Mortgage Blog

The song remains the same. The title of that Led Zeppelin song is a great description for some of the things we’re seeing lately in the Bond market. Read on for details, and what they mean for home loan rates.

First, several housing-related reports were released last week – and they show that the housing market continues to remain weak. Both Housing Starts and Building Permits came in meeting expectations. Existing Home Sales fell 0.9% in February to 4.59 million units (though that was nearly inline with expectations), while New Home Sales fell 1.6% in February, which was below expectations.

Perhaps the biggest takeaway from these reports is that they could cause the Fed to do another round of Bond buying (Quantitative Easing or QE3) under the guise of helping housing. The housing market remains fragile, and it can’t absorb an uptick in rates just yet. It will be important to see if there are any rumors of QE3 in the coming days and weeks. Rest assured that the Fed has noticed the uptick in home loan rates and subsequent fall off in loan origination activity. This could certainly lead to another round of Bond buying, and as home loan rates are tied to Mortgage Bonds, as Bonds improve so will home loan rates.

Another thing that could help Bonds and home loan rates is renewed emphasis on safe haven trading. While global economic news has taken on a bit of a brighter tone lately, causing investors to move some of their money out of the safety of our Bonds, it’s important to keep in mind that the debt crisis in Europe is far from over. Just last week, it was reported that Portugal’s economy is set to contract by 3.3%, and it seems that it will be nearly impossible for Portugal to meet the tighter fiscal union rules and annual budget deficit targets. Also, Europe’s Services and Manufacturing numbers contracted more than forecast…confirming that the region is moving into a recession.

It is important to note that while Stocks saw some declines last week, Bonds were unable to build any positive momentum. This is eye-opening and doesn’t bode well for further price appreciation in Bonds. Whether the potential for QE3 or future safe haven trading helps Bonds and home loan rates in the future remains to be seen.

The bottom line is that home loan rates still remain near historic lows and now continues to be a great time to purchase or refinance a home. Let me know if I can answer any questions at all.

In December 2011, Congress reached a last-minute deal to fund the payroll tax cut extension. The payroll tax extension will provide a 2% tax reduction for individuals making up to $106,800 – so the tax extension will be very helpful for many Americans who are struggling during these tough economic times. But like so many things in our tangled economy, there’s a flip side. In this case, the tax cut deal has a rippling effect that will impact the mortgage world.

Here’s what’s happening and what it means to home loan rates:

What is happening and why? To put it bluntly, the passage of the payroll tax cut extension is being funded via a mandate to Fannie Mae and Freddie Mac (the nation’s largest providers of mortgage money) to increase their guarantee fees or “g-fee’s” by at least 10 basis points on the rate. So rather than giving a par rate of 4.00%, for example, the par rate is now increased by at least 10 basis points, or approximately 4.10%. But home loan rates are priced and offered in .125% increments, so this will most likely impact consumers by .125% in rate. Whether you agree or not on the politics behind this cost being passed along to folks who are taking out mortgages, the Congressional Budget Office recently estimated that the increase will ultimately pay for about $35.7 Billion of the cost of the payroll tax extension.

What exactly is this “g-fee”? The guarantee fee or “g-fee” is an amount charged by mortgage-backed securities (MBS) providers, like Freddie Mac and Fannie Mae, to help protect against credit-related losses in the overall mortgage portfolio. In other words, it acts a lot like insurance and helps lower the overall risk…which means home loans can be offered at terrific interest rates to borrowers that have good – but not perfect – credit.

What exactly is the impact of the rate increase? For example, for a $200,000 home loan, the increased g-fee (assuming a .125% increase in rate) would equate to $250 more per year in interest, or $7,500 more over 30 years. Someone buying or refinancing a home can certainly choose to buy down the cost with cash up front – but most people probably won’t do this.

Who will this impact? The change will impact all new borrowers of Fannie Mae and Freddie Mac loans. The bill will also impact Federal Housing Administration (FHA) loans by increasing the annual mortgage insurance premium that borrowers pay by one-tenth of a percent.

When will it start? Officially, the increase to guarantee fees will begin on April 1, 2012. However, the increase is already starting to be seen in rate sheets right now, since home loans being originated now will likely not be closed, pooled and securitized until April…and therefore will need the increased g-fee priced in earlier.

How long will this be in effect? The increase will be effective through October 1, 2021.

The bottom line is that the g-fees will be going up…and this will impact homebuyers looking to obtain a home loan through Fannie Mae, Freddie Mac and FHA.

The good news is that home loan rates are still at historic lows right now, and it’s a great time to purchase a new home or refinance. If you or anyone you know has any questions, please call or email!

The economy and the housing market continue to recover… but that recovery is viewed as a marathon, not a sprint.

Last month, the Fed reiterated that sentiment. On the one hand, the Fed’s Policy Statement that it released after its regularly scheduled meeting was pretty much the same story, including such statements as stable long-term inflation expectations, a tepid economic recovery, and fragile job market. But there was one big exception to their norm. The Policy Statement said there will be “exceptionally low levels for the Federal Funds Rate at least through late 2014.” This is a huge change from the previous statements of “low rates until mid-2013.”

On the surface, extending the zero interest policy until 2015 tells us the Fed thinks the economy will just be slogging along, and accommodative monetary policy will be required to keep the economy growing at least at a modest pace. One could argue that recent economic data is better of late and that all this loose monetary policy is unnecessary. But the Fed has spoken, and as the old adage goes: “Don’t fight the Fed.”

The housing market also received a little good news last month. First, Existing Home Sales increased 5% over the previous reading (read more about that report in the article below). Second, the National Association of Home Builders’ Housing Market Index (HMI) rose in January to a reading of 25. That was up 4 points from the previous reading and marks the 4th consecutive month of increases. The last time the HMI had a reading of 25 or more was in June 2007.

The bottom line is that the economy and the markets continue to show some signs of improvement, but there’s still a way to go. That said, Bonds and home loan rates remain at historic best levels, which means now is still a great time to purchase or refinance a home. Let me know if I can answer any questions at all.

It’s been said that no news is good news. But last week, the Jobs Report brought some good news for the labor market. 

The headline Jobs Report showed 243,000 jobs created, which was much better than expected. Meanwhile, a whopping 257,000 private jobs were created, also much higher than expected. Upward revisions to November and December added another 60,000 jobs to what was previously reported for those months. And adding to the euphoria was a 0.2% decline in the Unemployment Rate, bringing it to 8.3%…the lowest since February 2009.

Despite all this good news, the report did show a pretty sharp decline in the labor participation rate from 64% to 63.7%. We really need to have more people “participating,” or working to help pay down our debt. Understandably, the demographics of baby boomers retiring does account for some of the decline. But is it the entire 0.3%? And the U-6 Unemployment Rate (which counts all persons marginally attached to the labor force, including those who are employed part-time but would prefer full-time) remains at a lofty 15.1%, with that figure dropping just 0.1% for the month.

And there was other good news to note last week as well: The Commerce Department reported that Personal Incomes rose in December by 0.5%, above expectations and well above the 0.1% reported in November. This marked the largest increase in nine months!

So what does all of this mean for the housing market and home loan rates?

While Bonds and home loan rates did worsen on the good Jobs Report news (remember good economic news often causes money to flow out of Bonds and into Stocks, as investor try to take advantage of gains), home loan rates remain near historic best levels. In addition, the problems in Europe remain…and as uncertainty reemerges, US Bonds (including Mortgage Bonds, to which home loan rates are tied) will benefit.

The takeaway from all of last week’s news is that the pace of improvement in the labor market is choppy and muddled at best. But the trend is improving over time, and this is welcome news for the struggling housing market because as people feel more secure in their jobs, they are more willing to consider making major purchases like a home.

The bottom line is that now is a great time to purchase or refinance. Let me know if I can answer any questions at all.

The National Association of Realtors® surveys homebuyers and sellers each year to uncover housing trends and monitor changes taking place in the industry. This year’s report highlights a number of trends that haven’t been seen in years. Here are just 11 highlights from the 2011 report.

1. In 2011, 37% of homebuyers were first-time buyers – which was down from 50% in 2010.

2. Last year, 88% of homebuyers used the Internet to search for a home. That number was down slightly from a high of 90% in 2009.

3. The typical homebuyer searched for 12 weeks and viewed 12 homes.

4. The number of buyers who purchased their home through a real estate agent or broker climbed to 89% – a share that has steadily increased from 69% in 2001.

5. Nearly 1 out of 4 buyers said the application and approval process was “somewhat more difficult” than expected…and 16% reported it was “much more difficult” than expected.

6. About half of home sellers traded up to a larger and more expensive home…and 60% traded up to a new home.

7. The top 3 factors influencing neighborhood choice were: the quality of the neighborhood, the convenience to job, and the overall affordability of homes.

8. The typical seller lived in their home for 9 years. That number has increased from 6 years in 2007.

9. Although 61% of sellers said they reduced their asking price at least once, the average home sold for 95% of the listing price.

10. Only 10% of sellers sold their homes without the assistance of a real estate agent. Of those people, 40% knew the buyer prior to the sale.

11. The typical “for sale by owner” home sold for $150,000 compared to $215,000 for the average agent-assisted home sale.

All Contents ©2012 The National Association of Realtors®.