Rates Take Spike After Fed Comments

June was a horrible month for mortgage interest rates. Interest rates hit their recent lows in May when the average 30-year fixed rate loan was 3.4%. Rates for the last week of June hit 4.45% a jump of just over one hundred basis points. In the second quarter, the quarterly rise in rates was the highest since the fourth quarter of 2010. The catalyst for the rate jump was Wall Street’s reaction to the Federal Reserve Chairman Ben Bernanke’s June 19 news conference. The following are the comments that moved the markets: “If the incoming data are broadly consistent with this forecast, the committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year; and if the subsequent data remain broadly aligned with our current expectations for the economy, we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around midyear.” After the extreme move in the markets, there has been a lot written about the likely overreaction of the markets to Bernanke’s words. Wall Street Journal economics editor David Wessel wrote a column, “A Hawkish Signal Bernanke Didn’t Send,” He wrote the markets overreacted to the Fed’s statements. “Futures markets are betting the Fed might lift short-term rates from zero as soon as mid-2014. “That is neither what Mr. Bernanke expected nor what he meant.” Wessel explained that Bernanke said, “There is no change in policy here” at the Fed’s news conference. After reactions to Bernanke’s statement, the Fed started to clarify the Fed’s positions to temper the market reactions. Fed Governor Jeremy Stein was quoted as saying that the Fed did not want to raise rates until 2015 or later. Even St. Louis Fed President James Bullard, who is known as an interest rate and inflation hawk, shifted his position on raising rates. He has acknowledged that inflation is running substantially below the Fed’s 2% target. The Fed has set a long-term inflation target of 2% when the bank would begin to tighten monetary policy. Inflation remains very low. Jeremy Siegel of the Wharton School of Economics wrote that partially due to the change in demographics – the population is getting older and will spend less and invest more conservatively. This will help to keep interest “rates low for years to come.” Historically speaking, rates are still attractive.

Mortgage

  -The fourth quarter of 2010 is proving to be a most interesting time in mortgages. Rates are fluctuating at near record lows. House prices are trying to stabilize. Underwriting is as stringent as ever. With house prices hovering around their recession-driven lows, this is an excellent time to buy a house in the Washington area. You will need some cash, and you will need to be able to qualify for it with full income and asset disclosure. Underwriters are being very careful when they underwrite mortgages these days. The mortgage application has to be complete, and everything has to be pretty perfect. Credit scores also factor in both the pricing models and underwriting. In non-government mortgages you need very good credit to qualify and excellent credit for the best prices. One of the best gauges of house prices is the Case-Shiller house price index, released by Standard and Poors. Standard and Poors’ August report revealed that 15 of 20 metropolitan areas in the survey showed a decrease in house values. The District of Columbia was one of five metropolitan areas that demonstrated an increase in house prices. The stabilization of home prices in DC has allowed lenders to allow for higher loan to values to be used for conventional loans. A year ago most lenders had to lower loan to value requirements because values were unstable. Appraisals are still problematic, but at least values are stabilizing. Refinancing is picking up its pace again. With mortgage at or near record lows, a lot of people are refinancing again. Even homeowners who refinanced a year ago are now refinancing again. The Washington metropolitan area has another advantage over other areas. DC metro is considered a “high cost” area. What this means is a homeowner can get a conventional or FHA mortgage up to $729,000. In areas not considered high cost, the loan limits are considerably lower, which means those homeowners who have large mortgages will need jumbo money. These typically carry higher rates and are more restrictive. Jumbo money traditionally carries interest rates a half point or higher in rate then a comparable conventional rate. Conventional loans can be sold to Fannie Mae or Freddie Mac. Jumbo loans need to be portfolio by lenders or secured by Wall Street. Beyond fixed rate loans, adjustable rate mortgages are priced very competitively. The two most popular adjustable rate products are 5/1 and 7/1 ARMs. These are fixed for five or seven years before they adjust. If you are going to move in five or seven years, an ARM can be a great loan. If you have a mortgage with a rate with a “5” or higher, consider a refinance. You may be very happy after your initial phone inquiry. Bill Starrels is a mortgage loan officer who lives in Georgetown. He can be reached at 703-625-7355 or emailed at, Bill.Starrels@gmail.com.

The Difficulties for the Self-Employed Borrower

As all of us are aware by now, after the largest housing bust since the great depression, getting a mortgage is far from the pre-bubble days where just filling out an application gave you an over 70% chance of getting a loan if you had good credit. Everything you can think of involving your financial picture now needs to be disclosed and reviewed by a lender. For those of you that are self-employed or own your own business, getting a loan can be even more toilsome. Pre-housing bubble days allowed the "self-employed" to just state their income and put a decent amount down in cash. We, the lenders, just focused on the borrowers' credit scores, the value of the property, and in most cases savings in the bank. As the housing market nationally started to crash, so did more of these stated income loans, referred to these days as "liar loans." Not all self-employed borrowers that used stated income loans were lying about their income, but since the program was abused it went "pop" with the bubble. Here is what you need to know about getting approved as a self-employed borrower: 1) You must have a 2-year history of being self-employed with reported 1040s to qualify for a mortgage. There are some exceptions, so e-mail me if you have any questions. 2) Lenders are looking for several months of "cash reserves," which are total mortgage payments in liquid assets. Many mortgage programs, especially if the loans are over the Fannie Mae/Freddie Mac loan limits, are looking for as little as 6 months or up to 12 months of cash reserves, depending on the loan size and down payment. 3) Lenders are now using income reported to the IRS as taxable income to qualify for a loan. If you are writing-off a lot of deductions then you are going to have a harder time qualifying for a loan. You have to be more conservative in your business deductions, which is hard in this economic climate. Bottom line: pay more in taxes to qualify for a larger loan. 4) Declining income is a red flag for an underwriter. If your business is still reeling from the economic tsunami of 2009, getting a loan can be even more difficult. Lenders will only use the lower of the two years of income to qualify you if, for example, 2010's income is lower than 2009's. We can make exceptions for declining income for a health issue or call to active duty, for example. 5) The higher your credit scores are, the better chance you have of getting a higher loan and qualifying for more. Reducing credit card debt is one of the easiest ways to improve your credit score, since credit card debt has an immediate impact on your score. Work with a credit repair company to get rid of any inaccurate information and make sure you check your credit scores regularly. Gregg Busch is Vice President of First Savings Mortgage Corporation. For more information or a free pre-approval contact him at GBusch@FSavings.com or 202-256-7777.

The Retirement Trap

Traditionally, we are taught to work hard, save hard, pay off our mortgage, contribute the maximum to retirement accounts and plan on downsizing. Plus, word on the street is that you will be in a lower tax bracket when you retire (which under every tax code I know only means you have reduced your lifestyle). We aren’t alone. Our government is in the business of retirement planning as well — except it is smarter. The federal government holds all the cards, providing tax incentives for us to contribute to retirement plans, requiring us to hand over our money for someone else to use. We carry all the risk and pay all the penalties when we finally need to access our capital. It makes sense. Our country was founded on Capitalism, defined as “increasing cooperation amongst strangers.” Stocks: We give money to other people. They have our cash and we have all the risk. Bonds: We loan money to other people. They have our cash and we have all the risk. The borrower, not the investor in these financial vehicles, can make the situation better. The lender/investor must live with the borrower’s decision. Bank accounts: We give money to a bank. The bank has our cash and we have all the risk. But we get a consolation prize: a pittance in interest. Banks also charge us four times the amount when we need to get cash out of our homes, which for many is our only source of non-taxable money. Then, adding to the insanity, we again pay interest to the bank on our money. Now, here is where people get tripped up. What is your net worth? In the eyes of Wall Street, your net worth is quantified by how much money you have invested in financial products. But realistically, your net worth is a combination of human capital and investment capital. Your human capital is your knowledge and experience, which give you the tools you need to wake up every day to generate income and take care of your family. But as we go through life, we take the one thing we own and control and transfer it into risk capital. We retire, only to realize that everything we worked for is at risk. At a time when we desire safety and certainty, instead we are trapped in retirement accounts: 15-year loans that handcuff us to obligations that may cost twice as much to support coming from a retirement account. In the 1970s and ’80s, our parents or grandparents retired when interest rates were 10 percent; a million dollars meant one day you could live on an income of $100,000 a year. But interest rates don’t stay in one place. Waking up to find interest rates at four percent, people could no longer afford to visit their children on holidays. You have a retirement plan. But do you have a plan for managing your retirement?

Touting Local Lending, EagleBank Hits Mortgage Milestone

This September, EagleBank passed a milestone of $1 billion in mortgages. With 17 branches in the Washington metropolitan area and the bank’s 18th on the way in January, EagleBank is showing serious strength as the largest community bank in the Washington metropolitan area. The Georgetowner discussed this milestone with EagleBank chairman Ronald Paul. Paul was a founding board member of EagleBank. It was founded in Bethesda, Md., in 1998. “We’re the largest community bank in the metropolitan area based on deposits,” Paul said. Investing in the community is important to Paul. “We’ve been active in staying local,” he said. “And, to me, that’s an important part about business. That’s what’s going to support our economy.” “We promoted a bill [which calls for local governments to switch deposits from national to local banks] in Montgomery County, and we have one proposed in the District,” Paul said. “For every dollar the District government deposits in EagleBank, we’ll match it with two dollars in lending in that marketplace. We’re working with Jack Evans in the District for it.” “You know, we put money into a restaurant in Bethesda that hired 68 employees, in which a third of those were unemployed,” Paul said. “So, obviously the big banks are not going to do that. That’s why Eagle has been as successful as it is. If it weren’t for a community bank like EagleBank, that restaurant would probably have never opened. Those 30 people might still be unemployed. And that’s why it’s so important for us to be supporting these community banks.”

What’s Behind Today’s Underwriting Guidelines

One question frequently asked is why mortgage standards are so strict these days. The reason for the stringent underwriting standards imposed is because of the very tight standards all mortgage loans go through after the bank has underwritten, closed and funded the loan. When a mortgage loan fails an audit by Fannie Mae or Freddie Mac, the major loan servicers to the banks, the loan can be sent back to the bank that originated the loan, and the institution can be forced to buy the mortgage back. According to the industry publication, American Banker, Sun Trust Mortgage in the fourth quarter of 2011 had $636 million in repurchase demands and a $215 million repurchase option. Sun Trust is a $177 billion-asset, Atlanta-based bank. Sun Trust’s CEO Bill Rogers was said that the increase in buy-back demands from the government-sponsored enterprises (Fannie Mae and Freddie Mac) was frustrating and hard to predict. Another institution, Flagstar received $190 million in buy-back requests in the fourth quarter. The only way to avoid mortgage buybacks is by delivering perfect loans. This is why underwriting standards are what they are. Until Fannie Mae and Freddie Mac lessen their post-closing audits, the standards will not and cannot be relaxed. A perfect loan five years ago would not necessarily be acceptable in 2012. Expect the process for loan approval to be tedious and slow. Be proactive. Manage the bank accounts you will be using in the mortgage application. Try to avoid non-payroll deposits. If applicants do this ahead of time, they will experience less aggravation later in the process. If there are non-payroll deposits, work on that information and have it ready to share. Some mortgages these days qualify for the president’s initiative, Making Homes Affordable (MHA) program. This enables some borrowers with loans backed by Fannie Mae and Freddie Mac to refinance their loans with no appraisal and no ratios. These are bank-to-bank transactions. You need to go back to the institution servicing your loan. MHA mortgages do not require the usual documentation and are relatively easy loans to get done. If you need a purchase mortgage or a non-MHA refinance, you have to prepare yourself for the reality of today’s underwriting standards. ? Bill Starrels is a mortgage loan professional who lives in Georgetown. He can be reached at 703-625-7355 or by email, bill.starrels@gmail.com

Mortgage: Dodd-Frank Brings Changes for 2014

As we close out 2013, the mortgage industry is bracing for significant changes. The new year will usher in updated rules, emanating from the Dodd-Frank legislation, as well as the tightening of FHA loan standards. These changes will make obtaining a mortgage more challenging for some folks. The high-cost loan limits on FHA loans are being lowered in 2014. The present high loan limit is $729,000. The new limit will be $625,500. This will put the FHA high limits in line with the high-cost loan limits. Washington, D.C., and most of its close-in jurisdictions are treated as high-cost areas. FHA mortgages enable a borrower to buy a home with a down payment of only 3.5 percent. There are no income limits on FHA borrowers. The allowable debt ratios will be tightened in the new year. The new rule limits the debt limit to 43 percent of income. This number is derived by taking the overall house payment and dividing it by the required payments on installment and credit card debts. The old limits were 45 percent or higher. These rules pertain to any mortgages that will be sold to Fannie Mae or Freddie Mac, which back up the vast majority of mortgages. One option that some lenders will have is to issue mortgages that are not backed by Fannie and Freddie. These are commonly called portfolio mortgages. A portfolio mortgage is a mortgage that is held in a specific bank’s portfolio, instead of being bundled and sold to Fannie or Freddie. The rules on portfolio loans can be more flexible than the rules for non-portfolio mortgages. Portfolio mortgages are usually jumbo mortgages, which start above $417,000, the limit for non-high-cost conventional mortgages. Among the more flexible rules for portfolio mortgages are higher debt-to-income limits and, in some cases, high LTV loans with no mortgage insurance. Expect strict asset requirements with the jumbo portfolio loans. Also, for the super jumbo portfolio loans (higher than $1,000,000), larger down payments are typically required. These requirements get stricter as the loan amounts increase. One result of the new rules will be seen in the once “more nimble” smaller lenders losing some of their flexibility. The larger banks which have large cash reserves will tend to be more eager to lend the jumbo money. This will be seen in aggressive rates and more flexibility. Bill Starrels lives in Georgetown. He specializes in home purchase and refinance mortgages. He can be reached at bill.starrels@gmail.com or 703-625-7355. NMLS #48502

Economic Numbers Continue to Impress

The February employment numbers blew the doors off consensus numbers. In February, the economy produced 236,000 new non-farm payroll jobs. The consensus was around 165,000. So the new numbers were 71,000 higher then predicted. The unemployment rate fell from 7.9 percent to 7.7 percent. It was an excellent report. Interest rates after the release of the employment numbers hit the highest levels since May of 2012. Generally speaking good news on the economy means higher mortgage interest rates. Consumer spending continues to be strong. This is likely attributable to continued robust consumer spending. Many economists expected consumer spending to decline after the increase in payroll taxes in January, which resulted in a decline in take home pay. One theory is the wealth effect. Household wealth is at its highest level since the third quarter of 2007. This figure represents the difference between the value of household assets and liabilities. The record highs of the stock markets, which in the first full week of March were at its highest level ever helps contribute to the good feeling of the consumer. Household income has held up surprisingly well in recent months. House prices are strong. Housing inventory is at very low levels. With demand rising and inventory at low levels, prices are increasing. Merrill Lynch increased its prediction for home appreciation. The new prediction is for single-family houses to appreciate by 8 percent in 2013. Prices were up 7.3 percent nationally in 2012. The housing affordability index is excellent. Mortgage interest rates are at low levels and house prices are still attractive. Both are off of their historic lows. The Federal Reserve Board of Governors has repeatedly stated that they will not stop their current foundation of low rates until the unemployment rate reaches 6.5 percent. No matter how pretty the February numbers were, the distance between an unemployment rate of 7.7 percent and 6.5 percent is a long one. There will be more fluctuations in the economy in the near term. Mortgage rates will likely stay in a relatively narrow range in the near term. Rates have bounced higher off of the recent historically low levels. Economists warn that sequestration may temper economic progress starting in the next couple of months. One strong employment report is good. Economists are anxious to see if the accelerated employment can be sustained in the next couple of months.?

Mortgage:Bad News Is Good News

Bad news for stocks can be good news for mortgage rates. Spurred by slower growth in China and unease in emerging markets, the stock market has been in a correction mode. When the stock markets tank, bond markets are often one of the safe-havens. Ten-Year Treasury notes closely mirror movement in the mortgage backed securities markets and often sends mortgage rates lower. This has translated into good news for mortgage interest rates. Current mortgage interest rates are at the lowest they have been for a few months. The trend appears to be that rates are drifting even lower. If a borrower has locked in a loan over the last several weeks and the loan is not closing immediately, they should go back to their lender and ask if they have a price renegotiation policy. Most banks do have a policy which allows a one-time rate change. It doesn’t cost anything to ask. In recent weeks Ten-Year Treasury notes reached a high of 3%. Currently Ten-Year Treasury notes are around 2.72%, a drop of over twenty-five basis points in the first part of the year. This is a large move. The new Dodd-Frank rules have kicked in for the banking industry. These rules have put further limits on the institutions and how they must qualify a borrower for a mortgage. No one seemed to think the rules were easy in 2013, and now the new rules are tougher. Ratios have been contracted to a total allowable debt ratio of 43%. Credit lines now must be counted against a borrower even if they are untouched. A lot of homeowners do have lines of credit which have no balances which may be a determent to their ability to refinance or buy a second home. The Dodd-Frank rules pose a downside risk for the housing market. If these regulations restrict the supply of credit, some households looking to purchase a home could find themselves shut out of the market, which would weaken demand. A lot of observers think the Dodd-Frank rules may slow the recovery in the housing sector. Time will tell if the current downturn in the equities markets persists or moves to the sidelines. If it becomes sustained for a period of time, it will tamp down economic growth prospects for 2014. This would potentially help keep mortgages lower. One of the most important reports around the corner is the employment report on February 7. Most expect a strong report in January and revised (higher) numbers for December. The report will be the foundation for the near term. Bill Starrels lives in Georgetown. He specializes in residential mortgages. He can be reached at 703-625- 7355 or bill.starrels@gmail.com NMLS#485021

Mortgage Interest Rates Defy Most Experts

The mortgage market is defying almost all economists’ short-term forecasts. Most expected bond yields and mortgage yields to be on the rise in 2014. This has not been the case. The 10-year Treasury yield hit its high-water mark at 3.03% on Jan. 2. At the end of May, it was at 2.46%, very close to a low for the year. These numbers basically caught all by surprise. Interest rates with no points on 30-year fixed-rate mortgages have been hovering around 4% on purchase-money conventional loans. Rates have been in the high 3s on government-backed 30-year fixed-rate FHA loans. On 15-year fixed-rate purchase loans, rates recently have been close to 3% with no points. Rates on adjustable-rate mortgages are also quite low. On a 5/1 ARM, with the loan fixed for the first five years, the rates are in the high 1s with no points. Also important is the LIBOR index. The London Interbank Offered Rate is defined as the benchmark rate that some of the world’s leading banks charge each other for short-term loans. The LIBOR index is used by most of today’s adjustable-rate mortgages. When an adjustable-rate mortgage is reset, the margin (usually 2.25%) is added to the index value; this determines the new rate going forward. As of the end of May, the one-year LIBOR index was 0.549. The new rate is: 2.25 + 0.549 = 2.799%. This is why folks with adjustable-rate mortgages are happy these days. In June 2012, there were criminal settlements against major European banks in connection with a LIBOR rate-fixing scheme that propped up the LIBOR index. The U.K. invoked the Financial Services Act of 2012, which brought the setting of LIBOR rates under U.K. regulatory oversight. The scandal has made it nearly impossible to track good historic data on the LIBOR index because normal market forces were not at work. One of the catalysts for the currently low bond yields is weakness in the eurozone economy, with further stimulus announced by the German Central Bank. Another is the revised fourth-quarter GDP, which showed negative growth for the first time since 2011. It is hard to predict where bond yields and mortgage rates are headed in the near term. One thing is certain: current rates are very attractive for folks looking to purchase or refinance a home. Bill Starrels lives in Georgetown. He specializes in refinance and purchase mortgages (NMLS #48502). He can be reached at 703-625-7355 or bill.starrels@gmail.com.