It has been an interesting summer in the mortgage industry. The following are highlights of where things are in the world of the mortgages.
Mortgage rates have stayed at or near record low territory for the last portion of the summer. There are a few factors that are keeping rates low.
First and foremost, the economy is weak. Job creation is inching along with the loss of government jobs wiping out the slow growth of private sector jobs. Without strong job creation, the economy will not be able to grow at a faster pace. Lack of jobs also squashes existing job holders from demanding more money from their employers. Without more money, folks cannot buy more goods, which is still another drag on the economy.
The dysfunctional Congress and their recent spectacle on the merits of raising the debt ceiling cast a pale on consumer and business confidence. With low consumer confidence, consumers tighten their belts – they spend less money. With businesses recoiling from the dysfunction on Capitol Hill, businesses spend less on expansion and find yet another reason not to hire new workers.
The downgrade of the nation’s debt by Standard and Poors further drove confidence down. The stock market recoiled at the news. Remember, when the stock market goes down, bonds go up. When bonds go up, yields go down. This is exactly what happened when the circus got out of control and Wall Street took a pounding.
The yield on the 10-Year Treasury note finished at 2 percent on Sept. 2, the same day the dismal jobs report was released. This represents a change in the yield of -24.5 percent from the same period last year.
The Federal Reserve Board of Governors recently announced that the Fed Funds rate will not be raised for the next two years.
Most adjustable rate mortgages are tied to the LIBOR index. The LIBOR index is trading near record lows. This means most adjustable rate mortgages are actually adjusting down. In order to compute how an adjustable rate mortgage is going to adjust you need a few things. First look at the note. The note tells the consumer what the index is. Next look at the margin. The margin will never change. To figure out the future rate, add the margin and the note. In early September the 1-Year LIBOR was at 0.8. Most loans have a margin of 2.25. This means the new rate would be 3.25 percent. The LIBOR index is likely to stay low for the near term.
Underwriting continues to be very strict and time consuming. A customer has to be fully documented in order to get a loan approved. Pay stubs, W-2’s for salaried folks and 1099’s and tax returns for self-employed are mandatory. Deposits that show on bank statements have to be explained. Loan files are now going through multi-stage audits which slow down the process and keeps the fact checking very stringent.
The days of “common sense” underwriting are a memory from a few years ago. Hopefully, one day in the not-too-distant future the industry will be able to move to more of a middle ground. Presently, the system has gone from one bad extreme to another extreme.
The constraints imposed in the mortgage industry are stagnating refinancing and the purchase of homes. Many people who would like to entertain selling their homes and moving cannot do so because of the more rigid underwriting guidelines.
For those who are in a position to refinance or purchase a home, now is a fantastic time to do so. Rates are quite low, and prices of homes are also at low levels. Eventually, rates and prices will go up.