Tuesday, December 9, 2008

Mortgage Rates at 5.5 % (Possibly Lower By the Time You Finish Reading This....)

Q&A: The Mortgage Buzz blog - Answers to questions about mortgages in December, 2oo8.

Is it a good time to buy a house right now? In the Charlottesville/Albemarle area? Or anywhere else? Who knows. But mortgage rates are on the buyer's side.

Just before Thanksgiving, Treasury Secretary Henry Paulson announced that the Bush Administration and the Federal Reserve will do more to aid American consumers, including a new "program": The Federal Reserve will buy up to $500 Billion of mortgage-backed securities, and up to $100 Billion in bonds, entirely separate from the $700 Billion in TARP funds, which was voted into place by Congress.

Immediately, mortgage rates dropped to 5.5%, the lowest in 40+ years, with speculation that the rates could drop to about 5%. In the past week+, there's been a veritable re-fi frenzy.

We received emails asking for details, the what and why of the news, so we turned to the local resource for all things home loan: The Mortgage Buzz. This blog is written by two loan officers at Crown Mortgage Services in Charlottesville, Va: Jason Crigler and Michael Martin. During this Fall's "credit freeze," Jason did a Q&A about mortgage availability.

Then the news got bigger. Maybe. On December 4, there was a "leak." "Rumor" had it that Treasury was going to back a program to guarantee mortgages at a 4.5% interest rate, in an effort to stabilize the entire economy. And Ben Bernanke, Chair of the Federal Reserve, has come out in support of this idea.

For now, though, the rates are at 5.5 % (+/-) on a 30 yr fixed. These are the details from Jason, in PART I of a Q&A:

1. Please tell us a little bit about your company and UpFront mortgage brokers.

We are a Virginia mortgage broker, based in Charlottesville. As a broker, we work with a number of national and regional banks and mortgage lenders. This access to banks and lenders gives us the ability to provide our clients with a wide range of mortgage products at very competitive rates. Jack Guttentag, aka The Mortgage Professor, offers his detailed explanation of the difference between brokers and lenders on his website. The Mortgage Professor also helped develop the UpFront Mortgage Brokers Association, of which we are a member. As UpFront Mortgage Brokers (UMB), we are committed to a set of consumer protection principles, which include being fully upfront and transparent with our compensation.

2. Could you explain what the Fed has done and why this impacts mortgage rates so much and so quickly? Any comment about the fact that the Fed will be "printing" money?

The FED’s announcement that they will purchase $500b of MBS [mortgage-backed securities - BB] (from Fannie/Freddie/Ginnie) was BIG news for the mortgage market. While $500b represents less than 10% of Fannie/Freddie’s outstanding guaranteed mortgages, the Treasury and Fed obviously hope that the plan will have a significant impact on mortgage rates for the next several quarters (ie, lower rates).

As my Tuesday post indicated, MBS prices shot up within an hour or so of the announcement. And since prices and yields have an inverse relationship, the price increase we saw translated into an immediate decrease in mortgage rates. Whether the rally came from the announcement itself or if the FED actually put some of the $500b to work that morning (or both), it had the desired effect.

For those who are interested in learning a bit more about bonds and MBS:

Mortgage News Daily – MBS Basics, which links to PIMCO’s - Bond Basics [PIMCO = Pacific Investment Management Company, whose head, Bill Gross, readers may be familiar with from CNN or CNBC - BB]

As far as the Treasury printing money, that’s a loaded subject. Can’t take that bait tonight. Maybe some other time. ;0) [We were quoting from the above-linked NYT story! - BB]

3. Is the Fed going to buy mortgages just from banks, or from other entities as well? (GMAC, etc.)

According to the press release, the FED is purchasing MBS from Fannie, Freddie & Ginnie, not from individual banks. And this makes sense because it is separate from the Treasury’s TARP program, which was supposed to purchase assets (including MBS) directly from banks and other qualified institutions. The FED’s $200b ABS (asset backed securities – bonds related to car loans, credit cards, etc) purchase program is directed at the paper on the books of various institutions, which may include everyone from GMAC to American Express. While a goal of this program may be to reduce rates among loan products, it seems to be geared more at freeing up balance sheets to make it easier for lenders to continue to offer credit to customers.

As I mentioned above, the MBS program seems to be targeting yields (ie mortgage rates). The recent MBS yields have baffled the FED and Treasury, as they have remained relatively high compared to similar Treasury bonds. If GSE [GSE = "governement sponsored enterprise,' for instance Fannie and Freddie - BB] debt is “effectively guaranteed” by the US government, why the disparity between T-bonds & MBS? Whatever the reason, that’s what they wanted to address. And so far it has worked.

4. Why is there speculation that mortgage rates will go down to 5%?

Simply put, $500b can buy a lot of GSE & Ginnie MBS. The FED will act as a major buyer (higher demand) of the current supply of MBS and this will push prices higher and rates down. A big question is whether or not more investors will see this as an opportunity to be sellers of MBS at higher prices. If a lot of investors sell as the FED buys, it could diminish the rate effects of the MBS purchase program. In other words, the rates we’re seeing now could be the best we get. But of course the FED hopes that’s not the case.

5. Could you give some examples...comparisons between monthlies/entire mortgage at 6.5% vs. 5.5%. (We realize that people could use the calculator on either of our blogs, but it will be useful to see it in print).

Sure, let’s use the 30yr fixed for an example (fractions rounded):

A $200,000 loan at 6.5% has a principal & interest payment of $1,264/mo. That same loan at 5.5% has a monthly payment of $1,136, which is a $128/mo reduction. Translated in to loan qualification terms, a borrower could make $3,500 less (annual income) to qualify for the $200,000 loan at 5.5% versus 6.5%, based on a 45% debt to income ratio.

Over the full 30yr term, the $200,000 loan at 6.5% carries $255,086 in interest. At 5.5%, you’re looking at $208,807, a savings of $46,279 in interest.

6. Are you doing or seeing 97% LTV, or how much/little downpayment? Is 720 credit score still "acceptable"?

Yes, 97% is still available through Fannie/Freddie and FHA [Federal Housing Authority] (and the rare portfolio mortgage program). We’ve only done a few (along with 95% loans) through Fannie this year, as most of our clients have had 10% or more downpayment/equity and good credit scores.

Fannie and Freddie’s 97% works well for those with credit scores of 680 and higher, where rates and points are similar to that of FHA. But with scores 680 or less, FHA is by far the better deal. FHA has no minimum credit score requirement, although some banks maintain a minimum policy such as 580 or 600.

720 is still the level for the best conventional mortgages rates (Fannie/Freddie). Though slightly higher, FHA’s rates do not change based on credit score or LTV [loan-to-value, that is, how much of a mortgage needed and the amount it is for], which is attractive for those with lower scores and higher LTVs.

USDA and VA mortgage programs have been around for while, and they’re very unique in today’s world. They both go to 100%, have no mortgage insurance (each have a funding/guarantee fee), have no minimum credit scores, and both are limited to certain borrowers. VA (Veteran’s Administration) is only for eligible US military veterans and USDA (US Department of Agriculture) is for rural properties and eligible borrowers. There has been an increase in the use of these programs, but not on the order of what the GSEs and FHA have seen. This is obviously attributable to the fact that only certain borrowers (and properties for USDA) are eligible for the programs.

7. Are these 30 yr fixed mortgages? Are there still other kinds of mortgages available (interest only, option arm) with changed rates?

Fannie/Freddie & FHA have fixed and ARM [Adjustable Rate Mortgage - BB] products. VA also has fixed and ARM mortgages, but USDA is only available as a 30yr fixed.

Interest only is not available at 97%+ – maybe that’s assumed, but I thought I’d point that out.

Fannie/Freddie – 3, 5, 7, & 10yr ARMs.

FHA/VA – 1, 3, 5yr ARMs.

8. Does the Fed's action bring jumbo mortgages down, too, and to what rate? (Could you first define a jumbo for readers who may not be aware of the distinction.) You mentioned on REALCentralVA that there seemed to be a slowdown in jumbo purchases around here...and there ARE a lot of properties available that need jumbos.

The term "Jumbo" is used to describe a loan amount that was higher than the conforming (Fannie/Freddie) maximum loan limit, which has been $417,000 since 2007. In March of this year Fannie and Freddie increased their conforming limit for many MSAs [Metropolitan Statistical Area - BB], up to a maximum of $729,750. Seventy counties across the US saw the conforming limit go to the max. The Charlottesville MSA’s limit was raised to $425,000. But what has happened is that the original $417,000 loan limit remained and the difference between that and the increased limit became “Conforming Jumbo” (and FHA/VA Jumbo). So now we have Jumbo and Conforming Jumbo.

But a basic Jumbo mortgage often can only go to $1m to $3m. Enter the Super Jumbo, where loans are anywhere from $2 or 3m plus. Both Jumbo and Super Jumbo are loans that are kept on the investor’s books (portfolio), whereas Conforming Jumbo can be sold to Fannie/Freddie or through Ginnie Mae.

Confused yet?

Right, I commented on Jim’s blog about jumbo mortgage availability. While there are still jumbo mortgage programs out there, they have diminished quite a bit. We have access to a number of jumbo programs, and banks offer them directly, but the credit freeze that intensified in September and October has lenders cutting back on all types of loans that they can’t easily sell (like to Fannie/Freddie).

I suspect that there are a lot of homes in the Charlottesville MSA that need jumbo mortgages ($425k+), but I couldn’t give you any numbers. [To search this, go to mycaar.com, click "Property" and then fill in your parameters. The system only has "$400k" and "$450k" options, so the following numbers are only estimates, from $450K and higher: In Charlottesville/Albemarle there are 410 properties, up to $18M; in the entire Central Va MLS there are 805 - BB]

How hard has it been to get jumbos? Will it continue to be hard? Has it been hard b/c people don't qualify or b/c lenders are afraid of such large amounts, or both? Or are there just no buyers for properties that need jumbos right now?

Well, gone are the days of stated income/asset loans, low or no doc and option ARMs. These mortgage types weren’t only for Joe the Plumber - they also catered to the jumbo market. But those programs ceased to exist months ago. What I mentioned above is what’s really restricting the market – the credit freeze. Investment firms and banks have been the lenders of Jumbo money.

Now that the investment bank model is nearly dead (Goldman Sachs & Morgan Stanley are holding on), that leaves the Jumbo market up to the banks. And as you know, banks are pretty shy right now about putting anything on their balance sheet except for cash. But again, it’s not that jumbo mortgages aren’t available altogether, but the cost for them has risen (anything for a price, right?). I think you have it right – fewer qualify and fewer banks want to lend. ARM rates are in the high 6% for loan amounts up to $1m, in the 7-8%+ range for over $1m. Fixed rates are 7%+. Of course, you’ll need 20-30% down and 720+ credit scores.

9. To shift gears a little: There are apparently 11.5 Million people underwater in their mortgages, according to Mark Zandi of Moody's Economy. These people can't qualify for re-fi's with no equity. Do you have any opinion you'd like to share about the mortgage mod programs? And any opinion on the fact that 50+% of loan mods re-default?

Your questions touch on this fact – that the problem is immense and complicated.

As FDIC Chair Sheila Bair puts it, “it all started with housing and I think it won’t end until we get the housing market corrected” (CNNMoney). I agree with her and join many others in believing that loan modifications are critical to helping stem the foreclosure crisis. But certainly the way a loan is modified makes a difference on the success rate. Modifications can be as simple as a new payment plan to get current, or as complicated as a rate and/or principle reduction. Payment plans can be worked out at the servicer’s level, but rate and principle reductions affect the owner of the loan and are much more difficult to do. Your Monday post about the investor suing BofA is an example of the problems with mortgage modifications. (Didn’t BofA see this coming?)

I think the only way to effectively deal with foreclosures related to underwater mortgages is with principal reductions. But how this would be done is the real rub. Forcing principle reductions is nearly impossible. So I have to hand it to Bair – she’s trying to work with the system she’s got.

This is the end of Part I. Part II will appear later this week.

Many Thanks to Jason. He'll take questions in Comments (or if you have a private question, you can email him:


Anonymous said...


do you have any comment on this? i'm a newbie but even to me this seems like bad news.

thanks for your post.

Anonymous said...

ok, so i just used the bankrate widget at the bottom of the blog. i clicked for 30 yr fixed and entered zip 22903.

six rates popped up.

bank of america 7.33
quicken 6.036
bbt 5.937

down to Total Mortgage Services 5.2

I don't really understand why they're so different. I mean, I get that this is why people shop around and use a broker. but why would b of a be so high?

jason said...

Anon1: I saw the article on Wed. and was planning to post the bloomberg link and give a brief opinion on our blog. As far as I know Director Lockhart is the only one who has publicly addressed the idea, and it was just a one sentence blurb at that. I agree with you 100% - it would be very bad news if this idea turned into a plan. I think the consequences would be devastating.

Anon2: I wonder about that too. Maybe they're quoting a program in which the borrower pays a higher rate to cover some or all closing costs. Maybe it's a case where they're "customizing" their rates for the particular audience (bankrate shoppers) - it's commonplace for offer rates to be different in various channels even with the same lender (company website, branch, online advertising like bankrate, etc). Or perhaps they didn't get the memo from bankrate on the loan parameters for which they should be quoting (j/k). As far as bankrate is concerned - been there, done that, don't plan on ever doing it again. It's a pay to play system, and my experience was that those who advertise on it usually are torn between charging their borrowers more to make up the cost of playing or trying to get away with a bait and switch.

The 30yr fixed was between 5 and 5.375% no points yesterday (depending on the loan profile).