Mortgage Facts

Who is to blame for this current state of affairs? The media seems to like to point the finger at the mortgage industry and specifically at mortgage brokers. As a Mortgage Broker, myself, I know that brokers had very little to do with the mess that we are currently seeing. The media (and certain regulatory bodies) say that brokers arranged the loans that are now in default, so we are to blame. However, there are far too many other players in  this game… players that stand to make a lot more money than a lowly broker. Who is to blame? The Broker? How about the Realtor that put them in the max house they could afford? What about the Mortgage Lender that offered the loan as a product for brokers to sell? They can only offer a product that they know will be backed by the investors, so ultimately the investor (the very player that has incurred the most losses) created their own “poison-pill.” They agreed to back these very high risk loans (at the advice of fund managers and bond traders), but when the foreclosures began to mount up, they were the first to pull out of the game (and file suit against the Mortgage Lenders to try to make them give back their profits in order to off-set the Investors’ losses.

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The main causes are high foreclosure rates, excessive losses to the funding sources, a decline in property values (in several large markets), a much greater number of “exotic” mortgages held by consumers, and the adjustment of many ARM loans to levels too high for homeowner’s to maintain. You may be wondering what is an “exotic mortgage”? This is the term that federal regulators have come up with to describe both Interest Only mortgages and Negative Amortization mortgages. Interest Only loans have a time period where you only pay the interest of the mortgage- The monthly payment is less than a normal mortgage, however the balance of the loan remains the same. A Negative Amortization mortgage goes a step further by offering the borrower the opportunity to make an extremely low payment each month, but the difference between that low payment and the actual amount of interest on the loan is added to the balance of the mortgage. Basically if you make the cheap payment, you end up owing more than where you started.

The Cause:             All of the causes above could really be expressed as one cause, but the media likes to break them up because it makes for better headlines, and they can talk about a different cause every day of the week. I’ll use an example to illustrate the basic chain of events that has caused a huge mess- Meet John and Jane our homebuyers/homeowners. John and Jane are shopping for a home in late 2005. They employ a real estate agent to help them. Eventually John and Jane buy the absolute biggest house that they can afford at the advice of their Realtor; they use a 100% Interest Only (Exotic) Loan to be able to afford it; they had some credit issues to start and no savings so their loan is a “non-conforming” loan; they initially got the loan with intent of refinancing it before the adjustment date; during the 3-yr fixed period on their loan, the INDEX that drives the adjustment increased over 4%; the public sees that rates are increasing, so home sales slow down; John has some bad luck and gets laid off his job; the ADJUSTMENT DATE comes… This is were it gets ugly- Their interest rate increases by 4% and there payment changes to a PRINCIPAL and Interest payment rather than an INTEREST ONLY payment. During that 3-yr period, John and Jane only paid the interest on the loan, so they own the same principal balance as when they began. Since they got a 100% loan, they, in effect, owe 100% of the market value of the home. Add to that the fact that sales have slowed in their area; houses sit on the market; sellers lower prices to get rid of them; the value of John and Jane’s home has just decreased. This scenario happened millions of times across America as every joined in the housing boom that carried our economy through out the recent recession.

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During your busy schedule, you may not have had the opportunity to keep up with everything that has occurred and that is forecasted in the housing and real estate industry. As a homeowner or potential homeowner, many of these events will affect you, be it through changes in the value of your home, or the availabilty of mortgages, or possibly your financial situation if you work in a housing industry-related field. The housing industry and its many related sub-sectors make up a huge portion of the national economy- banking, building, appliances, steel, office leasing, equipment leasing, equipment manufacturing, highway and road construction, local government, schools… the list is endless. All of these industries depend heavily on how many houses are built as well as how many houses are sold. Let’s start by looking at the mortgage industry since it has been making headlines lately.

Since late 2006 a total of 167 major U.S. lending institutions have closed their doors. These companies range from very large operations with 100+ offices across the U.S. employing over 7,500 people, all the way down to “mortgage divisions” of larger parent companies. The majority of the companies that have been forced out of the industry have been “non-conforming / sub-prime” lenders and “Alt-A” lenders. These are two classifications of lenders that basically offered mortgage products that fit consumers with either credit challenges or non-standard income or employment situations. When these companies closed their doors, the loan products that they offered disappeared as well. The types of mortgages available today are drastically different than just one short year ago. In upcoming posts we will look at some of the causes…

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This year has been a roller coaster ride for the mortgage and housing markets. Early predictions were for a drastic increase in mortgage rates and a bursting of the housing price “bubble”. To a certain extent these predictions came true, but as the year closes out, both mortgage and housing markets are regaining some of their lost steam. Locally, in NC, we felt little or no effect of a “bursting bubble” as property values continued to rise throughout the year. NC actually saw a major invasion from homebuyers who were fleeing the areas that were experiencing the “bubble”, and these buyers have been willing to pay top dollar for homes in NC because they are accustom to doing so in their previous markets- CA, NY, FL.

Predictions of an expansion and recovery in the US economy was a major factor in the increase in mortgage rates for Conventional Loans, while early delinquencies and post-foreclosure sale losses by investor drove up rates for many Sub-prime Loans. As the US economy did not respond as predicted through the year conventional mortgage rates settled back down to market-driven levels as investors gained confidence that bonds (which back conforming loans) were a much safer investment than the stock market. The sub-prime market had to reap what was sown during the recent mortgage boom. Over the years, sub-prime lending rules had become much less restrictive as Wall Street had an insatiable appetite for non-traditional loans- this was fuel largely again by the dramatic increase in home values in many major markets, and the US populations us of home equity to carry them through the slow economic times. Wall Street investors were willing to accept the losses due to foreclosure simply because their were very few actual losses in a market where values were increasing 15-20% every year. However, as values stalled and in some cases dropped, and at the same time delinquencies increased due to poor homebuyer education and adjustments to interest rates, the losses to investors sky-rocketed. To feed Wall Street’s appetite, mortgages were all but “given away”- Home-buyers had little or no cash invested in the home and had long histories of poor credit and cash-flow management; it was inevitable that they would be delinquent on a mortgage that greatly increased their monthly debt-load.

As we close out the year, we see conforming loan qualifying rules tightened in some areas, yet expanded in others, as lenders work to mitigate losses due to a slower rate or appreciation, but at the same develop new options for the world we live in with the addition of 40-yr term loans and expanded options for interest only loans. Rates are still at very low levels, and will likely remain so until the economy makes a major turn around. The sub-prime loan market, on the other hand, is in the middle of a major shake up, as many large sub-prime lenders are closing their doors and others are rushing to find different lending options in order to generate revenue. Sub-prime lending rules will see a dramatic tightening in the next 6-months in response to the huge losses incurred by Wall Street investors. This will limit the available credit sources to many lower income households, but may ultimately be a much needed answer to the on-going ethical issue of “Do you give someone a mortgage just because they can qualify for the mortgage?” In the end, 2006 had many ups and downs, but as a whole was a prosperous year for most homeowners, homebuyers, and companies associated with the housing market- and just as in past years, the housing market has continued to carry the US economy and prevent a major recession.

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generally loans are due to need for a large amount upfront for one of lifes big buys like a car, new home loan or education loan. you need to first ask yourself  if the purchase you would like to make is creating good debt or bad debt.

Good debt is considered borrowing for something that will apreciate in the long run and at a good rate. For example real estate and education are always smart ideas as of the last 50 years. Student loans can be considered good debt because it should increase your income and the rates are generally very good as well

Bad debt is debt used to fund something that doesn’t hold its value. Some examples would be car loans, boats, technology or personal loans for vacations. any consumable or temp item like this is a bad way to endebt yourself and not a good loan for investment strategy. If you are about to undertake a new home loan in Charlotte, give me a call toll free and I will give you free honest perspective on the phone or in our local huntersville office. We are your neighbor and an honest professional mortgage consultant you can trust to treat you like a friend.

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This week brings us the release of six monthly reports for the markets to digest. However, only a few of them can be considered highly important to mortgage rates. All of the releases are scheduled to be posted the middle and latter part of the week, therefore, expect tomorrow and Tuesday to be fairly quiet. On the other hand, this makes is quite likely that we will see sizable changes to mortgage rates later in the week.
Wednesday morning we will see April’s Durable Goods Orders data. This report gives us an indication of manufacturing sector strength by tracking orders at U.S. factories for big-ticket products. It is currently expected to show a decline in new orders of approximately 0.5%. If this report shows a stronger than expected reading, we should see mortgage rates rise because it indicates manufacturing growth. If it shows a larger than expected decline, we should see rates improve Wednesday morning.

April’s New Home Sales data will be released late Wednesday morning. This report, along with Thursday’s Existing Home Sales data, gives us a measurement of housing sector strength and future mortgage credit demand. However, these are the least important releases of the week and probably will not have much of an impact on mortgage pricing.

The first of two revisions to the 1st quarter Gross Domestic Pro duct (GDP) will be released at 8:30 AM Thursday. The second revision to this report comes next month but isn’t expected to have much of an impact on the financial markets. The GDP is the sum of all goods and services produced in the U.S. and is considered to be the best indicator of economic growth. Last month’s preliminary reading revealed a 4.8% annual rate of growth, which was much lower than expected. Some analysts expect a significant upward revision to this reading with the consensus being 5.8%. If true, we may see the bond market react negatively and mortgage rates rise.

Friday brings us the release of two important reports. The first is April’s Personal Income and Outlays data at 8:30 AM. This report gives us an indication of consumer ability to spend and current spending habits. An increase in income means that consumers have more money available to spend. Since consumer spending makes up two-thirds of the U.S. economy, this data can cause mo vement in the financial markets and mortgage rates. Current forecasts are showing a 0.7% rise in income and a 0.6% increase in spending.

The second report of the day and the last important data of the week will come from the University of Michigan who will update their Index of Consumer Sentiment for May. An upward revision may lead to slightly higher mortgage rates, while a downward change may help push rates slightly lower. The preliminary reading was 79.0

Also worth noting is the fact that the bond market will close early Friday afternoon ahead of the Memorial Day holiday next Monday. The stock markets will be open all day, but the early close in bond trading may put a little extra pressure on bond prices as investors protect themselves over the long weekend. The markets will be closed next Monday and will reopen Tuesday morning.

Overall, I expect to see the biggest changes to mortgage rates the latter part of the week. It is difficu lt to name one particular day the most important of the week. Wednesday’s and Thursday’s data can both cause noticeable changes to mortgage rates and any significant surprises in Friday’s can do the same. Accordingly, please proceed cautiously is still floating any interest rate.

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There are several important pieces of economic news scheduled to be released this week. There are a total of five reports scheduled, but two particularly stand out above the others. There is no relevant data due out tomorrow or Friday, so expect the stock markets to help drive bond trading and mortgage rates those days.

Tuesday brings us the release of t hree economic reports. The first release of the week is April’s Housing Starts early Tuesday morning. This data measures housing sector strength and mortgage credit demand by tracking new permits and actual starts of new home construction. It is expected to show a sizable increase in new starts from March’s readings. But, since this report is not considered to be of high importance to the bond market, it likely will have little impact on mortgage rates unless it varies greatly from forecasts.

Also Tuesday morning is April’s Producer Price Index (PPI), which helps us measure inflationary pressures at the producer level of the economy. If this report reveals weaker than expected readings, we should see the bond and stock markets rally. The overall index is expected to show an increase of 0.7%, while the core data that excludes food and energy prices is expected to rise 0.2%. A smaller than expected increase in the core data would be ideal for mortgage shoppers.

The last piece of data due Tuesday is April’s Industrial Production. It measures manufacturing sector strength by tracking output at U.S. factories, mines and utilities. It is expected to show a 0.4% increase in production, indicating that manufacturing activity is growing moderately. A smaller increase in output would be good news for the bond market and mortgage rates.

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