Consumer Price Drop May Help Mortgage Rates in Short Term

A dirty word as far as mortgage rates go, is “inflation”. The CPI numbers reported today showed a huge drop in consumer prices and a boost in confidence for those concerned about inflation in our economy. Consumer prices dropped by 1 percent last month, the largest amount in the past 61 years as gasoline pump prices dropped by a record amount.

The reaction to that announcement was met by a nice decrease to an already declining 10-year treasury yield. The current yield is approaching the January 2008 lows, which also offered the best mortgage rates by historical standards. While some worry that we could enter a period of deflation with continued drops in prices, most economists believe that current conditions are not likely to set the stage for a deflationary period, such as witnessed in the Great Depression.

The current mortgage spread premium continues to hover near all-time highs, which may hinder the full effect of the falling treasury yield, but expect at least a short-term dip in rates. Whether the dip lasts one day or several weeks, I will not venture to guess, as current market conditions are affecting mortgage rates at a furious pace.

On the negative side for housing, it was also reported today that construction of US homes fell by 4.5 percent in October as home builders have cut way back. This represents the lowest level on government records dating back to 1959. It appears that tighter lending standards, rising foreclosures, and fear of the housing market’s value have kept many potential homebuyers on the sidelines.

Look for continued government intervention to curtail the current housing slump. Hopefully it will come in the form of assistance to troubled homeowners along with programs aimed at stimulating buyers to step up and purchase homes. Home stabilization is the key to our ailing economy and future growth of our nation.

May the Mortgage Refinance Rates be with You!

Refinance Tool Box

Is The New Federal Mortgage Relief Plan Enough To Help Ailing Economy?

The government announced yesterday, it’s latest effort to help troubled homeowners, but will it really help?

On the surface, it appears like a great plan to help people stay in their homes and to keep newly foreclosed homes from entering the market. Qualified borrowers would receive help in a few key ways. Their interest rate would be reduced so that the borrower would not pay any more than 38 percent of their gross income on housing expenses. Home loans can be extended up to 40 years and in some cases, some of the principle can be deferred, interest free.

To qualify, the homeowner will have to be at least 90 days late on their mortgage and would have to owe 90 percent or more of their home’s value. Investment property owners and those in bankruptcy would not be eligible.

Now for the catch. The plan is focused on loans owned or guaranteed by Fannie Mae and Freddie Mac. The problem with this is that although they are the dominant owners of mortgages in the US, their portfolio only represents 20 percent of delinquent loans.

The vast majority of troubled loans have been packaged into complex investments that are very difficult to unwind. Deutsche Bank estimates more than 80 percent of the $1.8 trillion in outstanding troubled loans have been packaged and sold in slices to investors worldwide. Most of those loans won't likely be helped by the new plan.

Citigroup and JP Morgan are expanding their mortgage modification programs, which in reality, may be a good sign of things to come. Modification and forebearance from the private sector will be good for all involved and help to make a significant dent in current expanding foreclosure rates.

As for further government assistance to troubled homeowners, a much better plan needs to be implemented in my opinion. Current government actions have been woefully inadequate and almost laughable in contrast to the mortgage bailout for big business.

Home value is key to our entire current economic problems, and a true effort by the government to help ailing homeowners would give the housing market the jumpstart needed to begin economic recovery.

Too often, economic matters come down to dollars and cents, leaving common sense out of the equation. People are hurting and experiencing tremendous stress as they lose, or are about to lose their homes. We should expect a much better plan to help the common person than what has been received.

May the Mortgage Refinance Rates be with You!

Refinance Tool Box

Will the President-Elect Obama Administration Help the Ailing Housing Markets?

Congratulations to president-elect Obama and the hope his election brings for change in the economy and housing markets. No one can predict if his administration will help our ailing business environment, but hey, he can't do any worse than his predecessor.

Hopefully, the newly formatted staff on capital hill will enact legislation aimed at stabilizing housing prices. This is the number one area of concern for the revitalization of the economy in my opinion. The stabilization effort needs to be attacked on two fronts. The first being real legislation aimed at keeping struggling homeowners in their homes. The second front should be aimed at stimulating home buyers to purchase new and existing homes. Continued depreciating home prices will only continue the downard descent of our economy.

On the mortgage refinance rates front, the thirty year fixed rate jumped to 6.47 percent last week as mortgage purchase and refinance applications took a slide. Mortgage lenders are still hoarding cash and keeping the mortgage spread premium at higher than normal levels. This coupled with last week's jump in the 10-year treasury yield has caused the bump up in interest rates.

Those refinancing now are still in good shape on a historical level as a 6.5 percent 30 year fixed rate is relatively low. The 10 year yield has dropped a bit this week and we are experiencing a slight drop off that 6.5 percent level for those looking to lock a rate now.

Keep an eye on upcoming housing numbers as this will be a leading indicator for not only refinance rates, but the economy as a whole.

May the Mortgage Refinance Rates be with You!

Refinance Tool Box

Home Sales Up While Refinance Rates Little Changed on Week

Sales of newly constructed homes rose in September, according to the monthly report from the U.S. Census Bureau, moving up 2.7% from August. You might think this is a good sign for our ailing housing market, and maybe it is, but sales are up where prices are the lowest. At least bargain hunters are now entering the home purchase market and that is a welcome change. On average, home prices are down almost 10% nationwide and still weighing heavy on the refinance and home purchase mortgage lending business.

Mortgage refinance lenders are still not stepping up to the plate and all indications are that increased lender participation for mortgages will remain flat until housing stabilizes.

For the week, mortgage rates have been somewhat stable as the 10 year treasury yield continued it's yo-yo movement, but in the end remains constant.

The future of home sales is really uncertain, but is now becoming affected by job losses. One of the most important factors affecting home sales is of course jobs, but with current economic conditions, it may be some time before level out on the job front.

Look for continued volatility for refinance rates as we finish up with 2008, and good riddance! Again, if you are considering a refinance now that will provide you with solid benefit, look to lock on the dips. Mortgage refinance rates are still in great shape on a historical perspective.

May the Mortgage Refinance Rates be with You!

Refinance Tool Box

Refinance Rates Dip On the Week

Refinance rates dipped on the week, mainly due to the drop in the 10-year treasury yield. The yield dropped almost one-half percent since last week and is being reflected in mortgage refinance rates.

The mortgage markets have been a see-saw all year and this weeks action is just a continuance of business as usual. I have harped on this before, but if you are considering a refinance or out and out need to refinance, it's a good idea to lock on the dips.

If this year is any indication, rates could go up and down in significant percentage moves for some time to come.

The short term credit markets have opened up a bit, which is good news for everyone, yet long term credit lending such as mortgages, are still tight. Some very good news for the economy and possible refinance rates is the reduction in oil prices by 50 percent. This deflationary event could bring more investors to long term treasuries and help to stabilize low interest rates on mortgages.

Housing prices are still deteriorating and new construction is down big time due to the excess inventory of homes. We really need a stimulus for home buying to truly bottom out, not only in home values, but the economy as a whole.

May the Mortgage Rates be with You!

Refinance Tool Box

Refinance Rates Nudging Upward for Week

Refinance rates have increased steadily over the past week by an average of about one quarter point. The stock market chaos has sent the 10-year treasury yield up and down like a yo-yo, but the real driving force behind rates as of late continues to be the mortgage spread risk premium.

Refinance lenders are becoming tighter and tighter with their cash and are bumping up the mortgage interest rates to account for the risk.

Again, most of the lender risk is derived from housing values. The goverment bailouts of financial institutions for bad debts and the direct cash infusion for banks will not do anything to lower the spread premium though, not until home prices stabilize.

In my opinion, the government should be focusing on real measures to help people to retain their homes and also get people purchasing homes. Yes, mortgage application guidelines should be met, but we need a stimulus to get homebuyers buying. Downpayment assistance, lowered rates, something with teeth that will actually jumpstart the home buying. My guess is that we may hear of some goverment action in this area, but hopefully the sooner than later.

May the Mortgage Rates be with You!

Refinance Tool Box

Refinance Rates Very Near Year's Lows

Mortgage refinance rates are very near the year's lows as the mortgage spread premium dropped about .35%, while the 10 year treasury yield continues it's descent.

Huge news with Lehman going under, Merrill taken over, and AIG liquidity issues have led to a flight to the safety of bonds, which is good for mortgage rates ... maybe not so good for the economy.

The government's takeover of Fannie and Freddie is playing a big part in the mortgage spread decline. As investors feel more secure in mortgage backed securities, the risk premium declines and mortgage refinance rates go down.

Housing numbers and values are still taking a beating, but at least we have one bit of good news on the inflation front. Oil has finally dipped below the $100 per barrel mark. This can go a long way toward curbing inflation and helping our economy.

These are in deed historic times on Wall Street and expect more wild flucutation in refinance rates. The good news now is that rates are low. The bad news is that property values are still suffering with no clear stabilization in sight.

The dwindling landscape of big investor money players such as Lehman and Merrill, along with fear of other big firms facing bankrupcty does not look good for near term investor confidence in the home finance markets.

If we have learned anything this year, it's to refinance on the dips. Today's low rates can be gone in a day. 10 year treasury yields can go up rather quickly, along with the mortgage risk premium in today's economic environment.

For those that are refinancing now or looking to refinance, now is a great time to lock while rates are low.

May the Mortgage Rates be with You!

Refinance Tool Box

Refinance Rates Down Big on Week

We experienced a very nice quick drop in refinance rates this week with the announcement that the U.S. Government will be taking over Fannie Mae and Freddie Mac. Rates dropped up to a 1/2 point in many mortgage programs!

The extreme drop in rates is very uncommon, in fact, we may have only experienced this rate action only a few times in history. Mortgage rates fell because the government stepped in to guarantee billions of dollars in outstanding mortgage-backed securities issued by Fannie and Freddie, making them instantly more desirable to investors.

While the 10-year treasury yield remained relatively constant, the mortgage risk-spread premium declined significantly. As investors bid up the price of mortgage-backed securities, that sent interest rates tumbling, with the average 30-year fixed rate falling below 6 percent for the first time since January, when rates stayed down only briefly.

A lot of people missed out on these rates the first time, but now have a second chance to cash-in on the lowest refinance rates in some time.

Will these rates last forever? Probably not. For those refinancing and sitting on the fence, now would be a great time to lock a rate. Rates have been extremely volitile this year and any major negative inflation, housing, or credit liquidity news could shoot refinance rates up again, and rather quickly.

May the Mortgage Rates be with You!

Refinance Tool Box

Refinancing and Private Mortgage Insurance (PMI)

Private Mortgage Insurance ( PMI ) is required by conventional and FHA refinance lenders for individuals that borrow more than 80 percent of their home's value. This insurance is a protection for the mortgage lender from default on the loan. PMI is not a protection for the borrower.

Mortgage Insurance is typically paid monthly by the borrower, and included with the mortgage payment. Including PMI, your total monthly mortgage payment is made up of Principle, Interest, Mortgage Insurance, Taxes, and Homeowner's Insurance. Private mortgage insurance is a tax-deductible expense, beginning in 2007.

Mortgage Insurance (PMI) Cost?

PMI charges are dependent upon the Loan-to-Value ratio and the amount to be refinanced. The more that is refinanced above 80% of the home's value in five-percent intervals (ie: 80%, 85%, 90%, 95%, 100%), the higher the percentile used for the monthly PMI payment calculation. For instance, an 80% Loan-To-Value can bring a .50 percent multiplied by the loan amount for Mortgage Insurance, where a 95% Loan-To-Value ratio may bring a .75 percent of the refinanced loan amount for the PMI calculation. Figure on a .70 percent as an average PMI percentile for estimation purposes.

PMI Example:

Assume refinancing your home valued at $200,000 with a loan amount of $170,000. Multiply the $170,000 loan amount by .007, resulting in an annual PMI of $1,190. Next, divide the $1,190 by 12 for your monthly Mortgage Insurance payment of $99.17.

Terminating PMI

The Homeowner's Protection Act (HPA) of 1998 provides protection for home loan consumers regarding private mortgage insurance.

Under HPA, you have the right to request cancellation of PMI when you pay down your mortgage to the point that it equals 80% of the original purchase price or appraised value of your home at the time the loan was obtained, whichever is less. Lenders should automatically terminate PMI payments once the loan balance falls below 78%

It is always a good idea to keep track of your principle balance and notify your lender once you approach that 80 percent Loan-To-Value ratio to make sure your mortgage insurance payment is cancelled at the appropriate time.

May the Mortgage Rates be with You!

Refinance Tool Box

Bad Credit Refinance

Exactly what is a “Bad Credit Refinance”?

Now this is not an official definition, but I’ll give it a go. A bad credit refinance is one in which an individual’s credit score and/or derogatory items listed on their credit report result in non-qualification for a prime conventional mortgage. In other words, you have to apply for a subprime refinance or an FHA home loan. The worst-case scenario is when the individual does not qualify for any refinance program available.

In recent years, most with bad credit would eventually refinance with a subprime lender and end up paying up to 3% and more in interest rate as opposed to the same loan scenario qualified with excellent credit. Yes there was a huge difference in refinance rates between bad credit subprime and excellent credit conventional home loans.

Those keeping up with the mortgage market, now understand that subprime lenders are pretty much a thing of the past and FHA has stepped in to fill the void. The important difference is that FHA home loans offer a distinct advantage over subprime mortgages in that they offer excellent refinance rates (comparable to excellent credit conventional interest rates) coupled with a high Loan-to-Value limit of 97% of the borrowers appraised home value.

So tell me, what is a bad credit refinance?

Again, this is not an official definition, but generally those individuals that have credit scores below a 620 FICO fall into the “bad credit” refinance scenario. In fact, those with credit scores between 620-700 and/or those financing most of the equity in their home would be advised to get an FHA home loan quote in addition to a conventional mortgage program quote to choose the best option for them.

FHA home loans are not credit score driven, but most underwriting investors will require a minimum of a 580 credit score to qualify. Also, no mortgage late payments in the previous 12 months will be allowed.

Those with credit scores below 580 will have a much more difficult time qualifying for a competitive refinance home loan. Today, it is mostly “hard money” lenders that cater to this crowd, and charge a major premium in interest rate for the privilege. An alternative to going “hard money” is to contact a reputable credit restoration company to improve your credit score within FHA range. The few hundred dollars spent on credit restoration with result in multiple thousands in principle and interest savings with a FHA refinance as opposed to a “hard money” home loan.

May the Mortgage Rates be with You!

Refinance Tool Box

Refinace Rates Week in Review

For all the market volatility this past week, refinance rates were little changed on the whole. This makes sense as the 10-Year Treasury Yield ended the week at a break-even.

As we know, inflation and housing prices play a huge role, not only for refinance rates, but for the economy in general. We experienced a few bright spots in these areas this week. The dollar gained, oil prices dropped, and June pending home sales went up unexpectedly.


The assumption that the Fed is more inclined to raise interest rates helped drive some dollar buying ahead of Tuesday's FOMC meeting. As it so happened, the FOMC elected to leave the fed funds rate unchanged at 2.00%. A continued stronger dollar will help with inflation in a large way.

Crude oil prices dropped 7.9% for the week at Friday's settlement to $115.20 per barrel. They are now down 22% from the high they hit July. No need to mention the importance of oil prices to inflation.

The National Association of Realtors said its Pending Home Sales Index, which is based on contracts signed in June, was up 5.3 percent to 89.0 from a downwardly revised 84.5 in May. The pickup in June signings sharply contrasted with forecasts by economists polled by Reuters who had expected home sales contract signings to decline 1 percent. The realtors said the improvement in contract signings "appears to be broadening" and expressed hope that housing legislation signed into law last month will further encourage buyers.

One month's worth of pending home sales is not enough to provide a trend, but the numbers are a welcome change. A stabilization or reversal in housing numbers will have the biggest immediate positive impact on the economy and mortgage refinance rates. We'll have to keep an eye on next month's numbers and hope for the best.

Will this week's positive signs for inflation and housing signal a potential comeback for the economy and real estate? I doubt it, but always remember that perception breeds reality. The more positive signals reported, the better for the economy. Everyone likes to get in on the bottom floor and nothing better than a trickling of key positive econmic reports to get the pot stirring. When investors and home buyers feel like the train may have left the station, the action begins.


May the Mortgage Rates be with You!

Refinance Tool Box

Risk and Refinance Rates

Today, Freddie Mac reported a $821 million loss in 2nd-quarter as more people with risky loans default. It was more than three-times larger than Wall Street expected as a huge number of borrowers with good credit fell behind on their exotic and risky mortgages. These so-called Alt-A loans make up about 10 percent of Freddie's portfolio, but accounted for more than half of the company's credit losses in the quarter.

About the only good news to take from today's Freddie Mac earnings report is the fact that most of the loss is derived from a relative few high risk areas - California, Nevada, Florida, and Arizona.

What does this mean for refinance rates?

Higher than expected losses from either Freddie or Fannie translates to a higher risk to investors in the mortgage backed securities market. This means that they expect a higher rate of return for buying mortgages.

We continue to experience this in the mortgage market on a daily basis. Depending on the refinance program, the mortgage spread is as high as 2.5%, which is a full point above it's average historical level of 1.5%.

This results in refinance rates that are up to 1 percent higher than normal. Thankfully, the 10 Year Treasury Yield remains at a low level, which offsets the higher mortgage spread premium.

Look at it another way. All things being equal, a par 30 year fixed refinance rate would be in the 5.375% to 5.5% range today using the historical spread premium!

The real deal for refinance rates and the economy as a whole comes down to the housing market. Rising risk and rising mortgage premiums will not decline until home prices stabilize. Most feel that we still have a way to go before this will occur.

If you are sitting on the fence want to refinance soon, now would be a good time to lock a refinance rate. It doesn't appear as if rates will drop much from here in the near future, but the risk of further refinance rate increases looms larger by the day.

May the Mortgage Rates be with You!

Refinance Tool Box

Volatile Week in the Mortgage Markets

Strap yourself in. The wild roller coaster ride continues for the financial and mortgage markets.

The week ended close to where it started for the major market indices, but the 10 Year Treasury yield had a nice little decline and clipped an eighth point off mortgage rates overall.

Financials continue to take a hit, increasing the mortgage-spread premium across the board. Risk is the key here, and the economy is still not showing any clear signs of a recovery trend. This week, the FDIC seized two regional banks and Merrill Lynch announced on Tuesday that it is selling $30.6 billion worth of U.S. ABS CDOs for only $0.22 on the dollar, in an effort to reduce its risk exposure and shore up its balance sheet.

Of course, this week, President Bush signed the housing bill into law, which includes support for Fannie Mae and Freddie Mac. The new law will be a benefit to mortgage lenders as it restores investor faith in Fannie and Freddie issued mortgage securities. We’ll have to wait and see what it’s impact will be on the mortgage spread. Without any other economic stimuli, this backing of the twin tower mortgage giants should reduce the spread and lower mortgage rates.

The remaining portion of the housing bill is mainly political fluff designed to make the Fannie and Freddie bailout more palatable for the masses. Although I would like to mention one important add-on to the bill that actually has some teeth and positive news for Jumbo mortgage shoppers.

There are maximum amounts for loans that the FHA will insure, and that Fannie and Freddie will guarantee. Those loan limits were raised temporarily this year. The new law now raises limits permanently. For FHA-insured mortgages, the new limit will be 115 percent of the median home price in that area, up to $625,000.

For conforming mortgages, those eligible to be bought by Fannie Mae and Freddie Mac, the conforming limit will remain at $417,000 for a single family home. Starting next year, the new limit is either $417,000 or 115 percent of the area’s median home price, whichever is higher. This new provision should help Jumbo mortgage shoppers to shave a significant amount from their interest rate when refinancing or purchasing a new home.

Expect continued volatility for mortgage rates. For every positive sign, we get a negative report in return. Inflation, oil prices, financial liquidity, and housing numbers are the big areas to keep an eye on relating to their impact on mortgage rates. Mortgage rates, although off their yearly lows, continue in good shape.

May the Mortgage Rates be with You!

Refinance Tool Box

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