For anyone that wants to do some research on how the nonprime mortgage conditions are in Minnesota, or any other state, just browse on over to this interactive map provided by the Federal Reserve Bank of New York.
Dynamic Maps of Nonprime Mortgage Conditions in the United States
You can see how Minnesota isn't the hardest hit from loans of this variety but we are in the upper 30% of states affected.
Good morning everyone,
Here we are again, awaiting word from the Federal Reserve. What are they going to do with the Overnight Rate? What are they going to say in their Policy Statement? What does the future hold?
The speculation of the markets is that they'll either cut one more time, for another 0.25, and say they'll probably hold there going forward for awhile. One and done. However, a strong argument can be made that they should where they are. Why?
Well, they've already cut dramatically and pulled some dusty monetary tools of the shelves (the Discount Rate, the special credit facilities, etc.) to support the ailing financial machinery. Will another 0.25 have much impact at this stage? Doubtful. So, why fire a bullet, leaving one less to be fired, when the impact might be marginal?
An even more important reason is that after the Fed "came to our rescue" this year inflation is rising. You feel it. I feel it. We all feel it! As you go about your daily life, filling up your gas tank, buying food for you & your family, buying toothpaste, razor blades, lunch at Panera, doesn't it all seem more expensive?
That's because it is. The Fed will likely be changing gears in the coming 2-4 months and begin its focus on fighting inflation. It will have to. Why? Consumer spending will continue to be curtailed as we all have less & less disposable spending as our staples are eating up more and more of our pocketbook every day.
Oh yeah, your probably wondering where are mortgage rates ahead of this meeting. I got carried away with that missive. The 30 year fixed rate is holding around 5.875% with no points this AM. That's actually doing better than I thought.
If we get any dramatic moves I review it here and ping you on the email if it is important enough.
Year 2008. The year the music stopped.
After 6-7 years of rapidly rising home prices what is readily apparent now is that this fervor has stopped. The exit strategy of being able to sell a property for more than you paid for it is rapidly turning into a "no exit" dead-end for many people.
If you bought a property in 2005 or 2006, you most likely bought the top of the market. Ugh! I can really say that because I bought two properties at the top. Double ugh!
We are working our way through a period of deep psychological change regarding money, credit, savings, real estate, and the direction of our society. At least it can be said that we live in "interesting times."
Unfortunately, the music hasn't only stopped, the mic & speakers are also broken. Its going to take several years for the carnage and pain of this pullback to moderate in our collective psyche.
Last year, I predicted it'd probably be 2010 before we saw any upward progress again on real estate prices in Minnesota. That's what I still think.
My daily conversations with clients & acquaintances continue to add anecdote to this reality. I'm sure you know what I'm talking about, this effects each & every one of us.
What's that soon to be in our rearview mirrors?
Rates below 6%, that's what!
The technical damage to mortgage-backed securities continues in this morning's trading. You know how hard it is for home sellers these days to find buyers? Well, that's the same situation a mortgage lender has trying to find a buyer for the pools of recently originated mortgages it has on its books.
No one wants them. No one trust them anymore!
For real estate sellers, their only option is to low-ball their listing price. For mortgage debt sellers, they have to raise the interest rate to make it an appealing investment for the higher perceived risk in today's market.
Mark these words. We only have a few days left of sub-6% 30 year fixed rate mortgage rates and it probably will be YEARS before we see them again.
The Fed doesn't control mortgage rates. The U.S. government doesn't control mortgage rates. The market does and right now that market is getting smaller and smaller with every passing day.
On a side note, if you anticipate a need to get some of your equity in your home into cash you better do it soon. I will not be surprised if lenders completely do away with all cash-out transactions as 2008 becomes a landmark year for declining real estate prices across the country.
These times are proving this axiom: equity in your home is not like cash in the bank, the only thing like cash in the bank IS cash in the bank!
On my daily perusal of mortgage rate sheets today I saw striking evidence of the further worsening of options for those who need jumbo mortgages.
Here is a snapshot of the Jumbo ARM pricing of one national mortgage company:
If you are scratching your head I don't blame you. Normally, rates get lower for shorter fixed-rate terms on ARM programs. Those listed above show rates getting much worse for shorter term rates.
What does this mean?
This just shows how cautious and uncertain a large financial institution is about the near future. This lender is pricing themselves out of the market, they don't want it any more.
It also means that for those who need jumbo financing, your options continue to dwindle & get more expensive with every passing day. Unfortunately, I believe that this will continue to be the case for at least another 12 months. The only thing that will cure this is the rebuilding of confidence in these loans and that means new originations the perform (payments come in on time) to build a track record that captures investor interest again. That doesn't come quickly.
Brett
Click on this chart to open a bigger version to look at.
This chart shows the prices of the bond markets. Prices move in opposite direction of rate.
See that high from January? See how we are getting close to that again?
It is highly unlikely that bonds can get higher than that level again anytime soon. Translation: don't expect dramatically lower mortgage rates.
Also, mortgage lenders are bleeding money these days and fighting for their own survival. The biggest mortgage lending operator (Bear Stearns) just went under. If the big guy tumbles, you can bet the smaller ones are also hurting. Translation: these lenders are not going to lend money out as cheap as they did a few years ago.
Double translation: there really isn't a strong foundation to get us to much lower interest rates than we have right now.
Just a few weeks back the 30 year fixed was up at 6.375%. Now, it's been dancing around 5.5% to 5.75%.
In the topsy-turvy world of mortgage finance these days one of the questions on my mind is just that; "who's going to buy mortgage paper?"
Jump back a few years and every financial institution around was hungry to buy mortgage-backed securities and/or companies in the space.
The go-go real estate market fueled new ideas and new models of risk that are proving to not match the reality of human behavior when real estate prices turn south. I'm sure you've caught the stories of rising foreclosures. Of course foreclosures rise when people who were able to purchase a home with 0% or even 10% or 20% down now find themselves owing more than the home is worth. Add on top of that a forecast that it might take 10 years for us to get those homes back to the price they paid for them and you can see why people put the home back on the bank.
Back to our question on who is the buyer for mortgage debt these days.
We are in the midst of a massive tightening of underwriting guidelines and back to realistic pricing for all the various scenarios under which a new mortgage is originated. In addition, Fannie Mae and Freddie Mac are getting a green light to open up more funds. AND, the Federal Reserve is creating new credit facilities to move current, "questionable" mortgage-backed securities to the Fed during this time when no one wants them.
During these recent days I see how the credibility of mortgage-backed paper is beginning to heal.
However, let's remember simple economics. There will be fewer buyers in general going forward and that means higher prices. Higher prices on mortgage debt translates into higher rates. That means that on any given day, mortgage rates will be pricing higher than they would have a few years back when there were SO many other buyers.
We all benefited from the massive buying interest with lower rates than otherwise would have been available. Now, we move back to more normality and we need to recognize these structural changes of the marketplace.
That means, don't keep rates of the past as target rates to act. Opportunities will be dictated by our new future.
The bubble bursting today is Bear Stearns.
One of the largest financial institutions in our country, Bear Stearns made pocketfuls of cash leveraging up with derivatives and financial alchemy based on mortgage-backed securities. Well, while leverage is great when the market is going with you leverage eats you alive when the market turns.
Case in point today as the news is breaking regarding the dire situation for this company to survive.
This news, to me, indicates that we are moving into the second phase (of 3) of the whole subprime debacle & credit crisis. This second phase will be when major financial institutions go under. Bear Stearns appears headed that way, so does Countrywide, and a few other names will likely follow in the next couple of months.
The end of this mess is still a LONG way off, in my opinion. That opinion however is based on front-line knowledge with what built the mess. Unfortunately, every one of us is in the path of this storm and we have little in way of evacuation routes to afford us some safety.
I am not shocked at all to see the headline, "FBI probes Countrywide for possible fraud" on CNN Money this past weekend.
Countrywide's past slogan, "No one can do what Countrywide can," sure was true. They didn't become the nation's largest mortgage originator by following conservative lending guidelines.
In fact, I can recall several deals I lost in 2007 where the only reason I lost them is that Countrywide chose to either omit pertinent information regarding a property's appraisal or not accurately represent the occupancy type of the borrower.
I posted a comment about these underwriting practices back in July of 2007, "This does not surprise me as I've been first-hand witness to Countrywide making deals work by overlooking normal underwriting guidelines. Short-term "get the deal done" thinking brought on loans that never had the proper risk assessment and appropriate finance rate on them."
No wonder investors that purchased mortgage-backed securities built on Countrywide mortgage originations are getting ticked off as these portfolios experience higher defaults and delinquencies thant they anticipated.
I anticipate that this news story will continue to heat up and has not come anywhere near its crescendo. As the truth comes out, watch for the Bank of America purchase of Countrywide to falter, SEC heat to come down on CEO Angelo's Mozillo stock sales & misinformation given to shareholders and the public, and what looks more likely with every passing day, the collapse on one of the country's largest companies.
Enron. Long Term Capital Management. WorldCom. Now, Countrywide.
History sure does repeat itself!
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.
