Mortgage Market News

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.

No Comments »

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.

No Comments »

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…

No Comments »

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.

3 Comments »

As many people may have heard, the housing market is slowing down across the nation. This presents a remarkable opportunity for potential homebuyers. Three key factors are tipping the scales in your favor- 1) If homes are on the market for longer periods of time, sellers are more flexible on their price because there are more competing properties; 2) Lenders have grown accustom to the higher volume of loans- their first response to try to keep the volume “turned up” is to lower rates to spur buyers to decide to buy (Remember: Most lenders added extra staff and office space during the “boom” time, and now they have to keep the profits coming in the door); 3) It is nearing the end of 2006- Most lenders are making their final push of the year to finish strong, and impress their stockholders, and from a buyers stand-point, these are your last days to get a substantial write off for 2006 for any closing costs paid on a mortgage. Rates have dropped over the past few weeks due to these and other economic factors.

Put it all together and you have an excellent opportunity to save money and capitalize on great rates and great prices on homes. Time is running out for 2006… Get moving and good luck!

No Comments »

Tuesday’s bond market has opened strong following the release of this morning’s Producer Price Index (PPI). The stock markets have not had the same reaction to the news though. The Dow is currently down 18 points while the Nasdaq is nearly unchanged form yesterday’s close. The bond market is currently up 14/32, which will likely improve this morning’s mortgage rates by approximately .250 of a point.

The Labor Department posted August’s PPI early this morning, showing much weaker than expected results. The Index was forecasted to rise 0.2%, but actually fell a surprising 0.4%. This means that inflationary pressures at the producer level of the economy were much weaker than expected.

Late Thursday morning, the Conference Board will release its Leading Economic Indicators (LEI). This index attempts to measure economic activity over the next three to six months. If it estimates an increase in activity, the bond market will probably fall and mortgage rates will rise slightly. If it shows weaker than expected readings, the bond market may rally and mortgage rates should fall. Current forecasts are calling for a decline of 0.2%.

What does all of this mean? A weaker economy will continue to keep mortgage interest rates lower- as was shown by the Producer Price Index release. However, a forecast of improving economic conditions could move the market and interest rates the other way- at least until the forecast is proven. To the consumer, this is a great window of opportunity to lock in on lower rates. If you are in the process of financing a home, this would be the day to lock your rate.

1 Comment »

Tuesday’s bond market has opened down slightly after a new record trade deficit was announced. The stock markets are showing gains with the Dow up 65 points while the Nasdaq has gained 20 points. The bond market is currently down 4/32, which may push this morning’s mortgage rates higher by approximately .125 of a discount point.

The Commerce Departmen t posted July’s Goods and Services Trade Balance data this morning, showing a record deficit of $68 billion. This was higher than expected, but hasn’t had a significant impact on bonds or mortgage rates.

The results of today’s 10-year Treasury Note auction will be posted at 1:00 PM ET. If demand was strong, particularly from international investors, we could see mortgage rates improve this afternoon and tomorrow morning.

The answer is a resounding “Maybe”- the market is in a state of flucuation. My best advice to anyone interested in buying or refinancing a home is to get the process started as quickly as possible. Rates will not decrease drastically in the near future, but bad news in the investment markets could like cause a sharp increase on any given day. Start your loan and have your loan officer to monitor rates for the best day to lock in the best rate.

No Comments »