflationary developments pushed mortgage rates higher during the week.

The economic surprise this week came from the Employment report. Although the economy lost -345K jobs in May, it was far fewer than the consensus estimate for a loss of -525K jobs. The Unemployment Rate jumped to 9.4% from 8.9% in April. A surge in people entering the labor force was responsible for the unexpected increase in the Unemployment Rate. The labor market is typically one of the last areas to show improvement during an economic rebound, so signs of a turnaround are particularly significant.

Fed Chief Bernanke supported the notion that the recession would end this year. In testimony before Congress this week, Bernanke stated that he still expects the economy to move higher later this year, although it may take a while for growth to return to average levels. He looked ahead to measures needed once the economic crisis has passed, such as containing the budget deficit and reducing government control of markets. At this point, most investors believe that the Fed is not inclined to expand the mortgage-backed security (MBS) purchase program beyond its current level of $1.25 trillion, unless economic growth falls short of the Fed's outlook.

More evidence that the economy may be rebounding came from this week's housing data. April Pending Home Sales rose for the third consecutive month, increasing 7% from March. Pending Home Sales are a leading indicator, meaning that future New and Existing Home Sales reports may show increases

New Appraisal Process nightmare

2009-05-30T07:11:00.000-07:00

It's been a month now since the new appraisal rules went into effect. The Home Valuation Code of Conduct (HVCC) requires appraiser 'independence' from anyone who will be compensated from the completion of the transaction.

Sounds good, yeah? Appraisers shouldn't be pressured into 'hitting a number'. In practice, not so much.

Unfortunately, those nasty individuals who will be so greedy as to be compensated when a transaction goes through also happen to be the same people who know anything about the property (which is some useful information to someone who is hired to value the property).

It took all of 2 weeks for my first nightmare to ensue.

An investor purchased a property for $375k cash at foreclosure trustee sale. He then hired an agent to list said property for $450k on MLS...property received multiple offers, final contract price was $459k which happened to be my loan client.

Because the property had recently been purchased and the purchase price was increasing, I was limited to who I could take the loan to since most lenders have an 'anti-flipping' policy that the property has to be held for 90 days before resale.

I end up taking it to Flagstar Bank. Per HVCC, I ordered the appraisal through Flag's Appraisal Management Company (AMC), iMortgage services.

Appraiser is given all the information on the transaction including the listing, previous trustee sale information, offers and counter offers, fully executed contract, etc...

Appraiser ends up mis-measuring the subject property by about 500 sq ft. and subsequently uses the wrong comparable sales. Instead of addressing the discrepancy with one of the agents, he submits his report with a value of $400k.

Buyer freaks out, seller freaks out, agents freak out. Buyers agent ends up emailing the appraiser to inform him of his mistake regarding the sq footage as well as some of the other errors in the report.

Appraiser admits the error and amends report to correct the sq footage and provides new comps. He uploads corrected reports to iMortgage. All should be good, right?

iMortgage says WTF, we didn't request an updated report, why did you correct the report?

Appraiser says that the agent informed him that he had the wrong sq footage in the original report, so he needed to fix it.

Boom: HVCC VIOLATION - Agent isn't allowed to contact appraiser (even though she was the one who let him in the house to begin with). All communication has to go through AMC.

Appraisal is now voided. Flagstar now won't accept anything but the original $400k appraisal and deal is dead in the water since Flagstar was my only lender who could get around the flipping issue and the seller is just going to go to the next buyer in line.

Thank you government for solving a problem by creating an even bigger problem.

There are many other issues with HVCC, but this is a clear example of the inflexibility and the lack of common sense in our industry today.

End of Week Mortgage Update 5/15

2009-05-16T08:42:00.000-07:00

Retail Sales Decline

After several weeks of improving economic forecasts, weaker than expected economic data this week tempered some of the optimism for a near-term recovery, which was favorable for mortgage markets. Tame inflation data and sustained Fed purchases of mortgage-backed securities (MBS) also helped. As a result, mortgage rates fell moderately during the week. We are basically down close to the lowest levels that we have seen this year.

With a full economic calendar, the biggest surprise this week was the unexpectedly weak Retail Sales report. Retail Sales account for about 70% of economic activity, and many investors were hopeful that the report would lend support to the idea that the economy is poised to turn higher. Instead, a moderate decline in the monthly data caused investors to question how quickly the economy will rebound. For mortgage markets, weaker economic activity is good news, since it generally means lower inflation. The monthly inflation reports released this week showed that inflation is not a concern in the short-term. The April Consumer Price Index (CPI) was unchanged from March, and Core CPI inflation rose at a moderate 1.9% annual rate.

The Secretary of the Department of Housing and Urban Development (HUD) announced this week that home buyers will be allowed to use the $8,000 first-time homebuyer tax credit for down payments on purchases financed by FHA loans. FHA will allow approved lenders, nonprofits, and government agencies to advance the funds in the form of bridge loans that buyers would use for down payments. Buyers would repay the loans after they receive their tax refunds. The FHA will release more details on the program soon. Here's some information about the $8,000 tax credit for first time homebuyers.

In related news, my company, Stewart & Soss, Inc. received notice this week that we are a fully approved Lending Institution by HUD and now can offer all FHA products to our customers.

As always, call us for details! 408.295.2355

Did you win the Obama Lottery??

2009-05-12T00:09:00.000-07:00

The mortgage market is still as turbulent as ever. It seems that the only constant is constant change.

Among the many changes and governement programs that have come out to help stimulate the economy through putting more spendable (or saveable) cash in the hands of homeowners is the Home Affordable Refinance Program. Unlike the previous administration's failed housing relief programs, this program actually helps real people.

Does it help everyone? No. But it certainly rewards people who truly did nothing wrong except purchase at a time that they thought was the bottom, but it turns out wasn't.

The program allows borrowers to refinance into fixed rate loans at the current low levels (mid-4's to low 5's), so long as they meet the following criteria:

1. They must have put 20% down or more on the original loan
2. They must be able to income and credit qualify on the new loan
3. They must be at 105% equity based on current apprasied value
4. Their loan must have been pooled by Fannie Mae or Freddie Mac

A great deal of people fall into this category and most of them are more than qualified for a mortgage. Many are savings hundreds of dollard monthly by this program.

So, why the title of this post? What makes it a lottery?

A borrower has no control over if their particular loan was sold to Fannie or Freddie vs. some now defunct Wall St. investment bank or if it was retained in the lender's portfolio.

All in all, though...the program certainly has more teeth and is more helpful than the previous programs that have come out in the last few years.

Is this the beginning of the end of the Refi Boom

2009-05-08T00:47:00.000-07:00

Rates have hovered in the mid 4's to low 5's ever since December due to a combination of a flight to safety away from stocks and into bonds combined with direct market intervention by the Federal Government to directly purchase mortgages from Fannie Mae and Freddie Mac.

There seems to be a sediment recently that the worst of the economic troubles is behind us. I personaly think that this is a bit of a dead cat bounce, but I seem to be in the minority.

I'm predicting that we've seen the lowest of the interest rates and we will begin to hover in the mid 5% range for the remainder of the Summer with a small chance of us being in the 6's and a small chance of us remaining in the 4's.

Either way, there is basically no way that we are going lower than the lows that we saw in the last few weeks unless something crazy happens.

If you are on the sidelines, it's time to refinance now. If you are looking to purchase, you may consider getting approved and locking for 90-180 days to hedge the risk of rates going way up.

As always, give me a call if you have specific questions.

New Appraisal Rules to start tomorrow, May 1

2009-04-30T19:49:00.000-07:00

Starting tomorrow, May 1st, the Home Valuation Code of Conduct (HVCC) goes into effect.
While I support the general premise behind the bill (elimination of the pressuring of appraisers by loan originators), I believe that the implementation is a misguided, greedy money grab by a few large lenders and will have tremendous unintended negative effects on the industry. This is cronyism that we haven't seen since the Haliburton fiasco.

Here's what the National Association of Mortgage Brokers has to say:

https://www.namb.org/images/namb/GovernmentAffairs/Position_Papers/GSE%20Appraisal%20Agreements%20%28Feb%202009%29%20Final.pdf

In short, Brokers will no longer be able to order appraisals for clients. An appraisal must be ordered through an appraisal management company (AMC).

All by itself, this wouldn't be horrible (though I still think that they are attacking the problem of unreliable appraisals from the wrong angle). However, as they say, follow the money...

Most of the major lenders are requiring Brokers to order appraisals from specific AMCs. I'll give you one guess who has ownership interest in the chosen AMCs that the lenders are using.
That's right...a rule that tries to eliminate lender coercion of appraisers by forcing brokers to order appraisals through...you guessed it, lender owned appraisal companies.

Talk about the Fox and the Henhouse.

Subordination Frustration

2009-04-28T00:51:00.000-07:00

What was once an easy little formality at the end of a loan transaction has now become a major roadblock for borrowers wishing to refinance into the historic low rates. 2nd lienholders are now outright refusing or severely limiting subordination requests from borrowers.

What is a Subordination Request?
When a client has a 1st and a 2nd, but only wants to refinance the 1st into a lower interest rate (without touching the 2nd), the lender in 2nd position has to execute a Subordination Agreement.
This agreement is recorded with the new 1st loan in order to reflect that the 2nd lender is okay staying in 2nd position. Absent this agreement, the new 1st loan would technically be in 2nd position since it would be recorded at a later date than the existing 2nd (and no new 1st lender would agree to that).

Why would the 2nd lender hold up the Subordination?
When the 2nd lender issued the initial loan (or HELOC), they knew the terms of the first mortgage that they were going behind. Obviously, some 1st mortgages were more risky to be subordinate to than others. For instance, many 2nd lenders wouldn't go behind a short term ARM with a teaser rate, or an Option ARM with the potential for negative amortization.
If the 1st mortgage was more risky, the 2nd lender would limit the Loan to Value or require a higher credit score or a higher level of income documentation.
The theory is the same when they are agreeing to stay in 2nd position, they want to make sure that they are not being put in a worse position. A traditional example of this would be when the borrower was taking cash out of the first mortgage and subordinating the 2nd mortgage. The 2nd lender would have to approve the amount of cash out and the type of loan to determine if they were okay with it or if they wanted to deny the subordination because there was less equity in the property protecting their position.
Traditionally, as long as there was no cash out and the loan didn't allow for negative amortization, the subordination was approved.
Not so anymore.

What is different now?
2nd lenders have taken huge losses. When a property goes to foreclosure, in most cases, the 2nd lender is completely wiped out (that's the risk of being in 2nd position). The 1st lender loses some, but certainly not a total loss, like the 2nd.
For this reason, 2nd lenders are trying to do everything they can to get these loans off the books. If it is a HELOC, many lenders are reducing the line amounts so that there isn't any additional exposure. Another way of trying to get paid off is to severely restrict or flat out deny all requests for subordination, even if the subordination would put the 2nd lender in a BETTER position.
In addition to the severe guideline restrictions, the subordination process that used to take 3-5 days is now taking 60-90 days at some high volume lenders (Chase, BofA, Wells to name a few). This is causing borrowers with rates on their refinances in the mid-high 4's to have to spend exorbitant amounts of money extending their locks or risk losing them all together.

Does this make sense for 2nd lender to act this way?
In a word...no. If a borrower is not taking cash out and the only thing changing is that they are going from a high payment to a lower payment, the lender in 2nd position is only improving. It really shouldn't matter how much (if any) equity remains in the property.
The choice for the lender is not to make the loan or not at 100% LTV. The loan is already on the books. The choice is to be behind a 7% rate or a 5% rate. If they deny the subordination, guess what, they are still at 100% and now the borrower has a higher propensity to default because they are in a higher rate.
Long story short....if you have to subordinate your 2nd, make sure your loan officer checks all the guidelines for the subordinating 2nd lender before locking in a rate on a first and incurring any fees.