Behind The Mortgage

What Yesterday’s Fed Announcement Means for Mortgage Rates

Alex Stenback — Thu, 26 Jan 2012 15:33:56 +0000

Yesterday, the Federal Reserve Open Market Committee (FOMC) wrapped a two day conclave in the usual manner – with a policy statement and rate decision.

The policy statement, in addition to reciting the usual litany of economic yin and yang (economic growth moderate in US, slowing overseas. Employment bad, household spending kind of OK, housing in the dumps) contained some big news for rate watchers.

But before we get to that, lets rewind a little.

What Does the Fed Have to Do with Mortgage Rates?

First things first: The Fed does not set mortgage rates (say it with me, for emphasis: The Fed does not set mortgage rates.)

That said, for interest rate watchers of all stripes, the Fed statement is important – though the The Fed only sets certain, short term interest rates (the ‘Fed Funds’ rate, and the discount rate ) their outlook on monetary policy, the economy, and inflation is hugely influential when it comes to market-based rates like mortgages.

For instance, yesterday, within minutes of the official Fed Statement, mortgage bond markets rallied toward lower rates. That rally has followed through into today, with most lenders quoting 30 year fixed rates .125% to .25% lower than they were yesterday morning. That may not seem like a big deal – .125% is only worth about $16/mo on a $200,000 loan, after all – but as these things go, it is an impressive one-day move in mortgage rates.

If you read the statement, there was nothing in there that said “mortgage rates are hereby lowered by .125%” but that is in fact what happened. Which brings us to the next question.

Why Did Rates Drop?

For that answer, we need to look to the actual Fed Statement. Here’s the key passage.

“To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy…snip… and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014. ”

So big deal right? Let’s compare that to the last Fed Statement from Dec 13 2011:

“The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.”

And there you have it – the Fed has extended the “low rate” target date by a year or more – from “Mid 2013″ to “late 2014.”

Leaving aside what that says about the general state of the economy, this is a clear signal to the markets that the Fed sees neither inflation, nor economic recovery (the two things that will send mortgage rates higher) on the medium term horizon, and will maintain the course until at least late 2014.

In turn, bond markets immediately moved toward lower rates, and mortgages (or mortgage bonds) followed along.

This happens because the bond market (or any market) game is in part one of anticipation, that discounts not only present reality, but the expected reality 6 mos or more down the road. In other words – rates rise and fall based on what is happening today, but also in anticpation of future events or conditions.

So when the Fed says “Hey, rates are going to stay low for a lot longer than we said the last time” it clears the decks for market rates to move lower.

Does this mean low mortgage rates until 2014?

Not so fast. Remember, despite all the data, degrees, influence, and high powered minds at the Fed, they can be wrong. Markets can move against them. This is after all the same body that could not collectively see the 700 billion dollar housing bubble 6 mos before it popped. Think about that before you assume rates will stay this low until 2014.

Bottom line: All we really know is that Mortgage rates will stay low until they don’t.
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Watching mortgage rates? Need a rate quote? Follow me on Twitter for a leg up as mortgage-related news breaks, and if you are actively shopping for a mortgage, feel free to drop me a line I answer my own email and reply to all inquiries promptly..

Get Smarter: Ignore the National Real Estate Market and Use Local Tools

Alex Stenback — Thu, 22 Dec 2011 16:55:51 +0000

November Housing Inventory Lowest Since 2004

I’ve been telling you for a while that there is no such thing as a “National Real Estate Market” and that if you really want to understand what is going on, looking at the local picture (wherever local happens to be for you) is crucial.

Call it confirmation bias if you will, but here’s an excerpt from Calculated Risk (by far the best Macro Coverage for real estate on the web, bar none) today that should ring familiar to regular readers:

“…it is location dependent now – although I expect to see some more price declines on the national repeat sales indexes. Some areas have a significant backlog of distressed homes, and there is no rush to buy in those areas. In other areas, prices have probably already bottomed (or are close enough that there will be some attractive prices.)

So where to find the best local data? Start with your local real estate organizations. Be cautious – Levels of transparency vary, and you do need to get beyond the headlines and press release bullet points, which almost always have a little topspin – these are trade orgs, after all.

In Minnesota, we are fortunate to have a set of local Realtor Orgs that do a great job with transparency, hit a mostly straight ball, and put the date into multiple formats to help both realtors and homeowners make better sense of it all. We are lucky to have them, really, as a resource.

My personal favorite’s, data wise?

1. The monthly skinny video, which provides a nice flyover of the prior month’s real estate activity, with good insight on what to take away from the raw numbers.

2. The Thing: For the analytical-at-heart, or those that want to dig deeper into local housing market trends. You can search and filter sales data by zip code, city, school district, property type, price band and more. The Thing, if you will forgive the phrase, is The Shit.

Why Are Mortgage Documentation Standards So Strict?

Alex Stenback — Fri, 09 Dec 2011 17:01:47 +0000

A favorite question from many clients these days goes something like this:

“Help me understand why we need to document every deposit on our bank statements – I mean, we have the money, clearly. What gives? Are we being singled out for special treatment here?”

I find a speed limit analogy helps.

Today, it is well known that if you drive at 5-7 miles over the speed limit you will almost never get ticketed.

Imagine if one day, people driving even 1 mile over the limit almost caused a worldwide depression, and pushed the global economic system to the brink of the abyss?

That would be the end of the 5-7 mile per hour rule.

And that’s about where lending stands today. The path to loan approval is lined with virtual traffic cops who will pull you over and demand additional paperwork if any little thing is amiss.

Don’t take it personally - The good news is they won’t fine you, and as painful as it can be, they are there to ensure safe passage to your new home.

Weekly Mortgage Market Commentary: Monday, November 21st 2011

Alex Stenback — Mon, 21 Nov 2011 15:35:28 +0000

Last Week:

Mortgages chugged sideways last week. From Monday through Friday there was actually some modest improvement in raw pricing of mortgage bonds, but not enough to impact consumer facing rates, which remained virtually unchanged all week.

Why the drama free week? Moderately OK economic data points in the US (weekly jobless claims average slipped under 400K, jobless claims 7 month low, decent print from retail sales, optimistic permits/starts data from home builders, you get the idea…) and a Eurozone financial crisis that everyone knows is coming, but is being obfuscated and delayed by Eurozone politicians and bankers who’ve taken to continually pumping chaff into the jetstream rather than deal directly with the problem.

This Week:

Anything meaningful that happens this week will need to happen in 3 days – Thanksgiving looms, and markets are closed outright on Thursday, open for a half-day Friday but you can probably guess the level of activity expected.

The focus will continue to be on Eurozone finance, but the US is about to get a second debt ceiling debacle: 1. The “Supercomittee” to save the US will fail. 2. The cuts set during the last debt-ceiling deal will not happen. Both of these events, in a Macro sense, are mortgage rate friendly in that they are recessionary, and nothing sends rates lower, faster, than a failed recovery.

Problem is, rates are already very, very low (30 yr fixed trending at or below 4%, on average) so it is unclear how much room there is for mortgages to tumble here, and it would be a mistake to underestimate how difficult it is to predict the timing of any further drops, if they happen at all, no matter how ugly the timing might be.

As for the economic calendar proper, we have:

Monday: Existing home sales (expected to dip)

Tuesday: Real GDP 3Q (unchanged expected), Fed Minutes from 2 Nov meeting

Wednesday: Durable goods orders (expected to fall), Personal Income/outlays (inflation measure PCE within expected to rise .1%), weekly jobless claims

Thursday: Markets closed

Friday: Markets close 2PM, no data scheduled.
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Watching mortgage rates? Need a rate quote? Follow me on Twitter for a leg up as mortgage-related news breaks, and if you are actively shopping for a mortgage, feel free to drop me a line with a few bullet points about your situation. I answer my own email and reply to all inquiries promptly.

HARP II: Fannie and Freddie Release Expanded HARP Refinance Rules

Alex Stenback — Thu, 17 Nov 2011 22:31:14 +0000

Late in the day Tuesday, Fannie and and Freddie released their bulletins outlining the specific changes to the HARP, or Home Affordable Refinance Program.

[ If you are just picking this up now: HARP (now HARP II) is designed to help borrowers who may be underwater, or have little or no equity in their homes by making a refinance easier and more affordable. More on this here, but the changes will allow refinancing of loans that are more than 125% of the homes value, ease or eliminate the appraisal requirements, and a number other factors that will make it easier and cheaper for homeowners to take advantage of today's ultra-low rates.]

[This will be mostly gibberish to anyone but a lender, but for those interested, or suffering from insomnia, the actual updates are online here (Fannie) and here (Freddie) ]

Rather than attempt to put the changes to prose, I will just run them out for you below, Q&A style, but will add three important thoughts to keep in mind as you read:

1. Think ‘Phased’ Changes: Though the expanded rules have been published, the specific changes themselves will not go into effect right away, and will be phased in over the coming months. This is SOP for the Agency’s when announcing new or major product changes, and it means it could be 4-5 months before loans can actually close under some of the expanded rules. Other rules changes will be adopted much more quickly than that, however.

2. Lender Participation is Still TBD: The HARP program remains voluntary for lenders. While the agencies have made changes to incentivize more uniform and widespread adoption HARP II rules by lenders/servicers, it will still be some time before each lender analyzes these changes, assesses the risk, and decides which they will allow, which they won’t, under which circumstances, and when.

3. Change is Assured: This is a complicated program, with many counterparties (mortgage insurers, second mortgage lenders, servicers, originators, the agencies themselves) needing to act in concert. No easy task. This will take time to sort out, and inevitably the rules will undergo some tweaks as the involved parties attempt to figure this out in a practical “can we start closing loans” kind of way.

Read the Q&A, after the jump…

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HARP II Q & A: There are substantial, material differences in the way Fannie and Freddie are applying the HARP II rules, so I have split them up into separate Q & A’s. Today, I will tackle Freddie. Fannie will be tomorrow.

[ You can determine whether your mortgage is owned by either Freddie Mac or Fannie Mae by checking the follwing websites: http://www.freddiemac.com/mymortgage or http://www.fanniemae.com/loanlookup/ ]

Freddie Mac HARPII/Relief Refinance [open access] | You do NOT have to refinance with the same lender/servicer that currently holds your loan.

When can my HARP II refinance close? Except where noted, these changes will not be implemented until about March 15th 2012. I’ll update this Q&A as more information and new questions come up. It is important to note that you might be able to take advantage of the HARP II changes as early as January if you refinance with your current servicer. Same-servicer HARP rules are fairly different than the open access rules, so check with your servicer for details.

When will the progam expire? Loans under HARP II must close before Dec 31st 2013

What are the eligibility dates? Only Fannie or Freddie Mac Owned loans that closed prior to June 1st, 2009 are eligible for HARP II

Can I refinance with HARP II if my loan is more than 125% of my value?

Yes, Freddie Mac is removing the maximum loan-to-value ratio limit. However, this ONLY applies to new Fixed Rate Mortgages with terms up to 30 years. Loans with terms greater than 30 years, or Adjustable Rate Mortgages (ARM’s) with fixed terms of 5 Years or more are limited to 105% of value.

However: If your new first mortgage is less than or equal to 80% of value, the maximum total loan to value (first and seconds combined) may not exceed 105%, no matter the new mortgage type.

Will I need a physical appraisal of my property?

Not necessarily, but maybe. Lenders have two choices:

- Option 1: An automated appraisal through Freddie Mac’s proprietary Home Value Explorer, or HVE. Only for 1-2 unit properties, automated results must have a high or medium “confidence” factor (technicality, which basically means the automated appraisal is statistically sound as a measure of value.)

- Option 2: Obtain a new appraisal. This will be a less appealing option, since the lender then must stand behind the value and condition of the property, and is on the hook if in the future the value or condition is deemed to be misrepresented. I expect most lenders to follow option 1.

Can I combine a first and second mortgage?

No. All existing subordinate financing must be resubordinated (read: Stay in place) and cannot be paid with proceeds of the new mortgage.

Can I take out a new second mortgage at the same time as my HARP II refinance?

No. New subordinate financing is not permitted.

Can I refinance my second mortgage at the same time as my 1st?

yes, provided the terms of the second improve (payment must go down.)

Will I be restricted by loan type?

To a certain extent yes. You cannot take an ARM loan with a initial fixed rate period of less than 5 years. Aside from that, HARP refinancing does not restrict product type, but requires one of the following Borrower benefits: Reduce interest rate, Reduce monthly principal and interest payment, shorten the term, go from ARM to fixed, or interest only to amortizing.

Can a refinance my current loan into an Adjustable Rate Mortgage?

Yes, but the loan-to-value cannot exceed 105%, and ARM’s with initial fixed rate periods of less than 5 years are not allowed under HARP.

What if my payment history is not perfect. Will I be eligible for HARP II?

A perfect payment history is not required. Technically, there is no minimum required standard here, and the acceptability of the payment history will be determined by Freddie’s automated underwriting software. That said, I expect a few lenders to maintain an ‘overlay’ that requires no more than 1 30-day lates in the last 12 months.

Can my payments go up when I refinance?

Yes. There is no limit to the amount the payment may increase, so long as one of the other “borrower benefit” provisions are met: Reduce interest rate, shorten the term, go from ARM to fixed rate, or interest only to amortizing.

Will I have to document my income to refinance?

It depends. Technically, Freddie’s automated underwriting engine will determine the documentation requirements, so the results here will be HIGHLY dependent on other aspects of the loan file (LTV, Credit Score, Assets, etc.) At a minimum, a verbal verification of employment will be required, and at least one borrower must have a source if income.

What is I am self employed, will income documentation requirements differ?

Yes. Again, the ultimate determination will be made by Freddie’s automated underwriting software, so mileage will vary, but at a minimum you can expect verification of the existence of the business to be required.

Will investment properties and second homes be eligible?

Yes. Investment properties with 1-4 units, 1 unit second homes will be eligible, with some restrictions on both.

Will I be able to add closing costs to my refinance?

Yes. For loans greater than 80% of value, the lesser of 4% of the unpaid principal balance or $5000 in related closing costs/pre-paids/escrows may be added.

For loans less than 80% of value, you can add all related, bona-fide closing costs to the loan.

Can I get cash back at closing?

Yes, but only if the new first mortgage will be less than 80% of value, and the cash back amount does not exceed 2% of the new loan amount, or $2000 dollars, whichever is less.

For loans where the first mortgage is more than 80% of value, the cash back cannot exceed $250.

If I am bring cash to closing, will this cash be verified? Yes. Freddie’s automated underwriting software will determine the minimum documentation requirements. Expect to provide at least 30 days of bank statements.

Is there a minimum credit score required? Not technically,Freddie’s automated underwriting system will determine credit acceptability, but treatment will vary. Many lenders are expected to maintain minimum credit score requirements. Cuurently they range from 620-640, depending on the lender.

If I have mortgage insurance, will I be able to refinance?

Cautiously, yes. All of the details have not yet been worked out between the lenders/servicers, so we will have to punt a little until we see better guidance, but so long as the same percentage of coverage is maintained on the new loan, as existed on the original loan, for the entire unpaid principal balance, there’s nothing in the Freddie rules that prevent this.

What if I have LPMI, or Lender Paid Mortgage Insurance?

Maybe, but so far it does not look good. Previously, both LMPI borrowers and those who paid a single, up-front premium ran aground on the technicality that lenders and insurers just could not figure out how to effect this transfer.

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Interested in a HARP Refinance? Drop me a line with a few bullet points on your situation, and I will do my level best to help you determine if this is a good fit for you.

Also, pursuant to GSE rules, you are advised of the following: