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Mortgage Refinances Drop 11% As Rates Remain Low

July 29, 2009 by Leave a Comment

Refinances Decline as Rates Stabilize

The latest weekly survey from the Mortgage Bankers Association showed a decrease of 6.3% in mortgage loan applications.   Application volume compared to the previous year increased by 16%.

The interesting aspect of the latest weekly numbers is the decline of 10.9%  in the number of mortgage refinances.  The percentage of refinances to total mortgage applications declined by 2.9% to 53% of total mortgage applications.  With rates hovering at close to all time lows, reduced refinance activity seems to indicate that most borrowers have already taken advantage of the current low mortgage rates.

Have Mortgage Rates Bottomed?

The perfect mortgage borrower can still obtain a rate of around 5% on a thirty year fixed rate mortgage.  In addition, borrowers have had numerous opportunities over the past four years to refinance in the high 4’s or low 5% range.  Unless a borrower is applying for a cash out refinance, there would be little benefit to refinance a mortgage today with a rate of 5.5% or less.

If mortgage rates remain in the low 5% range, expect to see continued declines in the refinance sector of the mortgage market.  In January of this year, the amount of refinances hit a peak of 85% of total mortgage applications as borrowers rushed to take advantage of low rates .

Since it is usually not worth the time and cost of refinancing unless the mortgage rate can be lowered by at least a point, I would not expect to see another mortgage refinance boom unless mortgage rates decline to the low 4% range.  Considering the recent Federal Reserve report which indicates a slower pace of economic decline and an unchanged Fed monetary policy, mortgage rates may have bottomed at this point.

Filed Under: Federal Reserve, Interest Rates, Mortgages, refinance Tagged With: , ,

Will Mortgage Rates Soar As Fed Programs Wind Down?

July 21, 2009 by Leave a Comment

Fed Support No Longer Unlimited

There seems to be near unanimous agreement at all levels of government that a recovery in housing prices is essential for economic stabilization and future growth.   The Federal Reserve has supported this effort by driving short term interest rates to near zero and initiating a program to purchase as much as $1.75 trillion in mortgage debt and treasuries.  As of mid year, the Fed had purchased over a half trillion dollars of mortgage-backed securities and housing agency debt in an attempt to keep mortgage rates low.

How much longer will unlimited Fed support for the housing market continue and will mortgage rates increase when Fed support is withdrawn?  The Federal Reserve has indicated that the credit markets have stabilized.  The Federal Reserve’s balance sheet has been shrinking for weeks and is now below the $2 trillion level reached in March.   With financial Armageddon apparently no longer an immediate threat, the Fed also seems to be responding to political pressure to reduce various emergency lending programs.

In response to pointed warnings from foreign creditors about monetizing US debt,  Chairman Bernanke said:

WSJ – “We absolutely will not monetize the debt,” Mr. Bernanke says, using economist-speak that means he won’t let the Fed become the government’s source of cash for deficits. Fed-fueled deficits would be inflationary. Mr. Bernanke says, “we will not abandon price stability.”

In addition, the Fed faces a full assault on its authority from Ron Paul who is attempting to introduce legislation to audit the Fed.  Many other members of Congress have also been critical of the cost and secrecy of Federal Reserve programs and bailouts.

WSJ – As Mr. Bernanke heads to Capitol Hill today for two days of testimony on the economy, the central bank is fending off attacks on many fronts from critics who want to rein in its power and autonomy.

Rallying one charge is Ron Paul, an iconoclastic Texas Republican who wants to abolish the central bank entirely.

Still, Mr. Paul has persuaded nearly two-thirds of the House to co-sponsor a bill requiring far-reaching congressional audits of the Fed. Audits would show “that it’s the Fed that has caused all the mischief” in the U.S. economy, Mr. Paul says.

Mr. Bernanke will face a tough audience in his semiannual report to Congress Tuesday and Wednesday. The Fed “went too far in bailing out companies and exposing taxpayers” to the costs, says Sen. Richard Shelby of Alabama, the senior Republican on the Senate Banking Committee. “They utterly failed the American people as a bank regulator.”

Outlook For Mortgage Rates

With the credit markets stabilized and the Fed under political pressure to reduce its multi trillion dollar financial  commitments, how will mortgage rates respond as the Fed reduces its programs to keep rates low?  Two top rated bond managers at Pimco and American Beacon Advisors have similar opinions.

July 20 (Bloomberg) — Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., reduced holdings of mortgage debt last month and added to cash and equivalent securities.

Gross cut the $161 billion Total Return Fund’s investment in mortgage bonds to 54 percent of assets, the lowest in almost two years, from 61 percent in May, according to a report on Pimco’s Web site.  Gross trimmed holdings of government-related bonds to 24 percent of assets, the least since February, from 25 percent.

Gross has been selling mortgage-backed securities over the past few months after loading up on them last summer in the midst of the financial crisis, which started with the collapse of the U.S. property market in 2007.

AMERICAN BEACON ADVISORS’ BOND MAVENS, Kirk Brown and Patrick Sporl, have done an admirable job of flying their respective fixed-income funds, AB Treasury Inflation Protected and AB Intermediate Bond, through the credit-market turbulence of the past two years.

He thinks that stagflation — the dreaded combination of a stagnant economy and inflation — is more of a possibility now than at any time since the 1970s.

AB Intermediate Bond, meanwhile, is underweight mortgage-backed securities and overweight corporates.

A reduction of the Fed’s massive intervention in the mortgage market is certain to result in higher mortgage rates, but will not be the disaster that some fear.   The real disaster has already occurred based on the Fed’s past policy of ultra low interest rates to increase lending and inflate housing prices.

Disclosures: No positions

Filed Under: Bernanke, Congress, Federal Reserve, Housing, Mortgages Tagged With: ,

Wells Fargo’s New Zero Down Payment Mortgage Program

July 7, 2009 by 4 Comments

Risk Of No Down Payment Mortgages

There is  longstanding and overwhelming statistical proof that zero down payment home buyers default on mortgages at a far higher rate compared to home buyers who make a down payment.   This matter has lately received more attention than in the past due to the large number of foreclosures related to zero down payment purchases during the housing bubble years.  In 2005, for example, nearly half of all home purchasers were made with zero down payment mortgages.

Zero Down Payments = Foreclosures

FHA Delinquency Crisis

Could FHA’s rising delinquency rate be due to FHA incorporating risky practices that have become standard in the mortgage industry? Since industry experts often cite 100% financing as being a major factor in the mortgage meltdown, let’s take a look at borrower down payment sources:

The delinquency rate clearly rises in tandem with the increase in non-profit funded down payments.

In 2005, HUD commissioned a study entitled “An Examination of Downpayment Gift Programs Administered By Non-Profit Organizations”. Later that year, another report titled “Mortgage Financing: Additional Action Needed to Manage Risks of FHA-Insured Loans with Down Payment Assistance” was completed by the U.S. Government Accountability Office. Both studies concluded that seller funded down payment assistance increased the cost of homeownership and real estate prices in addition to maintaining a substantially higher delinquency and default rate.

No Skin In The Game
The analysis indicates that, by far, the most important factor related to foreclosures is the extent to which the homeowner now has or ever had positive equity in a home.

Instead, the important factor is whether or not the homeowner currently has or ever had an important financial stake in the house. Yet merely because an individual has a home with negative equity does not imply that he or she cannot make mortgage payments so much as it implies that the borrower is more willing to walk away from the loan.

Rather, stronger underwriting standards are needed — especially a requirement for relatively high down payments. If substantial down payments had been required, the housing price bubble would certainly have been smaller, if it occurred at all, and the incidence of negative equity would have been much smaller even as home prices fell.

No Down Payment

No Down Payment

Courtesy: WSJ

Wells Fargo Initiates Down Payment Assistance Program

Ignoring the overwhelming evidence of high default rates on zero down payment purchases, Wells Fargo (WFC) this week announced a major nationwide down payment assistance program (DAP) to be used for down payment and/or closing costs on FHA, VA and conforming loans.  Incredibly, the program is being advertised as a means of helping low to moderate income applicants achieve the “American dream” of home ownership.

Based on the historical evidence, Wells Fargo is sowing the seeds for the next major crop of foreclosures.  Incredibly, this is being done even as the current foreclosure crisis grows in intensity.  Approving mortgages that immediately put new homeowners at a high risk of default is financial lunacy and a  disservice not only to the homeowner but to a nation already in financial chaos due to defaulting homeowners.

Down Payment Assistance Programs (DAPs)

Help More Low- and Moderate-Income Borrowers Achieve Home Ownership.

Refer your low- to moderate-income applicants to local housing agency contacts and help them achieve home ownership by using one of these Downpayment Assistance Programs (DAPs) approved for use with a Wells Fargo Wholesale Lending first mortgage. DAPs provide financial assistance for qualified borrowers and, depending on the program, may be used for debt reduction, down payment and/or closing costs on FHA, VA and Conforming Conventional loans.

Disclosures: None

Filed Under: FHA Defaults, Housing, Mortgages, Wells Fargo Tagged With: , ,

Profile Of A “Making Home Affordable” Homeowner – Everyone Should Do It

July 7, 2009 by Leave a Comment

Overburdened  Homeowner Subsidized

Home Sweet Home?

Home Sweet Home?

Loan modification programs have been seen as the answer to preventing foreclosures and allowing the housing market to stabilize.  The programs have become progressively more aggressive as foreclosures continue to mount and housing prices continue to slide.  The current government program, Making Home Affordable, has a dual approach whereby a homeowner not eligible for refinancing (at loan to values up to 125%) can then attempt to have the mortgage modified to lower payments.  Eligibility requirements are quite simple – if the borrower has suffered a hardship (such as reduced income), is having trouble making the payment or simply bought more house than he could afford during the exuberance of the housing mania, relief in the form of lower payments may be available.

Here’s an actual example of a borrower granted mortgage concessions under the US Government’s Making Home Affordable program.

Home owner purchase the home in 2005 for $153,000 with a stated income mortgage, 100% financing.

Home owner refinanced a year later and received $30,000 cash with a stated income $190,000 mortgage at 7.125%.   The home is now worth about $165,000.

Home owner works at a grocery chain and earns $43,000 with limited prospects for increased income.  Credit card debt amounts to $22,000 with monthly payments of $315.

Home owner’s current housing expense and other debt payments result in front end and back end debt ratios of 46/55.   A back end debt ratio is calculated by dividing borrower’s total mortgage payment, taxes, insurance and all other minimum monthly debt payments divided by gross income.  After debt payments and payroll taxes, home owner is left with about $950 per month to cover all other expenses.  Home owner is 45 years old, has minimal savings and a negative net worth of around $50,000.

Home owner is not eligible for the Making Home Affordable refinance program since the debt ratios would still be too high even with a rate reduction to the current prevailing mid 5% mortgage rate.

Homeowner therefore applies for a mortgage modification.  The basic requirements are that you are having trouble paying your mortgage and your front end debt ratio exceeds 31%.   The front end debt ratio is the monthly mortgage payment, taxes and insurance divided by gross monthly income.  Homeowner is approved for a mortgage modification that lowers the rate to 2% fixed for two years, with an increase to 3% in year three, 4% in year four and then fixed in year five at the prevailing conforming rate.   No principal reduction of the loan was granted.   The initial rate reduction lower the home owners debt ratios to 31/40, a ratio that should allow debt payments to be handled without undue stress.

Comments – Who Won and Who Lost?

If the homeowner decides to sell the home, $30,000 cash would be required at closing due to negative equity, commissions due, etc.  Since the homeowner has no cash, a sale of the home would have to be a short sale, with the mortgage holder (or taxpayer) taking the loss.

The homeowner in this case received a mortgage rate that is unavailable to the best A+ borrower.  In addition, there were no closing costs to receive the 2% rate.  The average homeowner pays thousands in closing costs on a refinance.

The taxpayer winds up paying, one way or the other,  for the cost of the mortgage subsidy.

The subsidized 31% debt ratio puts the loan modification  homeowner in a vastly better off position than millions of other homeowners with much higher housing debt ratios who are unable to get a loan modification or a refinance.

The homeowner cited would never have been a homeowner if not for the 100% financing, no income verification programs that prevailed during the housing/mortgage bubble years.

Not everyone was victimized by the liar loans and sub prime lenders.  The homeowner in this example has nothing to complain about.   Besides the $30,000 cash received on the refinance and a zero investment in the property, the homeowner also has a super low 2% government subsidized mortgage rate .

As property values continue to decline, expect ever more costly, aggressive and futile  government efforts to reflate the burst Humpty/Dumpty housing bubble.

Filed Under: Bailout, Have Nots, Housing, loan modification, Making Home Very Affordable, Mortgages, Uncategorized Tagged With: , ,

Elderly Americans Last Refinance – Reverse Mortgages

July 6, 2009 by 1 Comment

Reverse Mortgages – More Easy Lending

As originally conceived, reverse mortgages were designed to fulfill a legitimate borrowing need.  Reverse mortgages were developed for elderly Americans who had a mortgage free home with substantial equity and wanted to cash out their home equity to supplement their retirement income without having to sell the house or face large mortgage payments.

Almost all reverse mortgages are purchased by HUD and insured by the Federal Housing Administration (FHA).  FHA insured reverse mortgages are known as “home equity conversion mortgages” (HECM) and they provide the following advantages to elderly homeowners:

  • Provides supplemental cash income to elderly homeowners.
  • Does not require a monthly payment.
  • Allows the homeowner to remain in his residence until death or sale of the property.
  • Should the borrower decide to sell and move, the  amount of the loan repayment cannot exceed the value of the house.
  • HECM allows the borrower either a monthly lifetime payment (based on value of the home and age at time of mortgage closing) , a lump sum payment, a line of credit or a combination of the above choices.

In theory, the HECM made sense by allowing homeowners to remain in their homes and monetize their equity.  The lifetime HECM payment, along with other retirement income and savings would allow for a more comfortable lifestyle.  The only theoretical loser on the HECM program would be the FHA if property values dropped.

HECM Program – Theory VS Reality

The disadvantages for a borrower of a reverse mortgage are as follows:

HECM rules require a borrower to make a full draw at closing to obtain a fixed rate mortgage.  Most borrowers take the adjustable rate option and a line of credit.  The adjustable rate HECM presently has a low borrower rate of around 3.1% based on a lending margin of 2.75% and a LIBOR index of only .32%.  At some point rates will rise again and rates on the HECM could rise dramatically – the lifetime cap on the loan is over 13%.  Borrowers could see their credit lines reduced and their equity vanish quickly with higher interest rates.

Borrowing money without having to make a loan payment equates to compounding interest working against the borrower since the loan balance increases each month along with interest charges.  Borrowers who later decide to pay off the HECM and sell their homes may find that most of their equity has been lost due to accrued interest.

The HECM is a very complex product.  Despite the fact that HUD requires a potential borrower to receive financial counseling, it is unlikely that most borrowers fully understand the type of mortgage they are taking out.

The HECM is available to all those 62 or older who have sufficient equity in their homes.  HECM program lends without regard to credit or income and is strictly  asset based lending.  Do these lending criteria remind anyone of  past  disastrous mortgage programs, such as  sub prime, ALT A or Pay Option ARMs??

The fees on a HECM are very high and include an upfront and monthly mortgage insurance payment to the FHA, loan origination fees and other closing fees.  Total fees over the life of the loan can reach 12%.

A HECM does not require that the homeowner escrow for taxes  or homeowners insurance.  A known risk factor for default is a non escrowed loan.  The homeowner can face foreclosure  for not properly maintaining the property or for non payment of taxes or insurance.

The most striking feature regarding the use of reverse mortgages by elderly Americans is the large amount of equity that is being extracted upfront, leaving them with only a small future monthly cash payment as can be seen in Exhibit 3 below.

HECM CASH PAY BY YEAR

HECM CASH PAY BY YEAR

Courtesy: HUD.GOV

The reason why borrowers are taking most of their available cash out upfront is because they are using the proceeds to pay off mortgages, consumer debt, medical bills, credit cards, etc.   Borrowers run up large amounts of debt when spending exceeds income, a situation likely to continue  after the borrower taps the last dime of equity from his home.  Since the HECM was the last option available, what happens in a couple of years when the borrower is again overwhelmed by debt?

HECM – Loan Of Last Resort

The number of reverse mortgages has increased tremendously as other borrowing sources have disappeared.  Many of the reverse mortgage borrowers are retirees with limited income who would not qualify for a traditional mortgage loan under current underwriting guidelines.  In the past, many of these borrowers would have taken out a stated or no income verification mortgage.   The  large increase of HECMs starting in 2005 correlates to the time period during which no income verification loans were being discontinued.

Reverse Mortgage Volume

Reverse Mortgage Volume

Here’s an actual example of a HUD approved HECM.  Borrower has a home worth $525,000 and owes $290,000 in mortgages and other debt which will be paid off with a $350,000 HECM.  Homeowner is left with about $60,000 at closing.  Borrower has an abysmal credit score of 510 and  is 90 days past due on his current mortgage.  Income is unknown since HUD doesn’t care about the borrowers income.

Based on the credit profile and debt levels incurred prior to his approval of a HECM, what are the odds that the borrower’s finances turn around after his refinance?  My guess is that within a few short years, borrower is in heavy debt again, unable to pay the property taxes or maintenance on the property and thus facing a potential foreclosure.  Since HUD will not be throwing senior citizens out of their homes, expect a mortgage modification program for reverse mortgages and further losses to the taxpayer on another mortgage program gone bad.

More on this topic

Smarter planning would probably eliminate the need to borrow when retiring.   Bob Adams writes an informative and thoughtful blog on the challenges of successful retirement – a site worth bookmarking.

Filed Under: FHA, FHA Defaults, Housing, loan modification, Mortgages, refinance, Reverse Mortgages Tagged With: , , ,

TARP 2 – Will Bad Loans Wipe Out Newly Raised Bank Capital?

June 22, 2009 by 1 Comment

Are The Banks Paying Back TARP Money Too Soon?

Since the beginning of the year, major banks have raised over $200 billion in capital, far in excess of the $75 billion of new capital that the government stress tests had called for.  The market prices of major bank stocks have recovered dramatically since March, indicating that Wall Street investors see a recovery in the banking industry.

In addition, the banking industry is enjoying one of the largest net interest margins in history due to a very low cost of funds.  Wells Fargo, for example, in the fourth quarter saw its average cost of funds decline to 1.5% while its net interest margin exceeded 4%.  With banks able to access cheap funding thanks to the super low rate money policy of the Federal Reserve, banks almost have a license to print money.

The big question is will the banks be able to earn enough to offset the huge amount of future write downs that will be needed on their troubled loans?  Earlier this year, Bloomberg reported that the International Monetary Fund (IMF) estimated U.S. banking losses through 2010 at $1.06 trillion.  To date the banking industry has taken write downs of only half that amount, indicating further write downs of an additional $500 billion will be necessary.

In addition, delinquency rates on $1 trillion of commercial real estate loans held by banks have been increasing at a higher rate than anticipated.  Credit card losses for the banks have also been rapidly mounting from previous estimates.

Mortgage Default Surge Could Wipe Out Banking Capital

Total Estimated Losses

Total Estimated Losses

Courtesy:  T2 Partners LLC

The banking industry’s mortgage portfolio is the real wild card and may result in the need for huge additional write downs to cover the cost of mounting defaults.  The banking industry is facing a potential nightmare surge in mortgage loan defaults, even if real estate prices stabilize at current levels due to the large negative equity positions of many homeowners.  (The above chart shows the total estimated banking losses of which only a fraction has been realized to date.)

There is no historical model to predict the correlation of mortgage defaults to equity position, but one would expect that being deeply underwater on the mortgage will result in a strong economic motive to stop paying or simply walk away.  How many homeowners, for example, will continue to make a mortgage payment on a $200,000 mortgage when the home is valued at $100,000?  The greater the negative equity, the greater the odds of a mortgage default, especially if the homeowner is under financial stress.

Unfortunately, the problem of negative equity is not theoretical.  In the latest overview of housing and the credit crisis, T2 Partners LLC, has assembled an in depth excellently documented case on why the pain in housing is not about to end quickly.  One eye opener in the report is the estimate, by type of mortgage borrower, of negative equity.  T2 shows the following stats: 73% of OptionARMs, 50% of subprime , 45% of Alt A and 25% of prime mortgage loans are underwater.  Combine this with a weak economy, job losses and negative income growth and the potential for additional huge write downs on residential mortgages seems inevitable.

The impact of a poor economy and huge negative equity is already being reflected in default rates never experienced in modern economic history.  Almost 10% of all mortgages are in some stage of delinquency or default.  The delinquency rate on prime mortgages, never expected to exceed historical delinquency rates of approximately 1%, are now over 4.5%.  Note that prime mortgage loans are the loans that were never expected to have more than a minimal default rate based on the borrower’s credit and income characteristics.

The banking industry is likely to need every dollar of newly raised capital and then some to cover future loan losses.   If future banking industry profits are overwhelmed by additional loan losses, it will be years before banks can be solidly classified as well capitalized.   A capital constrained banking industry will survive in some form, but it may not be able to provide the new lending necessary to foster future economic growth

Filed Under: Banking Industry, Housing, Mortgages, Problem banks Tagged With: , ,

Banks Loss Reserves Can’t Keep Pace With Troubled Loans

June 2, 2009 by Leave a Comment

The latest FDIC Quarterly Banking Profile reveals that banks increased loan loss reserves by 11.5% and the ratio of reserves to total loans increased to 2.5%, an all time high.   Despite the large loan loss reserves, the ratio of reserves to noncurrent loans fell for the 12th consecutive quarter to 66.5%, the lowest level in 17 years.   This low reserve ratio, despite large increases in loan loss provisions  indicates that the banking industry’s estimates of future delinquencies has consistently been too low.

Reserve Coverage Ratio

Reserve Coverage Ratio

Even if the amount of noncurrent loans level off, the implications for future banking profits is a dismal picture.   In order to establish an adequate coverage ratio for noncurrent loans, loan loss provisions will have to rise dramatically.

Prime Mortgage Defaults – Another Black Swan

The banking industry’s low estimate for loan delinquencies may be due in large part to the unexpectedly large increase in default rates seen on prime mortgages.   Prime mortgages were never expected to have a default rate above the historical ratio of around 1% since these were mortgage loans made to the best customers.  In the past, the only defaults typically seen on prime mortgages were due to unexpected job loss, a divorce, illness or other factors beyond the control of the borrower.

The rapid increase of delinquencies on prime mortgages  has caught the banks off guard.   The default rates on prime mortgages is now almost 5% (5 times normal),  a true Black Swan event for the banking industry.  In addition, the  default rate could rise even higher since 25% of prime mortgage holders now have negative equity, a situation which enhances the odds of  delinquency and defaults.

Based on the rapidly deteriorating numbers for prime mortgages, loan loss reserves need to be increased significantly.  The myth that most of the smaller community banks are not exposed to the risks that afflicted the bigger banks is only partially true.   Banks of all sizes have significant exposure to the mortgage market and the growing number of defaults  by prime mortgage borrowers will cause significantly higher than expected losses at all banks.

Prime Mortgage Delinquencies

Prime Mortgage Delinquencies

Courtesy of:  moremortgagemeltdown.com

Problem Banks, Failed Banks Increasing Rapidly

The 36 failed banks we have seen this year has expanded dramatically from 25 for all of 2008, but has remained very low considering the extent of the losses in the banking sector.  Many very weak banks have apparently been allowed to stay open under the misguided hope that mortgage defaults would decrease as the economy improved.  The number of banks classified by the FDIC as “Problem Banks” has risen to 305 from 90 last year.  The latest surge in mortgage defaults due to job losses,  declines in real estate  prices and negative income trends will have a devastating effect on an already weakened banking industry.

The FDIC’s line of credit with the Treasury was recently increased to $100 billion from $30 billion.  The FDIC can borrow up to $500 billion with Federal Reserve and Treasury Department approval.  Expect to see the FDIC draw down significantly on their expanded line of credit with the Treasury as the FDIC is forced to close increasing numbers of insolvent banking institutions.

Filed Under: Bailout, Banking Industry, FDIC, Housing, Mortgages, Problem banks Tagged With: , ,

Mortgage Rates Skyrocket As Fed’s Rate Manipulation Fails

May 28, 2009 by Leave a Comment

Markets Will Ultimately Determine Long Term Interest Rates

Treasuries continued their sell off today as the yield on the 10 year benchmark bond climbed to 3.72%, a stunning increase from the recent lows just over 2% in late 2008.  Investors have become concerned that record amount of debt sales and quantitative easing by the Treasury that may lead to inflation.

10 Year Treasury

10 Year Treasury

Courtesy Yahoo Finance

Further contributing to the huge bond selloff today were comments by Marc Faber that the US might enter “hyperinflation” based on the Fed’s super low rate policy, huge increases in government debt and massive liquidity injections into the banking system.

Mortgage Rates Explode Upward

The yield on the 10 year bond has been climbing since early January, gradually putting pressure on mortgage rates.  Until recently mortgage rates did not jump dramatically since the spread between the 30 year fixed rate mortgage and the 10 year treasury narrowed.

Some analysts have speculated that the  Fed was able to manipulate mortgage rates lower over the short term through purchases of mortgage backed securities.  Today, the Fed discovered the limits of  establishing artificial price points.  The Fed may be able to manipulate rates in the short term, but the markets will ultimately set the price of money based on the reality of  US financial conditions.

Bloomberg – The difference between yields on Fannie Mae’s current- coupon 30-year fixed-rate mortgage bonds and 10-year Treasuries had been narrowing. It was at 0.92 percentage point today, down from as high as 2.38 percentage points in March 2008, according to Bloomberg data. The Fed’s purchases drove the spread to 0.70 percentage point, the lowest since 1992, on May 22. The yield gap jumped from 0.71 percentage point yesterday.

“Many investors who felt MBS spreads were too tight thought it might be time to take chips off the table,” Credit Suisse’s Swaminathan said. “This is something we anticipated would build up” as many mortgage-bond holders who were previously wary of lightening their positions on the view the Fed buying would continue to support the market finally decided to act.

“The last two months have been quite abnormal” as mortgage rates generally held in a range between 4.5 percent and 4.75 percent even while Treasury yields began climbing, he said.

Today, the “abnormal” pricing situation was shredded.  Major banks sent out multiple mortgage rate increase notices as the day progressed.  Here’s an example of how mortgage rates have increased with one large bank over the past couple of days.

Mortgage Rates In The 4% Range Disappear

On Thursday, May 21st, a prime mortgage borrower could have obtained a 30 year fixed rate of 4.75% with a half point fee.  On May 27, the equivalent rate for a prime borrower is 5.375% with a half point fee.

To obtain the 4.75% rate today, a borrower would need to pay approximately $5,400 on a $250,000 loan to buy the 4.75% rate.  The monthly payment difference on a $250,000 mortgage loan at 5.375% vs. 4.75% amounts to $96 or $1152 per year.

Are 6% 30 Year Fixed Rate Mortgages Coming Soon?

So much for Mr. Bernanke’s grand experiment of buying mortgage debt with printed money.  If the spread between mortgage bonds and the 10 year treasury widen to the spread of 238 basis points seen in March 2008, the 30 year mortgage rate will be over 6%,  even if the 10 year treasury remains at 3.72%.

Filed Under: 6% plus mortgages, Government spending, Interest Rates, Mortgages, printing money Tagged With: , ,

Mortgage Mod And Foreclosure Scams: Saying Goodbye To The Mortgage May Be Better

May 28, 2009 by 3 Comments
Home Sweet Home?

Home Sweet Home?

FDIC Advice Good But Too Late

The FDIC Consumer News is warning homeowners to avoid falling prey to loan modification and foreclosure rescue scams.  Many financially distressed homeowners are  preyed upon by firms that “guarantee” financial salvation, take the homeowners last few dollars and deliver nothing in return.

Foreclosure Rescue and Loan Mod Scammers Prey on Stressed Homeowners

Many homeowners having difficulty making their monthly mortgage payments are being targeted by criminals who charge large upfront fees and falsely “guarantee” to rescue a home from foreclosure.

Try to deal only with lenders, businesses and other organizations you already know or that have been recommended.

You don’t need to pay a lot of money for help or information.

“But scam artists will demand a large upfront fee, often thousands of dollars, and they do very little to actually help the homeowner,” said Robert W. Mooney, FDIC Deputy Director for Consumer Protection and Community Affairs.

Be especially suspicious of unsolicited offers that arrive via phone, e-mail or a knock on your door.

“Some companies have falsely advertised or represented that they are part of a government-endorsed mortgage assistance network

Be particularly wary of any organization that says it guarantees foreclosure relief or that it has a near-perfect success rate.

“Also be wary of anyone who promises to pay off your mortgage or repair your credit if you ‘temporarily’ sign over to them the deed to your home, because you may be permanently losing your home to a thief.”

Ironically, the job of the con men engaged in loan mod and foreclosure rescue schemes is made easier due to widely advertised government mortgage relief programs.  The lure of “something for nothing” from a government program that the con men claim to be affiliated with is one of their most successful sales tactics.

The FDIC advice comes very late for many people who would have been far better off financially had they never purchased a home beyond their means to begin with.  None of the government mortgage agencies require a potential homeowner to evaluate the true financial obligations and risks of home ownership.  Many homeowners currently obtaining government mortgages are being approved with debt ratios that almost guarantee a future default and are not in the home buyer’s best interest.

One Option For Distressed Homeowners The FDIC Does Not Mention

The FDIC offers those in financial difficulty some good advice in their newsletter but what is not mentioned is whether the homeowner should consider becoming a renter. In addition, many of the government loan mod and Hope programs, etc. have done little to put homeowners in a better financial position and many default soon after they were “helped”.

For a homeowner struggling with the mortgage, constantly spending in excess of income and living a financially depraved existence, why not look at the benefits of becoming a renter?  In many locations, renting is cheaper than owning.

Although not mentioned by the FDIC,  government makes walking away from the mortgage an easy option.  A mere two years after a bankruptcy or three years after a foreclosure,  current FHA guidelines allow a borrower to apply for mortgage financing.

Do The Math

Here are  a couple of web sites that can tell you whether it makes sense to own or rent.

payorgo.com

youwalkaway.com

More On This Topic:

Loan Modification Scams and Fraud Widespread – Mortgage Servicing News

Filed Under: Deleveraging, FHA, loan modification, Mortgages Tagged With: , ,