NHLA Blog

Are mortgage rates going up? Are mortgage rates going down?

The Bankrate.com survey is for conforming mortgages only.

Here's the group's 30-day prediction for mortgage rates:

• 38% predict mortgage rates will increase
• 24% predict mortgage rates will decrease
• 38% predict mortgage rates will remain unchanged

The minority appear to be in the "rates decreasing camp", and while perhaps for good reason given the levels we are at today, rates do show a trend of "falling in the fall."

Now, I am not making any bold predictions here, but I would suggest that seasonal trends coupled with the current macro-economic landscape, would biased toward rates remaining at the low end of the range- likely not spiking rapidly above 5.50% on a 30 year fixed this fall.

If recent history is an indicator, Labor Day should bring lower mortgage rates with it.

Data from Freddie Mac since 2006 shows that 30-year fixed mortgage rates tend to elevate through the warmer months of May, June, July and August before settling lower into the fall season.

This year has stayed true to form.

Rates look poised to dip further as the U.S. is showing signs of economic recovery, but it's making the recovery without introducing inflationary pressures - which would typically increase bond yields and mortgage pricing.

Typically economic recovery would apply upward pressure on mortgage pricing, however, remember my blog post from 8/31?

http://bit.ly/3NaCYW

It's tough to know what's happening with mortgage rates in real-time because the CNBC ticker doesn't show MBS pricing like it does for the Dow Jones Industrial Average or for stocks.   Even the U.S. Treasury market fails as a proxy these days.

Mortgage pricing is a complex.  To keep up with mortgage pricing and economic conditions impacting them, be sure you are subscribed to our Rate Advisory and Alert Service.  You can sign-up yourself or a friend for a 30-day free trial at:

http://www.nationalhomeloanadvocates.com/RateAlertService

An estimated 1.4 million individuals have used the $8,000 federal tax credit for first-time home buyers, according to the Internal Revenue Service.
A Dec. 1 deadline looms for first-time buyers to purchase a house to qualify for the tax credit.

The credit equals 10 percent of the purchase price of a home, up to $8,000. It either reduces the individual’s tax payment or will be returned as a higher refund next year.  There are income limits to the program.

Why the First-Time Buyer Tax Credit is likely to be extended:

1. IT WORKED and studies have shown that hundreds of thousands of homes were SOLD , in part due to this tax credit. The article above says over 1 million buyers are already receiving this credit. If we do not have this credit we will see fewer sales and with more foreclosures coming to market, this could have a negative effect on housing

2. When a house is sold it keeps stimulating the economy because it creates jobs for contractors, home amenity suppliers, etc. And we all know that a house is never done!

3. Housing was at the center of this recession, to stop a program that is working so well, at this time, could be a mistake.

4. Housing and housing related services STIMULATED THE ECONOMY and that's good since much of the stimulous package hasn't been put to work yet.

5. Some of the credits that were given in the past for other things were not spent and went into savings instead. The first-time homebuyer tax credit is being spent by new home owners on their home so it definitely stimulates the economy as intended.

6. The first-time buyer tax credit should also be extended to ALL HOME BUYERS for a period of time. The jumbo market is still sufferring and prices in those communities continue to decline. At least give a buyer of an expensive home something for moving forward today.

Having said that, it is not without costs.  The original cost estimates for the current program were for $4.6 billion.  According to latest estimates, it appears that the current tax credit will have cost $15 billion when it expires.

The FHA critics I suspect are thinking I told you so with Friday's announcement that the FHA “reserves” have fallen below 2%.  But they would be wise to consider the following episode.

The story is legend among the HUD career staff: many, many years ago, an unnamed HUD Secretary upon learning the FHA “reserve” fund had surpassed $20 billion instructed the staff to print a rather large check, imprint it with the dollar amount and make it payable to the White House (whose budget office was looking for revenue).  With the check and the photographer in tow, the group proceeded to the White House.  With much fanfare, the Secretary presented the check to the White House budget office who was rather surprised at the Secretary’s gesture.  Why?  What he didn’t know, was that the FHA reserves (technically it is called a “Capital Reserve”) only existed in the ethereal and arcane world of actuarial accounting.

In short, each year a contractor hired by HUD estimates 30 years into the future how FHA loans will perform year-by-year.  If you wondering how exact can an opinion of what the economy will be like each year now until 2039 you’re not alone.  As a reminder the FHA is a mortgage insurance product plain and simple.  It collects premiums from borrowers (revenue) and also pays out claims to lenders when loans go into default and foreclosure (outlays).  The contractor estimates whether or not the revenue exceeds the expenditures.  The Congress has told HUD that the capital ratio must exceed 2% of the economic value of the loan portfolio which today numbers more than 5 million homes.

What happens to FHA if the value of those homes continues to erode and thus devalues their value within the FHA portfolio?  Or if the economy is sluggish and more people lose their jobs and can no longer make their mortgage payments?  While FHA did not take part in the housing boom, it is nonetheless feeling its effects through declining house prices which in turn drives down the economic value of their portfolio.  

Additionally, one year ago Congress, with much prodding from the FHA, finally banned a form of down payment assistance that utilized so-called “gift” funds.  Many of these entities that offered buyers “zero down” loans essentially funneled a donation from the seller through their charity to the borrower.  With absolutely no “skin in the game” from the borrower (many of whom had to repay the “gift” when it was added to the sales price) it is no wonder those loans defaulted at a rate 3 times greater than loans without the “gift” down payment.  Unfortunately, those loans became 1/3 of FHA’s new loan portfolio by 2007.  FHA twice tried to end the practice but was rebuked by the Courts.  Congress finally ended the program, but those loans are still in the FHA portfolio and there are hundreds of thousands of them.  Coupled with the struggling economy and declining home prices, the FHA loan portfolio must also endure the “gift” down payment loans for many years to come.

On the bright side, the last 18 months has put an exclamation point on why we have an FHA.  FHA has saved close to a million sub-prime/Alt-a borrowers from possible financial ruin by allowing them to refinance into a safe and secure 30 year fixed rate mortgage.  And I say “allow” since prospective borrowers must verify income and job history as part of a rigorous underwriting process.

Another 2 million qualified borrowers (80% of them first-time homebuyers) have taken advantage of the declining house prices and historically-low interest rates to purchase a home using FHA.  And through it all FHA has helped pump more than $400 billion of mortgage activity and liquidity into the market since 2008 and with a higher credit quality borrower whose average FICO score is 700.

One can only imagine how much worse our economy would be right now without the FHA.

But there are areas of concern with FHA.  For more than two years I implored Congress to give FHA the funds for more staff and to upgrade their IT systems whose average age was 18 years.  It is still a mystery to me why we never got the much-need funds especially when FHA went from 7%-10% of the mortgage market to close to 30% in a matter of weeks.  American taxpayers should be grateful to the FHA career staff who endured that massive run-up in volume without any additional staff.

So what happens next?  In an effort to increase the capital ratio back above 2% FHA could do some or all of the following:

• Tighten underwriting criteria
• Increase premiums
• Raise the down payment requirements above 3.5%
• Overlay a credit score cut-off
• Utilize other efficiency and risk management measures

And it may be the case that home prices will no longer decrease and thus the economic value of the portfolio could improve on its own.

I would add another fix: FHA should strongly consider lowering its loan limits.  While the maximum loan limit of $729,000 is only in 75 high-cost counties, another 600 counties have a loan limit between $275,000 and $729,000.  With a nationwide median home price of less than $200,000 I think it is time to consider lowering them.  I think most Americans are asking themselves that regardless of the location, why is the federal government helping someone buy a $729,000 home or a $600,000 one for that matter?

One year from now, FHA will again see how the FHA fund endured the withering economy.  While that outcome is not known, what is known is this: the FHA which is celebrating its 75th anniversary this year has performed its counter-cyclical role as designed.  And in so doing, saved millions of families from possible foreclosure.  That is a success story too few people know, unless you are one of the families FHA helped save.  Congress needs to do whatever it can to help ensure FHA is around another 75 years – and beyond.

Regulatory Alert R-1366

As you have probably heard by now, the Federal Reserve Board has issued two proposed rules making significant changes to Regulation Z (Truth in Lending). This stems from proposals in H.R. 1728 – the Mortgage Reform and Anti-Predatory Lending Act - which passed the house on May 7, 2009.

Essentially, the new amendments are positioned to provide new consumer protections for all home-secured credit… which by intent proposes many good things. But, as happens most of the time, this proposal has very dangerous components tucked within it.

One proposal that is embedded, which is written in an ambiguous way, would essentially wipeout the current compensation structure to loan officers… retail, correspondent, and broker. The FRB proposal would require mortgage lenders to pay originators – again, retail, correspondent, and brokers - a flat fee, which would be stated and disclosed upfront, and would not increase based on changes in the interest rate or other loan terms. This all sounds fair, but make no mistake, the target is on YSP, SRP, and compensation paid to all mortgage originators… with a goal of regulating and restricting them. In fact, in HR 1728 the term “banned” was used relative to YSP and SRP.

• Prohibit payments to a mortgage broker or the creditor’s loan officer based on the loan's interest rate or other terms.
• Prohibit a mortgage broker or loan officer from "steering" consumers to a lender offering less favorable terms in order to increase the broker's or loan officer's compensation.

When you read this it sounds fair – especially to a consumer, but imagine the unintended consequences of eliminating the ability to structure financing options for a consumer based on their specific needs. Should you also make the same “flat fee” for a $100,000 loan as you would on a $1.3 million loan? And, as you know, the industry has self-regulated the “excessive” YSP and SRP abuses that were so prevalent in retail and third-party originations.

Please review these links and submit comments as you see fit. After going to this link, scroll down to proposal R-1366 to review the proposal and submit your comments.

http://www.federalreserve.gov/generalinfo/foia/proposedregs.cfm

Additionally, if you are a business owner, you can contact the SBA Advocacy group with your concerns and coments- they are very interested to support you as well.

http://www.sba.gov/advo/laws/law_regalerts.html

You may also want to email your Senator to articulate your position and concerns.

http://www.senate.gov/general/contact_information/senators_cfm.cfm

We also believe that legislators are targeting things that were merely functions of the real problems that caused over-speculation in housing credit. Loose underwriting standards that were coupled with unregulated leverage (remember the Bear Stearns subprime fund that used 80:1 leverage?) created by Wall Street are more appropriate targets for regulation, certainly not compensation of a loan officer. There has also been an overly intense focus on any third-party originators- broker or correspondent- who were, at the end of the day, simply offering products and YSP structures allowed by the primary lenders / banks.

Too many times, we hear about these changes after they are accepted. This is your opportunity to voice your comments and opinion. This opportunity to make public comment ends on November 27, 2009!

Maybe you heard a few things about FHA changes on Friday?  There are a lot of documents- official and unofficial circulating, but we wanted to give you the condensed version of what we see as most noteworthy.

FHA Lender Certification.  The FHA "funding source" must maintain FHA certification, not the broker - who must only fund through a certified FHA lender.  This is good news for brokers, lenders, and consumers as it will ensure plenty of access and competition for FHA loans.

Requires Lender To Have An Audited Minimum Net Worth.  The "funding source" (not the broker) must have a minimum and audited net worth of $1 million.  The funding source must submit audited annual financial statements to FHA to prove they meet this criteria.  This is up from the previous minimum of $250,000.  There is speculation that further increases over and above this new $1 million minimum will be sought in the near future. 

Lender Performance "Skin In The Game".  Clearly the agency is seeking to ensure that lenders have funds available to compensate the FHA if their loans fail to meet qualify standards.  Additionally, lenders are going to be required to have more "skin in the game' relative to the performance of FHA loans they make.  This will assuredly tighten supply as lenders will bias toward conservative underwriting when they have more on the hook for future loan performance.

Modify Procedures for Streamline Refinance Transactions.  While a lot of particulars here, basically a streamline transaction must now be a fully document loan.  Some of the adds are new requirements for seasoning, payment history, income verification, demonstration of a net tangible benefit to the borrower, cap the max LTV to 125%, and require an appraisal when a borrower wants to add closing costs to the transaction.  This will also tighten supply of FHA credit somewhat, but the biggest impact will be slowing down the process and adding more weight to FHA pipelines for lenders.

Appraisal Process.  Historically FHA prohibited mortgagees from accepting appraisal reports completed by an appraiser selected, retained or compensated, in any manner by real estate agents. To ensure appraiser independence, FHA-approved lenders are now prohibited from accepting appraisals prepared by FHA Roster appraisers who are selected, retained or compensated in any manner by a mortgage broker or any member of a lender’s staff who is compensated on a commission basis tied to the successful completion of a loan.  In other words, the funding source will order the appraisal and will likely be using HVCC type guidelines as convenience.  This will undoubtedly add more time and cost into the appraisal piece which will ultimately be paid for by the consumer.  Also, appraisals will only be valid for no more than 4 months.

What Happened?  All of this came as FHA confirmed that they will announce, on September 28, that the agency will fall short of their legal requirement to maintain minimum reserves of 2% of the loans it insures.  Experts - including us- have been forecasting this for months.  This "cushion" was 3% in 2008, down from 6.7% in 2007.

FHA has been a stabilizer in the market by providing much needed liquidity for lenders and homebuyers/owners.  In the first half of this year, FHA accounted for about 19% of new home mortgages, compared to just 2% in 2006.  First-time homebuyers have been involved in nearly 40% of new home purchases this year and about half of them utilized FHA funding.

The most important part of the legislation from the standpoint of real estate and mortgage professionals is Section 6 which encourages the Obama administration to provide support for warehouse lending to non-banks.

The bill says, in part, that Congress finds that warehouse lending to be a critical link in the housing finance chain, accounting for as much as 40 percent of all residential mortgage lending in the U.S. and 55 percent of FHA loans.  The availability of warehouse funding has declined almost 90 percent since 2006 to a current level estimated at approximately $20 to $25 billion.  The proposed legislation projects a shortfall in home mortgage availability of “hundreds of billions of dollars,” resulting in high borrower costs, reduced credit access, and impacting the recovery of the housing industry.  The effects, the bill states, could be felt perhaps as early as this year, unless Federal regulators promptly address the issue.

In response to this perceived deficiency the bill suggests that the Secretaries of Treasury, HUD and the Director of the Federal Housing Finance Agency (FHFA) use their existing authority under the Emergency Economic Stabilization and the Housing and Economic Recovery Acts which were passed last year to provide additional warehouse capacity to qualified lenders.  The assistance might include direct loan guarantees, credit enhancement, and other incentives.

The bill had enjoyed the support of the National Association of Realtors, the National Association of Home Builders, and the Mortgage Bankers Association.  In a statement on its website the latter commented in part;  “Providing more resources for staffing and technology at FHA will allow that agency to continue to play its critical role in helping borrowers who may not have sterling credit or are unable to make a large down payment.  FHA needs to be able to hire and retain top quality staff and utilize 21st century technology if it is going to meet the growing demand for its products and adequately manage risks to its programs.

The legislation, sponsored by Rep. John Nadler (D-NJ,) makes a number of changes to existing FHA regulations which include giving the Secretary of Housing and Urban Development (HUD) more flexibility to appoint and compensate FHA personnel and to fund projects to upgrade FHA’s aging information systems.  The bill also exempts FHA from some provisions of the National Environmental Policy Act of 1969 when it insures a condominium with an undivided interest in the common areas and facilities which serve that condo.

www.nationalhomeloanadvocates.com

David Dickey

Some information just for fun...

What's Behind the Numbers

The list comes from real estate statistics provided by Altos Research, a national real estate data collection and research firm that tracks over 15,000 ZIP codes, amounting to about 90% of all real estate transactions. Home prices are based on the asking price for combined single-family and multiple-family markets. ZIPs were ranked according to the median home price.

Altos based its numbers on homes on the market as of Aug. 14, 2009, using Zoning Improvement Plan codes as defined by the U.S. Postal Service.

Top 5 of America's Most Expensive ZIP Codes

1. 07620
Alpine, N.J.
Median Home Price: $4,139,041

2. 94027
Atherton, Calif.
Median Home Price: $3,849,133

3. 10014
New York, N.Y.
Median Home Price: $3,521,514

4. 91008
Duarte, Calif.
Median Home Price: $3,444,773

5. 90210
Beverly Hills, Calif.
Median Home Price: $3,367,167

Click here to see the full list of America's 100 Most Expensive ZIP Codes

While it is important to maintain proper expectations about the risk of market fluctuations in the short run, the most important fact for any young investor to keep in mind is that time is on your side. In fact, time is the greatest ally for any individual who can allow his or her money to continue to stay invested for decades.

Those who get a jump-start on regular investing at a young age have the potential to profit in the years to come. There are notable advantages to investing early.

Market fluctuations

It is no secret that the stock market is a very unpredictable place to invest. Fast-developing events can quickly change the environment, and markets (and especially individual stocks) have fluctuated wildly in both directions over short periods of time. But as you stay invested, you can potentially ride out fluctuations in the market.

Consider the return history of the Standard & Poor’s 500 stock index. (The S&P 500 is a common barometer of overall stock market performance and an unmanaged index of stocks. It is not possible to invest directly in the index.) The worst-performing 12-month period going back to 1970, saw the S&P 500 Index return -43.32 percent. By contrast, the best 12-month period for the Index resulted in a return of 59.26 percent. That broad range of returns demonstrates just how unpredictable the market can be in the short term.

Expand the investment time horizon out to ten years, and the best and worst average annual return ranges from 19.44 to -3.43 percent.

The range of returns narrows even more significantly through a 20-year holding period. Since 1970, the average annual return through each 20-year period has ranged from a low of 7.10 percent to a high of 18.26 percent.

The point is simple – the longer you keep your money the more likely you can take advantage of upswings in the market. The value of your portfolio may move up or down from time-to-time, depending on the direction of the market, but allowing your money to remain invested longer makes the return more predictable.

Time can help you accumulate wealth

Having more time to let your investments work is important to help you manage risk, but it becomes an even more important ally when it comes to accumulating assets. The longer you can let your money work for you, the more likely you are to build up your savings. This assumes that, in general, the market works in your favor over time. While that can’t be guaranteed, historically, the market over time has trended higher.

It also helps to begin investing as soon as you can and to do so regularly and on an ongoing basis. This can make a significant difference in the amount of savings you accumulate. If you are like most young people, you may not have a large lump sum to invest today. But if you have a source of regular income, you could set aside part of it each month into a mutual fund or other investment option to begin building your long-term nest egg.

For example, an 18-year old who is able to put away $200 per month and continues to do so up to age 65 could accumulate $870,370 by the end of that 47-year period. This assumes an average annual return of 7 percent, with no fees or taxes accounted for in the calculation.

Consider what happens if the same individual delayed starting those contributions by ten years, but all other aspects of the investment (7 percent return, etc.) remained the same. The account would have grown to just $417,462, which is less than half of what was accumulated by starting a decade earlier. Wait 20 years to start, and the account would have reached a value of only $191,200. That means less money available to meet your retirement income needs. While retirement seems far into the future, a concerted effort to put time on your side and invest early will give you much greater financial flexibility later in life. Consult with a financial advisor to determine the best investment strategy for you.

Jim Larkin, CFP^®, CRPC^®

Financial Advisor

CERTIFIED FINANCIAL PLANNER™ practitioner

Ameriprise Financial Services, Inc.

1308 Village Creek Drive | Suite 2000 | Plano, TX 75093

Bus: 469.865.1050 | Fax: 469.865.1010

E-mail: James.k.larkin@ampf.com

Website: www.ameripriseadvisors.com/james.k.larkin

###

The illustration above is hypothetical and is not meant to represent any specific investment.

This column is for informational purposes only. The information may not be suitable for every situation and should not be relied on without the advice of your tax, legal and/or financial advisors. Neither Ameriprise Financial nor its financial advisors provide tax or legal advice. Consult with qualified tax and legal advisors about your tax and legal situation. This column was prepared by Ameriprise Financial.

I thought I would give you something different going into an extended holiday weekend.  Thank you for subscribing and have a great holiday weekend.

The following Optimist Creed was authored in 1912 by Christian D. Larson:

Promise Yourself

To be so strong that nothing can disturb your peace of mind.

To talk health, happiness, and prosperity to every person you meet.

To make all your friends feel that there is something worthwhile in them.

To look at the sunny side of everything and make your optimism come true.

To think only of the best, to work only for the best and to expect only the best.

To be just as enthusiastic about the success of others as you are about your own.

To forget the mistakes of the past and press on to the greater achievements of the future.

To wear a cheerful expression at all times and give a smile to every living creature you meet.

To give so much time to improving yourself that you have no time to criticize others.

To be too large for worry, too noble for anger, too strong for fear, and too happy to permit the presence of trouble.

To think well of yourself and to proclaim this fact to the world, not in loud word, but in great deeds.

To live in the faith that the whole world is on your side, so long as you are true to the best that is in you.

The Wall Street Journal has a great interactive graphic that breaks down the string of bank failure since the onset of the crisis: WSJ graphic.

The enormous bubble that engulfs the entire northwest corner of the US map is, of course, Washington Mutual — the biggest bank failure in US history with $188 billion in deposits. Luckily, JP Morgan Chase stepped in and took control, otherwise Wamu would have single-handedly wiped out the FDIC.

According to the WSJ, the FDIC insurance fund only has $10 billion in it…which doesn’t go too far when you’re insuring $6 trillion in deposits!

Meanwhile, the number of problem banks continues to rise. The WSJ writes, “The Federal Deposit Insurance Corp. said it had 416 banks on its “problem list” at the end of June, equivalent to about 5% of the nation’s banks, up from 305 at the end of March and 117 at the end of June 2008. Problem banks had a combined $299.8 billion of assets at the end of June, compared with $78.3 billion a year ago.”

So, while the economy does appear to be improving for now, the banking system remains in sorry shape. Ultimately, this will mean less credit creation and continued deflationary pressure, which should linger for years.

It would appear we aren't out of the woods yet.  Recent credit spreads and strength in the bond markets would indicate the fixed income markets are leery as well.

As new home sales supply drops, we will start to see more signs of downward price resistance and pressure.

No wonder the latest builder confidence reading is increasing rapidly.. their inventory is dropping at a furious pace.

For the 4th straight month, new home sales gained, posting the best numbers since September 2008 and beating economists expectations.

The available supply of new homes is down to 7.5 months nationally.. from over 9 months the month before.. and from over 13 months earlier this year.

Around a 6 months supply is considered "normal" and during the boom the hottest markets were in the 3 months supply range.

What's driving the demand?

1)  Very low mortgage rates historically.

2)  A first-time homebuyer tax credit about to expire.

3)  Hefty builder incentives.

Coupled with the blowout "existing home sales" numbers from July, we should at least see near-term support for current home price levels.

In 18 of the 20 markets tracked by the Case-Shiller Index it shows rising home values.  It's the 5th consecutive month with strong numbers and the best showing for this index since late 2006.

Despite the Case-Shiller's popularity, it does have some short-comings:

1) Data is on a 2 month lag.

2) Sample only includes 20 metro markets and misses some very large and important markets.

3)  Real Estate is not national.. it's very local.

However, it is a good index to get a feel for the broad market.

We still have not called a housing bottom, but all indicators appear to be heading in the right direction.  A few of our lingering concerns:

1)  Homebuyer tax credit is bringing forward 2010 sales.

2)  "Shadow" housing inventory that will hit the market this fall through Q1..ie.. foreclosures just now in process as lender, federal, and state level moratoriums expire.

3)  Impact of continued high unemployment.

David Dickey

www.nationalhomeloanadvocates.com