The Mortgage Manifesto

What the Heck Happened to Those Low Mortgage Rates?

Were fixed mortgage rates reallly a full one point lower only 45 days ago?  It's hard to believe given how quickly we've seen them move back up.

Didn't the Fed cut rates 0.75 and then 0.5?  Yes.  Then why don't we see lower mortgage rates?

These are common questions that will leave you confused if you follow the incomplete information spit out from the general media.  Mortgage rates have specific economics that dictate where they are on a day-by-day basis.  These economics are sometimes simple and sometimes complex.  What's going on right now is definitely on the complex end of the spectrum!

Any company or institution involved in the realm of mortgage finance faces great change and uncertainty.  They also face a great need to raise cash.  As such, mortgage lenders have no need whatsoever to be aggressive in the rates they offer to the U.S. homeowner.  Why?  Because they'd rather keep some cash in their accounts instead of borrowing it out on a 30 year repayment term.  Cash now is better than cash spread out over three decades!  In addition, as these lenders are also witnessing rising defaults and late payments that were not modeled accurately in their portfolio there is even a lesser desire to borrow money out. 

Not until new financial models are created that seem credible and the current liquidity crisis pass will lender be extremely aggressive in pricing mortgage rates to you and I.  That won't happen anytime soon.

In addition, the markets are finally realizing what I wrote about half a year ago, the U.S. economy is in recession.  How deep & long this recession will last is yet to be determined.

In normal mortgage finance, mortgage rates move lower during an economic recession.  However, as you might easily guess, these are far from normal times in mortgage finance.

Throw in steady inflationary pressures on top of the industry turmoil and the recipe does not produce lower mortgage rates.

So, what do I think we will see happen in 2008?  Well, I still see one more dip lower in mortgage rates to come sometime in the next 4-8 weeks.  While I used to believe we'd see that dip occur sooner and reach the lows we say in January I think that looks less likely given how high we've seen fixed mortgage rates moves up during the past 30 days.

For anyone that has a desire or need to refinance into a fixed mortgage program this upcoming dip, and however low it goes, will present the lowest rates you will find for the remainder of the year.  Forget the lows we say in January.  That is the past!  If you hold out for rates to get back to exactly those lows you are making the same mistake that the homeowner selling their home today is trying to get a 2006 market value of their home.  That is the past. 

After this upcoming dip and however low it goes we will most likely face rising fixed mortgage rates for the remainder of 2008.  Why?  Stubborn inflationary pressures, increasingly conservative lending policies, and continued decline of home values make the option to funnel money into mortgage-backed securities not the great investment they were in recent years. 

The bottom line of this is there is less demand to borrow to the U.S. homeowner.  Lower demand means higher prices.  Simple economics that mean higher rates ahead.

www.BrettGrendahl.com

Mortgage Ready to Move Lower

Did you catch that recent dip in rates?  No.  Well many didn't considering how fast those low, low rates appeared and then vanished!

Fixed mortgage rates moved higher and higher in the past few weeks and recently settled in almost a full point above the recent lows we saw in January.

Some good news to report today.  Mortgage bonds are reversing in today's trading so it is likely we have seen rates peak in the short-term.  Now, we will see those same January lows again?  A few weeks back I thought so for sure.  But now, with how much higher rates moved I'm not so sure.

However, we are likely to see a move lower come about in the coming 2-4 weeks.  Just how low we go will be left up to the market.  For those of you that armed me with the information to lock in a low rate, I'm watching every day.

www.BrettGrendahl.com

Have You Marked Down Your Home Yet?

As you read news post after news post of the largest of financial institutions writing down their assets as the ripples of subprime mortgage finance continue to affect the markets have you made your mark down yet?

If you've been trying to sell real estate you know exactly what I mean!  The price the market will bear for your property isn't as high as it was a year ago.  Heck, sometimes it hasn't budged from the price of 5 years ago.

What if you aren't selling?  Does it affect you?  Yes, it does.

In order to model your finances properly you will most likely be having to mark down the current value of your largest asset item, your home.  Even if you have no plans to sell anytime soon you are still affected.  How so?  Well, should you have any upcoming financial restructuring need the value of your home is one key variable that drives what may or may not be possible for new financing programs.

In addition, most of the aggressive 2nd mortgage lenders that were basically beating each other up to borrow you up to 100% of your home value are now in a major retreat.  With every passing month the underwriting guidelines continue to tighten and the question of how much can I borrow brings you a lower and lower answer.

As the swath of foreclosures continues to widen your fellow homeowner is being replaced by bankers, not residents.  While you may have fallen in love with your home you better believe the banker doesn't feel the same.  They never wanted to own the property.  They only borrowed someone money against their ability to repay the loan and for security, attached the financing to the property.  As the number of properties they own increase they need to raise cash and do so by lowering the price on those properties to get them off their books.

Unfortunately, these deep discounts will affect comparable sales values for years to come.  That hits you, it hits me, it hits everybody.  It's not just the banks that need to write down assets, we all do.

www.BrettGrendahl.com

What Happened to Those Low Mortgage Rates?

Are you wondering how can the Federal Reserve lower their Overnight Rate by 0.75 and then 0.5 within only a few weeks and mortgage rates dipped for one morning and then moved higher?

From a casual glance, does that make sense?

The typical gloss-over from the general news media makes the connection between the Fed's actions and mortgage rates seem like simple math.  It so is not!  Our financial markets are much more complex than that.

Avid readers of the Mortgage Manifesto know the truth behind the economics of mortgage rates.  What we've seen so far the past few weeks is a good lesson in how mortgage rates move. 

Another point on my mind is the timing of rate locks.  Mortgage rates are always moving in a range.  Your goal, if you are seeking new financing, is obviously to lock while they are in the low part of the range and save money.  Now, how do you do that?

Mortgage rates move from pressures on the general bond markets but then we have to keep in mind that a specific lender is the one offering the rate.  Take this for example, one of our primary investors offered aggressive pricing on the Wednesday dip three weeks back.  When they did that they took in 1,200 new loan applications across the country.  1,200.  This surge of volume has now hit a completly understaffed undewriting department and the turnaround time for new files hitting underwriting is running about 10 days.

I advised my clients that acted on that dip in rates to get information to me ASAP so we could get to the front of that line.  I'm happy to report that those clients are hitting their closings now.

If you've been reading along the past few weeks you know I foresee another similar dip somewhere in the next 2-3 weeks.  Many of you have supplied me with the information I need to lock you in should this dip occur.  There are many more people waiting in the wings for this dip than there were for the unexpected move a few weeks ago.  That means we can anticipate another big surge.  You know the drill, those that prepare ahead get through the crowd the best.

Oh, that lender I mentioned, they've now backed off their rates higher than the market.  Why?  They need to handle the business they already took in before they can add more to overworked staff and systems.

So, even though the market might improve, if the lender's systems are already taxed don't expect them to offer super aggressive rates when they don't need to.

The advice going forward is get an application prepared and have your documentation handy so you can pounce on the next opportunity. 

www.BrettGrendahl.com

Widening Out the Yield Curve

A snap back in the market today has taken the fixed rate mortgage programs back closer to the highs of their recent range.  What is interesting though is that rates on short term programs are getting back to very attractive spreads when compared to the benchmark 30 year fixed rate mortgage.

It's been quite awhile since we've seen this widening spread in the yield curve (the plotting of short term to long term rates).  A few years in fact.

Here's a snapshot of what I am talking about for current rates:

• 1 year Treasury ARM at 3.875%
• 5/1 Treasury ARM at 5.00%
• 30 year fixed rate at 5.875%

If are willing to take some risk you can get two points lower on that 1 year product right now.  The 5/1 ARM is becoming an attractive program again and should at least go into the decision making process for many people.

As the Fed continues to cut expect this widening to expand.

www.BrettGrendahl.com

Mortgage Rates Moving Higher

Quick market update as mortgage bonds are weakening in today's trading.  Expect to see mortgage rates continue to drift higher this afternoon or tomorrow. 

As I wrote during the last two weeks, expect it to take 4-5 weeks before we see another dip near or at the lows we saw two weeks ago.

Yep, the Fed cut their Overnight Rate and mortgage rates headed higher.  Please don't follow the general media headlines to gauge where and when mortgage rates move.  They are behind the curve on what really determines how mortgage rates price day-in and day-out.

www.BrettGrendahl.com

Fed Stimulus: Will it Be Spent or Saved?

If you haven't already caught the news of the governments speedy work to get cash money into Americans hands via a stimulus package cruising through Congress here are the details.

The House passed a bill that includes $146 billion of money set to start going out to working and non-working Americans beginning as early as this April.  The Senate is working on its version to the higher tune of $161 billion.

The goal:  get money to people so they spend and get the economy growing.

Will that happen?  If you received a check for $600 to $1,600 right now, what would you do with it?

Well, two separate surveys found that the majority of those surveyed would use the money to either pay down debt or put into savings.  Interesting!  Paying down debt from previously financed purchases and/or putting the money into savings does not add stimulus to the economy at all.

Our government faces some tough challenges right now.  The Fed makes drastic cuts to their Overnight Rate with arguably little effect.  Congress jumps in to put checks in our pockets and that might not do the trick.

I know what I'd do with the check, save it or pay down debt.  What will you do?

www.BrettGrendahl.com 

Countrywide Shuts the Doors on Customers

In recent weeks my instincts were telling me we will soon get news from the big lenders of home equtiy lines of credits that they are cutting off future draws on those lines.

Well, in a conference call this morning with a client this premonition was confirmed by facts.  This individual has a Home Equity Line of Credit (HELOC) with Countrywide and just received a letter from them stating that due to declining market values of real estate they were shutting the doors for any future draws on his credit line.  Say what?

This isn't a bad credit, subprime borrower.  No sirree.  We are talking about an A credit, great job borrower whose financial liquidity has just been dramatically cut.  That home equity that was so readily available in recent years is now stagnant & unattainable unless he decides to sell his property.  He didn't see that one coming!

So, what should YOU do?

Well, if you have a big Home Equity Line it is time for an assessment of your financial liquidity, i.e. how much cash can you get your hands on should you need it.  How many months in cash reserves do you have?  If you've always felt that your home equity line was as good as cash in the bank the current reality is that it IS NOT!  The only thing as good as cash in the bank IS cash in the bank.

You might want to consider drawing cash out against your line and parking it in a safe savings or money market account while we weather a few years of declining market values.  Yes, you might incur some interest expense but is your financial security worth it?  Is your peace of mind worth it?

All of these dramatic changes underscore how your mortgage financing is so much more than just a rate.  It needs to be structured best to protect your financial liquidity and security. 

One final point.  If you have a Home Equity Line of Credit with Countrywide the doors will likely be shutting on your line very soon.  Consider this a heads up.

www.BrettGrendahl.com

The Fed & Mortgage Rates Continued...

All right gang, how's the end of your week shaping up?

If you've been following the news out of the financial markets you probabaly have been excited for a big dip lower in mortgage rates this week after the "Fed cut rates by 0.5" news, right?  So, how come mortgage rates didn't change Thursday or today?  Confusing, not really.

Let's break it down.

The simple truth is the the Fed does not control mortgage rates.  Plain and simple.  The Fed's actions can INFLUENCE mortgage rate direction.  How that happens comes from the answer of a simple question.  What affect will the Fed's actions have on inflation in the future?

Answer that question and you can begin to predict where mortgage rates might go next.  For example, if the markets believe inflation is under control, we will see stable and/or improving mortgage rates.  However, if the markets believe inflation will be rising in the future, so will mortgage rates.

Now, this week gave us another interesting wrinkle in the never-ending saga of the financial markets.  The monthly Jobs Report that came out this morning showed the first loss of jobs (on a monthly aggregate basis for the U.S. economy) in 4 years.  Is that really a shocker given the swift slowdown in the U.S. housing market?

Normally, a report like that would have driven a bond market rally but today the bond market is essentially unchanged for the day as I write this in the morning.  What gives?  Good question.  The answer is the market's uncertainty.

Here's the silver lining.  Coming soon will be another window of opportunity during the next 4-5 weeks as mortgage rates will seek another dip.  That dip will be a technical bottom for rates for 2008.  Anyone that thinks mortgage rates will be lower later this year needs to rethink their assumptions for that belief.  The only thing that will drive mortgage rates lower will have to be something unexpected on the global level, like war.  Are you going to bet on that?

Many have been talking to me to get prepped, arming me with the information so I can act on their behalf should rates dip.  This is important because, if the dip only lasts 3 hours like it did last week, I'll be busy locking in those that planned ahead and will not have much time to answer new emails or phone calls.

So, that's the analysis for the week and the prudent strategy looking ahead for February.  If something is on your mind, feel free to reach out and let me know.

www.BrettGrendahl.com