Are mortgage rates going down? Or up?

The Fed cut rates by ½% today, and ¾% last week. So, why are mortgage rates going up?

As I have said in numerous post before, the rates that the Fed controls directly (the Federal Funds Rate and the Discount Rate) have very little to do with the mortgage rates. One is a long-term rate (mortgages) and the others are short-term rates (Fed Funds and Discount).

Last week I could get 5.375% and now it is almost 6 %. That doesn’t seem logical.

Here is what happened. A week ago Monday was Martin Luther King, Jr. Day and the markets in the United States were closed, while the other markets of the world were open and trading. While we were closed and could not make any trades, the other major stock indices across Europe and Asia were taking a bath. All we could do in the US was watch and wait until we could dump our positions on Tuesday.

Then, before the opening bell on Tuesday, the Dow Futures were down almost 500 points and the Fed stepped in and made a surprise cut to the Fed Funds and Discount Rate by an unprecedented ¾%. When the market opened, the Dow was down over 400 points and the yield on the 10 year bond was down to about 3.3% (The mortgage rates are not tied to the 10 year bond but they tend to trend in the same direction).

So, mortgage rates tumbled to 5.375% for a conventional borrower with credit scores above 680 and/or LTV less than 70% (See my post "How much will my credit score cost me on my next mortgage?" for more information on this).

I called everyone I could about the rates, and many people happily locked in the lowest rate they could have gotten in about 3 - 4 years. Some people, however, already knew the Fed was going to meet this week and most likely lower rates again. They were going to hold out for even lower rates. Then, as often happens when the Fed cuts rates, investors got a good feeling about the future of the economy and, therefore, got a good feeling about the future of the stock market and began to purchase stocks. When this happens, money goes out of bonds lowering the cost of bonds and increasing the yield (rate) on bonds. By the end of the day, the 5.375% was but a distant memory.

The stock market continued to add points over the next week and the yield on the 10 year bond continued to rise as well as - you guessed it - mortgage rates.

But, with the fed lowering rates another ½% today, surely rates had to come down.

This week, in addition to the Fed meetings, there was a slew of economic data for the markets to consume. All of it pointed to the fact that maybe the economy isn’t as bad off as previously suspected. Durable goods orders are better than expected. ADP payroll figures are better than expected. GDP was horrible, but this is from December 2007, and the markets like to look to the future.

When the Fed cut rates again today, the stock market went up, as did bond yields and mortgage rates. The best thing that could have happened for mortgage rates would have been if the Fed didn’t cut rates at all, or if they had only cut by ¼ % (as some had suspected after the economic news from the week). The stock market would have sold off and money would have flowed back into bonds, increasing the price of the bonds and, thus, lowering the rates.

The bright spot for rates as I am writing this article is that the major stock indices all ended lower today, and that selling has continued into the Asia markets. If the selling continues back to the US, we may see rates ease with the falling stock market.

So, how can we ever know when to lock at the lowest possible rates?

If I had the answer to that question I would be retired on a South Pacific island, wearing a funny shirt, and listening to ukulele music instead of writing this blog article at 11:30 PM on a Wednesday night. :)

The answer I give to everyone is to make the decision when it is right for you. If 5.375% was good enough to refinance, take it and refinance. If rates continue to fall, you can refinance again, usually at reduced costs, and take advantage of the lower rates. That is what several of my customers did during the past refinance boom. Some of my customers actually refinanced 3 and 4 times in a year and saved money every time.

Unfortunately, the last refinance boom trained people to be greedy.

We have all read the articles about the greedy mortgage industry, greedy Wall Street banks, greedy investors, etc. but we don’t read about the greedy consumer. Before the past refinance boom, a customer would call and ask for the current rates. We would discuss the costs of the refinance and the new payment, and see if it was worthwhile to refinance. Then, we would lock the rate and close the loan. Now, everyone is looking to get the best possible rate and waiting themselves OUT of an opportunity to refinance.

There is one last thing I need to share with you, much to the chagrin of one of my best and oldest friends. At the end of the refinance boom he was finally ready to refinance. (Never mind that his rate was over 6% and he could have refinanced as low as about 5.0% during the refinance boom!) As rates began to rise, he was sure they would go back down. Even as the Fed began tightening (raising rates) he thought he would still have a chance to refinance. Well, he never got that chance. So, last week when the rates were at 5.375% do you think he locked his rate? You guessed it, he did not.

The moral of the story?
Next time you have the opportunity to refinance and save money, take it.

---

Fed cuts key interest rates by 0.75%

In response to an economy that is heading for a recession, the Federal Reserve Board (Fed) chose to cut the Discount and Federal Funds Rate by 0.75% this morning before the market opened. It was a surprise move due to the fact that yesterday, while the U.S. markets were closed for Martin Luther King, Jr. Day, most other major stock markets across the world plunged at the prospect of a weaker US economy.

Does this mean that mortgage rates fell by 0.75%?

No. These rates are overnight rates that don't directly affect the mortgage interest rates. The Federal Funds Rate is the rate at which banks lend money to each other. The Discount Rate is the rate charged to banks that borrow money from the Central Bank. These rates are changed by the Fed in order to control the money supply and, thereby, influence the economy.

They are important, though, because they signal the direction of overall interest rates in the economy. Mortgage interest rates are determined by the rates offered on mortgage-backed securities (MBS) which are similar to bonds. The MBS’s generally move in the same direction as the ten-year bonds over the long run. So, when the Fed acts to lower rates, the overall trend for all interest rates is lower.

Before today’s action by the Fed, the markets were already anticipating a cut in rates of 0.5% and rates had already come down. Mortgage interest rates did head a little lower today and are approaching the all-time lows set during the refinance boom a few years ago.

Should I refinance now, or wait for rates to get even lower?

This is always the $64,000 question. If you can save money now, I always recommend doing it. If rates continue to fall, you can always refinance again.

When the Fed cuts rates, it is good for business. When business is good, people buy stocks hoping that the price will go up. When people buy stock, and the stock market goes up, money flows out of bonds and rates go up. In fact, many times when the Fed cuts rates, interest rates actually increase in the short term.

Today, the Dow Jones Industrial Average (Dow) opened almost 500 points lower. Because of the surprise rate cut by the Fed, the market rebounded and finished down about 128 points.

What should I do?

Contact me today to see how much you can save on your refinance, and to make sure a refinance makes sense for you. As I discussed in a previous article, “How much will my credit score cost me on my next mortgage?”, rates are determined by your credit score and LTV, as well as the market.

---

FHA Mortgages to Become More Popular

FHA Mortgages are sometimes referred to as the “Original Sub-Prime Mortgage.” Before there was a sub-prime mortgage market, those with low down payments, shaky credit histories, etc. had to go with the FHA mortgage to purchase a home. In the 1980's and 1990’s, FHA loans accounted for about 25% - 40% of all mortgages originated in the United States. According to Wikipedia, that fell to less than 2% in 2006.

With the increase in the number of "No Money Down Loans" and loans for those with poor credit, FHA fell out of favor. It was much easier to get a sub-prime loan than it was to get an FHA loan. Unfortunately, it was usually a less-affordable option for the homeowner in the long-term.

Now, with the sub-prime mortgage market all but non-existent, and the credit standards much tighter for those programs that remain, FHA will once again become an important program for many homeowners.

AS I discussed in my blog article, “This is not Your Father’s FHA” from April 2007, FHA has already made a lot of changes to make them more user-friendly. FHA mortgages are much more like conventional mortgage than they have been in the past, and closing them can take about the same amount of time.

Recently, the US Senate passed some more changes that will make FHA mortgages a more viable option for more homeowners. Some of these changes are:

• Down Payment/Minimum Cash Investment has been reduced from 3% to 1.5%


• Mortgage limit (“floor”) will be raised from 48% to 65% of GSE (Fannie Mae/Freddie Mac) limit ($271,050)


• Mortgage limit for “high cost” areas: $417,000, which equals the maximum mortgage amount for conventional mortgages


• Condominium processing: It will facilitate FHA acceptance of GSE approved projects and possibly other projects depending on how FHA implements the provision


• Reverse mortgages: Raise the maximum loan limit to $417,000 and allow reverse mortgages to be used for home purchases


• The Senate also included a measure that puts a one year moratorium on HUDs effort to introduce risk based pricing to the FHA program

The US House of Representatives also passed similar legislation months ago with some differences:

• No down payment required


• Maximum mortgage amount of $725,000

When Congress returns late this month, they will have to hammer out the differences before the bill goes to President Bush for approval. There is a lot of pressure on Congress to get these changes enacted so look for new legislation quickly.

With the upcoming changes added to the changes already made, FHA Mortgages are better than ever and will become increasingly popular. But, beware of lenders and loan officers who are not experienced with FHA loans. There are still enough differences in the ways FHA loans are originated and processed that can cause delays if you work with someone not experienced with FHA loans.

---

President Bush Signs a 3 Year Extension to the Income Tax Deduction for Mortgage Insurance

On December 20, 2007 President Bush signed into law legislation that will allow homeowners with mortgage insurance (those with less than 20% down payment) to deduct the cost of their mortgage insurance from their taxes. This deduction is for private mortgage insurance (PMI) on a conventional mortgage or Mortgage Insurance Premiums (MIP) on FHA loans.

In late 2006, Congress passed a law that allowed the income tax deduction on 2007 tax returns for loans originated in 2007 only. This new legislation extends that deduction for loans originated from 2007 – 2010 and is part of the Mortgage Forgiveness Debt Relief Act of 2007 approved last month by both the US House of Representatives and the US Senate.

The tax break is for families with an adjusted gross income (AGI) of $100,000 or less. Families with AGI greater than $100,000 up to $109,000 are eligible for a partial deduction.

With the collapse of the sub-prime mortgage market and the reduction of the amount of exotic mortgages that allowed for no money down and no income verification, more people will be using the more secure conventional and FHA mortgages with the protection of mortgage insurance. This deduction will save many low- and moderate-income families money and allow them to better afford their homes.

How much will my credit score cost me on my next mortgage?

Due to the mortgage market mess we have been experiencing, Fannie Mae and Freddie Mac are drastically changing the way they do business. Many people think these changes will help protect the corporations and the future of the mortgage market.

Until now, a credit score of 620 was the theoretical limit for obtaining a conventional loan. If your scores were above 620 you would get a rate the same whether your score was 620 or 800, as long as you had at least a 5% down payment. I say the 620 is theoretical because a lot more is considered when applying for a mortgage (e.g. credit history, down payment, cash reserves in the bank, debt-to-income ratios, etc.). Many people with credit scores below 620 have been approved for conventional loans and some with credit scores above 620 were denied.

Starting with loans delivered March 1, 2008, Fannie Mae and Freddie Mac are adding fees for any loans with a loan-to-value (LTV) greater than 70% and a credit score less than 680.

Following are the Loan-Level Price Adjustments (LLPAs) for loans with LTVs of 70.01% and greater:



These LLPAs are for single-family, owner-occupied properties and are adjustments to the points required on a loan, and not to the interest rate. There are other adjustments for 2-unit properties as well as mortgages with subordinate financing (2nd mortgages) such as 80/10/10s.

Borrowers will have to decide to pay for the LLPAs as points or accept a higher interest rate in place of the additional points. For example, for a borrower with a credit score below 620 and LTV greater than 70% they can expect to pay about 1.00% higher in their interest rate.

If you are planning to purchase or refinance a home in the future, make sure you contact your loan officer well in advance so you can check your credit scores and make any improvements necessary to increase your credit score. Please view my blog posting Understanding Credit Scoring and Credit Repair from August 2006 to see how you can improve your credit score.

---

How to do a short sale

With the increase in foreclosures lately you may have heard the term “short sale” and wondered what it was. A short sale is when the lender will accept less than the full amount due on a mortgage when a property is sold. Usually, the lender will accept the short sale to avoid the time and expense of a foreclosure.

When a borrower is in default on a mortgage they not only owe the back payments but also may owe late fees, property inspection fees, attorney fees, etc. This can add up quickly to eat up all the equity the borrower had in the property. If the borrower is unable to bring the account current the lender will then foreclose on the property. With a foreclosure, the lender can lose up to 40% of the mortgage amount because of the extra costs involved with foreclosing on a property: attorney fees, court costs, lost interest, eviction costs, property maintenance costs, and selling costs. Foreclosing on a property can also take up to two years in some states. Therefore, it is sometimes in the best interest of the lender to accept the short sale.

It also can be in the best interest of the borrower. They will not have to endure the time and stress of a foreclosure and their credit may not be as adversely affected as it would with a foreclosure. It is quicker and easier and does not subject the borrower to the embarrassment of a foreclosure.

How does it work?

The first thing the borrower should do when they can no longer afford a property is to contact the lender immediately. The last thing a lender wants to do is foreclose on the property. Lenders typically have departments that work with people who are behind on their payments to resolve the situation. If you cannot resolve the default with the lender, and you want to see if they will accept a short sale, they will direct you to the department that handles short sales.

The lender will usually require the borrower to submit a lot of information to the lender in order to consider the short sale. The information required may include:
• Income documentation such as W-2s and pay check stubs to verify the borrowers’ income.
• Bank statements to verify the borrowers’ assets
• Hardship letter – this letter will describe for the lender the reasons the borrowers are in the financial position they are in and will ask the lender to accept the short sale. Borrowers should make this letter sound as sad as possible and back up the story with any documentation you may have such as medical bills, etc.
• Fair market value for the property – depending on the lender they may require an appraisal or may accept an opinion from a local Realtor know as a Comparative Market Analysis (CMA).
• Preliminary proceeds sheet from the sale of the property. This will show the proceeds of the sale of the property after the mortgage is paid off and all other closing costs and fees are paid. This will be negative in the case of the short sale and this negative amount is the amount of the shortage.
• Listing agreement and purchase agreement when they are available.

When the lender reviews all of this they may or may not approve the short sale. If they do not approve the short sale they will proceed with the foreclosure. If they do agree to the short sale you will close on the sale of your property and the lender will take the loss.

So, is the borrower off the hook?

Not necessarily. The lender still has options to try to collect this shortage. As a condition of the short sale the lender may require the borrower to sign a note to repay the shortage. They may also file a collection or a judgment for the amount of the shortage. This is something that an attorney with expertise in this area of real estate needs to be consulted.

Also, the IRS may come after the borrowers for income taxes on the amount of the shortage. If the shortage was forgiven, the lender will report the shortage as income to the IRS and the IRS will collect taxes on this amount. Again, for the specifics on this please consult a tax professional.