What The Heck Are Rates Doing????

You won't read about it in the news or see it on TV until next week: Rates shoot up the most in one week since March/April 2010.

Rates are always last week's news. The reason is that Freddie Mac posts the country's weekly average 1-week in arrears. (They also post rates with an average in .7% in points paid to get the rate...meaning when they post about rates, they are telling you the average rate if you want to buy your rate down. I do not advocate buying points in a rate environment that is historically the lowest we've ever seen). Back to my point, media outlets usually make it a 1-day per week story. And, in the past 18 months there has not been really a negative trend for mortgage rates. Thus, it's not a sexy story to say: Rates are still low.

You can't look at rates weekly if you want to be sure you are getting the best that is available. Rates move by the minute...not the hour, not the day and certainly not by the week. Here is a good place to see national averages on a daily basis if you can't follow rates thru the day as I post them on myindymortgage.com: Check out this site at Rates

People think that mortgage rates are tied to the 10-Year Treasury. And, if you use this indicator more times then not you are going to guess right on which way mortgage rates are trending. The fact is, rates are tied to Mortgage Backed Securities. They are a bond, just like treasuries, that promise a yield (a return on your investment---an interest rate). So, if I give the Federal Govt $1000 on a 10 year treasury, I will receive in return all my principle back ($1000) after 10 years plus the yield, or interest rate, on that $1000 annually. The idea behind bonds is to provide a rate of return that keeps up with inflation---it is to ensure your money does not lose value.

The 10 year was yielding just under 2.5% back on Nov 4th. See the chart below. In 7 trading days since, yields have gone up to over 2.9% --- or a 0.4% increase.


The spread between a 10 year treasury and mortgage rates are commonly found to be 1.5% to 2%. It makes sense why: if you invest your cash with the Federal Government, it's less risky as our FED has not defaulted on our debt obligations before. If you invest in the American Public, you are betting that a mortgage payment will be made there needs to be a greater return on our investment as there is history where mortgage payments have not been made (we are in such a period and have been since 2006 where foreclosures are up). Thus, if a 10-year is yielding 2.48 on Nov 4th and rates are 4.25% on a 30 year fixed...it stands to reason if the 10-year goes up .4% that mortgage rates will follow in a similar spread.

Look at the 4% Fannie Mae Bond (a fancy name for the bond that yields a mortgage rate of about 4.5%). The price of the bond has dropped since Nov 4. And when bond prices drop...rates go up:


We have all heard of paying points. 1 discount point is equivalent to about 100 basis points. We have seen 250 basis points deteriorate in the past 7 days...or about 2 discount points. And in a rate environment where rates are historically low...I don't advocate paying points. Thus, if we lock today we are locking about .375% worse than we were less than 2 weeks ago.

I have heard this several times in the past 2 weeks: I thought the Federal Government was going to do another round of debt purchases (called Quantitative Easing 2) and the result would mean sustained low rates---or even lower rates. Unfortunately...the message we hear in the media lacks validity. The idea behind buying US Treasuries is to increase the supply of money, to increase inflation, improve the stock market and to lower the unemployment rate. When the goal is to make sure that the economy picks up, that inflation is spurred...Bonds are affected negatively. Bond traders are no longer satisifed with yesterday's rate of return, yesterday's yield...and will ask for a higher interest rate to combat the effects of inflation.

Another point is that each day the US FEDs step up and buy 5 Billion in treasuries, they do so in a market where there has been between 25 Billion to 30 Billion for sale. It's supply and demand here guys...if there is too much of a product and not enough buyers for that product, what happens? Yep, prices drop to make the product more attractive (a sale!!!!!). People step in and buy when there is a sale. Well, with bonds as the price drops the yield increases...in short, rates go up.

There is a push by republicans to get Mr. Bernanke to stop these asset purchases and let the market flow freely. For now, commentary from former Chairman Mr. Greenspan and the oversupply of bonds is driving prices down, rates up and you'll see this played out in the media next week while you are eating your turkey.

What we can watch here in the short term is this...prices have dropped on bonds extremely far and extremely fast. Over the past 18 months when we see something like this, there is often a bounce (a run on purchasing bonds). The bounce causes prices of bonds to increase and yields to fall. We'll need a few days of watching this play out to see if we bounce...or if we continue to slide and see rates climb. Rates are still low...just not at all time lows.

To my clients...if you like your rate in the mid to upper 4's...lock it. If the slide continues...we could be talking a 5% rate soon and your rate may look like a steal. If the bounce happens...we could revisit mid to lower 4% rates. I personally will be watching this for you...and will give my daily recommendation on myindymortgage.com (the twitter feed on the right side of the page).

Happy Thanksgiving!

In Remembrance of our Veterans

I want to take a moment to thank the men and women of this country that protect us, provide our safety and freedom, and to those who gave their lives so that I may live my own.

Mid September Review

As summer winds down in the next few days, let's look forward to what the fall and winter seasons may bring in terms of lending rates and refinances:

We were it all time lows this month. What does that mean? For buyers with 740+ credit scores it means interest rates crept down to 4.25% with no points for a day or two. It came and went fast. For the most part...4.375% was the standard 30-year conventional fixed rate with no points. Don't get caught up with the Bankrate.com sites or Freddie Mac's published rate. Yes, you may in fact see a 4 or 4.125% rate out there. Read the fine print. These advertisements always come with .7% to 1% in discount points...and the media never explains these rates involve you, the consumer, paying to have that rate. That means on a 100k loan...it costs you $700 to $1000 to buy the interest rate they publish...and that is on top of normal closing costs.

I never publish such rates. It's not my way of doing business...offering a lower rate to attract clients and then saying, "...but at the cost of $$$$$$$$ to get that rate?" Seems like it's a bit of a bait and switch.

Anyway...back to rates. 15-year mortgages have crept down into the 3.75% to 3.875% range. Incredible!

When looking for a mortgage rate, and specifically a refinance opportunity, do not just ask "What is your rate?" (See above paragraph) Chances are, you'll miss out on the real bargains. Think about this...you are a client with a 100k mortgage and and 6% 30 year fixed interest rate. Now, we want to look at the difference between a 4.375% interest rate and 4.75% for a refinance opportunity...the difference in payment is about $21 per month. On the 4.375 rate, you would save about $100 per month. On the 4.75% rate you would save about $79 per month. For my clients, we can almost always do a refinance with no closing costs at 4.75% in this scenario (and not roll them into the mortgage). If a typical refi costs $2000 to $2500 when you factor in closing costs, appraisal, and title fees...would you rather pay a mortgage that saves you $79 per month and costs you nothing. Or would you rather have a savings of $100 per month at a cost of $2000?

Simple math tells us the answer as Option B is the winner right up until the break even point below:
Option A
In 10 years on the 4.375% rate, we save $100 per month or $1200 per year. This is a savings of $12,000. It cost us $2000. Net savings $10,000.
Option B
In 10 years on the 4.75% rate, we save $79 per month or $948 per year. This is a savings of $9480.

In short...unless you are going to be in the home for 10 years...why pay the up front cost? Because if you do, you better be in the home for 10 years or you paid for a refi that you did not obtain the full benefits of the program. Don't get caught up in the rate. Yes, it is important. Get caught up in the payment...the savings....the cost. THAT is where good financial decisions are made.

Outlook
Rates are going to go up...it could be tomorrow, it could be 6 months from now. Don't get caught up in thinking they could go lower from these historic levels. If they go down .125%...who cares? It's $8 per month on a 100k loan. What if they go up .5% tomorrow? That is $40 per month. There is more downside to waiting to lower your rate/payment than upside of rates going lower. And if you close on your home now...and rates do in fact go lower...just refi at my no cost option. You have nothing to lose!

Good luck...happy house hunting...and call me about that refi opportunity.

Ryan

Why it's Time to Buy

It's Summer...and it's HOT. Who can remember a stretch like this? Last summer felt cold...but not this year. Maybe the temps will warm up the Economy...and the housing market. I was podering the heat and our industry and was thinking...it is a good time to buy or refinance. And here is why:

1) Rates are absolutely at the all time lows. Those nwho have waited this out are going to benefit. The news is bringing up the fact that the FED cannot keep short term rates low (these are not mortgage rates). But the truth is...when the FED says they are going to start bumping rates...then the Bond traders of the world are going to start moving their money away from Bonds and into more risk based assets. This will cause our mortgage rates to increase. So, if you are on the fence to buy...want to refi...it's now. A 100k home today at 4.375% will costs you $60 more per month if rates go up 1%. Rates were just there a few months ago. They will go back and surpass this level.

2) If you buy existing...it's summer. The best time to move is in the summer. Who wants to move with the weather poor. If you are buying new...you can build out in time to close before the end of the year. Many builders will incentivize you to do this!

3) We've noticed a stabilization to pricing here in Indy. I am not seeing the major drops to pricing to get a sale done. Sellers are starting to hold firm. Builders are trying to hold their margins more than just making a sale. The good deals are now...they won't last.

4) Permits in Indy have hit their low point and are going up. More buyers are looking at new construction. As sales increase...it becomes more of a sellers market. That means prices go up.

Get out there...find that first home, or upgrade to your next. Or, lower that payment on your current home---or even lower the term from 30 to 15 years. I bet you in 6 months you wish you had.

Ryan

Tax Credit Extension Update

The Senate stepped to the plate and passed the extension of the June 30th deadline for the 8k tax credit. This means once signed by President Obama...buyers will have until September 30th to close on the home they were under contract by April 30th of this year. In short...you cannot buy a home now and get the credit...you just have a longer period of time to close on the home you purchased on or before April 30th. So the Big Banks get a reprieve here because they cannot close loans in 30 days or less like we can. For more info, check out: http://online.wsj.com/article/BT-CO-20100701-705302.html

Tax Credit Deadline

The senate is still mulling the tax credit extension. Please check out this article on CNBC.com: http://www.cnbc.com/id/38022302

Will continue to keep you informed on the progress.

Ryan

Homebuyer Tax Credit Extension

The House overwhelmingly past the extension of the 8k tax credit closing date of Sept 30th last evening. This was after the Senate did not pass a bill that included the addition of the tax credit extension. The senate will now have to vote on this stand alone provision. Makes sense that the elected officials deal with one issue at a time rather than bundle things together. Let's get this passed!!!! Will let you know what happense. I still see NO WAY this does not get passed. There is too much backlash from the Big Banks that can't get closings and approvals done quickly...and they will take a lot of heat in the press unless this gets done. Not to worry here at the Robbins/Frantz Mortgage Planning Team. All clients eligible for the credit were approved on time and are closing on time.

8k Tax Credit Extension

The first piece of the 8k credit extension is in place. The senate today voted in favor of giving qualified buyers a 3-month extension to get their loans closed provided they were under contract by April 30th, 2010. Though no articles have mentioned the process...we can assume it must be signed off by the House and President to go into effect.

Here is an article to read up on today's vote: 8k Credit Extension

In short...this is for buyers already under contract from April 30th. They will get 3 months to close and still be eligible for the 8k credit.

8k Credit Update

This week I have received many calls in regards to "Is the gov't going to extend the 8k tax credit." There is a provision in a bill being voted on this week that would extend the closing date for all customers from June 30th to September 30th. The bill would not extend the "must purchase by April 30th" language however. What this means is that you still have to have made your home purchase by April 30th...but could now potentially close up thru September 30th provided the bill is passed. I feel you will see this get passed as many borrowers trying to close will not meet the June 30th deadline for a number of reasons. Reason number 1...there are too many people trying to close in the last 2 weeks of this month. Underwriting cannot keep up with the number of loan submissions; title companies do not have enough slots available for customers to close during the day; And banks only have so much money they can lend daily. An extension makes sense and I feel you will see this announced very soon.

USDA Update, Tax credit deadline and Mortgage Rate Outlook for June

The last post was nearly 6 weeks ago. I know...well overdue.

The 8k tax credit...
has done what it was supposed to do and that is sell some houses. We have been extra-busy preparing you and other clients for the June 30th Closing Deadline. Many of you have asked if I think the deadline will be extended. The short answer is no. I think the lawmakers are going to see what happens with housing numbers in the next few months...and should we see a dip in the economy and housing numbers then perhaps this will get revisited. But for now, do not expect any extension. On a similar front, many of you have asked me, "Ryan, I have heard the tax credit has been extended." This is for military personnel only and for those who are currently deployed. If you fall into this category send me an email or call me and we'll see if you qualify or you can read up here.

USDA...
an out of funds on May 13th and the government run organization has not been approving (their term is issuing conditional commitments) any loans since that time. They are now going to issue approvals again but at increased funding fee in respect to previously issued commitments. The funding fee will now be 3.5% (formerly 2%) for purchases and 2.25% (formerly .5%) for refinances. To read the memo in its entirety click here.

Remember, this program has no PMI and is ZERO DOWN. Excellent for those of you looking for a low payment and down payment. Please also remember this program is both income and geographic specific. That means your household income is to be under a certain limit and the home must be located in a certain area. To learn about the income limits and geographic eligible areas you can go to our website in the USDA section and read up.

Mortgage Rates...
The FED pulled out of the Mortgage Backed Security (MBS) purchase program at the end of March. And rates quickly spiked. Then, in April we started seeing the effects of Greece and other Euro-countries who have massive debt problems start to affect the stock and bond markets of the world. This unforeseen series of events has led investors to the safe haven of bonds...and specifically in US Treasuries and Mortgages (MBS). This has benefitted us as we have seen rates return to pre-March 31 levels when the FED exited their program. In short, I do not expect rates to stay low for long. If the economy continues its slow recovery...rates have to start moving up. If your rate is 5.75% or higher it may be worth a look to see if a refinance will help you. Many clients are looking to go from a 30 year loan to a 15 year loan. Those rates can be in the mid-4% range. 30-year fixed can hover between 4.875% and 5.5% depending on credit score, down payment and loan program. Lock your rate in while you can and take advantage while the environment is right.

If you have any topics you would like me to touch on send an email and I will include in the next post.

Ryan

Mortgage Rates, 8k tax credit and USDA

Rates:
So we have survived another round of the Federal Reserve auctioning off more US Debt. This week we saw another large supply of Treasury Notes made available to Bond Traders and Investors. We saw a total of 74 Billion...that's right, with a B...in Treasuries broken down as 40B in 3-year notes, 21B in 10-year notes and 13B in 30-year notes. The supply is less than we have seen in the past several months coupled with the auction being well received and rates are holding steady after the previous 2-week sell off.

Though we are holding steady, I still firmly believe that as the economy continues to show signs of life you will see the stock market continue to improve. And Bond traders will want a higher yield for their investments if they are to invest in that type of financial vehicle. Higher yields means higher rates! In conclusion, lock your rate if you like it because in 6-months you'll be in better shape than those buying on down the line.

8k Credit:
You have 3 weeks to get your contract written (April 30th deadline) to be eligible for the 8k tax credit. If you can come to terms and have an accepted purchase agreement by April 30th, your next goal to meet is the loan closing deadline of June 30th. Do both and you are eligible to claim the tax credit if 1) you have not owned a home in the past 3 years and 2) you fall under the income limit of $125k for a single person and 250k for a family.

Go get that free money!!!!!!!!

USDA:
Word came out last month that USDA is running short on funds and can be out by the end of April. We have been in touch with USDA and they are not releasing many details but as of this past Monday they still had about 2 billion to appropriate to new applicants. This 2B is nationwide...but looks like there is a shot that the money could fall into May as far as availability...we'll see. For now, it's unlikely if you have not signed a contract that you will be able to get approved for the program but we are always working for you, our client. Get your contract signed and get in for application so we can get your loan in line for USDA funds.

Remember, outside of a VA loan that USDA is the only 100% loan left out there and it has NO PMI!!!!!!!!!!! And the rates are just like any other loan. This program is a winner. Click this link to our website to learn about USDA: myindymortgage.com

Ryan
ryanf@fairwaymc.com
myindymortgage.com

Where rates go from here...

UPDATE 4/1/10:
Mortgage bonds open the first day without the Fed's involvement in the MBS Purchase Program -34 basis points...or just over a .25% discount point worse. It appears their exit is already impacting the bond traders of the world whether this be a direct or tangible affect...or if bond traders are showing fear due to the exit.

----------------------
Post from 3/31/10
In short...they go UP!

On March 31st, 2010 the Federal Reserve ended it Mortgage Backed Security (MBS) purchase program. This so-called quantative easing is the mechanism that our government has used to lower and keep mortgage interest rates in the low 5% or sub 5% range for the past 18 months. Without this purchaser of MBS...we expect interest rates to go up beginning in April likely in slow manner but there sure could be some volatility. How much...who knows. I think high 5% to 6% range by year end. In short, beginning in April if you like your rate, LOCK IT. Do not get hopeful or greedy thinking rates could go lower. I'll explain why we feel they are going to go up in the following paragraphs.

I like to call Mortgage Backed Securities the investment vehicle the drives interest rates. MBS are bonds---a safer investment than its counterpart Stocks. What you should know about bonds are they have a price and a yield. The price is the cost to purchase the security and the yield is the rate of return on that investment (or interest rate). You may recognize this as it is a similar investment to a bank CD. A simple example would be for me to give $1000 to my bank to invest for 1 year in return for 2% interest. After 1 year, I get my $1000 back plus $20 (which is 2% of $1000). And to finish, a key to Bonds you must understand: when bond prices go up, yields (interest rates) go down. And when bond prices go down, interest rates go up.

In the case of MBS...you would invest money in a bond security that would pay a specific rate. The popular securities today are 4%, 4.5% and 5% MBS coupons. Let's try an example: You usually have large fund managers of 401k's or mutual funds that buy shares of MBS in specific coupon levels. So if PIMCO funds bought $100Million in MBS at 4.5% they hope to get their principal back at a later date when the security expires or the loan is paid off plus the interest of 4.5% on an annual basis.

The past 18 months, the FED has been buying MBS at the tune of 1.25 trillion dollars worth. I am not sure of the guidelines they gave in the actual purchases...but I can imagine that the goal was to make set purchases each week in different coupon increments regardless of the price of the MBS bond.

A simple lesson in economics and Supply vs. Demand: if you have an over abundance of a product the manufacturer may have to lower the price to move all of their goods. You create demand by making the product more affordable. On the flip side, let's say that you have too little of a product and can't get enough of the product into consumers' hands: prices may go up as consumers can be willing to pay more to get that product.

To tie it all together. When the FED stepped in and started buying 20 billion worth of MBS every week, there was a limited supply of MBS on the market for the normal players like your 401k and mutual fund providers. Prices began to go up and interest rates began to drop. People started buying homes or refinancing their home loans to lower interest rates. As people buy, more MBS are created for these new loans each month. And now that the FED is exiting their purchase program...there will be additional bonds on the market without as many buyers or as much money buying the bonds as there was the past 18 months. Ahhh---supply vs demand and what we call a Supply Issue!!!! The way to create demand for the over supply? To lower price...and increase yields. Investors will want more in return for their money...and we pay a higher interest rate for our mortgage as a result.

In summary...LOCK YOUR RATE IF YOU LIKE IT!!! It's not a time to wait around and see if your rate goes lower. Good luck and happy house hunting.

Ryan
ryanf@fairwaymc.com
http://myindymortgage.com/

Many people have asked how MBS relate to points. I have this video below to help explain.

Interest Rates the Week of 3/22 - 3/26

What a week. We head into Friday having survived a rough week yet we are black and blue for sure. Rates to a real hit this week and it all began Wednesday morning. You can't say that this came out of the blue, yet a downgrade of Portugul's debt by Moody's & Fitch from AAA to AA- caused bond traders around the globe to look at their own portfolios and the debt of other countries. And that meant looking at home at the US---the notion of "maybe USA's debt is not so secure after all---look what just happened in Europe with Portugal and the issues Greece has had for the past several weeks." This spooked traders into unloading massive amounts of their bond portfolio and caused prices to drop significantly.

Another factor causing prices to drop: we have had another massive amount of Treasury debt being auctioned off this week (2,5 & 7 year treasury notes). When you have a set amount of investors and buyers of bonds in the market each week coupled with an additional supply of bonds brought to market to sell (over and additional 100 billion dollars worth), you have over-saturation in the market...and less dollars can go around and purchase this additional debt.

They key here...when bond prices drop we see interest rates go up to attract new buyers. Think about it a bit, I'll take you back to high school and your economics class when you went over Supply vs Demand. If you have an over supply of a product then prices could drop to increase the demand for the product. And this is what happens with bonds. The investors of the world are saying to the US and other countries, "If you want us to buy your debt...pay us more money." And when a country's debt has a yield (rate) increase...it can affect other investments---like mortgage rates!

In the case of mortgage backed securities (MBS), or what I call the investment vehicle that drives mortgage interest rates, we see the yield of MBS trade above the yield of the 10-year treasury note. US debt is and has been a safe haven for investors...we have repaid our debt plus interest for years. It's a safe investment. MBS is an investment that carry's some more risk. Would you rather invest in a 10-year US Treasury debt yielding 3.91% as of 3/25/10 or a MBS yielding 4.5% or 5% as you can openly purchase today. Well, that is an answer for bond traders. They know if they are willing to invest in "Joe American Homeowner" who repays their mortgage 95% of the time or more then maybe that 5% of not receiving the payment is worth an additional .6% to 1.1% in yield to them. It's risk vs reqard. But this additional risk...the chance that a home loan will not be repaid is why there is a premium to this investment type.

To bring it home for you...when US Debt gets over-sold then Treasury Yields go up as referenced by the link in the above paragraph (3.6 yield on a 10-year on March 1st vs 3.91% today). This happens because the FED is trying to attract new buyers of their debt. MBS yields in turn need to keep pace, or stay ahead of a 10-year yield to attract new buyers. If it didn't, no one would buy MBS...they would buy treasuries as it is a safer investment knowing the US will repay that debt. In summary, the over-supply of US Debt and a downgrade of debt over-seas caused bond traders to either seek other investments or require a higher yield to invest in those bonds...and this caused mortgage rates to go up .25% in one day.