Where will mortgage rates be in the coming years?

I often get this question from clients. Luckily, we just hired a mystic to forecast the mortgage interest rate climate for you. Previously, he worked for the local news in the weather department. So you know he must be rock solid with his forecasts. Seriously, no one knows. But, you can make an educated guess as to the overall direction. I would venture to say that mortgage rates and interest rates in general will be higher in the coming years. We are coming out of a period of Fed rates not seen since the 50's. Global investors are very unhappy with the falling dollar. This destroys their USD based returns. We have exported a large amount of debt both public and private. We saw the ten year reach 4.50% range recently which would usually have jumbo mortgages around 6.25% and conventional mortgages in the 5.75% range. This didn't happen as I believe investors/banks see a lot more risk in mortgage paper and will demand higher rates for the risk that has exploded in the last year. The weak dollar and the mortgage risk repricing makes me believe that rates will drift higher in the coming years.

The rich are different:Luxury Market Alive and Well.

NY Times has an excellent piece about the luxury market here:

$6 Million for the Co-op, Then Start to Renovate

Jumbo Mortgage Market Improves.

Fannie Mae put out a research piece highlighting the spread in the jumbo market vs the conforming "government guaranteed" paper. As you can see that the spread widened to about 1% and now is drifting down. The reason for the improvement is the market is repricing risk and we have seen improved jumbo mortgage rates especially for money good credits. These are the lower loan to value,higher FICO, and solid income loans. We continue to see higher rates for high loan to value scenarios. Most lenders/investors aren't doing 2nd's above 80%. WAMU and Indymac are out of this market. The market currently believes we will see a substantial decline in prices in the bubble areas so they aren't lending for risky loans. Scenarios above 80% on traditional jumbo lending require mortgage insurance from GE, AIG, etc. The monthly cost varies based on risk but can be $200-800 a month depending on loan balance and whether they agree to pledge their first born. All of the subprime jumbo mortgages are without mortgage insurance that's why they are trading at FIRE SALE prices. I believe we will see a clear distinction between the various risk levels. As in beef, a filet mignon is not a chuck roast. The market of 02-06 was so hungry for loans of any kind they couldn't tell the difference.

Image from Monty Python "The Meaning of Life"

The loans from 06 and 07 are the worst performing in history.

Moody's released a report highlighting the various vintages of subprime mortgages and their default characteristics so far. It shouldn't be a mystery to any of my readers that the worst loans were done right before the bubble popped. The reason being is that these were the last available buyers ("greater fool theory") or the most banged up refinance loan scenarios. The market had scraped the bottom of the barrel to approve people that wouldn't have been able to get a loan but the lenders were letting bad loans fund just to keep the volume up and maintain market share. Lenders who are now out of business which number over 161 according to our friends at the Implode-O-Meter would send daily emails and faxes to brokers advertising how crazy their programs were. It was a game of one upmanship. They then pass the loans to the investment banks like Lehman, Goldman Sachs, etc where they were packaged into billion dollar mortgage pools. The "lenders" didn't really care and the investment banks were just passing off the ultimate lending risk to other banks, hedge funds, and foreign governments. I heard a rumor that China has 300B worth of mortgage paper and a lot of it is subprime. They can't be happy. Maybe that's why they are sending shoddy products over. "You sold us bad loans, here are some badly made toys. Enjoy."

Subprime lending is still functioning albeit at much higher interest rates to compensate for the risk. The difference during the bubble years was .50-1%. Now most subprime investors are demanding 2-3 higher than prime and will only lend up to 85%. The sanity is returning to the market. Two forces in Wall St are fear and greed. The greed will return over the coming months and more products will be available to subprime borrowers but the rates will be much higher than Joe Sixpack is expecting.

100% Home Purchase after 04 can't refinance!

Thousands of prime full doc homeowners are shocked/angry to discover that they can't refinance under any terms. Washington Mutual, Bank of America, Indymac, etc don't allow above a 95% Loan to Value on jumbo loans after losing their shirts on risky loans in the last few years. Many people are coming out of adjustables or want a better fixed rate. These aren't risky cashout, stated deals. This is bread and butter lending. The banks and Wall St based money sources have completely pulled back on risk and this is terrible for client's trying to refinance anything above a conforming loan limit, (417k for a single family home.) The biggest problem is values in bubble market have collapsed back to 2004 or 05. These homeowners don't have equity and their loans are adjusting. This is the tip of the iceberg of the housing meltdown. The entire lending industry better get the math wizards in a room and whip up some products to do these loans otherwise you haven't even seen round 1 of this housing meltdown.

CNBC's Maria Bartiromo/Bill Maher Housing Bubble Video

Here is a clip from Real Time with Bill Maher which aired Friday September 28th. I have never heard the housing slump sound or look this good.

Millions of Homeowners Have Only Three Choices

I believe millions of homeowners that purchased with little or nothing down and folks who accessed the ATM machine one too many times via HELOCs and serial refis with unaffordable payments only have three choices. The first option is to consider refinancing now into an ARM or a fixed mortgage rate to avoid the rate resets that they may be facing in coming months. Most resetting ARM's both prime and subprime are looking at a first adjustment of 2-2.5% from the rate that they were accustomed to paying. This is only an option if their is equity, the client can afford the payment, fully document income and has a decent FICO score. Stated income is still available although the rates are healthy and are only available if their is 10-15% equity in the property.

The second option is to sell. Many people were severely stretching to pay the interest only or even the teaser rate on a pick-a-pay loan. Struggling to pay a mortgage is a bit more satisfying in a stable to rising environment as you get the benefits of home ownership and an investment vehicle. Buying in bubble markets was "worth" it for many people because the rising values allowed them to install an ATM and access money in amounts they had never had access to. The ATM is broken and cashout activity has slowed dramatically in the last year. (See chart below.)

Hundreds of thousands of homeowners have no equity or are upside down. This is especially true in Southern California as we had the largest percentage of exotic loan products and a cashout mania. The 2003-06 zero down purchasing frenzy is coming to haunt folks who bought too much home or who are just now experiencing their first rate adjustment. They are waking up to the fact that it wasn't worth it to pay 50% of their income just for housing. They should consider downgrading or renting. Most rents in Socal are $2000 for a standard single family home in a decent middle class neighborhood. This contrasts sharply with a 4k payment on the same home.

The third option is to conduct a short sale to avoid foreclosure. A foreclosure will destroy a FICO score like nothing else. They will be locked out of buying a new home for years. Folks should try to work out arrangements with their lender for a more affordable mortgage assuming that the late payments are because of a rate reset. If that isn't possible then a listing or a short sale should be explored with the lender and a competent realtor.

A short sale is a fire sale of the house to rapidly sell the home to pay off the lender(s). You don't fool around in this situation and list the home with a hope and pray price. This is where a realtor comes in and lists the home at TODAY'S market price to make a rapid sale. Don't be fooled by the housing inventory numbers, homes will and can sell if people drop prices to meet the available buyers. Home builders are doing this daily with crazy car dealer style weekend sales advertised on AM radio and by holding auctions. Someone will buy anything at the right price. If the home can't be sold or people ignore the reality of the market many will make out an envelope and mail the keys to the lender. That jingle is the last thing a bank wants to hear when they go to the payment P.O. Box. It is happening a lot more often than you would imagine.

If you or someone you know is facing these choices I would strongly advise speaking to a qualified professional about the options available. Consider yourself fortunate if none of this applies to you. Do you have any other ideas for homeowners facing these tough choices? Post your thoughts.

CA Tops List of Most Expensive Homes

If you are looking to buy the average home in the United States, these are the most expensive markets. The average home in this survey by Coldwell Banker is 2,200 square feet with 4 bedrooms, 2 1/2 baths, a family room, and a 2 car garage.
Looking over the list, California has 8 of the top 10 most expensive towns for the average home which is not a surprise with the fantastic run up in property values in the last decade and the largest percentage of wealthy citizens per capita of any state according to Forbes. Also on the list are Greenwich, Connecticut and Boston, Massachusetts in the northeast.
This accounts for the attention placed on housing out in California. When the working rich(doctors, lawyers, small business owners) have to dig up nearly a million to get into an "appropriate" home, housing becomes the leading discussion in the household. And if you held onto a home during the run-up you have a great deal of your wealth tied up in your primary residence. Consideration should be given to repositioning equity into other properties or markets.

Top 10 Most Expensive Markets For “Average Home”
Beverly Hills, Calif. $2,206,883
Greenwich, Conn. $2,018,750
La Jolla, Calif. $1,800,000
Santa Monica, Calif. $1,785,000
Palo Alto, Calif. $1,677,000
Newport Beach, Calif. $1,617,500
Santa Barbara, Calif. $1,599,667
San Mateo, Calif. $1,498,023
San Francisco, Calif. $1,451,250
Boston, Mass. $1,381,250

Why do mortgage rates move around daily?

1) What are mortgage interest rates based on? The only correct answer is Mortgage Backed Securities or Mortgage Bonds, NOT the 10-year Treasury Note. While the 10-year Treasury Note sometimes trends in the same direction as Mortgage Bonds, it is not unusual to see them move in completely opposite directions. DO NOT work with a lender who has their eyes on the wrong indicators.

2) What is the next Economic Report or event that could cause interest rate movement?A professional lender will have this at their fingertips. For an up-to-date calendar of weekly economic reports and events that may cause rates to fluctuate, email mrmortgage (AT) thegreatloan (DOT) com and we'll add you to our mortgage rates report. Can't post the address here because the spam bots would get it and we would be getting offers for prescription drugs and to help Nigerians with money exchanges.

3) When Bernanke and the Fed "change rates", what does this mean. and what impact does this have on mortgage interest rates? The answer may surprise you. When the Fed makes a move, they can change a rate called the "Fed Funds Rate" or "Discount Rate". These are both very short- term rates that impact credit cards, Home Equity credit lines, auto loans and the like. On the day of the Fed move, Mortgage rates most often will actually move in the opposite direction as the Fed change. This is due to the dynamics within the financial markets in response to inflation. For more information and explanation, just give me a call.

4) Do you have access to live, real time, mortgage bond quotes?If a lender cannot explain how Mortgage Bonds and interest rates are moving in real time and warn you in advance of a costly intra-day price change, you are talking with someone who is still reading yesterday's newspaper, and probably not a professional with whom to entrust your home mortgage financing. Would you work with a stockbroker who is only able to grab yesterday's paper to tell you how a stock traded yesterday, but had no idea what the movement looks like at the present time and what market conditions could cause changes in the near future?

Give children an XO laptop to climb out of poverty.

Do you want to fight a war on poverty? A war on terror? A war on the senseless waste of the sole source of capital, the human mind? Here’s your chance. For two weeks in November, you’ll be able to buy two XO laptops, the One-Laptop-Per-Child computer, with one coming to you and the other going to a hungry young mind overseas.

From the Boston Globe:
With orders for its rugged XO laptop falling short of its initial goal, the One Laptop Per Child project announced today that it would let consumers in the United States and Canada buy the cute computer for a limited time.

In an interview last week, Nicholas Negroponte, the former MIT Media Lab director and founder of the so-called $100 laptop initiative, conceded that he had not locked in the 3 million orders that he once said were necessary to trigger mass production.

The new “Give 1, Get 1″ initiative could be the antidote, he said, by helping to spread the project.

For a limited two-week span in November, people will be able to buy two laptops for $399, one for the buyer and one for a child in a developing country.

My take: Donate both, perhaps with one going to a child in your own town. Even better:

Starting today, people who simply want to donate a laptop to a child in a developing country for $200 can do so online at XOgiving.org.

I think there must be three billion candidates for this machine, so I can’t imagine how most of them will get one before they are no longer children. But the bounty of the harvest is planted one seed at a time. Click the laptop picture to do your part.

Greenspan Nailed in Interview w/ John Stewart

From the Daily Show on Comedy Central. My favorite show. The only way to get your "news," with a laugh. Enjoy.

The FED cut and rates are higher?

As clients are learning, mortgage rates are higher now than last week, back up to 6.5 percent for vanilla 30-year and 7% for Jumbo mortgages. Yes, higher.
Federal Reserve Chair Ben Bernanke probably has the same frustrated shoulder sag that we do: he played this thing exactly right, and has gotten nothing for his trouble but a run on the dollar.
The Fed's 0.5 percent was actually two quarters: the federal funds rate had been trading near 5 percent, 0.25 percent off-peg, for a few weeks. That was an inter meeting ease not formalized, a deft piece of central banking: if formalized, and then the crunch dissolved by itself, the Fed would have had to execute an embarrassing formal reversal. Instead, Sept. 7 news of sinking payrolls (an economic fade additional to and independent of housing and the crunch) made it easy to cut. At this moment the economy receives some dinky benefit from the cut (Construction money is 0.5 percent cheaper -- wanna build a house? Short-term rates are down -- how about a nice new neg-am pre-pay-penalty ARM? No?), but the crunch is still in place, especially in Mortgageland.

Other benefits have been cancelled as well. The 10-year T-note, driver for all long-term credit, has soared from 4.35 percent to 4.62 percent. The dollar run has been to the euro (now all-time high vs the dollar at $1.41) and to hard assets: gold at a 27-year high $744 and oil at one moment yesterday $84.

A great deal of domestic money has joined the run, buying into the fingernail-on-blackboard theorizing: there was no reason for Fed action; it guarantees a resurgence of inflation; it's just Bernanke's Put; and all bailouts all the time are bad.

This run has foreign fingerprints as well; Asia's currencies are dollar-pegged, but a race to hard assets is typical of our Persian Gulf friends and their several-trillion-dollar-hoard. Big currency moves often involve confidence, and it is disturbing in a time of financial crisis to find money running away from the dollar, the historical safe-haven. Confidence has aspects beyond interest rates and inflation: at some point, the average Persian Gulf observer of U.S. leadership, present and forthcoming, might well conclude that we don't have the good sense that Allah gave to the camel.

I like a good chart to see what happened in the past to see if it can give a little insight into the fog the future. Below is a chart of the U.S. dollar index which is our currency vs a basket of foreign currencies(Euro, Yen, Pound, Australian Dollar, etc.). Immediately below is the chart of the 10Y Treasury rates during the same period. In order to strengthen the dollar, rates need to rise to attract investment and/or taxes need to be reduced to drive growth. Taxes were cut during the early 80's, the growth engine revved up and interest rates dropped dramatically. I don't think with medicare, social security and a war machine at full speed the government can lower taxes. The FED is in a bind. The hope is that as they trash the dollar, this expands our export economy. Reviving growth, increasing tax receipts and paying back all the treasure we borrowed over the last few years. The US government owes 8.9 trillion dollars in bond money.

I believe rates across the board will need to rise in order to attract investment in our economy and to encourage investors to buy mortgage/ government debt. What's your take? I'm sure Bernanke and the new President could use you in Washington the next few years to sort out the problem.