For Home Buying California

Another day, another batch of Gloom-and-Doom stories in the news. Remember to keep a level head — the media’s job, in part, is to sell newspapers and capture eyeballs. Using the word “crisis” repeatedly is one way to meet that goal.

A few facts to keep it all in perspective:

1. There are still BILLIONS of dollars being lent to homeowners every single day.
2. In May, 98.3% of full documentation, “prime” conforming and jumbo mortgage payments were not 60 days late
3. In May, 99.5% of full documentation, “prime” conforming and jumbo mortgages were not in default

In other words, there is still a very low default for borrowers willing to submit tax returns, W-2s, bank statements, and other financial data along with their loan application. This represents the large percentage of American homeowners and is why the mortgage “crisis” is not so bad for most people.

The credit market troubles with home loans are more “inconvenience” than “crisis” and, so far, are limited to those that are self-employed, are highly commissioned, have poor credit history, and/or are unwilling to document their financial world to a mortgage lender.

If you are feeling in any way overwhelmed, reach out to your loan officer for advice and opinion. You’ll get better perspective from an industry insider than an industry reporter.

Source
Jumbo concerns in real estate markets
Amy Hoak
CBS MarketWatch, August 14, 2007, 6:00 P.M. ET
http://www.marketwatch.com/news/story/rates-jumbo-mortgages-rise-though/story.aspx?guid=%7BFDE8DFF0-86F7-4C4D-A217-877912918B6E%7D”>

As we discuss over and over again, mortgage interest rates are determined by the price of mortgage bonds. Nothing else, and nothing more. The challenge in that truth is that mortgage bond pricing is not very accessible to the general public.

This includes the press.

As a result, the media tends to use a government bond called the “10-Year Treasury Note” as a mortgage rate indicator because it tends to move in the same direction as mortgage bonds.

Not knowing any better and making matters worse, a lot of loan officers also use the 10-Year Treasury Note as a benchmark. This is dangerous to their clients.

Look at the data from today (as of 11:20 A.M. ET):

• 10-Year Treasury Note: + 53 basis points
• 30-Year 6.000% Mortgage-Backed Bond: - 19 basis points

If you were watching the 10-Year Treasury Note today, you’d think that mortgage rates would be decreasing over the course of the day instead of increasing.

This same divergence has occurred several times in August and — for people watching the wrong indicator — may have led to costly rate lock errors.

The only security to watch with respect to mortgage rates each day is the price of mortgage-backed securities.

Industry trade magazine Inside B&C Lending pegs the 2006 dollar volume of new sub-prime loans at $640 billion. According to the Real Estate Charts chart above, 78% of those dollars were in 2-year adjustable loans.

A loan of this variety is often called a 2/28 (“two twenty-eight”).

A 2/28 originated in 2006 will reach its first adjustment period sometime in 2008. Adjustments on sub-prime loans are typically 3% at the first adjustment, and 1.5% every six months thereafter until the “cap” of 7% above the original rate is reached.

Looking back to 2003-2006, a homeowner facing an upward adjustment in his mortgage rate could usually just replace the existing home loan with a new one, thereby avoiding the upward adjustment altogether. This is commonly called “refinancing” your home.

At present, though, this is a much more difficult proposition; there are considerably fewer mortgage products available for sub-prime borrowers to use.

With fewer available products into which to change, the homeowner with an adjusting mortgage may have no choice but to swallow the higher rate after the two-year fixed rate period ends.

If your home loan is among the 78% of 2/28s originated in 2006 — even if you have a pre-payment penalty — it may be time to call your loan officer just to check out your options.

Paying a little bit extra today on a new loan may be better than paying a lot on an adjusted mortgage tomorrow.

It’s been on the news a few times lately, so let’s address a key misconception about the Fed and its relationship to mortgage rates.

The markets now anticipate that the Fed will lower the Fed Funds Rate within the next 45 days. As a mortgage rate shopper, there’s not much reason to be interested. That’s because the Fed Funds Rate is not directly tied to mortgage rates.

The chart above is courtesy of HSH Associates and shows how the Fed Funds Rate has moved in relation to mortgage rates since June of 2004. If there was a connection between the two, mortgage rates would have moved higher along with the FFR (brown) line.

The FFR is important because it’s used as a throttle for the economy. The higher the rate, the harder is it to borrow money and/or finance “stuff”, and so, therefore, the lower the throttle. When the FFR is lowered, it signals that the economy is slowing down too fast for the Fed and a little bit more “gas” is needed.

Economists are fearful right now that credit market turmoil will rapidly decelerate the U.S. economy and that is why they are calling for the Fed to lower the Fed Funds Rate. A lower FFR could add some life to business and consumer spending and that is what propels our economy forward, of course.

Whether the Fed does, or whether the Fed doesn’t, expect mortgage rates to remain relatively stable regardless. Interest rates on mortgages are set by the demand for mortgage-backed securities, not by the Fed Funds Rate.

After all the volatility and talk of a global crumble, all of the major U.S. stock indices posts gains last week. It just goes to show you what a strange roller coaster ride we’re all on.

Last week, the market bounced its way through:

1. The Fed’s press release stating that inflation is still a concern
2. Central banks around the world injecting gobs of cash into the global economy
3. A French bank halting withdrawals in several funds until the “true” value of the assets can be determined
4. Bleak outlooks from several high-profile U.S.-based lenders

And none of those items were based on scheduled economic data releases.

This week, by contrast, hosts a bevy of economic growth predictors that will hit the wires. Continuing with today’s Retail Sales report, mortgage rate shoppers will get no rest from the recent see-saw action.

Tuesday and Wednesday feature six releases between them, Thursday holds three, and Friday is capped with the University of Michigan Consumer Sentiment survey.

Until mortgage bond risk is re-valued by Wall Street, though, expect the data’s normal importance to be somewhat muted. Rates should respond more to external factors like the ones we saw last week.