The mortgage market likes Obama

Using the same 30 year fixed loan with a 20% down payment that I have used in previous posts, the rate is now back down to about 6.125% when it was 6.625% just yesterday. What a difference a day makes.

Credit market beginning to thaw

Watching the Dow over the last week or two has probably given folks a little motion sickness and whiplash. Mortgage rates over the last week have been similarly volatile. After jumping up a percentage point last week, they have improved dramatically in the last few days. Using the same 30 year fixed loan with a 20% down payment that I have used in previous posts, the rate is now back down to 6.0% after climbing to 6.875% a week ago. Lower rates indicate more willingness to loan, and could give a much needed spark to the real estate and mortgage industry.

There are other signs that the credit market is beginning to thaw. The overnight LIBOR rate has fallen to 1.28%, below the Federal Funds rate of 1.5%, suggesting that credit markets are stabilizing. "Libor is a daily average of what 16 different banks charge other banks to lend money in London and is used to calculate adjustable rate mortgages...Overnight Libor soared to a high of 6.88% earlier this month after the government's $700 billion bailout bill was signed into law."

Other signs of the credit market beginning to thaw:

• Larger companies that were having difficulty getting overnight loans a month ago, are now finding a market for their 30 and 60 day loan paper.

• Shoreline School District sold capital-improvement bonds valued at $25 million for a total interest rate of 4.94 percent, said Trevor Carlson...As recently as last week the interest rate — and the potential cost to the district's taxpayers — would have been substantially higher, he said.

• King County's sale of $48 million in short-term "bond anticipation notes" for jail improvements attracted eight bidders — more than expected, said Ken Guy, the county's finance director.

CNN Money
Seattle Times

Both Dow and rates climb, Fed considers more action

The Dow closed up 976 points today as investors (finally) reacted to worldwide government interventions to ease the crisis. This is the largest single day point gain, and the fourth largest when viewed as a percentage gain (11.1%). This of course follows a historic slide over the last week.

At the same time mortgage rates climbed further, up almost a full point since Thursday to around 6.875%. Though the stock market is now reacting to the Fed's recent moves, credit markets remain somewhat frozen.

The Fed is considering a less talked about provision in the bailout bill that allows it to pump money directly into banks for an equity share. Rather than buy up the mortgage backed securities that have unstable value, the Fed can pump money into the banks and credit market. An article in the Seattle Times does a good job of explaining the different strategies and benefits.

If Paulson pays banks exactly what their mortgages are worth, he will not increase banks' capital (or their lending ability) — he will merely convert one asset (mortgages) into another (cash), making no impact on the credit crisis. If, to protect taxpayers, he buys mortgages at lower prices than banks list them, banks will have to write down their capital and consequently contract lending — and the credit crisis will worsen. If Paulson overpays for mortgages, he may marginally augment bank capital, but also incur massive taxpayer losses when he later resells the mortgages at their real price.

The silver lining is a little-noticed provision in the bailout bill allowing Paulson — if he chooses — to buy ownership stakes in banks. According to Robert Johnson, the Senate Banking Committee's former chief economist, this would cost roughly $375 billion less than the mortgage-buying plan and, better yet, more aggressively attack the credit crisis.

Mortgages may be underpriced today, but they retain some value on banks' books. So rather than purchasing mortgages (a capital-neutral transaction), Paulson could buy bank stock, infusing banks with new capital on top of their mortgages. That would exponentially increase lending capacity, prevent taxpayers from buying toxic assets, give the public a share of future profits, and grant regulators ownership leverage to restructure bank management.

Full Article

Mortgage rates up sharply

The rate on a 30 year fixed mortgage shot up by over half a point overnight following the drop in the Federal Funds Rate.

The Federal Reserve has dropped the rate that banks lend to each other from 4.25% in January to 1.5% yesterday, trying to spur economic growth without increasing inflation. Yet mortgage rates have been (relatively) steady in the high 5% to low 6% range for most of the year.

This latest point drop had an effect opposite to what people may expect. Rates at one of our lenders shot up from 5.875% to 6.5% on the same 30 year fixed loan. The effect of lowering the Federal Funds Rate is more a long term economic fix, as it can take six months to increase borrowing. It is unusual to see such a dramatic jump in mortgage rates as a response. It is possible things may settle down in the next couple of days, but clearly lenders are not any more confident in the market, and credit (at this point) remains tight despite the Fed's actions.

The Fed drops the rate again

The Federal Reserve has dropped the Federal Funds rate by a half a point from 2% to 1.5%. This is one more response to the worsening economy and stock market.

As I said, I'm not sure how effective this will be in loosening the credit markets. The rate drop was matched by similar rate drops in the U.K., Canada, Sweden, Switzerland, China, Hong Kong and Australia over the past day, so with this world-wide coordinated effort there may at least be a psychological boost to the market.

Wall Street Journal

CNN Money

Bernanke speaks

Federal Reserve Chairman Ben Bernanke released a statement predicting that the global economy will be down well into 2009 and hinted at a possible future rate cut. The next scheduled meeting is October 28-29, but there is a possibility of an emergency meeting.

CNN story

I don't believe another rate cut is warranted at this point as it is not rates holding people back from borrowing money, but the banks refusal to make the loans in this uncertain climate. There are also less funds to loan with the collapse of the secondary mortgage market, further restricting banks ability to approve loans. Hopefully the Fed's plan to buy up short-term debt (as well as troubled mortgage backed securities) will help unfreeze the credit market.

Rates are still historically low, at least in the mortgage lending market.

Thinking of refinancing? Don't let a good rate slip away.

Are you watching interest rates to see a substantial dip before moving ahead with your planned refinance? When you see that dip, you may not be able to react quickly enough to lock in that good rate.

Lending guidelines have tightened significantly and underwriters are taking longer to pore through a borrowers documentation. You can't really lock in a rate until you know your credit score and documentation will get you that loan approval. There are fewer lenders remaining after the mergers and closures, and the remaining underwriters are backlogged. It can take a week or possibly three to get approval. In that time rates may have bounced back up and your refinance doesn't look so attractive anymore.

Get pre-approved today. Once you have that pre-approval, we can watch rates daily and be prepared to lock in a good rate when it comes along. All it takes is a little time to gather your documentation and $19 for the credit report.

It is a great idea to watch rates. It is absolutely essential to be pre-approved to lock in that good rate before it slips away. Contact me today.

While you're waiting for prices to drop, you're losing buying power

Many buyers are sitting on the sidelines waiting for home prices to drop or bottom out. While they've been watching prices, interest rates have gone up half a point in the last three weeks.

For example, three weeks ago a principal and interest payment of $2,000 would have qualified you for a $342,000 home at 5.75%. At today's rate of 6.25%, that same $2,000 principal and interest payment now qualifies you for only $325,000.

You've lost $17,000 in purchase power and it is unlikely that the home's price has dropped by 5% in that same three weeks. In the last year home prices in King County dropped .2%, and in Snohomish County prices actually increased by 2.4%.

As an Integrated Agent at The Real Estate Group, I am both a Real Estate Agent and a Loan Officer. While I can save you some money during the real estate negotiation, it is likely I can save you even more when I help you obtain financing. I will search for the best loan program to maximize your buying power, and I will keep an eye on rates each day and do my best to lock you in at the lowest rate available.

Home buyers are in their strongest negotiating position in the last 5-10 years. Don't wait any longer. You can't afford to.

The FED drops both rates again

The Federal Reserve in an unscheduled meeting today dropped both the federal funds rate and the discount rate by 3/4 of a point. The federal funds rate (the rate many credit card and home equity rates are based on) now stands at 3.5%. There is speculation that the FED will drop rates again at their normal meeting on January 30th.

It is not clear what affect this will have on mortgage lending rates. As I have mentioned previously, lending rates follow the bond market, not the rise and fall of prime. The rate drop was primarily to ease concerns about a tight credit market for business and to probably to bolster the stock market. As of 4:30 east coast time, the DOW is down 128 points, and has dropped substantially in the last few days.

I don't know that this rate drop is a wise move. The U.S. (unfortunately) depends heavily on foriegn investors to sustain our spending. Lower rates will attract fewer investors, so that spigot of cash may be shut off. Our dollar is already weak in the world market, and a weakening dollar means any investment in U.S. dollars will be worth even less.

There are also significant inflationary pressures with rising fuel and food prices. The FED would typically raise rates to fight inflation, not lower them drastically as they have done today. It seems that the rate drop was simply to stop a panic in the stock market. I don't know that it will work, or if it is worth the risk as it may create much larger problems in the near future.

When the FED lowered the prime rate, why didn’t mortgage rates go down?

The Federal Reserve lowered the prime rate by .5 a point at their September 18th meeting. A major reason stated for lowering the prime rate was to prevent the mortgage market’s trouble from affecting the economy.

“…the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally. Today’s action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time.”

Their major concern is to protect the broader economy, not necessarily to save the real estate market. As I mentioned in an earlier post, I didn’t think that lowering interest rates would bring any new buyers into the market. As it turns out, lowering the prime rate didn’t produce a similar lowering of mortgage interest rates anyway.

Mortgage interest rates are not tied to the prime rate. They are more influenced by the bond market and inflation. The graph below shows how the rates have moved mostly unrelated over the past three years.


The immediate effect of lowering the prime rate is a drop in your credit card and home equity lines of credit rates. The drop in prime did little to lower mortgage rates, but they are still historically low. Lowering prime may help boost consumer confidence and might bring investors back, but if you’re waiting for them to drop prime again to get a better rate before buying a home, you may be waiting in vain.

“Mortgage Meltdown” is an overstatement

Part of the reason I haven’t written an entry on this blog in some time is the glut of sensational articles in the media. With headlines that scream CRISIS, MELTDOWN, and FORECLOSURE it is hard to get to the meat of the issue. Many potential buyers think that they can not get financing. This is not true for most borrowers.

First a little flowchart of how money is lent out. The mortgage broker or bank approves a loan for a home buyer. Rather than keep the loan and wait for the monthly payments, that loan is likely sold by the bank in order to get more funds to loan out. The way these loans are sold is by bundling many loans together and selling them as mortgage-backed securities on the bond market. Investors buy the securities and get a rate of return based on the types of loans in the security. The bank gets the needed cash to lend; the investors get a regular return.

The mortgage market’s problems stem from the past few years of easy lending requirements. The investors were all too eager to buy the mortgage-backed securities, not accounting that there was some risk attached to them. As the investors were buying without analyzing risk, some lenders (particularly sub-prime) stopped looking over borrower’s documentation. Borrowers were getting approved for more money than they could afford. Some borrowers never should have qualified at all. The lenders are to blame for not qualifying the borrowers; the borrowers are to blame for not realistically judging their ability to pay, and the investors are to blame for not balancing the return on investment vs. the risk.

Some loans started going bad --> Investors stopped buying the mortgage-backed securities --> Funds for new loans dried up --> Many lenders have gone out of business.

The remaining lenders have tightened their guidelines, partially to reduce the risk of foreclosure, but mostly in hopes of getting investors to start buying the loans again. This does mean that some borrowers no longer qualify, but many still do. The high loan-to-value and “no documentation” loans are largely gone, but the borrower that earns a paycheck and has a decent credit score can still get financing. 100% financing is still available as well, and mortgage insurance (if needed) is deductible just like interest on your loan. Rates are still at historical lows. This is actually a great time to be a buyer with low interest rates, a large supply of homes for sale, and employment still strong in the area.

Some sanity has returned to the lending industry. Lenders are back to qualifying borrowers based on their documentation. The highest risk borrowers will not qualify. It may be a while before the panic of the investors subsides, but for many borrowers not much has changed.

More Hints from the FED

On Friday, Federal Reserve Chairman Ben Bernanke spoke to a group of economists and indicated that the FED wants to avoid bailing out investors from the consequences of their financial decisions. Investors scooped up mortgage backed securities at an incredible rate the last couple of years. Often these securities were backed by riskier subprime mortgages, and these more speculative investments are now losing value due to the subprime mortgage market’s fallout. Bernanke indicated that the FED stands ready to take action if the financial markets woes spread too far into the general economy, but his statement seems to indicate he is trying to avoid a cut in the federal funds rate at their next meeting on September 18th.

Will a rate decrease boost the real estate market?

Lowering the federal funds rate might not have the immediate intended effect of making it easier for people to buy a house. There are many other hurdles to buyers trying to obtain financing. As the secondary market for mortgage-backed securities has dried up, many lenders large and small have disappeared. According to the Mortgage Lending Implode-o-meter, 130 lenders have gone out of business or have been bought out. Greenpoint Mortgage owned by Capital One was shut down just yesterday.

There are very few lenders issuing subprime or Alt-A loans. These are loans that many people turned to in the last few years as home prices increased dramatically. These lenders had expanded guidelines that allowed self-employed and lower credit borrowers to obtain financing. They are also where many borrowers found 100% financing. Even prime lenders have tightened their guidelines significantly in the past months in response to investor fears of mortgage defaults. Many have increased credit score and down payment requirements. They have also required borrowers to have more money in reserves as well.

Unfortunately with fewer places to find a mortgage, and with much tighter guidelines at the remaining lenders, many buyers are now out of the market. A rate drop may help the people who already qualify to afford a larger home, but it won’t necessarily bring more buyers into the market.

As it has become more difficult to obtain financing, it has become even more important to have an Integrated Agent in your corner. When anyone could get a loan, deals didn’t fall apart on financing as often as they had historically. Now that borrowing has become more difficult, our track record of closing 98% of our purchases will stand above the rest. Find out more about Integrated Agency and myself at www.seanday.net.

The Fed cuts one of the rates

The Federal Reserve cut their discount rate by half a point late last week, from 6.25% to 5.75%. The discount rate is the rate at which the Fed will loan directly to banks. They did not change the federal funds rate, which is the rate banks will lend to each other. This rate sits at 5.25% and is what prime (8.25%) is based on.

By lowering the discount rate, the Fed has tried in another way to infuse the lending industry with more liquidity. The Fed had already pumped billions of dollars into the banking system in the past two weeks. The rate drop came as a bit of a surprise, however, as there has not been a rate change between meeting dates since the week after September 11th 2001.

Their next meeting is scheduled for September 18th, and there is increased speculation that they will lower the federal funds rate. In a statement accompanying the rate decrease last week, the Fed indicated that they were now more concerned with adverse effects of market instability over their fears of inflation. This is a clear shift from their statement at their last meeting on August 7th.

Fed announces no change in federal funds rate

The Federal Reserve announced today that it will be leaving the federal funds rate at 5.25%. This is the ninth consecutive meeting where they have left the rate alone, after raising the rate in the previous 17 consecutive months.

“Economic growth was moderate during the first half of the year. Financial markets have been volatile in recent weeks, credit conditions have become tighter for some households and businesses, and the housing correction is ongoing. Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters, supported by solid growth in employment and incomes and a robust global economy.

Readings on core inflation have improved modestly in recent months. However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated. Moreover, the high level of resource utilization has the potential to sustain those pressures.”

There had been speculation that the Fed would lower rates later this year as a reaction to the tightening of credit standards in the lending market. The above statement, though mentioning the credit issue, seems to indicate they are a bit more worried about inflationary pressures if they were to lower the rate. The bond market has indicated that mortgage rates may come down a bit, but it is difficult to predict with all that is going on related to the subprime market problems. Many lenders no longer exist, and remaining lenders have tightened criteria on loans, or eliminated programs altogether. Zero down programs still exist, but they are a bit harder to find and qualify for.