May 25, 2022

Mortgage Rates at 5% Could be the Low for 2022

A few short months ago at the end of 2021, 30-year mortgage rates hit their lowest level in history in the low 3.25% range.  Since that time rates have skyrocketed by 50% to a shade below 5%.  Increased rates have occurred as the Federal Reserve was forced to raise rates due to a rapidly increasing rate of inflation resulting in double digit price increases for many products and services.

Any one expecting rates to decline from here is likely to be disappointed.  Both wage and price inflation have become embedded in the economy as shortages of workers and products relentlessly drive prices higher.  Trying to tame inflation while at the same time keeping the economy running at full speed is the biggest challenge the Fed has faced in the past thirty years when short term rates approached 20%. 

None of this has been on the boom/bust mortgage industry as thousands of workers have been laid off as mortgage refinances plunge and purchases slow down. 

According to the Mortgage Bankers Association, refinance volume has plunged 60% below levels one year ago.

… The Refinance Index decreased 15 percent from the previous week and was 60 percent lower than the same week one year ago. The seasonally adjusted Purchase Index increased 1 percent from one week earlier. The unadjusted Purchase Index increased 1 percent compared with the previous week and was 10 percent lower than the same week one year ago.

“Mortgage rates jumped to their highest level in more than three years last week, as investors continue to price in the impact of a more restrictive monetary policy from the Federal Reserve. Not surprisingly, refinance application volume declined further, as fewer borrowers have an incentive to apply at rates that are significantly higher than a year ago. Refinance application volume is now 60 percent below last year’s levels, in line with MBA’s forecast for 2022,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist…

The average interest rate for a conforming 30-year fixed rate conforming loan with a 20% down payment in now at about 4.8%. Although the mania in the purchase market continues, it’s only a matter of time until activity declines due to higher rates and dramatically increased home prices.  Potential purchasers are being squeezed as wages lag far behind the increases in the cost of living and housing.   

If the Fed engages in multiple half point rate hikes as they are suggesting, expect mortgage rates to steadily increase.

Bank of America Refinance Offer Raises Questions On Wealth Accumulation

A client of mine recently received a mortgage refinance offer by mail from Bank of America (BAC).  The offer showed that a savings of $2,225 per year was possible by refinancing to a new 30 year fixed rate mortgage.

My client called me to discuss whether or not a refinance made sense since her rate was only dropping by .375% to 4.75%.  Conventional analysis of a mortgage refinance usually assumes that a refinance only makes sense if the rate is dropping by at least 1 or 2 percentage points.  Other factors used in evaluating a refinance involve the period of time required to recoup closing costs, how many years the borrower intends to remain in the home and a review of the forecasts for future interest rate changes.

In my customer’s case, not only was the rate decrease small, there was also $5,706 in closing costs which included 2 points.  In addition, the savings that Bank of America projected were based on a 30 year fixed rate mortgage.  Since my customer only had 22 years left on her current 30 year fixed rate mortgage, this meant 8 years of additional payments.

The monthly savings of $185.42 ($2,225 yearly) for a refinance came at the cost of adding 8 more years to the mortgage term.  Despite the monthly savings, the total additional payments over 30 years for the new lower rate mortgage amounted to $48,048, including the financed closing costs.

Was Bank of America trying to fatten their bottom line with a refinance that made no sense?  Depends on your perspective and financial status.  For some households on very tight budgets, reducing the mortgage payment by $185 per month can make life a lot easier.

For other households, the $185 monthly savings can help increase long term wealth using a concept that most consumers have either never heard of or don’t understand.  It’s called compound interest, allegedly described by Albert Einstein as “the most powerful force in the universe”.

In the case cited above, if the homeowner saved the $185 per month from a refinance and achieved a 4.75% return over 30 years, the result would be a nest egg of $141,634.  The power of compounded gains over 30 years far exceeds the additional payments of $48,048 at 4.75% interest paid on the declining balance of a 30 year mortgage.  The homeowner winds up with a net gain of $93,586

A 6% return on the $185 per month savings over 30 years would yield $175,904 and a gain of 8% would yield $252,055.

A refinance that did not look compellingly attractive could actually increase long term wealth for those with the discipline to save.  After considering the options, my client decided to refinance and increased her 401k savings by $185 per month.

Disclosure: No position in Bank of America stock

“Liar Loans” – RIP – October 1, 2009

Liar Loans To Be Prohibited

No income verification and stated income mortgage loans have been available to borrowers for many years.   As originally conceived, a no income verification loan was a sound product, offering highly qualified borrowers the ability to purchase or refinance a home quickly with minimal documentation.  Stated income mortgages are still being offered today to highly qualified borrowers by lenders such as Emigrant Mortgage.

What was once a legitimate mortgage product, however, morphed into the worst type of irresponsible lending during the national housing/mortgage frenzy of the past decade.  “Liar loans” became a product of destruction that allowed millions of totally unqualified people to borrow money who had little or no ability to service the loan.

Due to the mortgage industry’s excesses and irresponsible behavior, the “liar loans” are scheduled for legislative extinction on October 1, 2009.  The new regulations will apply to a newly defined category “of higher-priced mortgages” and the following restrictions will apply:

Prohibit a lender from making a loan without regard to borrowers’ ability to repay the loan from income and assets other than the home’s value.

Require creditors to verify the income and assets they rely upon to determine repayment ability.

The rule’s definition of “higher-priced mortgage loans” will capture virtually all loans in the subprime market, but generally exclude loans in the prime market.  To provide an index, the Federal Reserve Board will publish the “average prime offer rate,” based on a survey currently published by Freddie Mac.  A loan is higher-priced if it is a first-lien mortgage and has an annual percentage rate that is 1.5 percentage points or more above this index…

The new rules take effect on October 1, 2009

No Income Loans To Become Niche Product

The new rules  severely limit the interest rate that can be charged on a stated income prime loan to only 1.5% above the average rate on a prime mortgage.  Given the higher lending risk involved in approving a mortgage without income verification, I would expect that after October 1st, stated income loans will become a niche product, offered by only a few lenders to highly qualified borrowers.

The new rules will make it much more difficult to borrow for those who cannot verify income.   Considering the financial havoc that can result from liar loans, the mortgage industry should welcome the new restrictions which impose proper responsibilities on both lender and borrower.

Mortgage Refinances Drop 11% As Rates Remain Low

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.

Elderly Americans Last Refinance – Reverse Mortgages

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.

Would Mortgage Rates At 3.625% Stimulate Home Purchases?

percentThe Limitation of Low Rates

The Fed has done everything under its power to bring down mortgage rates and the best customer today can get a 30 year fixed rate mortgage at around 4.75%.  Despite the all time low in mortgage rates, the housing market continues to suffer as foreclosures and mortgage delinquencies mount.  If mortgage rates dropped even lower, say to 3.625%, would such a low rate stimulate the purchase of houses?  Rock bottom rates offered by some home builders give us some insight into this question.

Mortgage Rates Cut By Builders

As mortgage rates fall to near historic lows, some home builders are offering even lower interest rates, in an effort to lure buyers amid the slow spring selling season.

The latest sales promotion: Lennar Corp. is offering a fixed 3.625% rate over the life of a 30-year fixed rate mortgage. The deal is besting average rates that have fallen below 5% nationwide, but it comes as other builders are reporting mixed results from similar incentives.

Hovnanian Enterprises Inc.’s recent offer of a 3.99% rate sparked “underwhelming” interest from home buyers, says Dan Klinger, president of the builder’s mortgage operation. “It wasn’t like we needed crowd control,” says Mr. Klinger.

Bargain mortgage rates are the latest sales strategy from builders struggling to sell homes. Mounting unemployment continues dogging the sector, because people without jobs, or those afraid of losing one, are unlikely to purchase, no matter how low the rate.

The builders’ low rates may help first-time home buyers, “but it’s not going to goose the trade-up market,” says Thomas Lawler, a housing economist. “That’s because most trade-up buyers use the equity from their previous home for a down payment, and that equity often doesn’t exist any more.”

While some builders acknowledge that price cuts are the most effective way to move inventory, such cuts could cause buyers who have already bought a house at a higher price to walk away from their deposits.

It Always About Jobs

Apparently, low mortgage rates can help but not cure the sick housing market.  Bailouts and stimulus spending may help housing in the short run but in the long term it’s always about jobs.  Until the economy starts to recover and jobs become secure, potential home buyers will lack the confidence to purchase homes.   Expensive homeowner bailouts and foreclosure holidays accomplish little in addressing the underlying fundamental problems of housing.   Once the jobs come back, the housing market will cure itself.

Unfortunately a housing recovery based on income and job growth just became less likely.  The ADP March employment report just released shows major job losses in every sector of the economy.  Non farm private employment plunged by 742,000 jobs in March.  This is the 15th consecutive month of job losses with no hint of recovery on the horizon.   Anyone looking for a fast recovery in the housing market will be disappointed.

HUD Imposes Dramatic Restrictions On FHA Cash Out Refinances

FHA Tightens Rules Again

First there was an increase in the required credit scores to be eligible for FHA financing.  (See FHA Increases Minimum Credit Score Requirement).  Now comes a major tightening of the rules on FHA cash out refinances.    HUD Mortgagee Letter 2009-08 announced that the maximum loan to value for any cash out FHA loan has been reduced from 95% to 85%, effective April 1, 2009.

HUD is taking this step due to the continued deterioration in the housing market and to limit their exposure to “undue risk”.

HUD Mortgagee Letter 2009-08

Effective for case number assignments on or after April 1, 2009, the loan-to-value (LTV) of any cash-out refinance to be insured by FHA may not exceed 85 percent of the appraiser’s estimate of value.

Given the continued deterioration in the housing market, and FHA’s need to limit its exposure to undue risk, this reduction to the maximum LTV for cash-out refinances is being instituted on a temporary basis while FHA further analyzes the housing and mortgage industry as well as its own portfolio to determine whether permanent measures should be taken.

Considering that the default rate on FHA loans exceeds 12%, this announcement is not surprising and  long overdue.   It is interesting, however,  to examine the conflicting signals from the government in regards to mortgage lending, as follows:

1. There is constant talk about the need  to increase the flow of credit and politicians from both sides of the aisle are encouraging the banks to lend money.  At the same time the “we need more lending talk” is going on, the government controlled agency lenders have dramatically increased restrictions on lending – see Few May Benefit From Lower Mortgage Rates and Banks Restrict Mortgage Lending To A+ Customers Only.

2.  Fannie Mae and Freddie Mac have imposed huge “delivery fees” on their mortgages, which has greatly increased the cost and reduced the benefits for many borrowers –  see Fannie and Freddie – The New Subprime Lenders.

3.  The Federal Reserve has already purchased mortgage backed securities.  Chairman Bernanke has stated his intention to dramatically increase such purchases in the future in an attempt to lower mortgage rates.  Since so few people are eligible for mortgages, he might as well save himself the trouble of printing the money that would be necessary to purchase mortgage backed securities.

Sound Mortgage Underwriting Essential

The banking system should have strict underwriting guidelines for approving a mortgage loan.  If proper underwriting guidelines had been adhered to in the past, we would not now have a major banking and housing crisis.  The question is, has the pendulum swung too far in the other direction?

Does The FHA Owe You A Refund?

FHA MIP

Any one who has paid off an FHA mortgage loan may be entitled to a refund of a portion of the mortgage insurance premium (MIP) that was paid by the borrower upfront when the loan was taken out.

The MIP is the mortgage insurance that is paid upfront when a borrower takes out an FHA loan.  In 2009 the MIP amounts to 1.75% of the loan amount.  Prior to 2009, the MIP was 1.5% of the mortgage loan.  The insurance premiums can be large.  For example, on a $200,000 loan taken out in 2008, a borrower was charged $3,000 in upfront premiums.  This upfront premium is in addition to the monthly mortgage insurance premium that is paid with each month’s mortgage payment.  A borrower may be unaware that the MIP was paid since it is not due in cash, but rather is added to your original loan amount.

Who Is Entitled To A Refund?

When an FHA loan is paid off through a refinance or sale, your mortgage company notifies HUD of the termination of the FHA mortgage insurance and any refund due should thereafter be automatically sent to the borrower.   Although this process usually works well, mistakes can happen.   If you have paid off an FHA loan either through a refinance or sale of your home and have not received an MIP refund, here’s an easy way to check if you are entitled to a refund.

Does HUD Owe You A Refund?

If you had an FHA-insured mortgage, you may be eligible for a refund from HUD/FHA.

Search our database to find out if you are due a refund

  • Enter your last name or
  • Enter your FHA case number (first 3 digits, a dash and the next 6 digits, example, 051-456789).

Name:
Case #:

You do not need to pay another person or firm to assist you in collecting your refund or share payment. If you need help with this form, call our support center at 1-800-697-6967 or email us at sf_premiums@hud.gov:

The above calculator is on the HUD website and can be accessed by clicking this HUD link.   It is a quick and easy way to find out if you are owed an MIP refund.

Some Basic MIP Refund Facts

The amount of a potential MIP HUD refund from a paid off FHA loan will vary based on the loan amount, the date the loan was taken and how many months that mortgage payments were made on the loan.   Restrictions have increased over the years on the amount of the refund due.  For example, for FHA insured loans closed on or after January 1, 2001, no refund is due after the fifth year of insurance.  For loans closed after December 8, 2004, no refund is due the homeowner unless the homeowner refinanced to a new FHA insured loan and no refund is due after three years of insurance.

Since HUD makes public the information on MIP refunds that remain unpaid, you may be contacted by a commercial organization offering to obtain your refund for a fee.  There is absolutely no reason to pay anyone for this service, since the refund can easily be obtained by contacting HUD.

Banks Restrict Mortgage Lending To A+ Customers Only

Latest Changes Eliminate More Borrowers From Mortgage Market

As written previously, for those without impeccable credit, adequate income and loan to value below 70%, the low advertised rates are not available.  See All Time Low Rates For A++ Borrowers Only and Few May Benefit From Lower Mortgage Rates.

Much more stringent underwritten guidelines for mortgage approvals were issued today by a major bank as follows:

Important Update Regarding Revised Minimum Credit Score for All Loan Products, Effective Immediately

Effective for locks on or after Tuesday, February 10, 2009, the minimum credit score requirement for ALL loan products is 640. This includes the following loan programs:

· Agency Loan Program

· Agency Affordable Lending Program

· Portfolio Affordable Housing Program

· Texas Cash Out Refinance

· FHA 203b (FHA),

· Veterans Administration (VA), and

· Rural Development (RD) Guaranteed Rural Housing (GRH) Program

Additionally, the following applies:

· a minimum credit score of 640 will be required for ALL scoreable borrowers regardless of the LTV/TLTV.

· A minimum credit score of 640 will be required for all traditionally underwritten and AUS (DU/DO and LP) processed loan transactions, regardless of the AUS approval or recommendation.

These new guidelines are far more restrictive than Fannie Mae, Freddie Mac and FHA guidelines.   The bank and mortgage company guidelines are the ones that really matter because a consumer cannot directly apply to the agencies for a mortgage.

Pricing on mortgages can be described as chaotic.  Guideline changes such as the ones instituted today are basically a message from the banks that the mortgage business is unprofitable to them.   Every customer is seen as a future default.  Simply put, the banks do not want new mortgage business, which is why virtually every major bank has eliminated their wholesale lending operations.   The mortgage bankers who sell their loans to the agencies or larger banks are restricted in lending activities by the lack of warehouse lines of credit.  All of the above factors combined have severely restricted mortgage lending and disrupted the established channels for mortgage lending.  A perfect borrower with a loan to value under 70% can still reap the full benefit of lower rates; all other borrowers will find it very difficult to qualify.

The Fed can buy mortgage backed securities and treasury bonds by the trillions to lower mortgage rates, but with the lending intermediaries either unwilling or unable to make new mortgage loans, the benefit of any rate reductions will be severely limited to  A++ customers.   The borrowers who need the benefit of lower rates the most will see the least benefit since many do not qualify under current guidelines.