Rumblings at the Federal Reserve

There was a shot across the bow in the financial markets on Feb. 18, when the Federal Reserve raised the interest rate it charges banks for emergency loans. The markets reacted predictably to the news. The bond market sold off with the yield on the 10-year treasuries, moving to 3.8 percent, a level not seen since late last summer. Mortgage interest rates, which follow the lead of the 10-year treasuries, also moved higher. Earlier in the day, rates for conforming 30-year fixed rate loans were around 5 percent with no points. By the end of the day the same rate commanded three-fourths of a point more in fees. The rates on 15-year fixed rate products essentially moved 12.5 percent higher in rate. Similar moves were seen in government-backed mortgages, otherwise known as FHA or VA loans. Rates essentially were an eighth higher then before the Federal Reserve’s actions. The slight tightening reminded people that the Fed is looking forward to exiting some government-sponsored programs and future tightening of interest rates. The Fed still views the overall economy as recovering from the severe recession, but highlights that the economy is still not strong. Until the economy proves that it is in much stronger condition, the Fed is not likely to do any broader policy hikes. Some called the reaction to the Fed’s decision overblown and highlighted the rise in the discount rate of .25 bps was not reflective of the economy as a whole and was a normalization of some aspects of the credit markets. Remember, Wall Street loves volatility. One has to keep in mind that traders make money when markets move. Most economists still think true tightening by the Feds is a ways off. Most are calling for tightening to begin no earlier then 2011. Others think the tightening may further down the road. The bottom line is the economy has to show stronger signs of economic strengthening before rates are raised. Mortgage interest rates will eventually rise, but presently remain low. It is still an excellent time to refinance or purchase a home. The Federal tax credit for buying homes is still in place. House prices remain low compared with prices of a few years ago. As we all know, what goes down eventually moves back up. Bill Starrels lives in Georgetown. He is a mortgage loan consultant. Contact him at 703-625-7355 or bill.starrels@gmail.com.

Mortgage:November 20, 2013

Economic events drive mortgage rates. The month of November showcased how events drive markets and cause mortgage interest rates to fluctuate. The employment report released on Nov. 8 showed job growth of 204,000 non-farm payroll jobs created in October. This number was considerably higher than the consensus estimates of 120,000. This good news on jobs was very bearish for the bond market and mortgage rates. On the heels of the employment report were the confirmation hearings for Vice Chairman Janet Yellen who has been nominated to replace the current Federal Reserve Chairman Ben Bernanke. Yellen?s remarks had the potential of moving the markets. If confirmed, Yellen will be the first female Chairperson of the Federal Reserve Bank in its 100-year old history. In her testimony Yellen stated that the quantitative easing made a meaningful contribution to economic growth. She went on to say that the resulting ?lower interest rates have been instrumental? for the growth in the housing sector. Yellen addressed the labor participation rate and the long-term unemployed. She said that there should be special focus on employment and didn?t argue when the point was raised that the employment numbers may be potentially higher due to the slack labor participation numbers. Inflation goals are the same as outgoing Fed Chairman Bernanke. It was reiterated that the rate of inflation is well below the goal of a twopercent inflation rate. Yellen stated that the quantitate easing program by the Fed cannot go on forever, but she did not signal that the program was ending anytime soon. The markets liked Yellen?s testimony. After Yellen?s testimony mortgage rates, there was a collective sigh of relieve reflected in the markets after her testimony. Yellen reaffirmed her reputation as someone who has been supportive of Bernanke?s rate and monitory policy. Rates moderated from the higher levels reached after the strong employment report. Rates were basically back to October levels. Jumbo money ? which can be used for loan amounts north of $418,000 with 20-percent down payments ? has been priced better than comparable super conventional money. Expect rates to keep in a relative narrow range for the near term. Historically, mortgage rates are in excellent shape. Bill Starrels lives in Georgetown, where he works as a mortgage loan officer. He can be reached at bill.starrels@ gmail.com or 703-625-7355. NMLS#485021

Bad News Is Good News For Mortgage Interest Rates

Mortgage interest rates continue to hit new lows as the economy plods ahead slowly. Rates declined in reaction to disappointing job growth, according to a report released on July 6. The number of non-farm payroll jobs for June was up by 80,000. The consensus was 100,000 jobs. Some Wall Street firms raised their guidance to 125,000 after the release of a stronger ADP employment report the previous day. As the report confirms, the reason for this market reaction is the economy’s tepid recovery. Rates simply are unlikely to move higher with a slow moving economy. Additionally, the Federal Reserve Bank may be prompted to do some quantitative easing. The markets are already pricing in more stimulus by the Fed. Mortgage rates are at historic lows. Purchase mortgage rates 30-year fixed rate mortgages are priced in the mid-3 percent range. Fifteen-year fixed mortgages are below 3 percent. Rates for 5/1 and 7/1 adjustable rate mortgages are below 3 percent. For every 200,000 borrowed at 3.5 percent on a 30-year note, the payment is $895 a month. At 5 percent, the payment would be $1,069 a month. This represents a savings of $174 monthly. With the low interest rates, a borrower can get a larger loan than was the norm just a year ago. In order to get approved for a loan, a borrower needs debt to income ratios of around 40 percent. With historically low rates and home prices coming off their lows, the affordability index is excellent. Other monthly reports were less than upbeat. The manufacturing index went down to a reading of 49.7 percent, below the 50 percent threshold considered the equilibrium. Readings below 50 percent are considered bearish. A factor contributing to this decline is the worsening of the EU economies. Exports are important to the manufacturing sector. Goldman Sachs has reduced its target GDP for the Q2 GDP to 1.5 percent, one-tenth lower than their previous prediction. Will rates still go lower? There is always the possibility. If one of the EU states stumbles in the weeks and months ahead, more money could flee to the safety of bonds. This could spur even lower rates. Meanwhile, rates could tick higher, too. Locking in at today’s low rates seems like the prudent thing to do. Take advantage of the historically low rates and refinance, or consider buying that house or condominium. Bill Starrels lives in Georgetown. He is a mortgage loan expert specializing in refinance and purchase loans. Bill.starrels@gmail.com or 703-625-7355.

The State of Mortgages

  -Mortgage rates remain in a narrow and favorable range. In recent days, rates for 30-year fixed-rate mortgages as gauged by Freddie Mac averaged below 5% percent again. This means for a primary house mortgage with at least 20 percent down and very good credit, rates are quite attractive. Interest rates on government insured FHA and VA mortgages were slightly higher. Fifteen-year mortgage rates typically carry rates that are around a half to three-eighths lower then typical 30-year rates. Interest rates on adjustable rate mortgages that have fixed terms of three, five and seven years were approaching a rate of 4 percent. The turmoil in the European markets produced instability in stock markets worldwide. When stock markets falter, investors put money into safer investments, which include the bond market. When bonds do well, so do interest rates. The yield on the 10-Year Treasuries was testing the 4 percent level before the turmoil in the stock markets. The yield for 10-Year Treasuries is now in the 3.5 percent range. The “flight to safety” should continue for at least the short term. Inflation or the fear of inflation is the major driving force for a rise in interest rates. There is little fear of inflation, nationally or globally. Some economists state that the long-term trend in inflation globally is titled in the direction of less inflation or even deflation. In the short term, there is no doubt that inflation is well under control and there is no fear of inflation rearing its head. If the European Union slides towards recession, then there will be no chance of interest rate rises by the Federal Reserve in the foreseeable future. Employment is starting the long road back to recovery. Jobs are starting to increase. However, more people are coming back into the job market, looking for jobs. That is why the unemployment rate rose to 9.9 percent, even though there was healthy job growth. There is a lot of work yet to be done. Underwriting standards remain strict. This means a loan has to be well documented with all the income and asset statements. If there is a gray area on a loan, the underwriter will cast doubt instead of giving the benefit of the situation. Mortgage loans are available, but the client has to be well qualified. If you are in the market for a mortgage, this can be a good time for you. Rates are low and as long as you can meet the underwriting criteria, you should end up with an excellent mortgage. Bill Starrels lives in Georgetown, specializing in residential mortgages. He can be reached at 703-625-7355 or bill.starrels@gmail.com.

End of Summer Rates Remain Hot

The summer of 2012 was one of the hottest on record, and mortgage rates were almost as hot as the weather. Mortgage interest rates have established or flirted with record lows for most of the summer months. Thirty-year fixed rate mortgages have been in the mid 3-percent range for purchase mortgages and closer to 4 percent for refinance money. Fifteen-year money has been below 3 percent on purchase mortgages and slightly higher for refinance transactions. The closely watched interest rate on 10-Year Treasury notes has been trending up in recent weeks as the stock market has been moving higher. The rates on the 10-Year note have most recently been around 1.85 percent as of late August. This has been a direct result in traders taking a more bullish sentiment on recent news. The 10-Year note has moved up around 40 basis points since early July. The yield on the 1-year LIBOR (London Interbank Offered Rate) actually went down slightly in August to 1.05 percent. The low watermark for the 1-Year LIBOR was 0.78 percent in January 2011. The 1-Year LIBOR is the most important index for most mortgage holders. This is because most adjustable rate mortgages (ARMs) are tied to the LIBOR index. The LIBOR index has been kind to holders of ARMs. A typical loan carries a margin of 2.25 percent. In order to figure out the newly indexed rate on an ARM, you take the index value and add that to the margin. 1.05% 1-Year LIBOR (as of 8/22/12) + 2.25% margin value = 3.30% is the new rate Many homeowners have done just fine after their adjustable rate mortgages have reset. Many times, the mortgage holder has enjoyed the maximum allowable adjustment, which resulted in a savings of hundreds of dollars. If a mortgage holder has an ARM at 5 percent for $200,000 their principle and interest payment is $1,074. The new payment at 3.3 percent would be $875 which represents a savings of $199.00 a month. Everyone wants to know where the markets and interest rates will be as students repopulate Georgetown, and everyone comes back from vacation. A lot hinges on the September employment report and what the Federal Reserve Board of Governors does in its September meeting. If they do more to stimulate the economy, then expect to see the yield on Treasuries and mortgages to come back to early July ranges. The Fed will not act in its October meeting as the presidential election is only two weeks away from that meeting. If one steps back from the volatility, one thing is clear, mortgage interest rates are in a great zone for homeowners, and rates are likely to stay in this level for some time to come.

Mortgage Rates Climb in an Unsettled Market

Mortgage rates continue to climb to higher levels as the market prepares for an eventual Federal Reserve Bank decision to pull back from its bond-buying program. The Fed has been buying $85 billion dollars worth of bonds and mortgage backed securities in an effort to keep mortgage rates at lower levels. If the Fed pulls back from its bond buying program, the expectation is for bond prices to go down in value and rates to go up. Over the last several weeks, the markets have driven rates on the 10-year Treasury notes up over 100 basis points. Mortgage interest rates have gone up around 150 basis points. The markets have likely priced in a good portion of the anticipated change, when the Fed does pull back on its stimulus program. Economic reports have been fair to good. Housing starts were good for multi-family and less then stellar for single-family homes. House sales have been strong but appear to be showing the effects of rising rates, which have hurt affordability. The latest employment report missed the consensus numbers and was generally a soft report. Additionally, there were downward revisions for the previous two months of employment numbers. The Fed has stated repeatedly that it will not raise the Fed Funds rate until employment goes to around 6.5 percent. Goldman Sachs, among others, does not think the Fed will raise rates until late 2015 or early 2016. Corporate earnings for the latest quarter have been coming in with less then robust numbers. The earnings reports suggest that the economy may be slowing some in the second half of the year. Housing inventory remains tight, and pricing remain at high levels. It does appear in the most recent reports and statistics that the rise in interest rates is dampening the rise in house prices. The housing affordability index is showing the highest readings in years. House prices are clearly rising faster then wages. This coupled with the spike in interest rates have made affordability more difficult for a lot of perspective home buyers. Congress, which reconvenes in September, will launch into its divisive do-nothing mode of governing as the next round of budget talks take center stage. It will be another glaring mess of a lack of governing. This will likely be unsettling for the markets and ultimately the economy. For the near term, expect volatile markets that do not always make sense. Interest rates will remain choppy and on the higher side. Keep focused on the prize of getting that house you want to live in. For your mortgage, simply get the best interest rate of the day and be happy. Bill Starrels lives in Georgetown. He works as a mortgage loan officer. Bill can be reached at 703-625-7355 or bill.starrels@gmail.com

DC Home Prices Increase, Despite National Trends

Case Shiller Index reported that of the 20 cities it recorded, home prices are off to a dismal start, with 18 cities down in price. Only 1 city actually had a 3.6% increase in prices. Guess which city that was…? You got it right, the Washington, DC area. So with all the negative press these days about housing being in the dumps and prices poised to drop further, one needs to recognize that these are national numbers, not local. Why is the District fairing better than the national average? Low unemployment with a rate of 5.6%, high affordability, above average home price growth, falling foreclosure rate, less houses under distressed sale, cheaper to buy then rent, and an increasing population. All these bode well for the future of housing in the Washington region. This is why we are actually seeing multiple offers this spring with low inventory levels. Realtors’ biggest complaint is that there is not enough inventory to sell, which is starting to drive up prices. So now you ask yourself why you should pull the trigger today. Here are the best reasons why now is a good time to jump off the sidelines and get into the housing market: 1.) You can still find a good price if you look hard. The MRIS (multiple regional listing service) and Delta Associates are estimating that the increasing number of jobs into the area will continue the price gains long term. Buying now makes sense as clear statistics show prices are on the incline. 2.) Mortgages rates are still low, but not for long as the economy shows continued signs of improvement. Today you can get a loan around 4.75%, where just 2½ years ago rates were at 6.25%. Over a 30-year period, that can save you many thousands of dollars. 3.) You will save on income taxes to be able to afford more per month. You can deduct the mortgage interest and real estate taxes off your net taxable income. 4.) You will be able to hedge against inflation in the long term. You are not guaranteed a quick return in 2 years, but history has shown that owning a home over an extended period of time does beat inflation by a couple of points a year over average. 5.) It’s forced savings. As you continue to make your mortgage payment monthly, more dollars go into principal to pay the loan down which builds up equity. On top of those savings you have the appreciation of the property over the long term. Like the stock market, it is risk capital. As the stock market continues to go up and the economy improves the price will start to appreciate again. Just look at history. As populations continue to grow in our country and here in the DC area, strain is going to be felt in the price of homes if new housing is not being created. New building permits are only growing at 4%, and while this is sufficient to cover population growth, it won’t be enough to cover those moving to the market or the people coming from being renters to buyers. Act now, and don’t pay attention to the negative headlines about housing.

Relief for FHA Customers is on the Way

In the Feb. 21st Georgetowner, the newspaper ran its mortgage with the headline, “It Is Time For Refinance Relief for FHA Mortgage Loan Holders.” My article highlighted the problem Federal Housing Administration-backed mortgage homeowners were experiencing with their desire to refinance their mortgages because of the new, much higher mortgage insurance premiums that all but wiped out their interest rate savings. You never know who is reading the Georgetowner.  On March 6, President Barack Obama announced changes in fees charged to FHA-Insured borrowers. The following is the president’s statement released by the White House: Reducing Fees for FHA Borrowers Seeking to Refinance: As part of the president’s aggressive effort to reduce barriers and costs for refinancing, the administration is also announcing that the FHA will cut its fees for refinancing loans already insured by the FHA. An estimated 2 to 3 million borrowers could be eligible for this savings, providing the typical FHA borrower with the opportunity to save about a thousand dollars a year through refinancing than they could have under today’s fee structure. The president announced rule changes that do not require approval by Congress. Considering how productive this latest Congress has been, this is a good thing for homeowners. Borrowers with FHA-backed mortgages who use the FHA streamline refinancing program currently are being charged an upfront mortgage insurance premium of 1 percent of the loan balance and an additional 1.10 percent for an annualized premium.  FHA is lowering the upfront premium to .01 percent for streamlined refinances for loans originated before June 1, 2009, and the annual mortgage insurance premium is being reduced to .55 percent (which is what these mortgage holders are presently paying). As an enhancement, the government is removing streamlined loans from the tracking mechanism called the “compare ratio” that tracks lender performance. By relaxing the requirement on streamlined loans the folks at FHA are in essence encouraging lenders to do more streamlined loans. It will take some time for both FHA and the banks to update systems so the new FHA streamline rules can be implemented.  Expect the new streamline loan program to be available in a couple of months. The president’s latest initiative will provide significant savings for millions of current FHA mortgage holders. Many non-FHA mortgage loan customers with loans backed by Fannie Mae and Freddie Mac can presently refinance under the HARP2 program, otherwise know as the Making Homes Affordable (MHA) program.With the latest presidential initiatives, it is proving to be a great year to refinance a home mortgage loan. Bill Starrels is a mortgage loan officer who lives in Georgetown. He can be reached at 703-625-7355; email Bill.Starrels@gmail.com.

Volatility In The Markets

Mortgage interest rates have become increasingly volatile in May. Money is flowing into the stock market and out of the bond market. When bonds sell off, yields go up. Mortgages usually follow the bond market. Although recent mortgage interest rates are close to the high water mark for 2013, they are still at very reasonable levels. The best execution for thirty-year fixed rate mortgage has moved from around 3.5 percent to close to 3.75 percent in the middle of May. The volatility is the sharpest the market has seen in several months. There have been recent articles about the Federal Reserve Bank backing away from quantitate easing programs which include massive purchasing of Treasury Bonds. The obvious concern is that once the Fed stops buying bonds, the price of bonds, which are the foundation for the mortgage markets, would go up in rate. This would translate to still higher interest rates. The housing markets locally, and in some regions nationwide, remain very strong. In these hot markets, listings are selling in 14 days. The strong job market in the Washington metropolitan area is a key driver to home sales. The effects of the federal sequestration are going to start to filter though the economy. Many government workers from the Park Police to defense workers are feeling it. The math is not hard to understand. If someone is working several fewer hours less a week, they get paid less. This translates to less money they have to spend. It will be interesting to see the Federal Reserve minutes due to be released in the third week of May. The Fed is likely to show a little disagreement in its ranks. At the same time, the Fed should be reiterating its policy of not raising rates for a couple of years. The nation’s economy is moving forward. Inflation is very low. The world economy has some catching up to do. Job growth is getting better, but there is a long way to go for “full” employment. The GDP is expected to rise less than in previous quarters. The Congressional Budget office forecasted that the Federal budget deficit will fall to about $642 billion, or 4 percent of the nation’s annual economic output, about $200 billion lower than the agency estimated just three months ago. This is positive for both the economy and the bond market. The bottom line is this: there will be more volatility in the markets in coming weeks and rates, too, will be volatile. Rates in general are in a good range.

Points in Our Favor: 2015 Mortgage Rates Looking Good

When it comes to predicting mortgage interest rates, during certain years economists are the smartest persons in the room. 2014 was not one of those years. In 2014, economists theorized that when the Federal Reserve stopped its program of buying longer-term treasuries and mortgage-backed securities, rates would rise. Freddie Mac’s deputy chief economist Len Kiefer said that he expected the average rate to rise to 5.1 percent by the end of 2014. Later in 2014, he pulled back his prediction to 4.3 percent. This prediction was still too high. For 2015, Freddie Mac’s chief economist Frank E. Nothaft – who is also a lecturer at Georgetown University – said he expects to see interest rates climb throughout 2015, averaging about 2.9 percent for 10-year treasuries and 4.6 percent for 30-year mortgages. Some economic forecasters think the Fed’s board of governors will not raise rates in 2015. Their rationale is that the euro, which is racing toward parity with the strengthening dollar, is making U.S. goods expensive for our trading partners. If the Fed raises rates, the dollar would get even stronger, harming the U.S. economy. Because of this and other factors, it seems unlikely that rates will be raised in 2015. Local real estate has benefited from the strengthening economy and low interest rates. When asked for some highlights of the Georgetown real estate market, Michael Brennan Jr. of the Georgetown office of TTR Sotheby’s said, “One of the most remarkable events in Georgetown real estate in 2014 was the rollout of 1055 High. In just seven days’ time, all seven units sold, all cash, all over list price.” Looking at the start of 2015, Brennan said that, as of early February, “There are only three houses listed for sale in Georgetown below $2 million. With available inventory this low, buyer demand will remain strong for our neighborhood in 2015.” The most notable listing so far – the Fillmore School building and property – was just listed by TTR Sotheby’s for $14 million. Clearly, Georgetown continues to be one of the hottest addresses in Washington and in the county. A well-balanced community with strong residential, business, restaurant and workspace components, it also continues to be one of the safest neighborhoods in D.C. With mortgage interest rates flirting with two-year lows, the affordability index is at one of its highest points ever. It looks like 2015 will be an excellent year for real estate and mortgage rates. Bill Starrels lives in Georgetown and is a mortgage banker specializing in residential purchase and refinance mortgages (NMLS#485021). Reach him at 703-625-7355.