In March 2008, HUD temporarily raised FHA loan limits around the country. Effective January 1, 2009, FHA loan limits revert.
FHA home loans are mortgages made by private lenders and insured by the federal government.
Historically, FHA home loans have been "easier" for which to qualify than their conforming mortgage counterparts and, therefore, tend to be associated with borrowers of tarnished credit quality.
Today, that's the not the case.
The FHA home loan underwriting process can be as tough -- or tougher -- than a conforming mortgage underwrite. There is extra documentation required and the home appraisal process is often more thorough.
Where FHA home loans shine is in their limited downpayment requirements.
To purchase a home with a FHA-insured mortgage requires a 3 percent downpayment as of today; in January, it moves to 3.5 percent. Versus the typical conforming mortgage requirement of 5 percent or more, FHA serves as somewhat of a home affordability product for Americans. In addition, FHA allows larger "cash out" refinances than Fannie Mae or Freddie Mac.
The 2009 FHA loan limits (in most areas of the country) are:
- 1-unit : $271,050
- 2-unit : $347,000
- 3-unit : $419,400
- 4-unit : $521,250
Note that the loan limits don't apply to all areas of the country equally. Higher-cost regions feature higher loan limits, based on typical home values. Homes in Los Angeles County, for example, can be FHA-insured up to $625,500 in 2009, and there are exceptions made for Alaska and Hawaii.
The official FHA announcement published all of the counties with access to higher loan limits, spread across two spreadsheets. The first spreadsheet lists each county at the $625,500 maximum; the second list is everyone else.
If your home county is on neither list, use the "base" numbers above.
In another week of up-and-down trading, mortgage rates ended the week slightly higher last week.
Ping-pong action like this has defined mortgage markets lately. It's increasingly common for rates to soar one day, and then come crashing down the next.
In response to market volatility, mortgage lenders issued as many as 8 distinct rate sheets in a holiday-shortened, 4-day trading week. Lately, shopping for a low mortgage rate has been as much about timing as anything else.
There wasn't much economic news to digest last week save for Friday's Retail Sales data.
The numbers reflected what most of us already know -- consumers are not spending as freely as in the past. And, because consumer spending accounts for 70 percent of the U.S. economy, retail restraint can mean the difference between a growing economy and a slowing one.
October marked the 5th straight month of declines for Retail Sales.
This week, markets will have their hands full with new data, 7 Fed speakers, and ongoing rescue effort discussions from Washington.
From a data perspective, the two most important data points are the Producer Price Index and the Consumer Price Index. Both measure the "cost of living" as it applies to businesses and consumers, respectively, and both can signal inflation when the readings are too high.
Falling energy prices will likely cause PPI and CPI to post negative readings, but if those negative numbers post higher than expected, mortgage rates should rise in response.
Regardless, mortgage rate shoppers should standby in Ready Mode. Changes to the mortgage market -- like changes to the stock market -- have been furious and swift, measurable in minutes, not hours. The only way to beat a market like this is to not play in it.
Once you find a rate-and-payment combination that suits your household budget, consider locking it in with your loan officer. The risk of not committing can be too great in a market moving as quickly as this one.
(Image courtesy: The New York Times)
To help demystify the mortgage process, the federal government is giving the much-maligned Good Faith Estimate document a makeover. Effective January 1, 2010, the current, 2-page form will be replaced by a new, easier-to-understand version, spanning 3 pages.
The biggest strength of the new Good Faith Estimate is that it uses everyday English to explain how the mortgage works. For example, in one section titled "Loan Summary", the Good Faith Estimate specifically answers:
- What is your interest rate?
- Can your interest rate rise?
- Does your loan have a prepayment penalty?
Using today's disclosures, the answers are spread across 3 separate forms.
In addition, the new-look Good Faith Estimate identifies what charges are legally allowed change at the time of settlement, and how a mortgage applicant can opt for higher fees in exchange for a lower mortgage rate, and vice versa.
These educational elements are lacking from the current model.
But for all of its clarity, the Good Faith Estimate doesn't address the issue of suitability. As in, is this the right loan for the right borrower? The new Good Faith Estimate won't prevent homeowners from choosing "bad loans" -- it will only educate them about the loan's facts.
For suitable advice -- as always -- talk with a trusted mortgage professional who will both listen to your needs and help you make plans for them. Getting the "best terms" on an unsuitable loan can be far worse that getting great terms on a loan that fits.
Foreclosure is a hot topic among the press lately. It's hard to turn on the television or open up a newspaper without seeing a story about it.
But what's most interesting about foreclosures is that they appear to be concentrated in certain areas of the country.
According to the foreclosure-tracking service RealtyTrac, 4 states accounted for more than half of nation's foreclosures last month.
And those 4 states -- California, Florida, Arizona, and Nevada -- share some very similar characteristics including:
- Their respective popularity with retirees and real estate investors
- Their large home value increases earlier this decade
In looking at the rest of the country's foreclosure data, the remaining 46 states combined accounted for just 48.8 percent of October's foreclosures.
That's 1.06% per state on average.
Now, this isn't meant to diminish the impact of foreclosures on the economy -- quite the opposite. Foreclosures harm to the national housing market because most mortgage lenders are national. But, we highlight statistics like this to show that the foreclosure "problem" isn't so bad in most parts of the country, relative.
Furthermore, mortgage lenders are intervening to slow the flow of defaults nationwide. Following the lead of JP Morgan and Bank of America, CitiMortgage just announced a sweeping plan to help homeowners avoid default and keep their homes.
In a way, for as good as this news is for homeowners, it's equally bad news for home buyers. As the number of foreclosures decrease in any given market, it reduces the inventory of homes for sale. Lower supply levels often lead to higher sale prices and less room to negotiate. And this may be what the banks are trying to accomplish.
For the 4th consecutive year, the government has set the conforming mortgage loan size limit at $417,000.
A conforming mortgage is one that, quite literally, conforms to the mortgage guidelines set forth by Fannie Mae or Freddie Mac.
The 2009 conforming loan limits, as released by the government, are:
- 1-unit properties : $417,000
- 2-unit properties : $533,850
- 3-unit properties : $645,300
- 4-unit properties : $801,950
Loans in excess of conforming loan limits are more commonly called "jumbo", or "super jumbo" home loans, depending on their size.
Out-sized mortgages like these are often more costly than their conforming-mortgage counterparts because jumbo loans are not guaranteed by the U.S. government like Fannie Mae loans are.
There are loan limit exceptions, however.
Left over from the Economic Stimulus Act of 2008, specific, "high-cost" areas around the country have their own conforming loan limits, not to exceed $625,500. There are 59 designated high-cost regions in the U.S., most of which are in California.
Loan limits are re-assigned each year, based on "typical" housing costs around the country. Since 1980, as home prices have increased, so have conforming loan limits. As home prices have fallen in recent years nationwide, however, the conforming loan limit has not.
Mortgage rates fell last week, marking just the second time since September that rates improved on a weekly basis.
The biggest news of the week was the U.S. Presidential Election. Markets appeared to cheer the Republican-to-Democrat transfer of power, posting large gains Tuesday, Wednesday and Thursday.
This in spite of a spate of negative economic news:
Instead, mortgage markets shrugged it off.
The general consensus among traders last week was that the Democratic White House will make every effort to ignite the economy and, if those efforts fail, it will try again. This bodes well for businesses and for the banking system and is one reason why mortgage rates dropped post-election.
This week, without much new data, markets should move on corporate earnings and momentum. It's been a while since corporate earnings meant so much to mortgage rates.
U.S. businesses are the backbone of the economy, spending money on goods and services and employing 144 million Americans. When business is strong, more workers get hired who then, in turn, spend their money and force the hiring of even more workers.
It's a self-reinforcing cycle so if retailers post better-than-expected numbers this week, expect stock markets to gain favor worldwide as investors chase returns. This will money to pull out from bond markets of all kinds -- including mortgage-backed bonds.
Less demand for bonds causes mortgage rates to rise.
Also, look at Friday as a volatile trading day. Not only will October's Retail Sales figures be announced, but Fed Chairman Ben Bernanke is sharing the stage with his European Central Bank counterpart, talking about monetary policy.
Word choice is a delicate matter on Wall Street so if Bernanke's comments are viewed as too anti-inflation, or too pro-inflation, expect for mortgage rates to move by a lot. If you're shopping for a mortgage right now, consider locking before Bernanke's 9:00 AM speech.
(Image courtesy: The Wall Street Journal Online)
On the first Friday of every month, the Bureau of Labor Statistics releases its Non-Farm Payrolls report. More commonly, it's called the "jobs report" and the October's data is trending with the rest of 2008.
After shedding another 240,000 jobs last month, the economy has now put 1.2 million Americans out of work this year and unemployment rates have climbed to 14-year highs.
As a strange twist, though, today's weak jobs data may lead to a positive turn for the economy and for housing in 2009.
In the wake of the jobs report, members of Congress are already calling for both tax cuts and direct stimulus to reverse the course of the economy. Both of these actions would put money back into U.S. citizens' household budgets, spurring consumer spending nationwide.
Because consumer spending accounts for 70 percent of the economy, this would be expected to push the economy forward at a time when it natural forces are slowing it down.
In addition, markets are betting that the Federal Reserve will cut the Fed Funds Rate below its current 1.000 percent level. This, too, would spur spending because the Fed Funds Rate is directly tied to consumer credit card rates and business credit lines.
Expectations for stimulus are one reason why mortgage rates have not risen today as high as they otherwise would have if this were a "normal" market.
Mortgage rates are slightly elevated as we head into the weekend, but don't be surprised if there's a late-afternoon push that brings them lower. For active home buyers, this could help home affordability as we cruise towards the holiday season.
(Image courtesy: USA Today)
The interest rate against which adjustable-rate mortgages change is falling -- evidence that the global banking system is starting to stabilize.
On any adjustable-rate mortgage, the initial "starter rate" remains fixed for some period of time, and then adjusts according to some pre-determined rules.
For a conforming mortgage, an ARM will typically adjust once per year, based on this formula:
(Adjusted Rate) = (Variable) + (Constant)
Where the variable is often assigned to 12-month LIBOR, and the constant is often fixed at 2.250 percent.
LIBOR is the equation's variable. Therefore, it's of paramount import to holders of ARMs. LIBOR is the rate at which banks lend money to each other. The 12-month LIBOR, therefore, is the borrowing rate for a 1-year, interbank loan.
So, to take the formula and apply to an real live mortgage, a homeowner's adjusted mortgage rate would be equal to whatever the 12-month LIBOR is at the time of adjustment, plus another 2.250 percent.
Looking at the chart, note LIBOR spiked in September. It's a direct correlation to the September 15 failure of Lehman Brothers. That bank shutdown started a wave of "who's going to be next?" anxiety on Wall Street but as global governments stepped up support for banks, LIBOR predictably fell.
For homeowners with adjusting mortgages, this is terrific news.
However, mortgage markets have rallied a bit this week, created an interesting opportunity for some holders of ARMs. Depending on credit scores and the amount of home equity, mortgage rates on a new loan may be lower that the soon-to-be-adjusted mortgage rate of the old one.
In other words, getting a new loan may be smarter than letting your current mortgage change. Contact your mortgage lender to see which plan fits you best.
The Federal Reserve confirmed what most of us already knew -- getting qualified for a "prime mortgage" is increasingly more difficult.
In a quarterly survey of 84 banks, 75 percent of respondent banks tightened mortgage guidelines over the last 3 months for the most qualified of home loan applicants.
"Prime" is a vague term when it comes to mortgages, but, historically, a prime borrower is one that can document:
- A well-documented credit history
- Very high credit scores
- Very low debt-to-incomes
Historically, banks bent over backwards to lend money to this class of borrower. Today, they're thinking twice.
The chart's steep ascent reinforces that members of all tax brackets face consequences from the current credit market turmoil. And, although some corners of credit looked poised to recover -- interbank lending, for one -- the mortgage market is yet unaffected and should be among the last to thaw.
All prospective home buyers should prepare for the likelihood that mortgage guidelines continue to toughen before they start to ease. Mortgage applicants on the cusp of being approved today will almost certainly be turned down for a mortgage in 2009.
Owning real estate can require a tremendous amount of advance planning and, sometimes, looking at the past is the best way to prepare for what's coming ahead.
According to the Federal Reserve's survey, what's coming ahead is more mortgage application scrutiny.
More than a handful would-be home buyers stayed on the sidelines this year, waiting for Election Day to pass.
The prevailing thought was that once the new President-Elect was identified, credit markets will systemically unfreeze and housing markets will return to normal.
If history is a guide, this is an unlikely scenario.
Election Day doesn't figure to alter markets any more in 2008 than it did after the four previous presidential elections.
If anything, post-Election Day market reaction has been muted:
- 1992 : Dow closes down 0.9 percent the day after Election Day
- 1996 : Dow closes up 1.6 percent the day after Election Day
- 2000 : Dow closes down 0.4 percent the day after Election Day
- 2004 : Dow closes up 1.0 percent the day after Election Day
But just because the stock market has a history of idling on the day after the election doesn't mean that mortgage rates will rest easy this week. The likely outcome is the opposite, actually.
If investors believe the President-elect will successfully stimulate the economy, stock markets would likely rally, causing mortgage bonds to sell off and mortgage rates to rise.
Or, if investors think the winning candidate will fail to revive the economy, money would flock to government bonds as a place of safety. This dollar flow would occur at the expense of the mortgage market, causing rates to rise in this scenario, too.
Of course, it's as difficult to predict post-Election market conditions as it is to predict the election itself but one thing is for certain -- rates may rise and fall before the week is out, but credit guidelines will remain extra-tight. Getting approved for a mortgage won't be any easier -- no matter which party wins the Presidential Election.
Source
Will the election drive the Dow?
Eamon Javers
Politico
http://news.yahoo.com/s/politico/20081022/pl_politico/14826
As global credit markets deteriorated in October, mortgage markets displayed an unnerving amount of volatility.
Last week was no different.
But, unlike in previous weeks in which rates improved on some days and worsened on others, mortgage rates were mostly higher last week, finishing the month on a surge.
The biggest reason why mortgage rates rose last week is that hedge funds and other investors are still hard-pressed for cash and are dumping their mortgage-backed bond portfolios into the market. The excess mortgage bond supply drove prices lower last week, which, in turn, caused rates to rise.
However, forced selling by hedge funds wasn't the only force working against mortgage rate shoppers last week.
In a move meant to stimulate the economy, the Federal Reserve cut the Fed Funds Rate to 1.000 percent -- the same level widely attributed to starting the global credit crisis several years ago. Low interest rates may stimulate the economy in the short-term, but long-term, they can lead to runaway inflation.
This is terrible for home buyers because inflation causes mortgage rates to rise.
Looking ahead to this week, mortgage markets have a lot of information to digest.
First, there will be four separate speeches from members of the Federal Reserve, plus one appearance by Treasury Secretary Paulson. In each speech, each mention of the word "inflation" will cause mortgage markets to flinch and rates to tick higher.
In addition, Friday is the first Friday of the month which means that the Employment Report hits the wires.
Because markets expect to see high unemployment rates, they're also predicting a slow holiday shopping season. If the jobs data is stronger-than-expected, expect stock markets to gain and mortgage markets to lose, pushing rates higher.
And, lastly, Tuesday is Election Day. Presumably, markets already priced in the likelihood of either candidate winning the election. However, as the voter's President-elect becomes clearer throughout the day, expect volatility in rates as traders rush to change their positions.
Mortgage markets should move lot Tuesday -- we just won't know in which direction until it happens.
(Images courtesy: The Wall Street Journal Online)
When the government nationalized mortgage lending in September, housing analysts predicted lower mortgage rates.
For a brief two-week stint, they were right -- post-takeover, the 30-year, fixed rate mortgage fell below 6.000 percent nationally for the first time in 7 months.
Since then, however, mortgage markets have reversed. Rates are now at pre-takeover levels.
Now, this isn't to say that the nationalization was a failure -- far from it. The government's takeover of Fannie Mae and Freddie Mac accomplished two very important goals:
- It restored failing confidence in the U.S. mortgage markets
- It opened legislative channels for faster, more relevant housing reform
And, long-term, most people agree, these are essential elements for a U.S. economic recovery. Over the short-term, however, the plan has not delivered the sustained low mortgage rate environment that was envisioned.
The biggest reason why rates are higher is because of Wall Street's manic trading behavior. When the economic outlook shows hints of sun, investors sprint to risky stock markets; when it shows signs of gloom, they flee in favor of ultra-safe treasuries. The buy-sell patterns have led to some of the wildest trading days on record and it's not what the Treasury expected.
See, when the takeover was first announced, mortgage-backed bonds were elevated to "government status". This created new demand for mortgage bonds which helped to push down rates. But, in the weeks that followed, the world's credit markets unraveled and traders sought the dual comfort of safety and liquidity in their portfolios.
That's a combination that only U.S. treasuries can provide. Versus "true" government bonds, mortgage-backed securities are just quasi.
We can't know where mortgage rates will move for certain but, for now at least, the 4 percent range some had predicted is out of reach. Until credit order is restored globally, expect volatility to continue and rates to remain up.
(Image courtesy: The Wall Street Journal)
The Federal Open Market Committee voted to cut the Fed Funds Rate by one-half percent today. The benchmark rate now stands at 1.000 percent.
In its press release, the Fed wasted no time addressing the key issue at-hand, stating that economic activity has "slowed markedly", pointing to three main causes:
- Consumer spending is falling
- Business equipment spending is falling
- Slowing foreign economies are hurting U.S. businesses
Furthermore, the voting FOMC members are wary of an "intensification" of the current financial market turmoil.
The announcement's 4th paragraph is noteworthy, too. It lists the plethora of growth-stimulating steps that the Fed has taken so far this year and concludes that credit conditions should improve in time. It does notes, however, that if markets don't improve in good time, the committee will "act as needed".
In the wake of the announcement, stock markets rallied. Investors liked what the Fed had to say and it drew funds into the stock market from all corners of Wall Street. Unfortunately for mortgage rate shoppers, one of those corners happened to be the mortgage bond market.
The exodus from bonds caused mortgage rates to rise.
It's a common misconception that the Federal Reserve controls mortgage rates and today's market action should help dispel that myth. As the Fed Funds Rate falls back near its 50-year low, mortgage rates are bumping up against a 3-year high.
Source
Parsing the Fed Statement
The Wall Street Journal Online
October 29, 2008
http://online.wsj.com/internal/mdc/info-fedparse0810.html
The Federal Open Market Committee adjourns from its scheduled 2-day meeting today at 2:15 P.M. ET and the markets are eagerly awaiting the central bank's press release.
In it, Fed Chairman Ben Bernanke is expected to address the U.S. economy, the future of credit, and the new Fed Funds Rate.
It's this last point to which mortgage rate shoppers should pay attention -- when the Fed Funds Rate falls, mortgage rates tend to rise.
The inverse relationship between mortgage rates and the Fed Funds Rate is based on the idea that cuts to the Fed Funds Rate are designed to add gas to U.S. economic engine.
In theory, over time, Fed Funds Rate cuts work to improve Corporate America's balance sheets, thereby rewarding shareholders. Therefore, when the Fed Funds Rate falls, or is expected to fall, investors often rush to buy stocks before their prices get bid up. Part of that process, of course, includes selling the "safe" parts of their portfolio which are usually loaded with mortgage-backed bonds.
If you were looking for a reason why mortgage rates tanked Tuesday while the Dow Jones added 11%, now you have it.
The Fed Funds Rate stands at 1.500% and markets are split about how far the FOMC will cut it this afternoon:
- A "pause" is expected by 2 percent of traders
- A 0.250% rate cut is expected by 5 percent of traders
- A 0.500% rate cut is expected by 45 percent of traders
- A 0.750% rate cut is expected by 40 percent of traders
- A 1.000% rate cut is expected by 8 percent of traders
Without a consensus opinion among traders, no matter what the Fed does today, a lot of investors will be forced to rebalance their portfolios to account for their "bad bets". This will add to market volatility for sure.
Mortgage rates are calm this morning. The calm likely won't last. If you are floating your mortgage rate and want to avoid additional risk, consider locking your rate prior to the FOMC press release.
Despite turmoil on Wall Street, the housing sector continues to deliver good news.
Last month, led by a 22 percent surge from the West Region, New Home Sales rose 2.7 percent over August.
A "new home" is a newly-built residence, never before lived in. New homes are usually built and sold by real estate development companies and their respective marketing firms.
The surge in New Home Sales volume is consistent with the other good news we've seen from the housing sector. It marks the 4th positive signal in the last two weeks.
- October 8: Homes under contract to sell surge 7.4 percent
- October 23: Foreclosed homes fall 12 percent in September
- October 24: The supply of "used homes" falls to an 8-month low
- October 27: The supply of new homes falls by 7 percent
However, it can't be ignored why housing is showing a statistical improvement. The main causes are two-fold:
- Banks are getting better about selling foreclosed homes
- Builders are keen to dump their excess inventory
Both of these factors drive down home sales prices nationwide which, in turn, draws value-seeking home buyers back to the market. In addition, because the number of active sellers dwarfs the number of active buyers, today's home seekers enjoy a tremendous amount of negotiation leverage, making real estate even more attractive.
But, as with everything in business, markets seek balance. As home supplies dwindle, buyers' ability to negotiate sales prices and closing costs will fall. It's Supply and Demand -- as supplies drop, relative demand rises, and prices rise with it.
In every American neighborhood, homes that are priced "right" are selling quickly. And now that banks and builders have figured out the formula, more homes are going under contract than at any time since 2007.
Much of the current economic climate is being blamed on housing. If the data is accurate, though, we can infer that the climate may not last much longer.
(Image courtesy: AP.org)
Mortgage markets followed the recurring trading pattern of 2008 last week -- volatility, volatility, and more volatility.
After opening with a strong performance that drove rates down, late-week fears of a global recession reversed that path. Mortgage rates ended the week unchanged.
This was an unexpected outcome for the week considering that:
- The dollar gained 5%, making bonds "worth more"
- Oil fell 11%, helping to spur consumer spending
- LIBOR dropped slightly, signaling a credit thaw
Each of the above factors usually helps to generate new demand for mortgage bonds, pressuring mortgage rates lower.
But, this market is anything but normal. Because of the stock market's weak showing last week, several hedge funds were forced to liquidate their holdings and move into cash. The rampant selling dumped an excess supply of mortgage bonds onto the market, offsetting the favorable bond market conditions, and causing mortgage rates to rise sharply from Wednesday to Friday.
Unsuspecting rate shoppers found this out the hard way.
This week, mortgage markets should be similarly unpredictable -- there is a bevy of economic news and government news on which markets will chew, digest, and attempt to swallow.
On the economic side, the two most influential data points are the Consumer Confidence survey, and Personal Consumption Expenditures. The former will be used to predict Holiday Season shopping -- a weak reading should cause mortgage rates to rise -- and the latter is the Federal Reserve's measure of inflation.
If PCE is low, expect calls for more economic stimulus which would help mortgage rates to recede.
And, on the government side, the Federal Reserve will hold its scheduled 2-day meeting Tuesday and Wednesday. It's widely expected that the Fed will lower the Fed Funds Rate by at least 0.250 percent, maybe more.
Often, when the Fed Funds Rate falls, mortgage rates rise in the immediate wake of the announcement. Be aware of this if you are currently floating a mortgage rate.
(Image courtesy: Wall Street Journal)
Statistics are what you make of them, but sometimes, they can provide good perspective.
For example, from its peak in 2005 to its trough in late-2007, the number of "used" homes sold nationwide plunged.
- In 2005: Roughly 7 million homes sold annually
- In 2007: Roughly 5 million homes sold annually
Through all of 2008, though, Existing Home Sales volume has been essentially flat. Some months up, some months down, but always hovering near the 5 million unit mark.
The data from September is no different.
For the 13th consecutive month, the number of home resales nationwide straddled the 5 million benchmark, clocking in at 5.18 million units. This tells us that everyday Americans are still buying and selling real estate at a fairly steady clip -- despite what the news keeps telling us.
Versus August, September sales volume grew by 5.5 percent.
Now, couple this two other data points and we can see that the housing market is showing multiple signs of strength:
- The national home supply is now down to 9.9 months
- The number of homes under contract is up 7.4 percent
Again, though, statistics are what you make of them. Just as there are positive signals about real estate, there are negative ones, too. The credit markets are one example of that.
But, either way, with a full year of stable sales volume behind us and stories of recovery in beat-up markets like California, we can't ignore the idea that housing may be done trolling its bottom.
It takes willing buyers and willing sellers to turnaround a market. It appears that housing may have both.
(Image courtesy: The Wall Street Journal Online)
According to foreclosure-tracking service RealtyTrac, the foreclosure rate is falling nationwide.
Versus August, foreclosures fell by 12 percent in September 2008 as more than half of the states showed month-over-month improvement.
Most interesting in the data is that several states that led the foreclosure boom in 2007 now appear to be leading the charge out of it.
For example:
- In Arizona, foreclosures are down 9.43 percent
- In California, foreclosures are down 31.64 percent
- In Colorado, foreclosures are down 6.22 percent
- In Illinois, foreclosures are down 5.14 percent
- In Michigan, foreclosures are down 22.43 percent
But despite September's promising data, the press is choosing to report that foreclosures are up 71 percent over the same period last year. The data is accurate, but not necessarily relevant.
When home buyers and sellers engage real estate markets, they rarely think in annual terms. For them, it's about buying or selling this month, or next month, or the month after that. When someone is "in" the market, their mentality is "right now".
In other words, annual data is more befitting of an economist, while month-to-month data is more befitting of you. Of course foreclosures are up 71 percent since last year -- a lot has happened since then. But on a monthly basis, signals point to improvement.
September's foreclosure data may be a signal of market recovery, or it may just be a blip. Time will tell, really. Either way, RealtyTrac's foreclosure data reinforces what most real estate professionals already know and that's that markets all over the country are showing signs of life.
In the widest definition possible, amortization (pronounced: am-ohr-tih-ZAY-shun) is the scheduled process by which a loan's principal balance pays down to $0.
The opposite of an amortizing loan is an interest only loan for which there is no scheduled principal repayment schedule.
With respect to mortgages, amortization is what determines how much of a monthly payment goes to principal, and how much goes to interest. Amortization schedules are the same for all fixed rate, non-interest only home loans including 15- and 30-year fixed rate mortgages, as well as all non-interest only ARMs.
Monthly principal and interest payments on a mortgage are based on the mathematical formula above, where:
- P = principal
- A = payment
- r = monthly interest rate
- n = number of payments
Now, if you've ever paid on an amortizing home loan, you don't need to use the formula to know that mortgage amortization schedules are dramatically front-loaded with interest.
In other words, in the early years of loan, the interest due on a mortgage is relatively high versus the principal due. And, if you've ever heard someone say, "You don't pay down much of a loan in the first few years," now you know -- mathematically -- why that is.
This interest-heavy mortgage repayment schedule helps banks to collect as much loan interest as possible up-front, offsetting potential loan losses.
But, just because the bank sets an amortization schedule doesn't mean that a homeowner can't change it. In any given month, a borrower can prepay extra principal to the lender, thereby changing the formula and accelerated the loan payoff date.
There are calculators online that do the prepayment math for you, but before making extra payments, talk with your loan officer or financial advisor first. Prepaying your mortgage could trigger a stiff penalty from your lender, or put your liquid assets at risk. Prepayment is not a bad plan, but it may be a bad plan for some.
(Image courtesy: Mortgage News Daily)
In an effort to limit risky borrower behavior, Fannie Mae announced a new round of mortgage guideline changes last week.
Unlike previous its previous 20-plus updates that raised income requirements and minimum credit scores (among other changes), Fannie's latest guideline tweaks focus on the value of its underlying mortgage assets -- home equity.
Effective December 13, 2008, Fannie Mae will require larger equity positions on some of its insured purchases and refinances.
A few of the updates include:
- Limiting primary residence, cash out refinances to 85% loan-to-value
- Requiring 10% downpayments on second/vacation homes
- Requiring a 25% equity position on all investment property refinances
And, while the above changes represent 5 percent equity increases over the current mortgage guidelines, some of the other updates call for increases of as much as 20 percent.
As we head into the election and Congress mulls over another economic stimulus package, it's unclear if mortgage rates will move higher or lower as we close out the year. We do know, however, that getting approved for a conforming mortgage will, in general, be harder come December 13, 2008.
If you're finding yourself on the fence about your next move -- whether it's to buy or to refinance -- consider taking the necessary steps before the guidelines change.
Low, low mortgage rates don't mean much if you don't have enough home equity to get a home loan approval.
(Image courtesy: The New York Times)
Last week, the Dow Jones Industrial Average recorded both its largest one-day point gain and second-largest one-day point loss in history.
Mortgage markets got whipsawed, too.
From day to day, huge rate swings made mortgage rate shopping difficult. It wasn't uncommon for lenders to change pricing 3 times per day.
When the week closed, though, rates were lower than at Market Open Monday, marking the first week of improvement in mortgage rates since early-September.
Last week's constant mortgage rate movement had several causes:
The biggest driver was -- and continues to be -- trader uncertainty.
As measured by the "Fear Index", market volatility reached an all-time high last Thursday. Investors moved into cash positions, selling assets of all types -- including mortgage bonds. This created an excess supply of bonds on the market which drove down prices and, in turn, pushed up rates.
But, there was a demand-side issue impacting rates last week, too.
If you'll remember, the first $250 billion of the government's Rescue Plan was meant to buy bad mortgage debt. Last week, however, those plans changed. Instead, the $250 billion was applied to the balance sheets of the nation's largest banks.
This caused an immediate $250 billion reduction in mortgage bond demand and the reduced demand further depressed prices. Again, mortgage rates rose as a result.
This week, with very little economic data, expect psychology, politics and corporate earnings to drive mortgage rates -- more than 20% of the S&P 500 will report their July-September 2008 numbers.
If earnings are weak, expect mortgage rates to rise on concerns about recession; lately, that has been the market pattern. Conversely, if earnings are strong, expect mortgage rates to improve.
(Image courtesy: The New York Times)
Private Mortgage Insurance (PMI) is a mortgage lender's insurance policy against highly-leveraged homeowners. It's typically required when homeowner equity is less than 20 percent at the time of closing.
With PMI defaults up 40 percent over last year, though, private mortgage insurers are taking big losses.
They're also taking outsized steps to prevent additional claims going forward and that is bad news for low-equity homeowners and home buyers.
The first PMI change new, higher insurance rates.
Like home insurers that adjust premiums after a worse-than-expected storm season, PMI insurers are raising mortgage insurance rates for all homeowners, regardless of credit history. The higher premiums are meant to offset the higher losses.
And, the second change is that some PMI firms are discontinuing coverage for "high-risk" transaction types. This includes purchases of non-owner occupied properties, and cash out refinances above 85 percent loan-to-value.
Both changes, however, point to similar conclusion about home loans: Home equity is increasingly important for today's homeowner.
PMI rates are higher than they were six months ago and the rising number of defaults makes it likely that rates will rise again soon. As PMI rates increase, so does the cost of homeownership for people whose lenders require it.
As the stock market dips then jumps then dips again, it's important to remember that markets are unpredictable and nobody knows what will happen tomorrow.
Unfortunately, that doesn't stop the analysts from trying.
An obvious example comes from May of this year. As the price of oil crossed $120 per barrel on its way to an all-time high of $147, a Goldman Sachs analyst was quoted as saying that $200 oil was "likely".
It seemed like a logical conclusion at the time.
Today, though, just five months after the prediction, the analyst's "likely" scenario looks downright laughable. Oil is off by more than 40 percent since that day. And there's hundreds of examples just like this, all around us.
Every day, economic experts and analysts are on television, telling us what's going to happen in the future:
- They tell us when housing prices will reach a bottom
- They tell us when stock markets will rebound for good
- They tell us what the economy will do over the next 12 months
But none of them operate with the proverbial crystal ball -- it's all on "gut".
Another example is from today's CNNMoney.com. In the wake of the government's banking response, a mortgage analyst predicts 7 percent interest rates over the next six months This would represent a 1.5 percent from the recent lows.
The rate prediction may be accurate, or it may not. We won't know for another six months. But what we know today, though, is that mortgage rates are all over the place -- just like the stock market. One day up, another day down. And nobody knows what they'll do tomorrow.
Predicting the future has always been an inexact science but that won't stop the experts from trying. And the experts are wrong as often as anybody else.
For homeowners with soon-to-adjust adjustable rate mortgages, the recent banking turmoil worldwide may lead to budgetary pain.
This is because most conforming ARMs made since 2003 are based on a borrowing cost called LIBOR and LIBOR is up an uncharacteristic 2 percent since September.
LIBOR stands for London Interbank Offered Rate and is the rate at which banks lend money to each other.
Historically, LIBOR has tracked the U.S. treasury market, plus a half-percent increase. This suggests that banks are only slightly less likely to default versus the U.S. government.
Today, that spread is close to 4.5 percent.
Since Lehman Brothers failed in September 2008, banks are fearful that their peers will meet a similar fate. Looking at the chart, we can see how LIBOR has responded.
The LIBOR spike is harming homeowners with adjustable-rate mortgages because adjusted rates on conforming mortgages are often calculated by adding 2.250 percent to the current 12-month LIBOR rate.
On sub-prime mortgages, the adjustments are even more steep.
In general, though, as LIBOR rises, household payments rise, too, so if your home loan is adjustable and is due to reset soon, call or email your loan officer to talk about how LIBOR may impact your adjusted mortgage rate and payment.
For many homeowners, it's less expensive to refinance into a new home loan that to just let the adjustment happen.
(Image courtesy: Wall Street Journal Online)
Throughout the feverish activity on Wall Street last week, mortgage bonds sold off with force, driving mortgage rates to their highest levels since July.
It was the fourth straight week in which mortgage rates worsened.
But, with the mortgage markets closed Monday, stock markets rallied to their largest one-day gain in history.
The Dow Jones' gains are expected to push mortgage rates down Tuesday, but not nearly enough to recover last week's losses. The market-wide carnage was mostly the result of a fear that has not been completely removed from investor psychology.
Until that fear is purged, therefore, expect mortgage rates to move on the dual basis economic data and market mentality. This will likely lead to rapid rate changes that will make shopping for a mortgage rate difficult.
This week, look for key inflation data including the Producer Price Index on Wednesday and the Consumer Price Index on Thursday.
Both measure the "cost of living" and reflect on price pressures in the economy. If costs are rising, it's considered inflationary and that tends to edge mortgage rates higher.
In addition, Retail Sales and Consumer Confidence data will be released this week and carefully watched. If either (or both) show strength, markets may interpret the data to be inflationary as well, further adding upside pressure to mortgage rates.
(Image source: The Wall Street Journal)
Given the stock market's recent performance, it's not surprising that gasoline's falling prices are garnering very little attention. That doesn't make it any less relevant, however.
Since peaking in July, gas prices are off by 20 percent.
Falling gas prices are an important positive for the U.S. economy because less money spent at the pump means that more money is saved per household for everyday items including food and other staples.
In addition, consumer spending makes up two-thirds of the economy.
Therefore, falling gas prices may lessen the impact of a forecasted recession. Because Americans are notoriously poor savers, the extra cash-on-hand is likely to get spent which will, in turn, push the economy forward through the upcoming holiday shopping season.
So, just as inflation can bad for mortgage rates, so can recession. And while recession won't always cause mortgage rates to rise, right now, it's one of the factors driving rates higher. Falling gas prices may help keep that scenario at bay.
Buyers are returning to the housing market.
Each month, The National Association of REALTORS® tracks homes under contract to sell, but whose closing has not yet happened. It calls them "pending sales" and publishes a monthly report to quantify them.
The Pending Home Sales report is important because it's meant to predict future home sales activity. History shows that 80 percent of homes under contract will "close" within 60 days, and most of the rest will close within 120 days.
If Pending Home Sales are up, it's believed, actual home sales will be up, too.
In August, Pending Home Sales jumped 7 percent from the month prior, returning to levels not seen in over a year.
The report's strength suggests that buyers are returning to the housing market, continuing the trend that started in March. This is tremendously good news for sellers because more buyers on the hunt means more demand for homes which, in turn, leads sale prices higher.
The Pending Homes Sales report is not a perfect predictor, however. For one, it's not measuring an actual sale -- just the expectation of one. In addition, it only accounts for "used" homes, ignoring new construction.
But that aside, the strong uptick in August tells us that home buyers are re-engaging at a quickening pace and finding that "now" is a good time to buy real estate. When buyer demand rises, the real estate market as a whole isn't usually that far behind.
(Image courtesy: The Wall Street Journal Online)
The Federal Reserve made an "emergency rate cut" this morning, dropping the Fed Funds Rate by one half-percent to 1.500 percent.
The move is meant to stimulate the U.S. economy.
When the Federal Reserve changes the Fed Funds Rate, it often takes 9 months for the changes to work their way through the economy.
On a broad scale, therefore, we won't know if the cut truly "worked" until Summer 2009.
But, as it relates to Americans in general, the rate cut spurred two immediate changes.
First, because Prime Rate is directly tied to the Fed Funds Rate, Prime Rate fell by 0.500 percent today, too. That means that interest rates on credit card debt and home equity lines of credit are now lower, reducing monthly interest costs for the majority of American households.
The second change is that mortgage rates are rising today.
The Fed's actions today sparked optimism in some corners of Wall Street and money is now flowing into the stock market at the expense of bonds. Because mortgage rates move in the opposite direction from bond demand, mortgage rates are higher this morning.
As always, mortgage markets and mortgage rates remain on edge. Therefore, rates are subject to change. And quickly. If you see a rate and payment you like, be ready to commit to it because it likely won't last long.
(Image courtesy: USA Today)
Monday, the Dow Jones Industrial Average closed below the psychologically-important 10,000 level for the first time since 2004.
Despite the milestone-marker breach, however, there was a large group of Americans with reason to cheer. As stocks sold off, mortgage markets rallied to the benefit of home buyers and mortgage rates shoppers everywhere.
Conforming mortgages rates improved yesterday.
Most interesting here is that rates improved for the same reason that the stock market fell. Because of lingering concerns about the worlds' economies, investors lost their collective appetite for risk Monday. In response, they sold their stock positions and parked the proceeds in the "safe haven" of U.S. government-backed debt.
The extra demand for safe investments pushed up the prices on mortgage bond which, in turn, pushed down mortgage bond rates.
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Now, we can't predict when the market's risk appetite will return, but when it does, expect money to flow into stocks just as quickly as it left.
All year long, with respect to stock markets, it's been either "everybody in" or "everybody out" and, for now, it's everybody out. This is why mortgage rates fell Monday.
But, when the momentum shifts -- and it will shift -- mortgage rate shoppers would do well to be prepared. Be ready to lock that mortgage rate because as soon as the stock market reverses course, mortgage rates will head higher.
And if stocks recover as quickly as they tanked, expect mortgage rates to spike badly.
(Image courtesy: USA Today)
Congress approved the $700 billion "Bailout Bill" Friday, answering the question that dogged mortgage markets all week long:
Will they or won't they pass it?
The uncertainty prior to the vote created huge market swings that ultimately sent the Dow Jones Industrial Average to its worst week since the 2001 terrorist attacks, while causing similar damage in the mortgage markets.
Mortgage rates worsened for the third straight week last week.
However, if we take the congressional vote out of the picture and look strictly at last week's data, we would have expected mortgage rates to fall instead of rise.
For example, the economy shed another 159,000 jobs, bringing the 2008 total to 760,000 lost jobs. This reduces the likelihood of inflation and is normally good for mortgage rates. In addition, the U.S. dollar had its strongest week ever against the Euro. This usually attracts buyers to the mortgage bond market, driving down rates.
And third, Fannie Mae eliminated one of its mandatory loan fees. This improves mortgage bond pricing for borrowers, ultimately leading to lower rates.
But, mortgage rates rose didn't fall last week and that shows how deep the economic uncertainty really ran. And this week, with the bill now passed into law, we would expect the market to turn its attention back to fundamentals. But it can't.
Unfortunately, there's no new data for release this week so, in the absence of data, markets should take their cues from the following sources:
- The 8 scheduled Fed speakers, including Bernanke on Tuesday
- Wednesday's Pending Home Sales report
- Persistent rumors of a "surprise" Fed Funds Rate cut
Regardless of to what markets react, though, be prepared for them to react swiftly and for mortgage rates to dip and spike -- often in the same day.
In other words, a mortgage rate quote from the morning is likely to be "expired" by the afternoon so if you see a rate and payment that you like, consider locking it. It likely won't last long.
