After a strong opening we watch the mortgage backed securities market fizzle out this afternoon and finish 2 ticks down on they day. This is particularly troubling considering the fact that treasury yields today were relatively flat. In essense this infers investors in the mortgage backed securities market have deemed the market inflated and are selling off to protect their portfolio.
Considering this week is the first week without Fed intervention in MBS, it is interesting to watch current movement. Clearly our market is weaker with losses occurring throughout the week, but the losses have been minimal. No large sell offs or firesales. There does appear to be some support at these levels, regardless the water is slowly coming to a boil. Right now rates offered to consumers are still very low. It appears as though this is slowly changing and rates are beginning to rise; question is how large of a flame is under the pot of water.
Let is all hope for a strong day tomorrow in the MBS market which will bring interest rates down for all of us.
Wednesday, March 31, 2010
Interest Rates and Inflation
Yesterday we discussed the recent movement in the Mortgage Backed Securities market in relation to currently offered interest rates. Many people understand what inflation is, but they do not understand the full ramifications of inflation on markets and their lives.
A simple definition of inflation is an increase in the cost of goods and services. Another way to look at it is, the value of every dollar you have drops so it takes more of those dollars to buy the goods or services you are looking to buy. This is something everyone for the most part understands, but also where their knowledge stops. Ultimately inflation is a result of poor monetary policy.
There is a single entity responsible for our printing presses and controlling monetary policy in our Country. This is a private entity despite the illusions that shroud it, and the politicians that ogle over it. This entity is the Federal Reserve. The Federal Reserve is ultimately responsible for monetary policy in our Country. They control the printing presses set the discount lending rates, and the federal funds rate... the Federal Reserve is a very powerful entity, some even consider its chairman to be the second most important person in Country behind only the President of the United States.
Understanding that it is the Federal Reserve that is ultimately responsible for our monetary policy, they are who we look to for signs of inflation. Not what they necessarily say in their released minutes but rather the actions they take around their comments. For instance, over the last couple of years the Federal Reserve has printed 13 trillion new dollars, but continue to stress inflation is not an immediate concern of theirs. Because most of us think short term, we read this and think no problem without focusing on the operative word "immediate." So it is a concern, just not a concern right now. This is the thought process to follow. We know they printed 13,000,000,000,000 new dollars and have been keeping the discount and funds rates very low making money more available than they would normally like. Hmmmm.... low rates mean easy money for those that need to borrow (banks, insurance companies etc,) which means more money in the system. Hmmmm... wonder why the Fed is saying not an "immediate concern" .... well there are a lot of people out of work which curbs spending in our economy which means less consumption... Less consumption infers demand on goods is currently low, and with low demand comes low pressure. Low or no pressure means no influence/pressure to force the selling point up for that good. So the price of goods and services for now stays relatively the same.
But that is not the whole story.... we continue our analysis looking at other indicators... The stock market was down in the 7,000s now back in the 10,000s. Gold's value is increasing steadily. The cost of oil is rising.
These are all indicators suggesting inflation is here it just has not hit the open market yet and the individual consumer yet because our economy is suffering so badly. What does this suggest.... simply that when our economy does turn around it will do so accompanied with rising prices and inflation which will send prices up. How high they will go is anyone's guess.
Once inflation begins we must to worry about something called hyperinflation which is simply inflation on steriods. Imagine minimum wage at 30 dollars an hour.... sounds great right??? Well also imagine a gallon of gasoline costsing 14 dollars. This is the power of hyperinflation. It should also be noted that inflation is somewhat controllable - hyperinflation is a beast out of its cage. Those that think they can tame it are usually bitten.
So understanding these points we begin to understand how inflation effects us.What we have not discussed is how inflation will affect the real estate market, and financing. The nice thing about inflation is the value of your home if you are a homeower should rise. That is you will be able to sell you home for more dollars albeit those dollars will be worth less due to inflation. Regardless inflation will pull people out from underwater and or return a nice equity position to them. On the other hand interest rates for home loans are going to go up in concert with inflation. This means if you seek financing the rate of interest you will be offered is going to be higher than it is today. Why? For the simple reason that the note you are issued is an investment vehicle for someone else. Moreover it is a long term investment. Since it is long term, and because they are looking to profit off of their investment, they have to make sure they beat future inflation, if they don't the investment will lose them money. So to combat current inflation they must offer an interest rate higher than inflation rates, so as inflation takes hold rates go up. How high depends completely on the rate of inflation.
The nice news is you should be making more dollars due to inflation to pay for the higher payments and rate of interest, however imagine for a moment your not needing to pay more. Imagine locking in a 30 year fixed with a rate of 5.000%. You will be making more money, but your loan still costs you the same. This is a good formula.
But let us digress.... you are currently renting. Guess what is going to happen to the cost of rent as inflation hits. The rent you pay will go up... in concert. Now what if you owned your own home with a 30 year fixed rate of interest. Your monthly payment is never going up. That's security.
Are we starting to understand how inflation plays a role in each of our lives. Point in fact, you can prepare for inflation and profit from it, or you can be caught unprepared and be a victim. People currently renting are going to experience higher rent. Those with adjustable rate mortgages set to adjust in the coming months and years will be subjected to a higher rate of interest. The people immune to inflation in the real estate market and are in a position to potentially profit, are homeowners with fixed programs.
These people are guaranteed the same payment month after month after month. When inflation hits this will not change even though the amount of money they have will. With inflation comes larger pools of capital which makes paying off their home loan that much easier.
We are happy to discuss you options without any obligation. Now is the time to begin planning.
A simple definition of inflation is an increase in the cost of goods and services. Another way to look at it is, the value of every dollar you have drops so it takes more of those dollars to buy the goods or services you are looking to buy. This is something everyone for the most part understands, but also where their knowledge stops. Ultimately inflation is a result of poor monetary policy.
There is a single entity responsible for our printing presses and controlling monetary policy in our Country. This is a private entity despite the illusions that shroud it, and the politicians that ogle over it. This entity is the Federal Reserve. The Federal Reserve is ultimately responsible for monetary policy in our Country. They control the printing presses set the discount lending rates, and the federal funds rate... the Federal Reserve is a very powerful entity, some even consider its chairman to be the second most important person in Country behind only the President of the United States.
Understanding that it is the Federal Reserve that is ultimately responsible for our monetary policy, they are who we look to for signs of inflation. Not what they necessarily say in their released minutes but rather the actions they take around their comments. For instance, over the last couple of years the Federal Reserve has printed 13 trillion new dollars, but continue to stress inflation is not an immediate concern of theirs. Because most of us think short term, we read this and think no problem without focusing on the operative word "immediate." So it is a concern, just not a concern right now. This is the thought process to follow. We know they printed 13,000,000,000,000 new dollars and have been keeping the discount and funds rates very low making money more available than they would normally like. Hmmmm.... low rates mean easy money for those that need to borrow (banks, insurance companies etc,) which means more money in the system. Hmmmm... wonder why the Fed is saying not an "immediate concern" .... well there are a lot of people out of work which curbs spending in our economy which means less consumption... Less consumption infers demand on goods is currently low, and with low demand comes low pressure. Low or no pressure means no influence/pressure to force the selling point up for that good. So the price of goods and services for now stays relatively the same.
But that is not the whole story.... we continue our analysis looking at other indicators... The stock market was down in the 7,000s now back in the 10,000s. Gold's value is increasing steadily. The cost of oil is rising.
These are all indicators suggesting inflation is here it just has not hit the open market yet and the individual consumer yet because our economy is suffering so badly. What does this suggest.... simply that when our economy does turn around it will do so accompanied with rising prices and inflation which will send prices up. How high they will go is anyone's guess.
Once inflation begins we must to worry about something called hyperinflation which is simply inflation on steriods. Imagine minimum wage at 30 dollars an hour.... sounds great right??? Well also imagine a gallon of gasoline costsing 14 dollars. This is the power of hyperinflation. It should also be noted that inflation is somewhat controllable - hyperinflation is a beast out of its cage. Those that think they can tame it are usually bitten.
So understanding these points we begin to understand how inflation effects us.What we have not discussed is how inflation will affect the real estate market, and financing. The nice thing about inflation is the value of your home if you are a homeower should rise. That is you will be able to sell you home for more dollars albeit those dollars will be worth less due to inflation. Regardless inflation will pull people out from underwater and or return a nice equity position to them. On the other hand interest rates for home loans are going to go up in concert with inflation. This means if you seek financing the rate of interest you will be offered is going to be higher than it is today. Why? For the simple reason that the note you are issued is an investment vehicle for someone else. Moreover it is a long term investment. Since it is long term, and because they are looking to profit off of their investment, they have to make sure they beat future inflation, if they don't the investment will lose them money. So to combat current inflation they must offer an interest rate higher than inflation rates, so as inflation takes hold rates go up. How high depends completely on the rate of inflation.
The nice news is you should be making more dollars due to inflation to pay for the higher payments and rate of interest, however imagine for a moment your not needing to pay more. Imagine locking in a 30 year fixed with a rate of 5.000%. You will be making more money, but your loan still costs you the same. This is a good formula.
But let us digress.... you are currently renting. Guess what is going to happen to the cost of rent as inflation hits. The rent you pay will go up... in concert. Now what if you owned your own home with a 30 year fixed rate of interest. Your monthly payment is never going up. That's security.
Are we starting to understand how inflation plays a role in each of our lives. Point in fact, you can prepare for inflation and profit from it, or you can be caught unprepared and be a victim. People currently renting are going to experience higher rent. Those with adjustable rate mortgages set to adjust in the coming months and years will be subjected to a higher rate of interest. The people immune to inflation in the real estate market and are in a position to potentially profit, are homeowners with fixed programs.
These people are guaranteed the same payment month after month after month. When inflation hits this will not change even though the amount of money they have will. With inflation comes larger pools of capital which makes paying off their home loan that much easier.
We are happy to discuss you options without any obligation. Now is the time to begin planning.
Tuesday, March 30, 2010
Home Loan Interest Rates Teetering
Home loan interest rates today are a little worse than yesterday after a early morning sell off resulting in a sharp downward 8 tick move in the Mortgage Backed Securities market. What was interesting is this occurred just before we saw treasuries climb to almost 3.9000 yield before reseeding, and falling back. As treasuries sank back, the Mortgage Backed Securities market found its footing and recovered slightly to the current level of down 3 ticks on the day.
The interesting thing about this chain of events was the MBS market selling off before the Treasury market posted higher yields. I have not yet been able to identify what news hit the wire to create this frenzy, and when I do, I will post it... regardless this move definitely caused lenders to pause and consider their opening rate sheets. Wells Fargo, already reposted (from what I can tell about an .125 worse in pricing), along with others despite the correction.
Generally speaking the formula for reprices is as follows: they are slow to give and quick to take away. An 8 tick move in secondary is usually enough to trigger a reprice for better or worse, although it should be noted reprices can occur at any time for any reason. In fact banks will sometime reprice themselves out of the market to deter new loans from entering their system because they cannot wearhouse any more loans until they clear the books for the month. All things considered repricing, although it can be measured and predicted, is as much of an art as music... there are fundamentals you must know to play, but every professional's style is a little different. Pricing analysts are the same way when creating rate sheets. They are all looking at the same information, but what is deduced from that information will be independent to each analyst.
Anyway, so there you have it, rates this morning are a little worse off than closing yesterday. But considering the Fed has removed itself from the equation, we should be happy that the market is holding where it is and interest rates for homes are still around or even below 5 percent. This is a fixed interest rate I am currently discussing not a hybrid ARM or ARM product. A 30 year fixed interest rate at 5% or lower... no prepayment penalties, and low cost. Isn't this what everyone has been waiting for? Get off the fence and lock it in now before these rates go up. If you have read any of the posts associated with this blog, then you are well aware of the fact that the trend for interest rates right now is a rising one. This means interest rates will only be getting worse (generally speaking - we all know graphs move up and down, up and down - regardless our trend will be one dominated by a downward force which results in higher rates).
Don't wait for inflation... if you do you will have missed the boat. More on inflation tomorrow.
The interesting thing about this chain of events was the MBS market selling off before the Treasury market posted higher yields. I have not yet been able to identify what news hit the wire to create this frenzy, and when I do, I will post it... regardless this move definitely caused lenders to pause and consider their opening rate sheets. Wells Fargo, already reposted (from what I can tell about an .125 worse in pricing), along with others despite the correction.
Generally speaking the formula for reprices is as follows: they are slow to give and quick to take away. An 8 tick move in secondary is usually enough to trigger a reprice for better or worse, although it should be noted reprices can occur at any time for any reason. In fact banks will sometime reprice themselves out of the market to deter new loans from entering their system because they cannot wearhouse any more loans until they clear the books for the month. All things considered repricing, although it can be measured and predicted, is as much of an art as music... there are fundamentals you must know to play, but every professional's style is a little different. Pricing analysts are the same way when creating rate sheets. They are all looking at the same information, but what is deduced from that information will be independent to each analyst.
Anyway, so there you have it, rates this morning are a little worse off than closing yesterday. But considering the Fed has removed itself from the equation, we should be happy that the market is holding where it is and interest rates for homes are still around or even below 5 percent. This is a fixed interest rate I am currently discussing not a hybrid ARM or ARM product. A 30 year fixed interest rate at 5% or lower... no prepayment penalties, and low cost. Isn't this what everyone has been waiting for? Get off the fence and lock it in now before these rates go up. If you have read any of the posts associated with this blog, then you are well aware of the fact that the trend for interest rates right now is a rising one. This means interest rates will only be getting worse (generally speaking - we all know graphs move up and down, up and down - regardless our trend will be one dominated by a downward force which results in higher rates).
Don't wait for inflation... if you do you will have missed the boat. More on inflation tomorrow.
Monday, March 29, 2010
Quote of the day....
Markets will remain irrational longer than you can remain solvent.... -John Maynard Keynes
Interest Rates Struggle to Find Foothold
Rates right now are struggling to hold the ground they made up last Friday in the wake of a 10 year treasury yield that we have not seen in sometime. With the 10 year treasury yield currently at 3.87%, the problem our market faces is better opportunity elsewhere. Keep in mind the 10 year treasury is a direct competitor to the Mortgage Backed Securities market. Essentially with both investment vehicles operating in long term markets - the questions that all investors are asking: What is my return on investment? How secure is the investment?
Let's be candid for a moment. Whatever you think of the United States government, I think we can all agree that Treasury Bonds are a more secure intrument than Mortgage Backed Securities - after all if the government fails and defaults on its bonds, I think it is safe to say our economy will be in ruins as well, which means MBS is also worthless. With this simple understanding we can reasonably deduce why Treasuries are a more attractive investment when the MBS is offering similar yields. This explains why Treasuries are gaining steam as MBS begins to lose traction.
Currently we are even on the day of trading in the MBS market. Interest rates for home loans are static right now, with lenders waiting for some indication as to which way the market is leaning after a strong Friday ending last week. Without the Fed participating, I believe the longer the period of consolidation, the more exposed we are to a firsale forcing rates up substantially.
Point in fact I do not expect home loan interest rates to move much if at all today, simply because our market needs to redefine itself, and investors are going to move slowly and cautiously in this regard. The danger we face with this type of trading is it signifies that both bulls and bears have questions about the market. During times of uncertainty, it is the bears that typically win out, moreover should the market begin to lose ground forcing home loan interest rates up, we could see a snowball develop as bulls leave the market on top of the bears in attempt to curb any losses they are exposed to.
In addition there is serious risk associated with home loan investment opportunities right now, a new report claiming nearly one out of five homeowners is current behind on their payments. Considering this fact along with the unemployment numbers not improving, the question becomes, how stable is this market for investors? If investors believe there is too much risk in the MBS market, this will reduce the money coming in which will leads to higher interest rates which will make it harder for people to refinance or purchase which will hurt the real estate market further and down the drain we go.
This is why the White House revamped and released a new program to address foresclosures and people that are currently unemployed and/or upside down - something we addressed in our post to end last week. But even with this program, it does not address the real problem which is the ability to repay. Without work, people do not have income which makes paying their home loan next to impossible. Clearly low interest rates are important right now to ensure people that need help with their home loan or are looking to buy a new home have financing available to them.
One thing is for certain, with the government willing to pay people's home loan payments, and willing to subsidize the banks when they reduce mortgage balances for homeowner's upside down; it is clear our economy and the overall condition of our Country is not as favorable as we are being led to believe.
Let me close with one final point... if you do not own your own home and can afford to buy one on a 30 year fixed mortgage... now is the time to buy. Real estate is not just an investment, it is your home - a place of shelter. The three necessities of life are food, water, shelter. Of these three shelter is the moat important. Forget about the investment side of this. If you have your own home in a 30 year fixed rate... you know your monthly obligation. Should inflation hit... your monthly payment, your cost of shelter is fixed and will not change... if you are renting you can't say the same thing. We know our government undertstands how serious this problem is even if they are not talking about it. Inflation is by in large the nemesis of interest rates. We all know inflation is coming... you cannot print and spend the type of money like our government is doing without experiencing inflation. When inflation hits, we will see rates rise, and the cost to rent will increase as well. Having a fixed rate that dictates a stable and consistent payment during times like these is a huge advantage. Couple that with the fact that it will be the lowest fixed rate in history and you are sitting on a major opportunity.
Now let's talk about the investment side of this. With inflation coming, we know the value of you home will be rising. What do we all try to do? Buy low and sell high.
Happy to discuss particular situations. Just make sure you talk to a professional about your purcahse or refinance.
Let's be candid for a moment. Whatever you think of the United States government, I think we can all agree that Treasury Bonds are a more secure intrument than Mortgage Backed Securities - after all if the government fails and defaults on its bonds, I think it is safe to say our economy will be in ruins as well, which means MBS is also worthless. With this simple understanding we can reasonably deduce why Treasuries are a more attractive investment when the MBS is offering similar yields. This explains why Treasuries are gaining steam as MBS begins to lose traction.
Currently we are even on the day of trading in the MBS market. Interest rates for home loans are static right now, with lenders waiting for some indication as to which way the market is leaning after a strong Friday ending last week. Without the Fed participating, I believe the longer the period of consolidation, the more exposed we are to a firsale forcing rates up substantially.
Point in fact I do not expect home loan interest rates to move much if at all today, simply because our market needs to redefine itself, and investors are going to move slowly and cautiously in this regard. The danger we face with this type of trading is it signifies that both bulls and bears have questions about the market. During times of uncertainty, it is the bears that typically win out, moreover should the market begin to lose ground forcing home loan interest rates up, we could see a snowball develop as bulls leave the market on top of the bears in attempt to curb any losses they are exposed to.
In addition there is serious risk associated with home loan investment opportunities right now, a new report claiming nearly one out of five homeowners is current behind on their payments. Considering this fact along with the unemployment numbers not improving, the question becomes, how stable is this market for investors? If investors believe there is too much risk in the MBS market, this will reduce the money coming in which will leads to higher interest rates which will make it harder for people to refinance or purchase which will hurt the real estate market further and down the drain we go.
This is why the White House revamped and released a new program to address foresclosures and people that are currently unemployed and/or upside down - something we addressed in our post to end last week. But even with this program, it does not address the real problem which is the ability to repay. Without work, people do not have income which makes paying their home loan next to impossible. Clearly low interest rates are important right now to ensure people that need help with their home loan or are looking to buy a new home have financing available to them.
One thing is for certain, with the government willing to pay people's home loan payments, and willing to subsidize the banks when they reduce mortgage balances for homeowner's upside down; it is clear our economy and the overall condition of our Country is not as favorable as we are being led to believe.
Let me close with one final point... if you do not own your own home and can afford to buy one on a 30 year fixed mortgage... now is the time to buy. Real estate is not just an investment, it is your home - a place of shelter. The three necessities of life are food, water, shelter. Of these three shelter is the moat important. Forget about the investment side of this. If you have your own home in a 30 year fixed rate... you know your monthly obligation. Should inflation hit... your monthly payment, your cost of shelter is fixed and will not change... if you are renting you can't say the same thing. We know our government undertstands how serious this problem is even if they are not talking about it. Inflation is by in large the nemesis of interest rates. We all know inflation is coming... you cannot print and spend the type of money like our government is doing without experiencing inflation. When inflation hits, we will see rates rise, and the cost to rent will increase as well. Having a fixed rate that dictates a stable and consistent payment during times like these is a huge advantage. Couple that with the fact that it will be the lowest fixed rate in history and you are sitting on a major opportunity.
Now let's talk about the investment side of this. With inflation coming, we know the value of you home will be rising. What do we all try to do? Buy low and sell high.
Happy to discuss particular situations. Just make sure you talk to a professional about your purcahse or refinance.
Friday, March 26, 2010
White House Announces New Plan to Help Foreclosures...
We sort of a new plan, they're looking to get lenders to forgive loan balances and put a moratorium on foreclosures by using TARP money to fund the losses. Essentially it is a get out of jail free card for homeowners currently underwater and behind on payments.
It is structured as a mortgage program designed to reduce the amount owed while forgiving payments. Its focus, the unemployed and those that are upside down. The plan is to use TARP funds to fund 3 to 6 months of payments for these people. When they get their job back the money will have to be repaid.
It has decent face value, but the question is does this real deal with the real problem - unemployment. This is only postponing the inevitable and spending us further into debt. Although supporters argue because this is being funded by unused TARP funds it is not costing taxpayers anything.
The question remains, will the 15 to 50 billion dollar program really address and help the 1,000,000 people they claim it will. History has shown us programs like this in the past have fallen well short, and if this money is used to simply buy some time and is only delaying the inevitable could this money be spent (or not spent at all) in better ways.
It is an interesting move designed to help those unable to refinance due to the real estate market fall and the overall economy. Time will tell whether or not this is well spent money. Point in fact it is another bailout, becuase it is essentially giving funds to the banks to keep them operating a little while longer instead of subjecting them and homeowners to the real and hard truth of the matter.
Other questions remain, will homeowner's that participate have marks on their credit due to this program. If so, will it curb their borrowing ability in the future. How will this effect other markets dependent on credit, like the auto industry, furniture, construction, etc... is still under question. But we're here to talk about real estate and right now, this may afford some an opportunity. Let us all hope that it is not another overfunded underproductive program.
It is structured as a mortgage program designed to reduce the amount owed while forgiving payments. Its focus, the unemployed and those that are upside down. The plan is to use TARP funds to fund 3 to 6 months of payments for these people. When they get their job back the money will have to be repaid.
It has decent face value, but the question is does this real deal with the real problem - unemployment. This is only postponing the inevitable and spending us further into debt. Although supporters argue because this is being funded by unused TARP funds it is not costing taxpayers anything.
The question remains, will the 15 to 50 billion dollar program really address and help the 1,000,000 people they claim it will. History has shown us programs like this in the past have fallen well short, and if this money is used to simply buy some time and is only delaying the inevitable could this money be spent (or not spent at all) in better ways.
It is an interesting move designed to help those unable to refinance due to the real estate market fall and the overall economy. Time will tell whether or not this is well spent money. Point in fact it is another bailout, becuase it is essentially giving funds to the banks to keep them operating a little while longer instead of subjecting them and homeowners to the real and hard truth of the matter.
Other questions remain, will homeowner's that participate have marks on their credit due to this program. If so, will it curb their borrowing ability in the future. How will this effect other markets dependent on credit, like the auto industry, furniture, construction, etc... is still under question. But we're here to talk about real estate and right now, this may afford some an opportunity. Let us all hope that it is not another overfunded underproductive program.
Rates Rebound but for How Long
Friday, March 26, 2010... the last day the Fed is participating in its Mortgage Backed Securities purchasing program in which it has spent 1,250,000,000,000 dollars to keep interest rates artificially low. Over the last year and half or so, the MBS market has been subsidized by Federal government by the tune of 1,25 trillion dollars, today that program stops.
On Wednesday of this week we got a taste of what the market without the Fed may look like. Thursday we saw the market continue sliding until afternoon sessions when it rebounded despite the highest treasury yields we have seen in years. Today we have begun the day up 8 ticks. The question is, how active is the Fed right now and are these gains simply their final exit strategy or are private investors party to this upswing on a day typically reserved for profit taking and selling?
Personally I believe this jump in secondary can be attributed to the Fed injecting one last pool of funds into the MBS market. Due to it being Friday, a day when our market is typically less active than on other business days, the amount of money required to buy these gains is reduced and comes at a discount. If in fact the Fed is currently trying to make the market in its final day of investing, then today and today's gains really mean nothing in the grand scheme of things, and come Monday we will see a secondary sell off and these gains realized will disappear.
It is troubling to think that our market has been artificially supported by the Fed for so long now, that when the free market reacts to their leaving we will be forced to experience some type of correcting period. This could be a day, or take weeks, the point is MBS has not been a truly free market for some time. It has been under the watchful eye of the Fed, the same people that print our money. Of course they can afford to buy... all it costs them is ink and cotton. The real investors however do not have an indefinite slush fund and cannot print their own money when the coffers run out. It will be a very interesting transition.
It is my opinion that rates will not hold at their current levels, and what we saw Wednesday will happen again. If you missed Wednesday, the seconday market fell a full 26 ticks bringing interest rates up to their highest levels of the year. Expect more of this moving into Spring and Summer.
Home loan rates have come down temporarily... if you are in a position to lock, lock. If you have been on the fence looking for a reason to move on financing, now is that time. With the Fed leaving rates will rise, and everyone should get into one of these low rates if at all possible.
Consider these better rates a very short term occurance. I expect these gains to dissolve by Tuesday at the latest.
On Wednesday of this week we got a taste of what the market without the Fed may look like. Thursday we saw the market continue sliding until afternoon sessions when it rebounded despite the highest treasury yields we have seen in years. Today we have begun the day up 8 ticks. The question is, how active is the Fed right now and are these gains simply their final exit strategy or are private investors party to this upswing on a day typically reserved for profit taking and selling?
Personally I believe this jump in secondary can be attributed to the Fed injecting one last pool of funds into the MBS market. Due to it being Friday, a day when our market is typically less active than on other business days, the amount of money required to buy these gains is reduced and comes at a discount. If in fact the Fed is currently trying to make the market in its final day of investing, then today and today's gains really mean nothing in the grand scheme of things, and come Monday we will see a secondary sell off and these gains realized will disappear.
It is troubling to think that our market has been artificially supported by the Fed for so long now, that when the free market reacts to their leaving we will be forced to experience some type of correcting period. This could be a day, or take weeks, the point is MBS has not been a truly free market for some time. It has been under the watchful eye of the Fed, the same people that print our money. Of course they can afford to buy... all it costs them is ink and cotton. The real investors however do not have an indefinite slush fund and cannot print their own money when the coffers run out. It will be a very interesting transition.
It is my opinion that rates will not hold at their current levels, and what we saw Wednesday will happen again. If you missed Wednesday, the seconday market fell a full 26 ticks bringing interest rates up to their highest levels of the year. Expect more of this moving into Spring and Summer.
Home loan rates have come down temporarily... if you are in a position to lock, lock. If you have been on the fence looking for a reason to move on financing, now is that time. With the Fed leaving rates will rise, and everyone should get into one of these low rates if at all possible.
Consider these better rates a very short term occurance. I expect these gains to dissolve by Tuesday at the latest.
Thursday, March 25, 2010
Mortgage Interest Rates Rise
It has begun... interest rates associated with home loans have begun their inevitable and perpetual climb up. Yesterday was the worst day in 2010 for the mortgage backed securities market, losing 26 ticks on the day, interest rates climbed from 4.75% to 4.875% and moving towards 5.000 for conforming products (historically speaking this is still an incredible rate). Jumbo conforming is climbing faster due to less liquidity in secondary for these products which causes their pricing to react more sharply to the MBS; we were at 4.875% for jumbo conforming, rates have now climbed up to 5.125%.
The problem is right now there is no reason for Mortgage Backed Securities to return to previous levels (if you have read any of my previous posts, you know this is something we have been expecting and why I have been screaming lock your rate now). After all in just a couple of days the Fed is pulling out completely from the MBS market, and will be concluded their 1.25 trillion dollar MBS purchase program designed with the intention to keep rates low.
Yesterday as we watched the firesale in secondary it should be noted that the Fed was still active, spending approximately 2.5 billion in funds buying MBS as it fell against a rising treasury yield. Considering yesterday brought us 26 ticks lower, with the 4.5 note closing at 100.02 suggests private investors (everyone else but the Fed) see no support for current levels of the MBS. Moreover with the 10 year treasury yield pushing 3.85%, our primary competition is looking that much more attractive right now. This is interesting considering we have another treasury auction today, this one for the 7 year, which everyone is eagerly awaiting the results for - published 10am PST - and is probably the primary reason we have not seen more activity in the MBS market this morning. This auction today will only bring more liquidity into the treasury market and unless recieved strongly will force treasury yields up further putting even more pressure on mortgage backed securities.
All things considered I am not anticipating a strong auction today which will hurt our market further forcing rates up higher. If I am right we will see a continuation of yesterdays sell off. With the Fed leaving our market at the end of this month, this sell off could be nasty (remember my prediction was rates would increase by about half a point in a short period of time with the Fed exit). The problem is exasperated by the fact that their does not seem to be any other investors willing to pick up the slack of the Fed. China for example seems quite, lending institutions that people thought would be buying excess supply are relatively quiet protecting their balance sheets, insurance companies are sidelined as well.
We are now through the eye of the storm and it is time for everyone to batten down the hatches again. Remember how you felt in 2008... our economy in question, housing in peril... well get ready for round two; this time however the Fed does not have any money to throw at the problem, and our market along with the rest of the economy is going to be forced deal with the real problem without the option of buying it off.
If you have not already refinanced your adjustable rate mortgage into a fixed program, do it now. I assure you, you will thank me for this recommendation down the road. Rates will continue to rise, how high no one can say, but look to our history and you can see fixed rates as high as 18% during Jimmy Carters Presidency. It can happen again....
The problem is right now there is no reason for Mortgage Backed Securities to return to previous levels (if you have read any of my previous posts, you know this is something we have been expecting and why I have been screaming lock your rate now). After all in just a couple of days the Fed is pulling out completely from the MBS market, and will be concluded their 1.25 trillion dollar MBS purchase program designed with the intention to keep rates low.
Yesterday as we watched the firesale in secondary it should be noted that the Fed was still active, spending approximately 2.5 billion in funds buying MBS as it fell against a rising treasury yield. Considering yesterday brought us 26 ticks lower, with the 4.5 note closing at 100.02 suggests private investors (everyone else but the Fed) see no support for current levels of the MBS. Moreover with the 10 year treasury yield pushing 3.85%, our primary competition is looking that much more attractive right now. This is interesting considering we have another treasury auction today, this one for the 7 year, which everyone is eagerly awaiting the results for - published 10am PST - and is probably the primary reason we have not seen more activity in the MBS market this morning. This auction today will only bring more liquidity into the treasury market and unless recieved strongly will force treasury yields up further putting even more pressure on mortgage backed securities.
All things considered I am not anticipating a strong auction today which will hurt our market further forcing rates up higher. If I am right we will see a continuation of yesterdays sell off. With the Fed leaving our market at the end of this month, this sell off could be nasty (remember my prediction was rates would increase by about half a point in a short period of time with the Fed exit). The problem is exasperated by the fact that their does not seem to be any other investors willing to pick up the slack of the Fed. China for example seems quite, lending institutions that people thought would be buying excess supply are relatively quiet protecting their balance sheets, insurance companies are sidelined as well.
We are now through the eye of the storm and it is time for everyone to batten down the hatches again. Remember how you felt in 2008... our economy in question, housing in peril... well get ready for round two; this time however the Fed does not have any money to throw at the problem, and our market along with the rest of the economy is going to be forced deal with the real problem without the option of buying it off.
If you have not already refinanced your adjustable rate mortgage into a fixed program, do it now. I assure you, you will thank me for this recommendation down the road. Rates will continue to rise, how high no one can say, but look to our history and you can see fixed rates as high as 18% during Jimmy Carters Presidency. It can happen again....
Tuesday, March 23, 2010
The Future of Fannie and Freddie
Yesterday there was talk on the hill about the fate of Fannie Mae and Freddie Mac. Some believe these are outdated entities much to blame for the current state of affairs, and arguing for their continuation is to encourage a failing body. Others insist without them, the housing market and secondary would suffer even more and believe without them, lending would not be possible as it is; therefore those looking to buy or refinance would not be able to, essentially financing channels open right now would be closed without Fannie and Freddie. This whiplash would again jeopardize the fragile housing market which would put the overall economy in peril. Tim Geithner yesterday admitted that these two bodies needed a drastic overhaul, but he unfortunately did not go into any real detail as to what type of overhaul that may be.
Point in fact, Fannie and Freddie are currently major powerhouses behind lending. But when all is said and done, these two really do nothing more than write universal guidelines for everyone to follow, and package the loans that are closed under these agency guidelines together so they can then be sold to private investors, hedge funds, insurance companies, whomever. It is during this sale that Fannie and Freddie make their profit, taking what's known as a haircut off the loan. That is scraping some of the long term investor profit by charging the investor a premium up front for control of the note that will be paying over 30 years. Investors pay this premium because they understand that collecting the monthly payments will eventually yield them a larger return than the initial cost of the premium.
So what do Fannie and Freddie do? As far as I can tell, they write guidelines for everyone to follow, and they bundle loans together to sell to private investors after collecting a small profit. Now who is Fannie and Freddie? Well as of 2008 Fannie and Freddie are government run entities.... remember the federal government seizing Fannie Mae and Freddie Mac not too long ago because they were going to fail and ruin our economy. Anyway, essentially what this means is the government is now writing the guielines that allow you, me, or anyone to get into financing for a home. Since Fannie and Freddie attribute for about 8 out of 10 loans in the market they cater to a significant piece of the population. In addition to the government defining the requirements to secure financing in this market, they are also able to profit from the mortgage industry through the haircuts mentioned above... after all Fannie and Freddie both look to make a profit on the sale of these bundled mortgage notes.
So right now the government essentially writes the financing guidelines, profits on sale of your mortgage note in secondary, and collects property taxes on your home, and taxes on the profits the investors make holding the mortgage notes they just sold them. Considering this, I definitely think Fanne and Freddie need an overhaul. As they stand now, they are simply a vehicle for government control, and profit. If we were to dissolve Fanne and Freddie, investors could write their own guidelines (more competition), and would not be forced to pay haircuts (better terms). Essentially you would be unshackling the free market by dissolving Fannie and Freddie. As for too big to fail... spare me, the free market is too big to fail, every company operating inside of it is simply a cog that will be replaced with a more efficient cog when the first fails... that is productivity, and innovation. Why stifle it?
Yes I think there would be a couple months of unrest but in the end, the market shaping itself is much safer than an elected official trying to shape it for us... let's be honest they can't make sense of ANYTHING let alone a market none of them have any experience in.
It is my hope that Fannie and Freddie are dismantled. Remove them from the equation, let investors write their own guidelines, and let the chips fall where they may. I am confident that our market will not only survive it will flourish without these two entities. Do I think it will happen? No. I think whatever overhaul occurs to Fannie and Freddie will result in stiffer government controls which will create an even larger burden on the real estate finance market until they have systematically removed all the small players and they have a large beaurocracy in place and in charge of all lending in our Country. Their answer seems to be less competition not more competition, which is interesting because the immediate question becomes, well than how do you keep the cost down? The simple answer is you don't, why would they want to keep the cost down, they are in line to make a profit.
Point in fact, Fannie and Freddie are currently major powerhouses behind lending. But when all is said and done, these two really do nothing more than write universal guidelines for everyone to follow, and package the loans that are closed under these agency guidelines together so they can then be sold to private investors, hedge funds, insurance companies, whomever. It is during this sale that Fannie and Freddie make their profit, taking what's known as a haircut off the loan. That is scraping some of the long term investor profit by charging the investor a premium up front for control of the note that will be paying over 30 years. Investors pay this premium because they understand that collecting the monthly payments will eventually yield them a larger return than the initial cost of the premium.
So what do Fannie and Freddie do? As far as I can tell, they write guidelines for everyone to follow, and they bundle loans together to sell to private investors after collecting a small profit. Now who is Fannie and Freddie? Well as of 2008 Fannie and Freddie are government run entities.... remember the federal government seizing Fannie Mae and Freddie Mac not too long ago because they were going to fail and ruin our economy. Anyway, essentially what this means is the government is now writing the guielines that allow you, me, or anyone to get into financing for a home. Since Fannie and Freddie attribute for about 8 out of 10 loans in the market they cater to a significant piece of the population. In addition to the government defining the requirements to secure financing in this market, they are also able to profit from the mortgage industry through the haircuts mentioned above... after all Fannie and Freddie both look to make a profit on the sale of these bundled mortgage notes.
So right now the government essentially writes the financing guidelines, profits on sale of your mortgage note in secondary, and collects property taxes on your home, and taxes on the profits the investors make holding the mortgage notes they just sold them. Considering this, I definitely think Fanne and Freddie need an overhaul. As they stand now, they are simply a vehicle for government control, and profit. If we were to dissolve Fanne and Freddie, investors could write their own guidelines (more competition), and would not be forced to pay haircuts (better terms). Essentially you would be unshackling the free market by dissolving Fannie and Freddie. As for too big to fail... spare me, the free market is too big to fail, every company operating inside of it is simply a cog that will be replaced with a more efficient cog when the first fails... that is productivity, and innovation. Why stifle it?
Yes I think there would be a couple months of unrest but in the end, the market shaping itself is much safer than an elected official trying to shape it for us... let's be honest they can't make sense of ANYTHING let alone a market none of them have any experience in.
It is my hope that Fannie and Freddie are dismantled. Remove them from the equation, let investors write their own guidelines, and let the chips fall where they may. I am confident that our market will not only survive it will flourish without these two entities. Do I think it will happen? No. I think whatever overhaul occurs to Fannie and Freddie will result in stiffer government controls which will create an even larger burden on the real estate finance market until they have systematically removed all the small players and they have a large beaurocracy in place and in charge of all lending in our Country. Their answer seems to be less competition not more competition, which is interesting because the immediate question becomes, well than how do you keep the cost down? The simple answer is you don't, why would they want to keep the cost down, they are in line to make a profit.
Market Finishes Even... Rates Holding... For Now
After steady gains this morning we saw a sell off this afternoon bringing the market straight back to even for the close. Interesting... if I were a betting man I would say banks will hedge on tomorrows opening rate sheets and they will open a little worse than closing this afternoon. Of course if I'm right and the market comes out strong tomorrow, we'll see reprices early. All things considered we all should be thankful rates are still as low as they are.
Let us count our blessings, these days are marked.
Let us count our blessings, these days are marked.
Rates Improving On Home Loans End of March
Yesterday was a critical day for interest rates in the secondary mortgage market considering it was the first day of the last week that the Fed would be purchasing mortgage backed securities.
Last week we ended on a negative note with the market down 3 ticks, and I mentioned that Monday of this week would be a critical day in determining which way our market would turn. Yesterday we finished up on the day 6 ticks, and today we are off to a good start up 2 ticks waiting on international news about Greece and Japan to guide the remaining hours of the trading day. This is expected at 10am Pacific Standard.
Regardless, the gains tell us something about our market and economy in a whole. Namely investors (which are the lifeblood of our economy) are skeptical about the direction of our economy. Point in fact when our economy and short terms markets are performing poorly, mortgage backed securities typically post gains and improve lowering rates available to consumers. On the other hand when our economy is flourishing and short term markets are active and healthy, long term markets like the MBS suffer. After all why would someone invest long term when they can invest short term and make as much if not more in return? The answer is simple, and is why the health of our economy dictates interest rates for home loans and rates suffer in strong economies.
Currently the sentiment seems clear, investors are still skeptical about our economic recovery and are opting for long term investment vehicles. This is important to recognize because with the Fed leaving in the next few days, we should be gearing up for a firesale. Instead we have seen steady, albeit small daily gains. There is no doubt about it, it is too early to call whether or not rates will increase substantially in the next couple of weeks. I still believe everyone in the market now should plan for the worst and lock. Whatever your decision, it is important to recognize how important the market is in the upcoming days, and should be watched carefully.
Last week we ended on a negative note with the market down 3 ticks, and I mentioned that Monday of this week would be a critical day in determining which way our market would turn. Yesterday we finished up on the day 6 ticks, and today we are off to a good start up 2 ticks waiting on international news about Greece and Japan to guide the remaining hours of the trading day. This is expected at 10am Pacific Standard.
Regardless, the gains tell us something about our market and economy in a whole. Namely investors (which are the lifeblood of our economy) are skeptical about the direction of our economy. Point in fact when our economy and short terms markets are performing poorly, mortgage backed securities typically post gains and improve lowering rates available to consumers. On the other hand when our economy is flourishing and short term markets are active and healthy, long term markets like the MBS suffer. After all why would someone invest long term when they can invest short term and make as much if not more in return? The answer is simple, and is why the health of our economy dictates interest rates for home loans and rates suffer in strong economies.
Currently the sentiment seems clear, investors are still skeptical about our economic recovery and are opting for long term investment vehicles. This is important to recognize because with the Fed leaving in the next few days, we should be gearing up for a firesale. Instead we have seen steady, albeit small daily gains. There is no doubt about it, it is too early to call whether or not rates will increase substantially in the next couple of weeks. I still believe everyone in the market now should plan for the worst and lock. Whatever your decision, it is important to recognize how important the market is in the upcoming days, and should be watched carefully.
Friday, March 19, 2010
Quantitative Easing in the Afternoon Hour
Secondary market really tried but coming to a close on the day we are down 3 ticks. Nothing to be too discouraged over; be that as it may, it puts all the more pressure on Monday.
Monday, March 22, 2010 is not just your average Monday it is the first day of the last week of the Fed buying MBS. That in and of itself is news that investors looking at our market may weigh heavily on. If treasury yields are high, all that much more to be concerned over.
I am expecting a slow opening Monday morning as investors try to gauge what other investors are thinking. If any momentum is to build we're going to have to quash the selling trend developing.
Monday, March 22, 2010 is not just your average Monday it is the first day of the last week of the Fed buying MBS. That in and of itself is news that investors looking at our market may weigh heavily on. If treasury yields are high, all that much more to be concerned over.
I am expecting a slow opening Monday morning as investors try to gauge what other investors are thinking. If any momentum is to build we're going to have to quash the selling trend developing.
Moving Forward
As anticipated today's rates are not as favorable as yesterdays rate sheet, and currently the secondary market is flat, although it should be noted we make up some ground early this morning after gains and then a retraction in the 10 year treasury note. With the economic calender quite for the day, and other news will most likely dominate the marketplace - NCAA basketball tournament and the health care bill - and it will be a slow trading day. Even though this is how the day seems to be lining up, we should all remember that it is Friday, a day notorious for profit taking.
We made up good ground early this morning suggesting the bears are not ready to make a move on the MBS, regardless if treasurys found their legs, this day could turn red quickly. If this happens it would make for an interesting Monday. But it hasn't happened, at least not yet, and as of now this is simply a worst case scenario we should consider and be prepared to handle.
While some loan officer may be off watching March madness, your truly is on the frontlines making sure our markets behave, and cases currently moving forward continue to do so. It is important to note that in this market it only takes a one day for things to turn ugly and if your loan officer is not carefully monitoring your case all the way to closing things could turn bad. This is a perfact day to make sure your agent is hard at work. Give them a call, ask for an update, go into some detail about your loan.
We made up good ground early this morning suggesting the bears are not ready to make a move on the MBS, regardless if treasurys found their legs, this day could turn red quickly. If this happens it would make for an interesting Monday. But it hasn't happened, at least not yet, and as of now this is simply a worst case scenario we should consider and be prepared to handle.
While some loan officer may be off watching March madness, your truly is on the frontlines making sure our markets behave, and cases currently moving forward continue to do so. It is important to note that in this market it only takes a one day for things to turn ugly and if your loan officer is not carefully monitoring your case all the way to closing things could turn bad. This is a perfact day to make sure your agent is hard at work. Give them a call, ask for an update, go into some detail about your loan.
Thursday, March 18, 2010
Tomorrows Opening Rate Sheet
Expect tomorrow's opening rate sheet to be a little worse tomorrow with secondary closing 3 ticks down on the day.
Although it's too early to call it a trend, the MBS tracked downward all day; if this continues tomorrow, it's something to start getting concerned over.
Regardless of what happens tomorrow during business, we can expect opening rate sheets to have worse pricing tomorrow based on today's trading day. If we open in negative territory I do not expect it to take long for banks to reprice for the worse. Especially since we saw some hedging early this afternoon.
Although it's too early to call it a trend, the MBS tracked downward all day; if this continues tomorrow, it's something to start getting concerned over.
Regardless of what happens tomorrow during business, we can expect opening rate sheets to have worse pricing tomorrow based on today's trading day. If we open in negative territory I do not expect it to take long for banks to reprice for the worse. Especially since we saw some hedging early this afternoon.
Banks Beginning to Hedge... Reprices for the Worse at Some
As I mentioned in my post earlier this morning, currently secondary is holding (down a minor 2 ticks), which in and of itself does not really warrant a reprice. With that said, a bank can reprice at any time for any reason, that is their perogative.
It is high noon Pacific Standard and we have seen a couple of reprices for the worse despite minor losses on the day. This reprice has to be a hedge play. What I mean by that, essentially the lender is pricing higher in anticipation that the market will worsen. In other words, they do not believe current levels are sustainable, and rather than wait for real losses in secondary, they will assume losses to come and price worse now which protects their position.
If this was a minor hedge play I would probably let it go and not report on it, but with a .25 worse reprice on Wells Fargo's wholesale rate sheet, that is a substantial difference, and suggests a significant retraction may be coming in secondary.
I should mention, this is simply one lenders read on the market, their hedging does not mean secondary will not continue to improve, it very well could. Moreover a bank can price themselves out of the market for various reasons (although there is nothing to signify this is the case right now which is why I'm reading it as a hedge play).
If you did not lock your rate this morning don't kick yourself, rates are still very good... lock now to stop the bleeding. If you're a risk taker (and you'd better be), you can hold out and hope we post new gains in secondary which would trigger an additional reprice either this afternoon, or better open rates tomorrow. I think this is strategy is very risky at this point in time; if you do decide to float make sure your loan officer is ready to lock your rate in immediately should things begin to turn for the worse.
It is high noon Pacific Standard and we have seen a couple of reprices for the worse despite minor losses on the day. This reprice has to be a hedge play. What I mean by that, essentially the lender is pricing higher in anticipation that the market will worsen. In other words, they do not believe current levels are sustainable, and rather than wait for real losses in secondary, they will assume losses to come and price worse now which protects their position.
If this was a minor hedge play I would probably let it go and not report on it, but with a .25 worse reprice on Wells Fargo's wholesale rate sheet, that is a substantial difference, and suggests a significant retraction may be coming in secondary.
I should mention, this is simply one lenders read on the market, their hedging does not mean secondary will not continue to improve, it very well could. Moreover a bank can price themselves out of the market for various reasons (although there is nothing to signify this is the case right now which is why I'm reading it as a hedge play).
If you did not lock your rate this morning don't kick yourself, rates are still very good... lock now to stop the bleeding. If you're a risk taker (and you'd better be), you can hold out and hope we post new gains in secondary which would trigger an additional reprice either this afternoon, or better open rates tomorrow. I think this is strategy is very risky at this point in time; if you do decide to float make sure your loan officer is ready to lock your rate in immediately should things begin to turn for the worse.
Rates and MBS Holding Despite Treasury Pressure
With treasury yields up substantially this morning from yesterday, the Mortgage Backed Securities market is under pressure. Typically as treasury yields rise investors leave our market and move into treasurys... as the yield comes down they return to our market.
This relationship between treasurys and MBS is a question of competition. Both markets catering to the same type of investor (long term) so it's a price play as to which market to invest into at any given time. For this reason treasurys and MBS have an indirect relationship and behave inversely. Although one does not directly influence the other, they usually move in sequence; when one goes up the other down, and vice versa.
Today we have seen the yield on the 10 year treasury climb from 3.637 to 3.673, but the Mortgage Backed Securities market is holding, only down two ticks on the day.
Considering the recent consolidation we experienced, and the Fed exiting the mortgage backed securities market at the end of this month, I find it incredible that the MBS levels are holding.
Point in fact there is a fine line between buyers and sellers in any market, and currently buyers and sellers are comfortable with where the MBS is positioned. This at least for the time being is excellent news for everyone looking to secure home financing. With the dawn of higher rates approaching (March), every extra day we have to take advantage of these low interest rates is something to be cherished.
I should also mention because of yesterdays gains, open market rates sheets are currently better than closing rates sheets yesterday. What does this mean? Rates are the best they have been this month. Yesterday the MBS hit resistence levels and bounced off them a number of times, but still finished up on the day. As a result pricing agents at various lenders published better rates this morning for us mortgage brokers to offer to you. Even though the MBS is currently down 2 ticks, this pricing is still available. Moreover, a 2 tick drop in secondary does not warrant a reprice for the worse, so I expect these rates to hold as long as the MBS does not sell off in the coming hours.
If you are currently in the process of securing financing, now would be the time to lock. We have hit the cap of secondary, and have begun turning down which will inevitably bring worse pricing. Even though 2 ticks does not warrant a reprice for the worse, banks can hedge against the market and issue a reprice before it is warranted as a means of establishing some security in a volatile market. How can they get away with this type of action? Most loan officers are not linked in to secondary and do not see the movement as I do and therefore are unaware that the bank has hedged against the market. Because they do not know, you are never informed.
That's why this is "Mortgage Insiders" we bring you the information others simply don't have, or are unwilling to share with you.
This relationship between treasurys and MBS is a question of competition. Both markets catering to the same type of investor (long term) so it's a price play as to which market to invest into at any given time. For this reason treasurys and MBS have an indirect relationship and behave inversely. Although one does not directly influence the other, they usually move in sequence; when one goes up the other down, and vice versa.
Today we have seen the yield on the 10 year treasury climb from 3.637 to 3.673, but the Mortgage Backed Securities market is holding, only down two ticks on the day.
Considering the recent consolidation we experienced, and the Fed exiting the mortgage backed securities market at the end of this month, I find it incredible that the MBS levels are holding.
Point in fact there is a fine line between buyers and sellers in any market, and currently buyers and sellers are comfortable with where the MBS is positioned. This at least for the time being is excellent news for everyone looking to secure home financing. With the dawn of higher rates approaching (March), every extra day we have to take advantage of these low interest rates is something to be cherished.
I should also mention because of yesterdays gains, open market rates sheets are currently better than closing rates sheets yesterday. What does this mean? Rates are the best they have been this month. Yesterday the MBS hit resistence levels and bounced off them a number of times, but still finished up on the day. As a result pricing agents at various lenders published better rates this morning for us mortgage brokers to offer to you. Even though the MBS is currently down 2 ticks, this pricing is still available. Moreover, a 2 tick drop in secondary does not warrant a reprice for the worse, so I expect these rates to hold as long as the MBS does not sell off in the coming hours.
If you are currently in the process of securing financing, now would be the time to lock. We have hit the cap of secondary, and have begun turning down which will inevitably bring worse pricing. Even though 2 ticks does not warrant a reprice for the worse, banks can hedge against the market and issue a reprice before it is warranted as a means of establishing some security in a volatile market. How can they get away with this type of action? Most loan officers are not linked in to secondary and do not see the movement as I do and therefore are unaware that the bank has hedged against the market. Because they do not know, you are never informed.
That's why this is "Mortgage Insiders" we bring you the information others simply don't have, or are unwilling to share with you.
Wednesday, March 17, 2010
The End of Adjustable Rate Mortgages???
So far the rumors are only whispers floating around various forums and between professionals trying to substantiate, trying to make sense out of this nonsensical lending environment we now find ourselves in.
The whispers are about the fate of agency products, namely Adjustable Rate Mortgages potentially becoming a product of the past. Before I continue let me digress. So we are all on the same page "agency" refers to the secondary market and Fannie Mae and Freddie Mac. These two entities write the guidelines that all lenders must follow if they plan on selling funded notes to them in secondary. If a lender does not follow the guidelines, the funded note is considered unsaleable in secondary because it does not meet the agency guidelines. Currently I would estimate 80% of loans originated if not more fall into this agency bucket.
Moving forward, if Fanne and Freddie decide to cut their ARM programs, essentially the agency product line would become 30 and 15 year fixed home loans. This dramatic reduction in product line, would have a incredible effect on lending and the real estate market in general.
Point in fact ARM interest rates are lower than fixed products which means many people that could otherwise qualify for buying a home will find themselves unable to secure financing for large enough loan amounts. Those people currently in ARMs that could finance into another ARM thereby lengthing the fixed term, will now be forced to refinance into a 30 or 15 year fixed which is fine and dandy unless they do not qualify for the higher interest rate associated with that 30 year product. If they don't qualify they'll be stuck holding onto an adjusting mortgage.
The point is, this action will produce a significant ripple in our market that most people are not anticipating or planning for.
Behind the scenes if this is in fact being discussed and is not pure conjecture, they are looking at the bottom line which stems from the preformance of these financing vehicles. Point in fact it is adjustable rate mortgages that are compromising the preformance of Fannie and Freddie's portfolio right now. Since investors are always trying to trim the fat so to speak to produce the largest return on investment possible, it seems logical for Fannie and Freddie to terminate this product line, which will eventually result in clearing their books of the underperforming notes. Eventually, as time passes and these ARM notes clear their books with fixed rate notes taking their place, they will have a stronger and more secure portfolio moving forward.
Considering what has happened to Fannie and Freddie over the last couple years, I can understand why they probably have a couple higher ups locked in a sound proof room somewhere discussing all possible avenues. With that said, I hope they are not this shortsighted, and keep the ARM programs available.
If we are honest with ourselves, it isn't the program that is dangerous, it's the borrower. To make an analogy, we don't sell guns to minors, we don't even sell BB guns, or air soft guns (plastic BBs), or paintball guns for that matter to minors; if you are a minor you get Nerf. Well adjustable rate mortgage financing is similar to a BB gun... I agree it should not be sold to minors, but they should still be available for sale. ARM financing guidelines and qualifying for the program should simply become stricter and a detailed explanation of how ARMs work should be provided and must be signed by the borrower aknowledging receipt and understanding. Assuming they meet the new guidelines, and have taken the training (our explanation of ARMs) at this point in time, they should be able to secure an ARM program, end of story.
To remove a product from the market because some people got in trouble is a mistake. It is as large of a mistake as writing the guidelines too loose so everyone and their brother will qualify for it. Instead of removing the product from the market, the guidelines curtailing its distribution must be revised so people moving forward will be in a strong position to pay these loans back. Why? Because the guidelines that they had to meet to get into the program are stricter, therefore they are a stronger borrower to begin with, are more likely to make the payments, etc...
The point is, losing agency ARM products would truly be unfortunate. It would put an unforseen burden on the housing market, significantly reduce financing options for borrowers, and would have untold effects on portfolio performance. All things considered, I really hope this is only a rumor, and does not come to pass.
The whispers are about the fate of agency products, namely Adjustable Rate Mortgages potentially becoming a product of the past. Before I continue let me digress. So we are all on the same page "agency" refers to the secondary market and Fannie Mae and Freddie Mac. These two entities write the guidelines that all lenders must follow if they plan on selling funded notes to them in secondary. If a lender does not follow the guidelines, the funded note is considered unsaleable in secondary because it does not meet the agency guidelines. Currently I would estimate 80% of loans originated if not more fall into this agency bucket.
Moving forward, if Fanne and Freddie decide to cut their ARM programs, essentially the agency product line would become 30 and 15 year fixed home loans. This dramatic reduction in product line, would have a incredible effect on lending and the real estate market in general.
Point in fact ARM interest rates are lower than fixed products which means many people that could otherwise qualify for buying a home will find themselves unable to secure financing for large enough loan amounts. Those people currently in ARMs that could finance into another ARM thereby lengthing the fixed term, will now be forced to refinance into a 30 or 15 year fixed which is fine and dandy unless they do not qualify for the higher interest rate associated with that 30 year product. If they don't qualify they'll be stuck holding onto an adjusting mortgage.
The point is, this action will produce a significant ripple in our market that most people are not anticipating or planning for.
Behind the scenes if this is in fact being discussed and is not pure conjecture, they are looking at the bottom line which stems from the preformance of these financing vehicles. Point in fact it is adjustable rate mortgages that are compromising the preformance of Fannie and Freddie's portfolio right now. Since investors are always trying to trim the fat so to speak to produce the largest return on investment possible, it seems logical for Fannie and Freddie to terminate this product line, which will eventually result in clearing their books of the underperforming notes. Eventually, as time passes and these ARM notes clear their books with fixed rate notes taking their place, they will have a stronger and more secure portfolio moving forward.
Considering what has happened to Fannie and Freddie over the last couple years, I can understand why they probably have a couple higher ups locked in a sound proof room somewhere discussing all possible avenues. With that said, I hope they are not this shortsighted, and keep the ARM programs available.
If we are honest with ourselves, it isn't the program that is dangerous, it's the borrower. To make an analogy, we don't sell guns to minors, we don't even sell BB guns, or air soft guns (plastic BBs), or paintball guns for that matter to minors; if you are a minor you get Nerf. Well adjustable rate mortgage financing is similar to a BB gun... I agree it should not be sold to minors, but they should still be available for sale. ARM financing guidelines and qualifying for the program should simply become stricter and a detailed explanation of how ARMs work should be provided and must be signed by the borrower aknowledging receipt and understanding. Assuming they meet the new guidelines, and have taken the training (our explanation of ARMs) at this point in time, they should be able to secure an ARM program, end of story.
To remove a product from the market because some people got in trouble is a mistake. It is as large of a mistake as writing the guidelines too loose so everyone and their brother will qualify for it. Instead of removing the product from the market, the guidelines curtailing its distribution must be revised so people moving forward will be in a strong position to pay these loans back. Why? Because the guidelines that they had to meet to get into the program are stricter, therefore they are a stronger borrower to begin with, are more likely to make the payments, etc...
The point is, losing agency ARM products would truly be unfortunate. It would put an unforseen burden on the housing market, significantly reduce financing options for borrowers, and would have untold effects on portfolio performance. All things considered, I really hope this is only a rumor, and does not come to pass.
Tuesday, March 16, 2010
Interest Rates Improve in the Short Term
We have seen reprices for the better from many of the major lenders this afternoon as the MBS market posts gains for the first time in five days... Up 7 ticks on the day, apparently investors found some comfort on our market as treasury's sank after the release of Fed comments.
Despite these short term gains, our outlook is still conservative under the looming withdrawal of the Fed from the MBS market. Take while the taking is good. Lock your rate before these gains are lost.
Despite these short term gains, our outlook is still conservative under the looming withdrawal of the Fed from the MBS market. Take while the taking is good. Lock your rate before these gains are lost.
FOMC comments...
As expected the FED will not be extending the MBS purchase program.
Here are the comments from the meeting:
"To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve has been purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt, those purchase are nearing completion, and the remaining transactions will be executed by the end of this month... The committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability."
In addition the Fed commented on housing starts stating, "Housing starts have been flat at depressed levels," and reiterated its position on rates... stating the Federal Funds rate will remain low for an "extended period."
All things considered, this is what we were expecting.
Currently the market is up by 5 ticks after this report was released, an interesting move; we will see if these gains hold or if a late sell off ensues. Based on their exiting the MBS, these gains even if they hold will be short lived... come the end of March, expect the MBS to suffer and rates to rise as a consequence.
Here are the comments from the meeting:
"To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve has been purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt, those purchase are nearing completion, and the remaining transactions will be executed by the end of this month... The committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability."
In addition the Fed commented on housing starts stating, "Housing starts have been flat at depressed levels," and reiterated its position on rates... stating the Federal Funds rate will remain low for an "extended period."
All things considered, this is what we were expecting.
Currently the market is up by 5 ticks after this report was released, an interesting move; we will see if these gains hold or if a late sell off ensues. Based on their exiting the MBS, these gains even if they hold will be short lived... come the end of March, expect the MBS to suffer and rates to rise as a consequence.
Rates Holding... All Eyes on the FOMC
With the Fed meeting taking place today, and results due in the next hour and a half, all eyes are focused on what will come of this meeting; to be more specific what type of language will be used. Will the Fed keep the "extended language" or will they opt to use language that suggests policy change in the nearer future.
One thing is for certain no one is expecting the Fed to change policy right now. What they are looking for are the subtle nuances in the language they choose to use in the release, and whether or not there is dissidence among the rankers.
Currently the Mortgage Backed Securities market has shown little movement today, with us up currently one tick, and having closed at the same level for the last four trading days... it's clear everyone is looking for some indicator as to which direction the Mortgage Backed Securities will trend. If you have read any of my previous posts, you know I think there is only one direction the MBS can head, and that is down (remember losses lead to higher interest rates).
The wise move for those of you currently working through financing would be to lock in the rate now while rates are still in the 4s. Anyone that is a gambler understands the importance of odds. Currently the odds of interest rates remaining in the 4s for an length of time is slim. Therefore a wise gambler (if there is such a thing) would take while the taking's good and lock... If you're not a gambler, I don't know why you are floating your rate in open market in the first place. A .25 point reprice for the worse (which is not uncommon) on a 200,000 dollar home loan would cost you 500.00 dollars. Conservative people that do not like risk should already have their rate locked to avoid this.
One thing is for certain no one is expecting the Fed to change policy right now. What they are looking for are the subtle nuances in the language they choose to use in the release, and whether or not there is dissidence among the rankers.
Currently the Mortgage Backed Securities market has shown little movement today, with us up currently one tick, and having closed at the same level for the last four trading days... it's clear everyone is looking for some indicator as to which direction the Mortgage Backed Securities will trend. If you have read any of my previous posts, you know I think there is only one direction the MBS can head, and that is down (remember losses lead to higher interest rates).
The wise move for those of you currently working through financing would be to lock in the rate now while rates are still in the 4s. Anyone that is a gambler understands the importance of odds. Currently the odds of interest rates remaining in the 4s for an length of time is slim. Therefore a wise gambler (if there is such a thing) would take while the taking's good and lock... If you're not a gambler, I don't know why you are floating your rate in open market in the first place. A .25 point reprice for the worse (which is not uncommon) on a 200,000 dollar home loan would cost you 500.00 dollars. Conservative people that do not like risk should already have their rate locked to avoid this.
Monday, March 15, 2010
Market and Rates Range Bound
Today the Mortgage Backed Securities market is still range bound, albeit with some serious volatility. Although rates are holding for the time being this volatility suggests future movement and a breakout in the near future.
Considering the news we have to look forward to in the coming week it's likely that the breakout will occur sometime in the next five days. Here is a brief sample of what we have to look forward to:
FOMC meeting (only one day instead of their typical two day meetings), housing stats, industrial production numbers, and the release of the treasury debt supply terms for the 2, 5 and 7 year. In addition along with health care, financial reform will be a hot topic on the lips of politicians this week which could sway our markets.
If you are currently approved with a lender and floating your interest rate, I would keep a steady eye on rates this week. Be prepared to lock if needs be.... remember a bird in the hand.
Considering the news we have to look forward to in the coming week it's likely that the breakout will occur sometime in the next five days. Here is a brief sample of what we have to look forward to:
FOMC meeting (only one day instead of their typical two day meetings), housing stats, industrial production numbers, and the release of the treasury debt supply terms for the 2, 5 and 7 year. In addition along with health care, financial reform will be a hot topic on the lips of politicians this week which could sway our markets.
If you are currently approved with a lender and floating your interest rate, I would keep a steady eye on rates this week. Be prepared to lock if needs be.... remember a bird in the hand.
Sunday, March 14, 2010
Investing in Your Home
Someone once told me that there are two types of investors out there: professionals and amateurs. Professionals are people that make money investing, whether that is stock, bonds, forex, real estate, whatever the medium they choose to practice the point is they are profitable. Amateur investors on the other hand are very rarely profitable, and when they are they tend to lose it in future investments. They may choose to focus on the same mediums but whatever the reason, when chips are counted they are usually in the red with many many battle scars.
Ultimately there is a single mindset that is responsible for this paradigm. The ameteur question before taking a position in a particular investment is 'how much money can I make' while the professional in the same situation is asking 'how much money can I lose.'
Think about this difference for a moment. Now ask yourself what would you rather hear "good news" or "bad news." If you are starting or already think like a professional you want the bad news, because the bad news is what forces you to consider potential loss. Moreover it puts you in a position to be proactive and do what needs to be done to ensure whatever the bad news is, it doesn't have a major effect on your life. Good news on the other hand is awesome to receive and makes us feel good, but rarely does good news force us into a particular investment... after all we want to be in the investment before the good news hits the wire so we take advantage of that news and the profit that will follow. What is the old saying lurking the the background of this last thought?
Buy low, sell high. Easily said, but how do we accomplish this? The answer is above... we must ask ourselves before each investment "how much can I lose?"
Let's explore this with a real life example. Depending on which source, 2005 was the peak of the real estate market. Since then and very recently we have seen real estate value fall dramatically across the Country. The boom in real estate was a result of many things but primarily the availability of financing, exotic programs that allowed people to defer interest, and/or finance 100% of the purchase. At this time and the years proceeding, it was not uncommon for people to pay more than the list price for real estate, and agent's were spouting the impossibility of home pricing falling.
The amateur investor looked at this situation and agreed with the listing agent...and their train of thought went something like this: "home prices can't come down, real estate is safe, they can only go up, and how long am I going to sit on the sidelines not making any money. I'll buy now, and sell for profit when the market caps. But how can I afford it... option ARM perhaps, Billy's got one and he loves it, only pays 837 bucks a month on his 400,000 dollar home loan. Figures he'll sell in a couple years and buy a larger home, after all he's got 5 years deferred interest which the market and appreciation is essentially pay for. This is a no brainer. We need to start getting offers on the table before it's too late." The sad reality is this is not fiction, and many people fell into this trap and are now facing serious financial consequences.
The professional investor look at this situation a little differently... and their train of thought went something like this: "Yeah real estate is hot right now, but it can't go on forever, and when this cycle runs it's course we're going to see this bubble pop big time. Think about it. All these people buying homes with no money down. Taking out adjustable rate and deferred interest programs. When rates adjust higher, we're going to see a lot of people unable to make their new payment. If you ask me this is a catastrophy waiting to happen, and when it does guess who is going to be on the side line picking up homes for pennies on the dollar. Short sales and foreclosures is what I'll be looking at. Not to buy now, no no no, thinking three maybe four years down the road once this cycle turns the other direction. After all I don't pay retail for gifts when the Christmas sale is a couple months away."
Yes the professional has successfully weathered this storm, while the ametuer who may have made some quick appreciation in the short term is now probably underwater and deep in the red.
So while the amateur is thinking, 'me me me, now now now' the professional is more reserved 'is now the time, what can I lose." The amateur is exclamatory!!!! The professional is questioning.
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
What prompted these thoughts this Sunday morning? I was thinking about the majority. The fact of the matter is about 95% of us think and act like amateur investors, while the remaining 5% profit from these mistakes by taking the time, asking the right questions, forming a plan, and being patient for the right opportunity to execute.
Right now we have seen interest rates reach all time lows. Point in fact it was not too long ago that we recorded to lowest 30 year fixed rate ever offered in our Country. Yet despite this fact, there are still many people sitting on Adjustable Rate Mortgages because right now their rate happens to be lower than what is offered on a 30 year fixed.
I feel sorry for these people. Inevitably we are going to see the value of the dollar fall (inflation), which will consequently force the indices up which is going to bring the adjustable rates up as well. By the time they recognize that they should refinance, 30 year fixed programs will be much higher and the benefit will be minimum. It's like putting a band aid on a wound, that we could have avoided by not running the knife across our arm. Rather than use the band aid to stop the bleeding, simply take the knife away from your arm and don't cut yourself.
Let me sight a specific point in our history that will help highlight what could happen. When President Jimmy Carter was in office back in the 1970s we saw fixed interest rates reach 18%. This was about 40 years ago... (do me a favor and google long term economic cycles you'll see they run in about 40 year increments depending the source). This happened in our lifetime, yet most people have either forgotten, don't know rates can go that high, or are simply ignoring the issue. Now if this happens, and it most definitely could (hyper inflation is a nasty beast no one can control and we're rattling it's cage) then your max rate on your adjustable rate mortgage is going to become a reality. Financing into a better vehicle won't be an option, and you'll be paying 9-14% (depending on your cap) when you could have refinanced now into a 30 year fixed at a rate of 4.75%
Now tell me what do you think the professionals have already done? They've refinanced so not to take any unnecessary risk. Unfortunately 95% of us, have decided whether consciously or not that this risk is worth taking.
And we wonder why most of the wealth in this Country is controlled by 5%.
I am happy to help anyone looking for solutions. Now is the time to discuss your options. After all knowing your options is the first step towards making a plan. And to be a professional we all must plan.
Ultimately there is a single mindset that is responsible for this paradigm. The ameteur question before taking a position in a particular investment is 'how much money can I make' while the professional in the same situation is asking 'how much money can I lose.'
Think about this difference for a moment. Now ask yourself what would you rather hear "good news" or "bad news." If you are starting or already think like a professional you want the bad news, because the bad news is what forces you to consider potential loss. Moreover it puts you in a position to be proactive and do what needs to be done to ensure whatever the bad news is, it doesn't have a major effect on your life. Good news on the other hand is awesome to receive and makes us feel good, but rarely does good news force us into a particular investment... after all we want to be in the investment before the good news hits the wire so we take advantage of that news and the profit that will follow. What is the old saying lurking the the background of this last thought?
Buy low, sell high. Easily said, but how do we accomplish this? The answer is above... we must ask ourselves before each investment "how much can I lose?"
Let's explore this with a real life example. Depending on which source, 2005 was the peak of the real estate market. Since then and very recently we have seen real estate value fall dramatically across the Country. The boom in real estate was a result of many things but primarily the availability of financing, exotic programs that allowed people to defer interest, and/or finance 100% of the purchase. At this time and the years proceeding, it was not uncommon for people to pay more than the list price for real estate, and agent's were spouting the impossibility of home pricing falling.
The amateur investor looked at this situation and agreed with the listing agent...and their train of thought went something like this: "home prices can't come down, real estate is safe, they can only go up, and how long am I going to sit on the sidelines not making any money. I'll buy now, and sell for profit when the market caps. But how can I afford it... option ARM perhaps, Billy's got one and he loves it, only pays 837 bucks a month on his 400,000 dollar home loan. Figures he'll sell in a couple years and buy a larger home, after all he's got 5 years deferred interest which the market and appreciation is essentially pay for. This is a no brainer. We need to start getting offers on the table before it's too late." The sad reality is this is not fiction, and many people fell into this trap and are now facing serious financial consequences.
The professional investor look at this situation a little differently... and their train of thought went something like this: "Yeah real estate is hot right now, but it can't go on forever, and when this cycle runs it's course we're going to see this bubble pop big time. Think about it. All these people buying homes with no money down. Taking out adjustable rate and deferred interest programs. When rates adjust higher, we're going to see a lot of people unable to make their new payment. If you ask me this is a catastrophy waiting to happen, and when it does guess who is going to be on the side line picking up homes for pennies on the dollar. Short sales and foreclosures is what I'll be looking at. Not to buy now, no no no, thinking three maybe four years down the road once this cycle turns the other direction. After all I don't pay retail for gifts when the Christmas sale is a couple months away."
Yes the professional has successfully weathered this storm, while the ametuer who may have made some quick appreciation in the short term is now probably underwater and deep in the red.
So while the amateur is thinking, 'me me me, now now now' the professional is more reserved 'is now the time, what can I lose." The amateur is exclamatory!!!! The professional is questioning.
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
What prompted these thoughts this Sunday morning? I was thinking about the majority. The fact of the matter is about 95% of us think and act like amateur investors, while the remaining 5% profit from these mistakes by taking the time, asking the right questions, forming a plan, and being patient for the right opportunity to execute.
Right now we have seen interest rates reach all time lows. Point in fact it was not too long ago that we recorded to lowest 30 year fixed rate ever offered in our Country. Yet despite this fact, there are still many people sitting on Adjustable Rate Mortgages because right now their rate happens to be lower than what is offered on a 30 year fixed.
I feel sorry for these people. Inevitably we are going to see the value of the dollar fall (inflation), which will consequently force the indices up which is going to bring the adjustable rates up as well. By the time they recognize that they should refinance, 30 year fixed programs will be much higher and the benefit will be minimum. It's like putting a band aid on a wound, that we could have avoided by not running the knife across our arm. Rather than use the band aid to stop the bleeding, simply take the knife away from your arm and don't cut yourself.
Let me sight a specific point in our history that will help highlight what could happen. When President Jimmy Carter was in office back in the 1970s we saw fixed interest rates reach 18%. This was about 40 years ago... (do me a favor and google long term economic cycles you'll see they run in about 40 year increments depending the source). This happened in our lifetime, yet most people have either forgotten, don't know rates can go that high, or are simply ignoring the issue. Now if this happens, and it most definitely could (hyper inflation is a nasty beast no one can control and we're rattling it's cage) then your max rate on your adjustable rate mortgage is going to become a reality. Financing into a better vehicle won't be an option, and you'll be paying 9-14% (depending on your cap) when you could have refinanced now into a 30 year fixed at a rate of 4.75%
Now tell me what do you think the professionals have already done? They've refinanced so not to take any unnecessary risk. Unfortunately 95% of us, have decided whether consciously or not that this risk is worth taking.
And we wonder why most of the wealth in this Country is controlled by 5%.
I am happy to help anyone looking for solutions. Now is the time to discuss your options. After all knowing your options is the first step towards making a plan. And to be a professional we all must plan.
Saturday, March 13, 2010
Mortgage Backed Securities Market Consolidating Before FED Exit
The first question everyone asks me when they find out I am a mortgage broker that specializes in financing is inevitably about interest rates. What are rates? Are rates getting better? Can I get a lower rate? When will rates be going up? What is the lowest rate available? The list is indefinite....
Because I love what I do I happily answer their question. But as I give them their answer almost always something interesting happens. Slowly a glazed look will fall over the questioners face as they regress and fade into their own subconscious as if the answer to this single question will provide a beacon that they are hoping will lead them into a better situation. Unfortunately, it rarely does and the response after I stop talking is usually - "yeah I think I'm going to wait a little longer."
Since this is typically an informal conversation I leave it at that, and usually the topic changes shortly thereafter to something more, well "fun" to most people.
Well those of you still "waiting" it is time to get off the proverbial fence to take action. Why? Because interest rates will be rising very soon, and if you don't want a burning match glued to your finger, it's time to refinance.
For those of you familiar with the Mortgage Backed Securities (MBS) market, you should not have trouble following me from one conclusion to the next. For the unfamiliar I am going to ask you to take a leap of faith and simply accept that the MBS is ultimately responsible for dictating interest rates offered to the consumer.
Right now the MBS market is in a state of uncertainty. Currently and for the last year and a half or so (actually a little longer), the Fed has been buying mortgage backed securities to keep interest rates low. All in all they will have spent 1,250,000,000,000 dollars in MBS purchases... that's 1.25 trillion dollars for those of you having trouble with all those zeros. What did this buy us... the low interest rates that have been on the market and available for the last couple of years. Although it is difficult to estimate, it is figured that the Fed has made up at least 80% of the investor pool buying mortgage backed securites. What this means is essentially the Fed has artificially saturated the market with cash thereby forcing available rates to unsustainable lows.
Fast forward... it is now the end of March and Q1 2010 has come to an end. Guess what the Fed's plan is at the end of Q1? To stop buying mortgage backed securities... the 1.25 trillion has been spent, and they do not have any more money to infuse into this market. When this happens the largest investor, now responisble for 80% of the buying that is occuring in this market will no longer be buying MBS. With 80% of the money coming in right now disappearing, the remaining 20% will be forced to fill the void. Will this happen in my opinion, no.
Essentially that means less money in the market to lend which means the money lent will come at higher premiums, consequently the rate of interest offered to the general public will be going up.
Currently our market is in a state of consolidation. For the last three days we have seen mortgage backed securities open and close at the same number. These daily dojis are an excellent indicator that our market is currently in a state of equilibrium. For most that probably sounds like a good thing... in the trading world it means we are poised for a significant change.
Right now the bulls and bears are in agreement as to the prescribed value of our market. With the largest investor (our government) exiting, the bulls are going to be very short handed. To make an analogy... in the game of soccer you have 11 people on each team or 22 people on the field... let's remove each team's goalie... leaving ten players per team, or 20 players on the field... Since we are in a state of equilibrium between bulls and bears in our market... we divide 20 in half and get 10... 10 bulls, 10 bears.... now we know the Fed is leaving the market, and since the Fed is currently buying they are on the bulls side, we must reduce the bulls team by 80%... But the bears are still out in full force... the number of investors and their strategies have not changed so they still have a full team of 10... in our analogy currently we have set up a game, starting in April (beginning of Q2), that will be broken as follows... each team has their goalie, the bulls can play with 2 players on the field, the bears get the full 10. Now who do you think is going to win this game? The bears of course.... their are more of them, and all other things being equal 10 should and will always beat out 2.
Well our market behaves the same way... as soon as bears out number the bulls, the overall investment strategy of the MBS market is going to change and all of the sudden selling (bear action), not buying (bull action) is going to be the predominant formula which means the mortgage backed securities market is going to post losses which inevitably will lead to higher rates for the consumer.
I am sure there are those of you out there looking to poke holes in my analogy, and there are definitely other circumstances that must be taken into consideration, supply and demand, prepayment cycles, Fed monetary policy, etc... the list is too long to complete... but the fundamental argument is sound because if we reduce a market to its foundation... you have two primary entities responsible for making that market... you have buyers and you have sellers... remove either one of these variables and you no longer have a market.
The point - everyone that is considering refinancing in the near future... this year, one, two, or three years down the road, would be a fool, a FOOL!!! to not look at their current options before this inevitable rate climb takes affect. There is still time, and if you qualify, now is the time to take action.
This is literally the witching hour... and I had to speak out, warning everyone before things turned for the worse... the consolidation we have seen over the last three days in the mortgage backed securities market is the beginning.
Take action now before it's too late.
Tuesday, March 2, 2010
Home Loan & Mortgage Price vs. Cost Analysis
When evaluating a proposed home loan, the first thing that must be done is differeniate the "price" of the home loan from the "cost" of the home loan. The price of something is how much you pay for it initially, while the cost of that same item is how much you spend over time for that item to remain operational. When considering a home loan, it is clear that there are two very different types of expenses - closing costs and your monthly mortgage payments. In the mortgage industry these are known as reoccuring (cost) and non-reoccurring (price) closing costs.The reoccurring costs refer to the closing costs that will be collected in escrow when finalizing the loan. Due to the various ways home loans and the associated fees can be structured, and as a means of evaluating different programs between one another, our government requires the disclosure of a representative number that consolidates the total cost of the loan weighted proportionally, and represents it in a single rate known as your Annual Percentage Rate or APR which can be found on your Truth In Lending.
Regardless the APR is not a final measurement, and this type of evaluation requires a more in depth analysis. There are four primary points that must be considerd when considering price vs. cost anaylsis: the interest rate, the cost of closing, the term, the loan program.
The type of program that is in question is very important because different programs are going to produce different figures, therefore it is important to compare "like" porgrams when evaluating price vs. cost. Comparing two different programs is going to make this type of evaluation subjective by introducing risk and security. In addition the program you are applying for will have internal guidelines, so if you decide to change the terms of the loan (how much you are borrowing, cash out or rate and term, primary residence or investment property, credit score, etc...) but want the same program, you may inadvertantly change the terms offered for that program so do you best to avoid this type of situation when possible. The point is differences do exist inside of a single program, therefore accuracy is crucial during your evaluation.
The term is the most expensive part of a home loan which is why it is an independent point. It is the largest contributor to cost. Extending the term guarantees a higher cost because you will be required to make more payments. A 200,000 dollar loan fixed for 30 years at 5% interest has a payment of 1,073.65; over 30 years or 360 payments you will have spent 386,514. A 200,000 dollar loan fized for 40 years at 4% interest (one full point lower) has a payment of 835.88; over 40 years or 480 payments you will have spent 401,222. Despite the lower interst rate and payment you will have spent 14,708 more due to the term. Accepting the shortest term possible will reduce your cost significantly, moreover interest rates are, more often than not, better for home loans with shorter terms (less risk to the lender) so you get the best of both worlds.
The interest rate is going to have a large effect on your cost, after all the lower the interest rate the lower the monthly payment associated with your home loan. It goes without saying you want to get the lowest rate possible, so you have two choices wait for a lower offered interest rate, or buy the interest rate you want. The first option is what most people elect to do, unfortunately they are operating on hope rather than fact that the market will move in the right direction in the timeframe they require. If this is your plan it is important that you are paired up with a professional that keeps a close track of the market you will be participating in (there are different markets the largest being the Mortgage Backed Securities or MBS). If this is your plan and you do not have a loan consultant you trust that actively watches these markets and knows your future plans and when to contact you, and you are relying on your local newspaper, random internet searches, or the network news, it is highly recommended you seek professional help immediately and find a home loan consultant that watches these markets and is focused on your goals rather than an immedaite commission. If on the other hand you are already in a position in which you must close and buying the rate down is an appealing option you must take a close look at the cost of closing.
The cost of closing is going to include all of the upfront fees required to close the loan. These fees will include third party title, escrow and recording fees, interest per day, impounds (if you are going to have impounds), lender fees, cost of the interest rate, loan origination fee to your loan officer (if this applies they could make it in yield spread/rebate), the appraisal fee, etc.... There are different ways to handle the cost of closing, bringing cash to the table, paying with current equity, seller credits, broker credits, are a combination of these.
If you bring cash to the table, the primary advantage is keeping your home loan balance low, after all the lower the balance the less interest collected. If you choose to settle closing costs with equity essentially you are financing your closing costs... after all your loan balance will be higher and you will be paying interest on that additional portion borrowed. If you are highly concerned with cost (long term expenses) and motivated to reduce your principle balances as quickly as possible, the first option listed here would make the most sense for you because it is taking advantage of the true "price" concept. For most people however, financing the cost of closing into your home loan is a reasonable compromise and the ultimate direction they go. This solution does demonstrate a concern over cost, but is not as conservative as paying the cost of closing out of pocket to keep the loan balance low. With that said it is definitely more conservative than accepting a higher interest rate and taking a no cost loan.
The question remains, what if your plans are not long term, and you are more concerned over the price than the long term cost? This is when you look into a no cost loan. A no cost loan is accomplished by you accepting an interest rate that is above the current market rate. The yield spread generated by the oversold interest rate can then be credited back to be used to cover the cost of closing. Instead of the closing costs being added to your loan amount, they are made in commission, and then credited back to cover the cost of closing. The clear disadvantage of this is because you are accepting a higher interest rate your monthly payment will go up. If you know you will be selling or refinancing your home in the near future this is a better option because a no cost loan has the lowest price, but the highest cost associated with it. It actually should be called a "no price loan."
Here is an example that demonstrates the price cost relationship for a rate and term refinance (program) covering a 195,000 dollar home loan currently at 7% interest with a payment of 1,330.60 set to adjust up to 8% next month on their primary residence (program). The client wants a 30 year fixed (program/term) and to know their options:
So we know the general program - rate and term refinance, primary residence, and a fixed rate. We also know the preferred term, 30 years. Closing costs are going to be 4,000 dollars all inclusive, and clearly this is something the client needs to move on because of their currently high and adjusting interest rate. The proposed interest rate with these closing costs is 4.875%. If you were to elect to pay the closing costs out of pocket your loan amount would remain the same, 195,000. At a rate of 4.875% the principle and interest payment on this loan amount would be 1,031.96. If on the other hand you elected to wrap the closing costs up into the loan you would have a new loan amount of 199,000 at a rate of 4.875% with a payment of 1,053.15. The advantage of not spending 4,000 dollars out of pocket on closing costs is clear, you retain the liquid 4,000 dollars which you can invest in other markets. the disadvantage is a higher payment of 21.19. It would take 189 months or about fifteen and a half years to make up this difference which is why most people elect to wrap the cost of closing into the new loan. For most, the chances of moving or refinancing within fifteen years is substantial so the out of pocket up front cost of 4,000 to close would not be cost effective. Then again if you plan on trying to pay down your balance quickly, or will be holding onto this loan throughout the duration; paying the fees out of pocket will save you money, demonstrated by the numbers above.
Both of these options represent high price but low overall cost home loans. If we went the other direction we could drastically reduce the price, but the cost would increase. If this client decided to accept a higher interest rate than the market offered say 5.875% that rate would pay the originating agent a yield spread, which the agent (if willing) may credit back towards closing thereby achieving a no cost loan. 5.875% pays a rebate of 2.125% which means the originating agent would make 4143.75 in yield spread off of a 195,000 dollar loan. The associated payment would be 1153.49 which is 100.34 dollars higher than the same loan with closing costs wrapped into the new loan balance of 199,000 (above). It would take 40 months before the higher payments cost you more than the closing costs associated with the lower rate (4000.00 dollars), so if you were planning on selling or refinancing inside this time period, the no cost loan would make more sense than the low cost loan it is compared to.
These calculations can be made and applied to any type of home loan. By evaluating this price cost relationship inside the program you are looking to take advantage of, you can identify the best fee structure based on your particular situation, which does not always transpire into the lowest APR (Annual Percentage Rate), which is why you cannot look to this figure as the final determining factor. A no cost loan will have a higher APR than a low cost loan because of the difference in interest rtes, but if your plans warrant a no cost home loan, the higher APR should not concern you. If on the other hand you are looking for long term financing that will stand the test of time, securing the lowest possible APR should be a primary focus.
Generally speaking a low cost loan with fees wrapped into the new home loan will cost you far less then any no cost loan. In our above example 199,000 dollar loan at 4.875% had a monthly payment of 1,053.15 while the no cost loan although smaller (195,000) had a payment of 1153.49. Over 30 years the low cost loan will cost you 379,134 (1053.15X360), while the no cost loan would cost you 415,256.40 (1153.49X360). The conclusion we can draw, paying a higher price will mean spending less in cost over the couse of the loan. Cost is always more expensive than price, and should be taken advantage of only in specific situations that require short term solutions.
Whatever your sitaution, if you are working with an experienced loan officer that understands the details and consequences - good or bad - of price cost structure, you should be able to work through your particular situation and identify the most advantageous solution based on your future goals.
We are committed to servciing our clients and assisting them in evaluating the fee strucutre of all loans recommended. For your own detailed free evaluation froma professional with no oligation please feel free to contact us.
Regardless the APR is not a final measurement, and this type of evaluation requires a more in depth analysis. There are four primary points that must be considerd when considering price vs. cost anaylsis: the interest rate, the cost of closing, the term, the loan program.
The type of program that is in question is very important because different programs are going to produce different figures, therefore it is important to compare "like" porgrams when evaluating price vs. cost. Comparing two different programs is going to make this type of evaluation subjective by introducing risk and security. In addition the program you are applying for will have internal guidelines, so if you decide to change the terms of the loan (how much you are borrowing, cash out or rate and term, primary residence or investment property, credit score, etc...) but want the same program, you may inadvertantly change the terms offered for that program so do you best to avoid this type of situation when possible. The point is differences do exist inside of a single program, therefore accuracy is crucial during your evaluation.
The term is the most expensive part of a home loan which is why it is an independent point. It is the largest contributor to cost. Extending the term guarantees a higher cost because you will be required to make more payments. A 200,000 dollar loan fixed for 30 years at 5% interest has a payment of 1,073.65; over 30 years or 360 payments you will have spent 386,514. A 200,000 dollar loan fized for 40 years at 4% interest (one full point lower) has a payment of 835.88; over 40 years or 480 payments you will have spent 401,222. Despite the lower interst rate and payment you will have spent 14,708 more due to the term. Accepting the shortest term possible will reduce your cost significantly, moreover interest rates are, more often than not, better for home loans with shorter terms (less risk to the lender) so you get the best of both worlds.
The interest rate is going to have a large effect on your cost, after all the lower the interest rate the lower the monthly payment associated with your home loan. It goes without saying you want to get the lowest rate possible, so you have two choices wait for a lower offered interest rate, or buy the interest rate you want. The first option is what most people elect to do, unfortunately they are operating on hope rather than fact that the market will move in the right direction in the timeframe they require. If this is your plan it is important that you are paired up with a professional that keeps a close track of the market you will be participating in (there are different markets the largest being the Mortgage Backed Securities or MBS). If this is your plan and you do not have a loan consultant you trust that actively watches these markets and knows your future plans and when to contact you, and you are relying on your local newspaper, random internet searches, or the network news, it is highly recommended you seek professional help immediately and find a home loan consultant that watches these markets and is focused on your goals rather than an immedaite commission. If on the other hand you are already in a position in which you must close and buying the rate down is an appealing option you must take a close look at the cost of closing.
The cost of closing is going to include all of the upfront fees required to close the loan. These fees will include third party title, escrow and recording fees, interest per day, impounds (if you are going to have impounds), lender fees, cost of the interest rate, loan origination fee to your loan officer (if this applies they could make it in yield spread/rebate), the appraisal fee, etc.... There are different ways to handle the cost of closing, bringing cash to the table, paying with current equity, seller credits, broker credits, are a combination of these.
If you bring cash to the table, the primary advantage is keeping your home loan balance low, after all the lower the balance the less interest collected. If you choose to settle closing costs with equity essentially you are financing your closing costs... after all your loan balance will be higher and you will be paying interest on that additional portion borrowed. If you are highly concerned with cost (long term expenses) and motivated to reduce your principle balances as quickly as possible, the first option listed here would make the most sense for you because it is taking advantage of the true "price" concept. For most people however, financing the cost of closing into your home loan is a reasonable compromise and the ultimate direction they go. This solution does demonstrate a concern over cost, but is not as conservative as paying the cost of closing out of pocket to keep the loan balance low. With that said it is definitely more conservative than accepting a higher interest rate and taking a no cost loan.
The question remains, what if your plans are not long term, and you are more concerned over the price than the long term cost? This is when you look into a no cost loan. A no cost loan is accomplished by you accepting an interest rate that is above the current market rate. The yield spread generated by the oversold interest rate can then be credited back to be used to cover the cost of closing. Instead of the closing costs being added to your loan amount, they are made in commission, and then credited back to cover the cost of closing. The clear disadvantage of this is because you are accepting a higher interest rate your monthly payment will go up. If you know you will be selling or refinancing your home in the near future this is a better option because a no cost loan has the lowest price, but the highest cost associated with it. It actually should be called a "no price loan."
Here is an example that demonstrates the price cost relationship for a rate and term refinance (program) covering a 195,000 dollar home loan currently at 7% interest with a payment of 1,330.60 set to adjust up to 8% next month on their primary residence (program). The client wants a 30 year fixed (program/term) and to know their options:
So we know the general program - rate and term refinance, primary residence, and a fixed rate. We also know the preferred term, 30 years. Closing costs are going to be 4,000 dollars all inclusive, and clearly this is something the client needs to move on because of their currently high and adjusting interest rate. The proposed interest rate with these closing costs is 4.875%. If you were to elect to pay the closing costs out of pocket your loan amount would remain the same, 195,000. At a rate of 4.875% the principle and interest payment on this loan amount would be 1,031.96. If on the other hand you elected to wrap the closing costs up into the loan you would have a new loan amount of 199,000 at a rate of 4.875% with a payment of 1,053.15. The advantage of not spending 4,000 dollars out of pocket on closing costs is clear, you retain the liquid 4,000 dollars which you can invest in other markets. the disadvantage is a higher payment of 21.19. It would take 189 months or about fifteen and a half years to make up this difference which is why most people elect to wrap the cost of closing into the new loan. For most, the chances of moving or refinancing within fifteen years is substantial so the out of pocket up front cost of 4,000 to close would not be cost effective. Then again if you plan on trying to pay down your balance quickly, or will be holding onto this loan throughout the duration; paying the fees out of pocket will save you money, demonstrated by the numbers above.
Both of these options represent high price but low overall cost home loans. If we went the other direction we could drastically reduce the price, but the cost would increase. If this client decided to accept a higher interest rate than the market offered say 5.875% that rate would pay the originating agent a yield spread, which the agent (if willing) may credit back towards closing thereby achieving a no cost loan. 5.875% pays a rebate of 2.125% which means the originating agent would make 4143.75 in yield spread off of a 195,000 dollar loan. The associated payment would be 1153.49 which is 100.34 dollars higher than the same loan with closing costs wrapped into the new loan balance of 199,000 (above). It would take 40 months before the higher payments cost you more than the closing costs associated with the lower rate (4000.00 dollars), so if you were planning on selling or refinancing inside this time period, the no cost loan would make more sense than the low cost loan it is compared to.
These calculations can be made and applied to any type of home loan. By evaluating this price cost relationship inside the program you are looking to take advantage of, you can identify the best fee structure based on your particular situation, which does not always transpire into the lowest APR (Annual Percentage Rate), which is why you cannot look to this figure as the final determining factor. A no cost loan will have a higher APR than a low cost loan because of the difference in interest rtes, but if your plans warrant a no cost home loan, the higher APR should not concern you. If on the other hand you are looking for long term financing that will stand the test of time, securing the lowest possible APR should be a primary focus.
Generally speaking a low cost loan with fees wrapped into the new home loan will cost you far less then any no cost loan. In our above example 199,000 dollar loan at 4.875% had a monthly payment of 1,053.15 while the no cost loan although smaller (195,000) had a payment of 1153.49. Over 30 years the low cost loan will cost you 379,134 (1053.15X360), while the no cost loan would cost you 415,256.40 (1153.49X360). The conclusion we can draw, paying a higher price will mean spending less in cost over the couse of the loan. Cost is always more expensive than price, and should be taken advantage of only in specific situations that require short term solutions.
Whatever your sitaution, if you are working with an experienced loan officer that understands the details and consequences - good or bad - of price cost structure, you should be able to work through your particular situation and identify the most advantageous solution based on your future goals.
We are committed to servciing our clients and assisting them in evaluating the fee strucutre of all loans recommended. For your own detailed free evaluation froma professional with no oligation please feel free to contact us.
Evaluating Home Loan Interest Rates and Closing Costs
When considering the interest rate associated with your home loan, it is important to understand that once qualified for a particular home loan program, more often than not, you will have a variety of interest rates available to you to choose from. This fact is something that most people never realize, and can turn into a costly mistake. The purpose of this article is to breakdown home loan interest rates for consumers to understand the difference between their rate and the price associated with their home loan. With this fundamental understanding you will be able to evaluate the interest rate and closing costs associated with a proposed home loan in conjunction with your personal plans for the sole purpose of determining the benefits of a proposed home loan.
Once qualified for a home loan you will have a wide variety of rates available to you. Usually this point remains undisclosed to the consumer; regardless this remains a truth in nearly all situations. Of all the interest rates offered to you, one will be deemed your "par" interest rate. Par in the mortgage industry is a term used to describe the interest rate closest to coming at no cost and paying no yield spread. For this reason you can think of par as your neutral interest rate.
Every interest rate that is offered to you is going to have a charge associated with it, with the par rate separating the charge into two forms either positive or negative. If the charge is positive, the interest rate comes at a cost, if however the charge is negative that interest rate is above market and is paying back a yield spread to the originating agent outside of closing. Yield spread premium is also known as "rebate" or "YSP." If the rate pays enough rebate, a no cost home loan can be accomplished. Whether this is the best option is something that should be evaluated.
Rate 4.875% 5.000% 5.125% 5.250% 5.375% 5.500% 5.625% 5.750%
Base Points 0.875% 0.125% -0.375% -0.625% -1.000% -1.375% -1.750% -2.000%
Lock Period 0.125% 0.125% 0.125% 0.125% 0.125% 0.125% 0.125% 0.125%
AdverseMarket 0.250% 0.250% 0.250% 0.250% 0.250% 0.250% 0.250% 0.250%
Special -0.250% -0.250% -0.250% -0.250% -0.250% -0.250% -0.250% -0.250%
FINAL 1.000% .250% -.250% -.500% -.875% -1.250% -1.625% -1.75%
Here we have an example of an internal rate sheet that is usually not shared with the public. Across the top you will see a variety of interest rates offered which change throughout the day based on market fluctuation. These are all the interest rates available to you at this particular time. As the secondary market (which is where mortgage notes are bought and sold by major lending institutions and where the interest rates are established) moves up or down these offered rates will move accordingly, but not as one might expect. What forces rates to go up or down are pricing adjustments. The first adjustment know as "base points" is what fluctuates based on market trading. With enough volatility the base price will adjust thereby changing your par rate for better or worse... a point I make becuase rates are always available, how much you will pay for any given rate is what changes.
Below the interest rates published and their base points are pricing adjustments that are particular to this situation (your pricing adjustments may be better or worse than those represented in this example). These adjustments will remain static for all interest rates as long as the loan parameters do not change.
The final catagory at the bottom labeled "FINAL" is the total of the price adjusters and the final cost or rebate of the interest rate published. Notice that the lower rates have a higher cost while the higher interest rates pay rebate back to the originating agent. In this particular example your par interest rate falls between 5.000% and 5.125% because 5.000% comes at a slight cost of .25, and 5.125% pays a small rebate of -.25.
So what do does FINAL mean to you in dollars and cents? Multiply this FINAL figure by your loan amount and you will know how much that rate will cost you up front, or how much that rate is paying back in yield spread to your loan officer. For example on a 200,000 dollar home loan at a rate of 4.875% would mean a cost of 1.000%, or 2,000 dollar up front for that particular rate. Let's add another point for the originating agents fee for service which is another 2,000 for a total cost of 4,000 dollars. In this example it is important to understand that one point is going to buy down the interest rate, the other point is what the originating agent hopes to make on the transaction. If you didn't want to pay these fees up front, you could accept a slightly higher rate, let's say 5.500% which is paying a rebate of -1.25%... this rebate will result in 2500 dollars being paid back to the originating agent for selling you a higher interest rate than the market is offering you. By taking this higher rate essentially you have created a situation in which the lender is paying the originating agent his compensation thereby avoiding the higher closing costs associated with the lower rate.
To continue, a home loan for 200,000 dollars with an interest rate of 4.875% has a monthly payment of 1,058.42, while that same loan amount with a rate of 5.500% has a payment of 1,135.57 (both amortized). The monthly difference equals 77.15 a month. Over 30 years or 360 payments you will spend 27,774 more by accepting the higher interest rate. The gross difference in cost between these two rates is 6,500 (4000 + 2500) which is clearly made up in savings over the course of the loan. Bottom line, the lower interest rate with higher closing costs, costs less over the course of the loan, than the higher rate with lower closing costs.
So how do you use this information to evaulate your personal situation? By understanding how your interest rate is determined and the costs associated with each individual rate offered, you will be able to plan accordingly. If you will be selling your home in a short period of time, the no cost loan may make more sense, in our example above it will take 85 months to make up the 6500 dollar cost spread between the rates used in our example above. So if you will be selling your home inside of 85 months, it would not make sense to take the lower rate and higher costs. On the other hand if you plan on keeping your home for a long period of time the best course of action would be accepting the lower interest rate and the higher cost because the monthly savings would eventually make it worthwhile... when... 85 months later or in 7 years. Or course it may make sense accepting a rate somewhere in the middle of of this spread; the point is these options are rarely explored to their full degree, and doing so is an exercise well worth the time because it allows you to tailor the cost of closing to your particular situation.
Evaluating which interest rate has the most benefit for you is something your loan consultant should be willing to help you with. With that said it should be mentioned that this is not always the case, moreover certain lending institutions, namely those carrying CFL licenses are not required to disclose yield spread/rebate that is collected at closing, so if you are not working with a lender that is entirely forthcoming, you may not be aware of some of these options. Moreover the lender could choose to simply keep the entire yield spread and charge an upfront fee for service costing you significantly more than is required to close the loan elsewhere.
For this exclusive reason it is important that the lender you choose to work with is willing to provide you full disclosure of the fees you are being charged. Usually this means agreeing on a set fee for service that the loan officer will be making before moving forward. Once this is determined, how the fee for service is made becomes irrelevant, and full disclosure of the yield spread and fees assoicated with the rates can be discussed in full confidence.
At the time you lock your rate with the lender, your lender should be able to demonstrate on the lock confirmation the yield spread or up front cost of the associated interest rate, and the remaining fees can be adjusted if necessary. The rate lock confirmation is something most consumers never ask for, but it is a very useful document to have and I highly recommend you request one from your lender as soon as your home loan is locked. It should not be a problem for your loan consultant to provide, and if it is that may be a sign something is wrong.
By taking action, you will play an active rather than passive role in determining the cost of closing for your new home loan. This will help ensure that your future goals are met and the home loan in contributuing to your overall plans rather than standing in as an obstacle. Because most people's home loan is their largest form of debt, it is crucial that terms be in line with their future plans, and this is one of the most effective forms of evaluation.
We are committed to servicing our clients, and hope you have found this information helpful. For more information please feel free to contact us directly so we can assist you on a personal level.
Once qualified for a home loan you will have a wide variety of rates available to you. Usually this point remains undisclosed to the consumer; regardless this remains a truth in nearly all situations. Of all the interest rates offered to you, one will be deemed your "par" interest rate. Par in the mortgage industry is a term used to describe the interest rate closest to coming at no cost and paying no yield spread. For this reason you can think of par as your neutral interest rate.
Every interest rate that is offered to you is going to have a charge associated with it, with the par rate separating the charge into two forms either positive or negative. If the charge is positive, the interest rate comes at a cost, if however the charge is negative that interest rate is above market and is paying back a yield spread to the originating agent outside of closing. Yield spread premium is also known as "rebate" or "YSP." If the rate pays enough rebate, a no cost home loan can be accomplished. Whether this is the best option is something that should be evaluated.
Rate 4.875% 5.000% 5.125% 5.250% 5.375% 5.500% 5.625% 5.750%
Base Points 0.875% 0.125% -0.375% -0.625% -1.000% -1.375% -1.750% -2.000%
Lock Period 0.125% 0.125% 0.125% 0.125% 0.125% 0.125% 0.125% 0.125%
AdverseMarket 0.250% 0.250% 0.250% 0.250% 0.250% 0.250% 0.250% 0.250%
Special -0.250% -0.250% -0.250% -0.250% -0.250% -0.250% -0.250% -0.250%
FINAL 1.000% .250% -.250% -.500% -.875% -1.250% -1.625% -1.75%
Here we have an example of an internal rate sheet that is usually not shared with the public. Across the top you will see a variety of interest rates offered which change throughout the day based on market fluctuation. These are all the interest rates available to you at this particular time. As the secondary market (which is where mortgage notes are bought and sold by major lending institutions and where the interest rates are established) moves up or down these offered rates will move accordingly, but not as one might expect. What forces rates to go up or down are pricing adjustments. The first adjustment know as "base points" is what fluctuates based on market trading. With enough volatility the base price will adjust thereby changing your par rate for better or worse... a point I make becuase rates are always available, how much you will pay for any given rate is what changes.
Below the interest rates published and their base points are pricing adjustments that are particular to this situation (your pricing adjustments may be better or worse than those represented in this example). These adjustments will remain static for all interest rates as long as the loan parameters do not change.
The final catagory at the bottom labeled "FINAL" is the total of the price adjusters and the final cost or rebate of the interest rate published. Notice that the lower rates have a higher cost while the higher interest rates pay rebate back to the originating agent. In this particular example your par interest rate falls between 5.000% and 5.125% because 5.000% comes at a slight cost of .25, and 5.125% pays a small rebate of -.25.
So what do does FINAL mean to you in dollars and cents? Multiply this FINAL figure by your loan amount and you will know how much that rate will cost you up front, or how much that rate is paying back in yield spread to your loan officer. For example on a 200,000 dollar home loan at a rate of 4.875% would mean a cost of 1.000%, or 2,000 dollar up front for that particular rate. Let's add another point for the originating agents fee for service which is another 2,000 for a total cost of 4,000 dollars. In this example it is important to understand that one point is going to buy down the interest rate, the other point is what the originating agent hopes to make on the transaction. If you didn't want to pay these fees up front, you could accept a slightly higher rate, let's say 5.500% which is paying a rebate of -1.25%... this rebate will result in 2500 dollars being paid back to the originating agent for selling you a higher interest rate than the market is offering you. By taking this higher rate essentially you have created a situation in which the lender is paying the originating agent his compensation thereby avoiding the higher closing costs associated with the lower rate.
To continue, a home loan for 200,000 dollars with an interest rate of 4.875% has a monthly payment of 1,058.42, while that same loan amount with a rate of 5.500% has a payment of 1,135.57 (both amortized). The monthly difference equals 77.15 a month. Over 30 years or 360 payments you will spend 27,774 more by accepting the higher interest rate. The gross difference in cost between these two rates is 6,500 (4000 + 2500) which is clearly made up in savings over the course of the loan. Bottom line, the lower interest rate with higher closing costs, costs less over the course of the loan, than the higher rate with lower closing costs.
So how do you use this information to evaulate your personal situation? By understanding how your interest rate is determined and the costs associated with each individual rate offered, you will be able to plan accordingly. If you will be selling your home in a short period of time, the no cost loan may make more sense, in our example above it will take 85 months to make up the 6500 dollar cost spread between the rates used in our example above. So if you will be selling your home inside of 85 months, it would not make sense to take the lower rate and higher costs. On the other hand if you plan on keeping your home for a long period of time the best course of action would be accepting the lower interest rate and the higher cost because the monthly savings would eventually make it worthwhile... when... 85 months later or in 7 years. Or course it may make sense accepting a rate somewhere in the middle of of this spread; the point is these options are rarely explored to their full degree, and doing so is an exercise well worth the time because it allows you to tailor the cost of closing to your particular situation.
Evaluating which interest rate has the most benefit for you is something your loan consultant should be willing to help you with. With that said it should be mentioned that this is not always the case, moreover certain lending institutions, namely those carrying CFL licenses are not required to disclose yield spread/rebate that is collected at closing, so if you are not working with a lender that is entirely forthcoming, you may not be aware of some of these options. Moreover the lender could choose to simply keep the entire yield spread and charge an upfront fee for service costing you significantly more than is required to close the loan elsewhere.
For this exclusive reason it is important that the lender you choose to work with is willing to provide you full disclosure of the fees you are being charged. Usually this means agreeing on a set fee for service that the loan officer will be making before moving forward. Once this is determined, how the fee for service is made becomes irrelevant, and full disclosure of the yield spread and fees assoicated with the rates can be discussed in full confidence.
At the time you lock your rate with the lender, your lender should be able to demonstrate on the lock confirmation the yield spread or up front cost of the associated interest rate, and the remaining fees can be adjusted if necessary. The rate lock confirmation is something most consumers never ask for, but it is a very useful document to have and I highly recommend you request one from your lender as soon as your home loan is locked. It should not be a problem for your loan consultant to provide, and if it is that may be a sign something is wrong.
By taking action, you will play an active rather than passive role in determining the cost of closing for your new home loan. This will help ensure that your future goals are met and the home loan in contributuing to your overall plans rather than standing in as an obstacle. Because most people's home loan is their largest form of debt, it is crucial that terms be in line with their future plans, and this is one of the most effective forms of evaluation.
We are committed to servicing our clients, and hope you have found this information helpful. For more information please feel free to contact us directly so we can assist you on a personal level.
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