Tuesday, July 29, 2008

Looking Back and Looking Ahead

Employment rates are likely to show continued weakness, a good thing for mortgage ratesOn the wave of a two-day rally, mortgage rates improved last week overall. This despite a Friday reversal that had caused rates to tick higher just before weekend house-hunting began.
And, like so many other weeks this year, last week's mortgage market activity was defined by its quick-moving interest rates. At least one major mortgage lender issued 11 separate rates sheets between -- an average of more than 2 per day. Now, as an active mortgage rate shopper, you can't predict mortgage rate volatility but you can be prepared for it.
Start by knowing which mortgage product is the best fit for your long- and short-term financial goals and then be ready to pounce on a "good rate" because the rates expire as soon as that next rate sheet gets issued.

Another effective way to prepare for shopping is to watch for data that can influence the market's opinion of the U.S. economy. This week, there's a lot of it --starting with Tuesday's Consumer Confidence report. When confidence levels are high, economists expect Americans to spend more, propelling the economy forward towards inflation. Inflation makes mortgage rates rise.

Then, on Thursday, the Employment Cost Index data is released. This will be a closely-watched figure this month because it should show if American workers are pressuring employers for raises in light of higher gas and food prices. If wages are up, it will be considered inflationary because businesses eventually pass that cost back to consumers.

Again, bad for mortgage rates. And lastly, on Friday, the jobs report will be released. American businesses have shed jobs in each of the last 6 months, and June is expected to show the same. The jobs report's influence on mortgage rates is enormous so expect big rate swings Friday, either up or down.

Overall this week, considering the weight of the data, it may be prudent to finish-up rate shopping as soon as possible and get locked in with your lender. As the week progresses and the data's import grows, the markets should get less and less stable.
Jumbo Mortgage rates for July 29, 2008. Loan amounts up to $2,000,000:
3/1 ARM 5.875%
5/1 ARM 6.25%
7/1 ARM 6.50%
10/1 ARM 7.75%
30 Yr Fixed 7.875%
All rates offered to the borrower with 1 point cost. Rate quotes assume an owner occupied purchase transaction with a 25% down payment, 720 credit score, full income qualification and 12 months of verified reserves. Rates are subject to fluctuation. Custom jumbo loan rate quotes and rate lock advice are available by visiting www.thegreatloan.com

Next 7 days: Slightly Lower
Next 30 days: Flat
Next 3 months: Higher

Wednesday, July 16, 2008

Fannie and Freddie Baked in the Cake

Jumbo Mortgage markets have turned their attention back to the U.S. economy this morning, causing yesterday's rate improvements to unwind a bit.
Rates had fallen Monday after the Federal Reserve and U.S. Treasury's joint announcement in support of Fannie Mae and Freddie Mac. Today, it's the data that is taking center stage.
Most notably, the U.S. Dollar is trading at an all-time low versus the Euro and other currencies.
This is a negative for active home buyers because American homeowners repay their mortgage interest in U.S. dollars. When the dollar loses value, so does the value of those interest payments so mortgage rates end up increasing in order to attract new investors.
Another reason why mortgage rates are higher this morning is that June's Producer Price Index registered much higher than was expected, posting its largest one-month gain since November 2007.
PPI is a lot like the Cost of Living index, except that it measures operating costs for businesses instead. When business costs are increasing, they are often passed onto consumers and this is why rising PPI is thought to be inflationary and inflation -- like a weakening dollar -- pressures mortgage rates to rise.
So, while Monday's rate improvements haven't completely erased, today's action reminds us that mortgage markets wait for no one and yesterday's mortgage rates rarely carry forward.
Especially when inflation is in the mix. Did you buy bread or gas this week? I did. Inflation is alive and killing our purchasing power.

Thursday, July 10, 2008

When the Power Goes Out and Other Lessons.

In part of Los Angeles and Orange County we had a power outage that lasted about two hours this afternoon. This isn't Iraq where 40% of the time they have power failures. This is a rare event but it reminded me of the world and people we depend on to go about our daily lives.

Today's home owner or home buyer is experiencing the same level of surprise when they try to get a mortgage loan. Make no mistake about it THIS IS NOT A PROBLEM FOR OTHER PEOPLE. If you are thinking about selling, your buyer has to put 10-20% down now or take a high rate on an FHA loan with a big monthly mortgage insurance payment. It was 0% down two years ago with so-so credit. If you are thinking about refinancing now or some point when you can find the time. Do it now! If you don't have the equity or are 1 point shy on the FICO you are out of luck and stuck with your current loan.

I kid you not, it all matters. The rampant inflation has caused rates to move into the low 6% range on 5 and 7Y ARMs for the most qualified clients with plenty of equity. This is a shock to people that borrowed during the 02-05 period when rates were the lowest level in 50 years. Most of these client's are coming out of 5% rates on adjustables. These adjust against the LIBOR which is now 3.20%. Almost every Prime perfect credit ARM is 2.50% plus the LIBOR index. If you were adjusting today your rate would be 5.70%, not bad but look at this chart and do the math:
Rates move back to the 2006 or 2007 levels and you are at 7-8%+. In order to stop inflation central banks(i.e. the FED) raise rates. Don't be shocked to see HELOCs at 8% in two years and LIBOR at 6%. Why should a person put money in a CD at 3% when inflation is really 5-7%. Do you buy gas or food? Enough said. Rates will go higher to compensate.

Welcome to the new reality of a weak dollar, high inflation, and falling home values. No area in the country is immune to these forces. These winds have a dramatic impact on the loans available even to the most stellar money good borrowers. The new standard for jumbo loans is to have 20% equity minimum. This is for loans that are above the new Fannie Mae "conforming jumbo" limits which differ by area. In most high cost markets it is 729k. Do you have the equity to refinance? Are you close to not having 20% equity in your home? If not you can't refinance unless you bring a check to the table if you are in the jumbo loan market. Otherwise you can have 5-10% equity but now you have to carry mortgage insurance which can run a few hundred hard earned dollars a month.

If you want to check your home value go to realtor.com or redfin.com. Search for a home just like yours. Find similar homes and then find the lowest priced comparable. That is the market. Banks are looking at the lowest comparable home now because it is a falling market. This is called deflation. Home values are deflating like a balloon with a hole in it.

We have seen dozens of client's this month that can't refinance because they don't have the required equity. Their next move is usually to put their home on the market or sit tight and pray to the interest rate gods that their mortgage payment doesn't adjust too high. Don't gamble with your most valuable financial asset and largest liability. Pay attention to your risks and work to get the best possible loan for your situation. If you don't work with our firm, please work with someone competent. Take care and have a great weekend. The American Dream isn't dead we are just having a nightmare scenario. It will pass.