Everyone Wants a Crystal Ball

So, you (like everyone else) want to know what mortgage rates are going to do this week.  I’m here to help.

Have you ever asked a loan officer if they know what the mortgage market is doing and they respond with:

"Well, if I only had a crystal ball.. I’d be able to forecast exactly what they’ll do…"

The bad news is, they have no idea what they’re doing.  It’s a horrible line that just says "I’m not familiar with the factors that effect mortgage rates, but I can quote you a stellar rate right now!"   The good news is, you’ve found someone that does get it.  If you want to capitalize on the best mortgage rates with the best terms, you need to work with someone who can tell you what effects rates and when they will change.

Seriously, you need to stop rate shopping and start advice shopping. It will save you thousands more.

Here’s this week’s WealthWithMortgage economic calendar (still struggling on photo quality…I’m a mortgage guy, not a graphics guy.)

If you want to see market updates (and random rants) as they come available, please ‘Follow Me’ on Twitter! 

Oh, and I can help you if you’re considering buying or refinancing a home and are shopping advice – the phone’s always on (515-991-7102). 

One Announcement = $200 Billion In Liquidity, Now.

This morning, The Office of Federal Housing Enterprise Oversight (OFHEO) announced it’s reducing Fannie Mae (FNM) and Freddie Mac’s (FRE) 30% capital surplus requirement to 20%.  Basically, they don’t have to have as much money in reserves, so they’ll be able to buy up some more mortgages and mortgage-backed securities.

By OFHEO making this ‘small’ change, it should free up as much as $200 billion of immediate liquidity to the market for mortgage-backed securities.  MarketWatch suggested this move should allow both Fannie and Freddie to buy or guarantee about $2 trillion in mortgages this year.  Wow.

Since I’m not a stock guy, I’m not going to go on telling you about how well the these two stocks did today.  But I will say that this built up some confidence in a highly emotional market and mortgage bonds improved by 72 basis points today.  This was a recovery of what happened on Tuesday after the Fed Cut.  My advice is to lock in before investors in the bond markets see the inflation concerns that are six months down the road. 

If you don’t believe me, just look at this.  History has a sick way of repeating itself.  Here’s what happened in the past few rate cuts:

Get ahead of the curve and make sure you’re getting good advice.  If you’re dealing with a mortgage consultant, ask them what their opinion on the market is.  If they don’t have one, find a mortgage consultant that does.

JP Morgan Announces They Will Buy Bear Stearns

Surprise!  That’s what I said when I read over the weekend that J.P. Morgan announced they would buy Bear Stearns for $2 a share.  Yes, that’s not a typo.. $2 a Share.  The total deal is worth 236.2 Million.

One thing I must bring up, is an experience I personally had with Bear Stearn’s about 12 months ago.  Bear had a mortgage wholesale department, which I had a working relationship with.  I had a borrower with over 100 properties financed in Iowa and I was looking for a 70% refinance (no cash-out) on a non-owner occupied deal, an extremely credit worthy borrower.  They turned it down because they felt it was too risky.  Wow.  I was surprised then, I’m still surprised now (well, sort of).   I can only say from my experience that Bear started to shy away from mortgage securities quite a while back.

I found this brief history of the value of Bear Stearn’s stock extremely interesting:

• March 14th, 2008 – $30/Share
• a week ago – $60/Share
• a year ago – more than $150/Share

As MarketWatch put it:

‘The $2-a-share price represents 2.4% of Bear Stearn’s fourth-quarter 2007 book value per share of $84.09, Oppenheimer analyst Meredith Whitney said in a research note Monday.’

One interesting addition to an already surprising story, is the Federal Reserve;s move to provide as much as $30 billion in financing for Bear Stearn’s less-liquid assets (like mortgage securities!) which they have been unable to sell.  This is believed to be the largest advance of money to a single company.   The exact financing terms or assets involved have not been announced from the Fed. 

More importantly, I’m discussing this move because it will drive the market today.  Currently (at 7:30am CST), futures are down 221 pts.  Overnight, stocks fell sharply in Asia and Europe.   It could be ugly as investors assess what could only be called a fire sale on Bear Sterns and a ‘bail out’ from the Fed.  We know what happened globally overnight, what will happen here?

Quick Mid-Day Update:
I found an interesting summary of Bear’s Risk Positions.  Here’s the breakdown:

• CMBS (Commerical Mortgage Backed Securities) – $16 Billion
• Prime and Alt-A Mortgages – $15 Billion
• Subprime – $2 Billion
• Total – $33 Billion

As far as the market goes, DOW is down about 48pts.  Financial stocks are pretty weak on the news over the weekend:

• Lehman Brothers down 18%
• Goldman Sachs down 7%
• Morgan Stanley down 8%
• Merrill Lynch down 8%

Mortgage Backed Securites are up 50bps, so rates open for the better.  We’re currently up against a strong level of resistance.. so things could get pushed further down (rates increasing).  Watch technical factors today to decide which direction things will go!

So, Apparently The Fed Works on Sundays?

In a surprise move, this afternoon (Sunday afternoon)… The Fed announced two changes to the discount rate.  The first change, the most surprising one – was an expansion of it’s lending to securities dealers for up to six months.  The securities will join the banks that the Fed worked directly with before.

The second part of the announcement was reducing the discount rate from 3.5% to 3.25%.  This cut is said to have part to do with the announcement of JP Morgan Chase & Co’s purchase of Bear Stearns.  There have been many speculators calling some of the recent moves of the Fed ‘bailouts’.  I just think we’re seeing the fed work in ways we’ve never seen them work before.

The Wall Street Journal said it the best:

‘Since the current credit crisis began in August (2007), the Fed has taken even more innovative steps to push its remedies beyond the banking system.’

It’s interesting to see the Fed continue to stop in and make moves to inject liquidity into the financial markets.  What will they do next?…. No, seriously.. WHAT WILL THEY DO NEXT?

You’re guess is probably as good as mine.  I’m betting on a 3/4% cut to the Fed Funds Rate (FFR) on Tuesday. 

Let’s make a connection of what all this means to mortgage rates in the short term (as it’s the question I’m most often asked).  When a change to fiscal policy is made, it normally takes 6 months to see the effects of it.  With the FFR moving down as quickly as it has, we’ll probably be facing nasty inflation numbers down the road.  As investors realize this, they’ll pull money out of mortgage bonds (smart ones already have) and back into stocks.  Until we start seeing some fed hikes (it’s a ways out there), we’re going to see mortgage rates slowly increase.

However, we’ll still continue to see the crazy volatility that we’ve been seeing.  Sometimes the market is emotional instead of logical.  Make sure that you’re partnered with a mortgage planner that is watching the market closely so you can capitalize on the opportunity when it happens.

Related Stories Worth Reading:
Federal Reserve Statement on Rate Cut
‘Fed acts Sunday to prevent global bank run Monday’ on MarketWatch
‘Fed Cuts Rates, Extends Loans to Calm Markets’ on Wall Street Journal

Higher Cost Mortgages? Fannie Mae Says Yes.

Once again, there is some re-pricing of risk going on.  If you have recently applied for a loan, you may notice that you’re rate is higher than the ‘going rate’ you’re seeing in less than honest ad’s.  Fannie Mae has made the decision to increase the rates on what they consider higher risk loans.  As I’ve mentioned in recent posts, we’re beginning to see a lot of credit score driven adjustments. 

If you have less than a 720 credit score, you will have an adjustment against the ‘base rate’ that you’d qualify for.  I can almost promise that the longer you wait to get a loan, the larger these adjustments will get.  All of these adjustments were determined on extremely complicated statistics and analysis, so don’t get too mad.  Obviously, Fannie Mae believes these loans have a better chance of not performing (meaning they are more likely to end up in foreclosure).

You’ll find Fannie Mae’s announcement at their website.  I’ve taken screen shots directly from the announcement so you can see the breakdown of the ‘loan level price adjustments’.

The first chart is for purchase loans and refinances without any cash out:

(Click On Chart To Hugisize)

The second chart is for cash-out refinances:

So what does this mean to you, the customer? 

Quick scenario: Let’s say you’re buying a home for $300,000 and you’re financing 90%.  You have a 660 credit score, you have the income and assets to qualify for the loan.

Here is an example before the loan level price adjustment took place (Before):

• $270,000 Loan
• 30 Year Fixed Amortization
• 6% Rate
• $1618.79 per month (principal and interest)

Here is an example after the loan level price adjustment took place (Now):

• $270,000 Loan
• 30 Year Fixed Amortization
• 6.25% Rate
• $1,662.44 per month (principal and interest)

A difference of $44 more each month!  As you can see with the adjustments, rates could be seriously worse if your credit score is below 660. 

If you need help determining how these changes effect you, or how to improve your credit score to qualify for a better rate – please let me know.  I’d be glad to help!

Another Example of Why Real Estate is LOCAL!

Just as we don’t get one national forecast for weather, we also shouldn’t get a national forecast for real estate. Too often, Iowans get caught up in the national numbers and with the declines in property values on the coasts.  If you take a closer look, you’ll realize our market really isn’t in the recession that other markets are suffering.  To be fair, no – real estate isn’t as sexy to talk about as it was 2 years ago.  However, let’s be realistic – things aren’t THAT bad… really, they aren’t.  Let’s start acting like it.

According to an update from the Des Moines Business Record today, Iowa’s unemployment rate dropped from 3.8% to 3.6% in January. Also notable, the number of workers increased 9,800 in January.  Elisabeth Buch, Director of Iowa workforce Development said:

"The Iowa labor market grew at a moderate pace in January, while the national economy showed serious signs of faltering."

Specifics on job growth are as follows:

• 3,900 jobs gained in the service sector
• 1,600 new jobs in transportation and government
• 1,600 new jobs in trade
• 800 new jobs in professional and business services
• 400 new jobs in the finance industry
• 1,000 jobs were lost in construction
• 900 jobs were lost in manufacturing

Again, don’t get caught up in the media hype.  Iowa may have a slight slowdown in our real estate market (watch our weekly market watch), but overall, things aren’t as bad as they may seem in the news.  Yes, foreclosures will continue to be a problem.. and if I don’t already sound like a broken record – things will continue to get worse with foreclosures before they get better.

If you’re an real estate investor in Iowa, you should be out looking for deals.  I have numerous clients that are currently building their retirement plan through real estate, you should be too.   

PMI Companies Decide to Shuffle Guidelines – You Need To Read This!

If you haven’t heard yet, there have been some BIG changes at the private mortgage insurance companies.  Since PMI companies are the real risk takers when financing over 80%, they’ve decided to really tighten up their guidelines in the past two months.

Whether you’re a borrower looking for answers, or an originator trying to make something of this mess.  You’ve come to the right place.  I’ve been doing a TON of research to get guidelines updated as of today.  I must warn readers that these guidelines can change at a moments notice and most likely will.  So take the information with caution and check directly with mortgage insurance companies (customers, have your loan officer do this) to make sure that the loan still qualifies.  Often, we cannot order mortgage insurance until we have the loan underwritten.  So the faster you can move, the better off you are.

Real quick – Mortgage Insurance is a product that lenders require borrowers to carry to insure them for the amount lent over 80% of the purchase price on purchases or appraised value on refinances.  If you can’t get PMI, you can’t get a mortgage loan – period.

FICO (credit score) based risk is the new way things are now done in the mortgage industry.  As mentioned before, we’ve seen the guidelines changes for the mortgage insurance specifically on that factor (I’m sure we’ll see Fannie and Freddie do the same thing soon).  Here’s the readers digest version of the changes:

For Owner Occupied Loans with an ‘Approve/Eligible’ (Top Teir Fannie Mae Approval)
Max LTV 80.01- 95%  need a minimum score 620 (Purchase or Rate/Term)
Max LTV 95.01-100% need a minimum score of 680 (Purchase or Rate/Term)
Max LTV 80.01-90% need a minimum score 680 for Cash Out.   (Effective March 14)

For Owner Occupied Loans with a ‘Level’ approval (Less Than Cream of the Crop, a Growing Pool)
LTV’s less than 80% need 620 minimum score
Max LTV-80.01- 95% need a 660 minimum score (Purchase or Rate/Term)
Max LTV-80.01- 90% need a 680 minimum score for Cash Out.
** There are no ‘level’ approvals on non-owner occupied properties with any LTV **

For Non-Owner Occupied with an ‘Approve/Eligible’
Max LTV 80.01-90% need a minimum score 660 (Purchase or Rate/Term)
Max LTV 80.01-90% need a minimum score 720 (CASH OUT)

If you’re a detail person, here is the full table w/ company specific information:

(Click to Hugisize)

If you’re a borrower currently looking for answers, I hope you find this summary beneficial. 

If your current loan officer has:

• Abandoned you
• Won’t call you back
• Turned your loan down
• Hasn’t mentioned the MI guideline changes
• Doesn’t understand the recent changes
• …fill in the blank of a horrible quality or problem

Please give me a call or e-mail me.   I’d love to be a resource for you and help you find a home for your home loan!

Did You Miss The Bus This Week? Don’t next time.

If you’ve been following me on Twitter, you’d know that rates have increased as much as 1/2% since Monday.  If you haven’t been following me on Twitter, today – you might consider starting. The bus of low mortgage rates has left the station and it’ll be a while before it returns.

To understand why rates have been climbing this week, you first have to understand what mortgage rates are based on.  Mortgage rates directly correlate with value of mortgage backed securities (MBS).  Rates are NOT based on the 10 Year T-Note, stock market, or the fed funds rate (FFR).  These common misconceptions are due to the lack of visibility of MBS.  In order to receive live bond quotes, you have to pay to subscribe to a service (and it’s not cheap).

Ok, now for the specifics on WHY rates have increased (so much) this week.  When you buy a bond (like a mortgage backed security), you buy it and it will have a pre-determined amount paid over time.   If inflation is creeping up, that pre-determined payout is going worth less to the owner of that bond in the future.  Make sense?  When investors see inflation as a concern, they sell off their mortgage bonds and put their money elsewhere. 

The higher the value of a mortgage backed security, the lower an interest rate will be on a mortgage.  If the value falls, rates increase.  As I had mentioned, some individuals in my industry give advice to follow the 10-Year T-Note the same way I follow mortgage bonds.  I’m not one to laugh at other’s expense (actually, I sort of do), but take a look at what happened today (especially if you were watching the 10-Year T-Note):

A loss of 103 basis points for MBS is a big one.  Rates worsened between 1/4% and 1/2% just Thursday.  If you or your loan originator were following the 10-Year T-Note, you missed the bus… and you will be spending thousands of dollars more over the life of your loan because of some bad advice.

Are you and your loan officer watching the right indicators?  Do you know when the best time to lock is? Is someone managing your mortgage?  Are you receiving top notch advice? Does your lender have access to live, real time, mortgage bond quotes?

If you answer no to any of these questions, we should chat. I love this stuff, seriously.  I look like a kid at a candy store when I’m watching bond quotes… It’s sick, it’s sad and you should take advantage of it.

Bernanke Suggests Principal Writedowns

If you missed it, Mr. Ben Bernanke made some interesting comments at the Independent Community Bankers Conference.  While addressing the current foreclosure crisis, Bernanke suggested banks make principal reductions on problem loans.  Here are a couple excepts from his speech (I found the quotes at Alex Stenbeck’s blog):

"In this environment, principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure. "

"…a reduction in principal may increase the expected payoff by reducing the risk of default and foreclosure. "

"A write down that is sufficient to make borrowers eligible for a new loan would remove the downside risk to investors of additional write downs or a re-default."

This is meant for banks to manage their risk and make homes affordable for owners that would end up in foreclosure otherwise.  Instead of taking a huge loss in a foreclosure situation, the bank keeps the home in the homeowners hands and continues recieving some form of re-payment instead of none.  Once again, proving – bank’s ARE NOT in the property management business.

The only ‘problem’ I see with this solution, is that folks will inevitably be trying to take advantage of the write downs when they really shouldn’t really be eligible.   It’s a sick sad world we live in sometimes.. but we have to acknowledge there will be potential freeloaders.  No offense intended, sort of.

Here’s a link to more info about the speech.

Thanks on the photo to invisibleman.com

‘Iowa Mortgage Help Hotline’ Is Announced

Announced earlier last week, ‘Iowa Mortgage Help Hotline’ will assist Iowan homeowners that are currently struggling with their house payments.  Recently funded by an additional $1.5 million dollar grant, the capacity will be increased on the foreclosure hotline.

"We want Iowans to call the mortgage help hotline if they are currently struggling or as soon as they think they may be headed toward financial difficulty.  Our counselors have more resources available to help people who are in the early stages of mortgage delinquency.  Ideally, we’d like to talk with Iowans before they miss a mortgage payment."  Bret Mills, IFA Executive Director

The goal of Iowa Mortgage Help Hotline is to help 7,000 Iowans before the end of 2008.  This program has been heavily promoted by Bret Mills of Iowa Finance Authority and Iowa Attorney General, Tom Miller.

Statistically speaking, nearly 50% of people who are unable to pay their mortgage never contact their lender or seek assistance from a trained counselor. Since it was established in September of 2007, the helpline has received about 8,000 calls and is presently handling about 700 cases.

If you personally would like to get help, please contact the Iowa Mortgage Help Hotline at:
1-877-622-4866 or online at www.IowaMortgageHelp.com.