Homeowner Rescue Plan - The Bad and the Good

Despite reservations, Bush is ready to sign the mortgage relief measure for 400,000 strapped homeowners. The measure, regarded as the most significant housing legislation in decades, lets homeowners who cannot afford their payments refinance into more affordable government-backed loans rather than losing their homes. It also offers a temporary financial lifeline to troubled mortgage companies Fannie Mae and Freddie Mac -- pillars of the home loan market whose losses have sparked investor fears -- and tightens controls over the two government-sponsored businesses.

The bad. As with the government's previous attempt to protect and bail-out homeowners in line for foreclosure, the current measure is much the same. The FHA will be allowed to insure up to $300 billion in new 30-year fixed-rate mortgages for at-risk borrowers in owner-occupied homes if their lenders agree to write down loan balances to 90% of the homes' current appraised value. Will it help many people to stay out of foreclosure? Not really. You see, its the same story all over again. Individual homeowners set to lose their homes must make an "arrangement" with their lender to reduce monthly mortgage payments into the affordable range. The homeowner must meet pre-defined criteria to qualify and it is ultimately up to the lender to allow a renegotiation or not. Most homeowners will not be helped with this measure, which in my opinion, is no more than a public relations "add-on" to the bill to help pacify disapproval of the Fannie and Freddie bail-out.

The good. To free up safer and more affordable mortgage credit, the bill permanently would increase to $625,000 the size of home loans that Fannie Mae and Freddie Mac can buy and the FHA can insure. They also could buy and back mortgages 15 percent higher than the median home price in certain areas. Also, the bill allows Treasury over the next 18 months to offer Fannie and Freddie an unlimited line of credit and the authority to buy stock in the companies if necessary.

Restored investor faith in the quality Fannie/Freddie mortgage backed securities, the expansion of low cost available credit for home lending, and the increase in loan limits qualifying for conventional home loan mortgage rates is the real intent and the real positive of the measure.

In recent months, we have witnessed lackluster investor participation in the mortgage markets. This has kept current mortgage rates, although good, from reaching the lowest levels in history. Lender spreads continue at all-time highs to account for the current risk in the market.

The effect of more available and safer mortgage credit will lead to more action on the home-buying front. In turn, housing stabilizes and lenders reduce their mortgage spread premium as risk lowers and lender competition increases. This is the good that can come with this measure.

I know, there are many out there stomping at the bit because taxpayers may have to foot a large bill for the bailout. I don't blame them, and agree that lender greed coupled with borrowers with blinders on, are at the root of our current housing mess.

No matter how we got here, or who is to blame, something needed to be done. The financial stability of our nation is at stake, and I think this is a major step in the right direction.

Foreclosure rates continue to rise and home sales tumble.

220,000 homes were lost to bank repossessions in the second quarter, according to a housing market report Friday issued by RealtyTrac. A total of 739,714 foreclosure filings were recorded during that three-month period, up 14% from the first quarter, and 121% from the same period in 2007. That means that one of every 171 U.S. households received a filing, which include notices of default, auction sale notices and bank repossessions.

Existing home sales fell 2.6 percent in June, more than double the expected amount. The National Association of Realtors reported Thursday that sales dropped by 2.6 percent last month to a seasonally adjusted annual rate of 4.86 million units, the slowest sales pace since the first quarter of 1998.

Yes, we certainly could use a lift, and the housing bill could be just what we need.

May the Mortgage Rates be with You!

Refinance Tool Box

Rates A-Risin

Rates have bulked up considerably this week. .25% to .50% depending upon the term and LTV.

There are a number of factors causing this, but the main culprits are the treasury yields and mortgage spread premium. The 10-year trasury yield has gone up almost one quarter percent in one week. Money has been moving out of bonds and into the stock market on the risk side and other higher yielding investments on the safe side. Lately, the drop in oil has spurred the activity out of bonds.

You might ask yourself... Self, why have 30-year fixed rates gone up one-half percent when the treasury yield only went up one quarter percent?

Well, the mortgage spread premium that mortgage buying investors and banks has gone up once again. Perceived mortgage investor risk has heightened with the Fannie and Freddie bail-out news. There are more and more lenders pulling out of the mortgage market. Less competition equals higher mortgage rates when demand is less than stellar.

You might consider locking a rate if you are refinancing and have a beneficial program option. Mortgage rates are still in a low range historically, but that could change and quickly. Better to lock a sure thing low rate than to sit on the fence and let your benefits rise away into the sunset.

I've experienced too many people talk themselves out of locking superior rates this year, waiting for lower and lower rates. So many have been burned by the hesitation this year. Hey, rates could go down from here, but the odds of a substantial rate reduction in the cuurent financial environment is very slim. The odds of mortgage rates rising even into the 8% range is not out of the question. Important thing to keep in mind if you are currently shopping mortgage rates.

May the Mortgage Rates be with You!

Refinance Tool Box

Welcome to Mortgage Gamblers Anonymous!

Welcome to the first meeting of Mortgage Gamblers Anonymous. Our support group is here to help those that sit on the fence checking mortgage rates day after day, yet cannot bring themselves to actually lock a rate. They possess a grave fear that the minute their rate is locked, mortgage rates will suddenly drop. To their chagrin, stomachs turn as mortgage rates go up, when great rates were available only yesterday. Yes, this is a horrifying disorder that unfortunately affects millions in our country. It needs to stop!

Working together, we can make a difference. Those sitting frozen in fear, glancing at their latest mortgage rate quote, can and will say “Lock My Rate!” They will not feel remorse if rates drop after commitment. In fact, our ex-mortgage gamblers will rejoice in the knowledge they made a wise financial decision that will produce benefits for years to come.

First up…. My name is Power Arms and I am a Mortgage Gambler. Alleluia! The crowded room cheers in excitement at the revelation, tears flow, and one by one all members admit they are in fact ….. Mortgage Gamblers!

You too, can make this courageous affirmation and end your suffering! Don’t worry, all Mortgage Gamblers Anonymous member identities are held completely confidential by punishment of a rather large mortgage pre-payment penalty for those who leak names.

Ok, I might have gone slightly overboard with our new club, but my fellow mortgage professionals and I work with this situation on a daily basis. Literally thousands upon thousands of rate shoppers looking for the best mortgage rates, are eligible for a rate that will bring substantial immediate and long-term benefit, yet state …. “I’m gonna wait for rates to drop a bit more”. Rates promptly rise and reduce their original benefit opportunity. The common follow-up response …. “I wish I locked the rate with the first quote you gave me …. I think I’ll wait for rates to drop to get that first deal”.

Don’t feel bad if you fall into this category, you have plenty of company. My unofficial guess is that more refinance mortgage shoppers wait for a better deal, rather than lock immediately, even when the benefits are quite substantial.

Refinance rates are still near historical lows, so rate shoppers should keep in mind that currently, there is not a lot of room for rates to drop. Yes, maybe there is room for a one-half to three-quarters percentage rate drop under perfect conditions, but recent underlying economic factors suggest otherwise.

Look at it another way. A half-point reduction in rate on a $200,000 mortgage will result in savings of roughly $60 per month. Now, assume that refinancing at the current rate will save you $300 per month. You decide to wait because you want that extra half-point cut in rate, although the odds are not in your favor. If you have to wait one year to get your dream rate, you lose $3,600 (12 months x $300 initial savings benefit). You wait three years, lose $10,800. Wait five years, you lose $18,000!

Now, assume that you timed things perfectly and got that one-half point cut in rate the following week (repeat- highly unlikely), which results in a monthly savings of $360. Over five years you would save $21,600 as opposed to the $18,000 savings by locking your original rate quote. The difference in savings is only $3,600 over five years.

Would you risk losing a “sure thing” $18,000 five-year savings over a high-risk wait for a rate drop that will only save an additional $3,600? I hope not!

Every once in a while, we have to bring out the “Tough Love” here at the Refinance Tool Box. Mortgage Gambling is a tough addiction to break, but we know you will overcome! We hope that you will be able to “Lock that Rate” when presented with a beneficial refinance scenario, and not be that guy who risks and loses multiple thousands, gambling to save a few extra bucks.

May the Mortgage Rates be with You!

Refinance Tool Box

Fannie and Freddie – Proud Parents of Many New Mortgages to Come!

Government backing of GSE giants Fannie Mae and Freddie Mac has bolstered the mortgage industry outlook for now and ensured us that Fannie and Freddie will continue to adopt new mortgage offspring, adding to their already huge family of home loans.

The Bush administration and the Federal Reserve announced an emergency rescue plan Sunday to bolster Fannie Mae and Freddie Mac, which hold or guarantee more than $5 trillion in mortgages -- almost half of the nation's total.

The plan would temporarily increase a long-standing Treasury line of credit that could be provided to either company. Treasury also said it would, if necessary, buy stock in the companies to make sure they have enough money to operate. The Fed also announced it would allow Fannie and Freddie to get loans directly from the Fed -- a privilege previously granted only to commercial banks until this March, when the Fed extended the borrowing to investment banks to deal with the collapse of Bear Stearns.

Fannie and Freddie buy mortgages and then package them into bonds, which they guarantee. They then sell the bonds to investors, including mutual funds, hedge funds, pensions, annuities - just about any institutional investor you can think of. Monday began with a good sign for Freddie Mac: It attracted more bidders than it had all year for one of its regular debt auctions which raised $3 billion in short-term securities.

The government has caught flak from many sides for it’s response to the Fannie and Freddie credit crisis. The biggest outcry is that the Fannie-Freddie lifeline puts taxpayers on the hook for the bill. The sad truth is that without government assistance, taxpayers would ultimately pay a much higher price with a Fannie-Freddie collapse.

A collapse of Freddie and Fannie would mean disaster for this economy, already walking on a tight-rope. Warren Buffett has made statements in the past that he feared the failure of Fannie and Freddie could set off a "derivatives time bomb" that would implode the whole financial system.

According to Bloomberg, "Freddie Mac owed $5.2 billion more than its assets were worth in the first quarter, making it insolvent under fair value accounting rules... The fair value of Fannie Mae's assets fell 66 percent to $12.2 billion, data provided by the Washington-based company show, and may be negative next quarter." Both companies need to raise billions of dollars to stay afloat and that is the issue. With shares of both companies in collapse and little investor faith in their new bond issues, it would have been impossible for them to raise the money they need. The government backing has at least in the short term, relieved this capital infusion issue.

What will the cost to the taxpayer be? No one can tell at present, but it might not be as much as some feel. A new investor faith in the security of Fannie-Freddie bonds, coupled with a rebound in their share prices could significantly reduce the need for Fannie-Freddie to dive into its government credit line. The severity of the continued housing slump and inflation will ultimately determine the depth of taxpayer burden in this matter in my opinion.

How will this affect mortgage rates? Again, there are two opposing views. One camp feels that mortgage rates will rise significantly as inflation rises and mortgage investors demand a higher spread premium for risk.

Others, including myself, feel that we will continue on for the remaining year in a relative tight range for mortgage rates, not moving too far from current historical low levels. Investor confidence in Freddie-Fannie may even reduce the mortgage spread premium as evidenced this week.

Refinancing at current mortgage rate levels is advisable if you’ve been waiting on the fence. The best-case scenario, rates drop slightly from here. Worst-case, we get hit with heavy inflation and worse housing numbers and rates go up 1 percent to 2 percent. Don’t be that borrower sitting on the fence and missing the opportunity for great mortgage rates!

May the Mortgage Rates be with You!

Refinance Tool Box

Government Shuts Down Mortgage Lender IndyMac, While the Fannie/Freddie Wild Ride Hits Full Speed

IndyMac Bank's assets were seized by federal regulators on Friday after the mortgage lender succumbed to the pressures of tighter credit, tumbling home prices and rising foreclosures. The bank is the largest regulated thrift to fail and the second largest financial institution to close in U.S. history, regulators said.

IndyMac grew rapidly during the real estate and home building boom. Its specialty was so-called Alt-A loans, those for which home buyers were asked to produce little or no evidence of income or assets other than the house they were buying. But when the housing bubble burst and prices began to fall, losses at IndyMac began to rise. Investors ran away from the mortgage-backed securities, leaving the bank to suffer the loan losses itself and without the funding it needed to make new, safer loans.

I’ve been harping for months about mortgage lenders sitting on the fence, and now you have a major league example of why investors are not exactly excited about venturing into mortgage-backed securities (MBS).

Today, the only real competition among conventional mortgage lenders is in the Low Loan-to-Value mortgages coupled with fully documented High Credit Score borrowers. We’re talking 80% LTV and below coupled with 700 and up borrower credit scores. This A Grade loan type presents a relative small risk to the investor because there is enough equity to absorb a loss in the event of default on the mortgage, and a lower risk of default for high credit score borrowers that have provided full documentation on their mortgage. Mortgage rates are still near historic lows for this loan type because the relative low risk and high liquidity in the mortgage after-market.

So, where do you go to get a great mortgage rate if you have a high LTV loan scenario and/or less than perfect credit?

Just a minute as I cue my broken record….. FHA …. Of course! Since FHA home loans are Federally Insured, lenders are more than happy to jump in the pool for these mortgages. Mortgage rates are as low as conventional Grade A home loan types, without the restrictive entry qualifications. LTV’s can go as high as 97% of the appraised value of the borrower’s home. The three major qualifications that must be met on today’s FHA are: 1) No mortgage late payments in the previous 12 months 2) A mid fico credit score at 580 or above 3) You must meet the Debt-to-Income ratio (DTI) requirement as “Stated Income” loans are not offered with the FHA home loan program.


IndyMac's failure came the same day that financial markets plunged when investors tried to gauge whether the government would have to save mortgage giants Fannie Mae and Freddie Mac.

The anxiety over Fannie Mae and Freddie Mac, crucial to a recovery of the battered housing market and the economy as a whole, reached a fever pitch on Friday and took shares of the companies and the broader markets on a wild ride.

The well-being of Fannie Mae and Freddie Mac is crucial because they hold or guarantee about $5 trillion worth of mortgages, or about half the outstanding mortgages in the United States. Fannie and Freddie both said in statements issued late Friday that they have the adequate capital they need to operate and to meet targets required by regulators. "In fact, we have more core capital, and a higher surplus over our regulatory requirement, than at any time in this company's history," said Fannie's statement.

"Freddie Mac is not on the threshold of conservatorship because we are adequately capitalized," said the statement. "The preliminary indications of our expected financial performance for the second quarter, while reflecting the challenges that face the industry, do not point to an immediate need to raise additional capital."


We really need to see what Fannie and Freddie’s true current credit losses are. News of a liquidity crisis for a major financial institution will always create market panic. Investors are worried that continued problems in the housing market would cause more than the $12.7 billion losses the two firms have lost between them since last July. The decline in their stock value makes raising additional capital to cover those future losses that much more expensive and difficult.

Still, analysts say there is little doubt that the federal government would step in to rescue Fannie and Freddie should rising losses and plunging stock prices leave them without the capital they needed to continue to be the primary source of mortgage funding in the nation.

We’ll wait and see where the Fannie-Freddie wild ride takes us, but rest assured, it will be headline news for some time to come.

May the Mortgage Rates be with You!

Refinance Tool Box

Mortgage Rates Dipping on Week

Mortgage rates have dipped on average of 1/8 to 1/4 percent this week thanks to an upsurge in buying activity on the bond market. 10 Year treasury yields have declined .125% over the past week and mortgage shoppers are reaping the reward.

With a slow economic week past and present, the market seems focussed on the price swings in oil. We'll take what we can get in the mortgage market and run to the closing table on any dips. Those on the refinance fence might want to venture on in for a quote and seriously consider locking now. Continued threats of rising inflation and weak financials accompanied by a continuation of poor housing numbers could move mortgage rates out of their historical low range very quickly. It's better to lock a sure thing when the getting is good than to gamble on lower rates down the road in my opinion. Many mortgage shoppers waited on this January's mortgage rate lows and are kicking themselves at present time.

Not much more to report of any significance, so we'll hope the recent dip in mortgage rates hold for the remaining week.

May the Mortgage Rates be with You!

Refinance Tool Box

Falling Dollar, Rising Mortgage Rates

The rate of “Inflation” plays a pivotal role in the final mortgage rate percentage quoted for home loans. Mortgage lenders and investors will expect a certain pre-defined rate of return after inflation, to cover their anticipated profit, and to account for risk of default on the mortgage coupled with insufficient home equity to cover the original note.

This is where the dollar enters the picture. The almighty dollar has been declining steadily for six years against other major currencies, undercutting its role as the leading international banking currency. The long slide is fanning inflation at home and playing a major role in the run-up of oil and gasoline prices everywhere.

A Falling dollar makes everything made in America near dirt cheap to many foreigners. Meanwhile, American consumers, both those who travel and those who stay at home, are seeing big price increases in energy, food and imported goods. The dollar has lost roughly a quarter of its purchasing power against the currencies of major U.S. trading partners from its peak in 2002.

Since oil is bought and sold in dollars worldwide, the devalued dollar has made the recent surge in energy prices even worse for Americans, leading to $4 gasoline in the United States. Analysts suggest that of the $140 a barrel that oil fetches globally, some $25 may be due to the devalued dollar. Further declines in the dollar will add to oil's appeal as a commodity to be traded.

The only thing keeping current mortgage rates near all-time lows is the bond market. Luckily for mortgage shoppers, mortgage rates are made up of US bond yields (10-Year Treasury Yield) plus a mark-up for lender return (anticipated return + risk factor + rate of inflation). Despite the fact that mortgage lender mark-ups are historically high, we are still experiencing low mortgage rates.

The national average 30-Year fixed mortgage rate is currently in the 6.25% range, despite the unusually high lender mark-up averaging approximately 2.3%. Now, without the current lender risk and high inflation, the lender mark-up would be more in the 1.5% range historically, and result in current mortgage rates for 30-Year fixed rate mortgages at 5.5%!!!

The impact of the falling dollar is not always visible to the average consumer. Not like the big numbers on gas pumps that give stark evidence of price levels. Since the falling dollar has a significant impact on inflation, and inflation has such a large role in the make-up of mortgage rates, mortgage rates shoppers should keep an eye on the value of the dollar. For the sake of continued low mortgage rates, we hope The Buck Stops Here!

May the Mortgage Rates be with You!

Refinance Tool Box

Mortgage Lenders Sitting on The Fence, Trying to make a Dollar out of 95 Cents

With today’s market close, we have experienced a .302% decrease in the 10 Year treasury yield, which should mean that mortgage rates have decreased by the same amount…. Right? Well, in normal times yes, but today, no. In fact mortgage rates have nudged down very little in that time span.

It seems that mortgage lenders are still sitting on the fence and hoarding as much cash as possible. In fact, the lender spread premium in mortgage rates for shorter term 20 year, 15 year, 10 Year, and assorted 1 to 10 Year ARM mortgages have increased steadily in the previous three weeks.

There is little for lenders to get excited about as unstable home values, credit liquidity concerns, and inflation hold center court with little positive news as of late. Simple supply and demand tells us that lenders can charge a higher yield on mortgage rates because they have little worry about competition for your mortgage.

Fortunately for those that enjoy low mortgage rates, the treasury yields are at such a low level that we are still experiencing near historic low mortgage rates, despite the non-historic high lender spread.

Now, these historic low mortgage rates do not apply to everyone. As the loan-to-value ratio heads above 80% to the 95% level, lender spreads and mortgage rates are increasing significantly. In my opinion, FHA home loans will be the best bang for your buck if you are refinancing at over 85% LTV. FHA mortgage rates are still at excellent levels for those high equity loans and should at least be checked out before blindly going conventional.

As a recap, conventional mortgage rates are still at excellent historic levels if you have good credit and are refinancing lower than 80% of your home’s value. For those with poor credit and/or refinancing over 85% of your home’s value, FHA is the place to go for current low mortgage rates.

Take care, and Happy 4th of July!

May the Mortgage Rates be with You!

Refinance Tool Box