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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.

Interest Rates Are Still Attractive

The only constant about mortgage interest rates is that they do move. Depending on the economic news of the day rates will go higher or they will go lower. Case in point was the first week of May. The much touted monthly employment numbers blew past expectations. Additionally, the numbers preciously reported for the preceding two months were revised higher. Total nonfarm payrolls were higher by 165,000 led by 176,000 new private sector jobs. Most were expecting a number closer to 125,000. The unemployment rate fell to 7.5 percent. Most economists expected the rate to hold steady at 7.7 percent. Increased jobs were higher in transportation, financial services and health care. Job losses were seen in government and information services. Construction jobs were off by 6,000 after rising 138,000 for the previous six months. The jobs numbers were revised upwards for February and March. February was revised to 332,000 and March to 138,000 The report was the catalyst for the stock markets. The Standard and Poors index reached 16,000 and the Dow Jones Industrial average reached 15,000, both represented new highs. Conversely there was a selloff in the bond market. The 10-year Treasury notes were yielding around 1.62 percent before the jobs report was released. The yield on the 10-Year notes ended the day at 1.74 percent. Mortgage interest rates track the 10-Year Treasury notes. Mortgage rates bounced higher after the jobs numbers were released. Rates generally speaking rose by around 1/8 in rate. The overall jobs numbers are encouraging. They do point to an economy that is growing at a modest pace. The GDP numbers for the first quarter of 2013 showed a growth rate of 2.5 percent. Although positive, this is a modest pace. The effects of the government sequestration will likely be a weight in the second quarter numbers. Inflation remains benign. The rate of inflation is presently around 1.5 perfect. There is no cause for concern. Some inflation is good for the economy. Mortgage interest rates are still at very nice low levels. They are off of their recent lows, but not by much. Expect rates to keep in a relatively narrow range in the near term. It is still an excellent time if one needs a purchase or refinance mortgage.

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 Standards Getting Tougher

There is one constant in the mortgage industry these days. It is not easy getting a mortgage. Well, folks, coming to you in 2014 – even tougher mortgage standards. The Consumer Financial Protection Bureau (CFPB) has announced new rules for a new class of “qualified mortgages” unveiled on Jan. 10. Banks that underwrite mortgages that meet the criteria as “qualified mortgages” will be protected from homeowner lawsuits which is a big win for the banking industry. This comes on the heals of the multi-billion dollar settlements the nation’s largest banks just paid to Fannie Mae and Freddie Mac. Some of the basic changes in the new rules include; •Lowering the maximum loan to value ratio to 43% •Eliminating interest only mortgages •Limiting up front fees charged on a mortgage •Eliminating most low documentation loans •Raising the amount of down payment required on mortgages Reactions by various industry leaders where mixed. Debra Still, chairman of the Mortgage Bankers Association, said that the MBA agrees that the goal of the regulations, ensuring that borrowers receive loans they can repay, is in everyone’s best interests. The MBA did express some reservations about some aspects of the new rules that could curb competition and perhaps increase some costs. Fred Becker, the president and CEO of the National Association of Federal Credit Unions, embraced the inclusion of credit unions in the new umbrella. Becker said, “NAFCU strongly believes that the safe harbor approach is preferable for all parties involved in a mortgage loan transaction as it provides parties clarity and certainty, and consequently discourages frivolous lawsuits, claims or defenses.” It appears that industry leaders see the protection against lawsuits as a good tradeoff for the tightening of constraints of underwriting standards. The National Association of Home Builders was cautious in its reaction, stating that the new rules should strike a “proper balance” that encourages lenders to appropriately provide credit to qualified borrowers while assuring financial institutions they will be protected from lawsuits if they follow the rule’s criteria. The industry has gone from very lax underwriting standards which helps lead to the housing crisis of 2008. Many have commented that standards had swung to the other extreme. Now, the rules are getting tighter. We hope he new, stricter rules will not constrain the market further. Bill Starrels lives in Georgetown and is a mortgage loan officer. He can be reached at 703- 625-7355 or bill.starrels@gmail.com.

Interest Rates and the Fiscal Cliff

Mortgage interest rates during the presidential campaign season have remained in a relatively steady range. Rates have been hovering near record lows. The fluctuations have been around a quarter point in rate. Rates for the balance of the year should remain steady to lower depending on pending action by the president and Congress to avoid the fiscal cliff in early 2013. The fiscal cliff — a term coined by Federal Reserve chairman Ben Bernanke — is used to describe a raft of tax increases and spending cuts that will automatically come into effect at the beginning of 2013 if Congress does not take decisive action on the budget. If automatic cuts are triggered, the economic recovery could be slowed due to the severity of those budget cuts as dictated by the fiscal cliff. One expects that the spirit or hope of bipartisanship will carry the day and ultimately encourage some type of compromise between the president and Congress to avoid the consequences of inaction. Congress will also have to tackle the debt ceiling next year. If the talks around the fiscal cliff go badly, then the debt ceiling negotiations will be difficult and likely become a real struggle. Another possibility would be for Congressional leaders to strike a bipartisan plan that would take a more gradual approach to aus- terity measures including defense cuts. There is no clear-cut road map. With Congressional elections two years away, one would think Congress would like to find a solution. The politics of obstruction failed to elect a Republican president. Voters are looking for an Obama-Christie moment more than a repeat of the deficit-ceiling debacle of last year. Interest rates will benefit from the bad days during the evolution of the upcoming work on the fiscal cliff. If a compromise is finally reached, then money will go back into equity markets and taken from bonds. This would cause rates to go higher. With the reelection of Obama the fiscal poli- cy of the Federal Reserve should remain dovish. With all the variables in the economy, including the effects of Hurricane Sandy, the Fed is not going to change policy at this time. The one certainty in the coming weeks is there will be a lot of uncertainty, which will move the equity and bond markets. Look for rates to be reactive along with the progress of our post-election leaders. Bill Starrels is a mortgage loan consultant who lives in Georgetown. 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.

It Is a Great Time to Buy a Home

With mortgage interest rates bouncing off all-time lows and house prices near recessionary levels, this is a great time to buy a house or condominium. The National Association of Realtors’ Housing Affordability Index rose to its highest level ever in the first quarter of 2012. The index measures median home prices, median family incomes and average mortgage interest rates. The index rose to 205.9 in the first quarter, the first time the index was above 200. The index has been tracked since 1970. NAR president Moe Veissi, broker-owner of Veissi & Associates Inc., in Miami, says market conditions are optimal for homebuyers: “For those with good credit, we’ve never seen better housing affordability conditions or market opportunities than we see at present.” He adds, “although home prices are stabilizing and sales are rising, some buyers still have to jump through a lot of hoops to convince a lender that they are creditworthy, even for a mortgage that would be well within their means. This is especially true for self-employed buyers.” The comments by the NAR president explain why it is important for homebuyers to be pre-approved for a loan. There are a few basic reasons why a pre-approval makes sense. First, with a pre-approval, the prospective buyer will find out how much of a mortgage he or she can qualify for and afford. The old affordability ratios have changed. Credit requirements are more stringent and can affect interest rates. Documentation standards have changed, as well. The old rule of thumb was individuals could qualify to purchase a home around three times their gross income. Now, the ratio is significantly higher. It takes a professional to look at actual income and liabilities to come up with that exact number. Credit scores are important. If the scores are too low, the borrower may not qualify for a loan. If he or she does qualify for a loan, the rates may be adversely affected. If the credit is pulled early enough, these problems can be addressed. Sometimes, the borrower can be re-scored, and sometimes those scores can go up by 50 to 100 points. Documentation standards are strict, and verge on the unreasonable side of rationality. Full income documentation is now standard. For self-employed folks who write off almost all their income, they have likely written-off their chance to buy a house at a price level that matches their true pre-deduction income. Bank statements that are being used for the house purchase should be devoid of most non-payroll deposits. Any non-payroll deposits will have to be documented. To minimize things, a borrower should use direct deposit of payroll checks avoid small miscellaneous deposits. With a little preparation, one can better negotiate the home buying environment and take advantage of this great home-buying opportunity. Bill Starrels lives in Georgetown and is a mortgage loan officer who specializes in refinance and purchase mortgages. He can be reached at 703-625-7355 or bill.starrels@gmail.com

As Mortgage Rates Drift Lower, it’s Time to Buy

Mortgage rates are being driven by continued European debt crisis. With the recent elections in Greece and France, further uncertainty rules the day in the European economies. In recent days headlines in The Wall Street Journal and other publications have talked about the European Union preparing for the departure of Greece from the EU. While the European economy continues to generate uncertainty, the United States economy is showing signs of strength. Consumer sentiment in May was at its highest levels since January 2008 according to studies from the University of Michigan. Industrial production is strong. Projected automobile sales for this year have been increased. Housing starts are strengthening. In April, Housing starts rose to an annualized rate of 717,000 homes in April. This is well over consensus numbers. Existing home sales reached an annualized rate of 4.62% in April. Mortgage rates are continuing to reach lower levels. In the May 24, 2012 mortgage rate survey by Freddie Mac, the rate of thirty-year fixed-rate mortgages averaged 3.79%. The rate for fifteen-year fixed rate mortgages averaged 3.04%, all with 0.7 of a point. In the January 5, 2012 the averages in the Freddie Mac Survey were 3.91% and 3.23% with 0.7 of a point. In January 2011, the rates were 4.77% and 4.13% Since January 2011 the rates for 30-year fixedrate mortgages have been down approximately 100 basis points and 109 basis points on 15-year fixed rate mortgages. For homeowners who refinanced in late 2011 it may be worth refinancing—or considering refinancing—again. Rates on adjustable rate mortgages are attractive these days. Rates on a 10-to-1 mortgage, the rate is around 3% and is fixed for ten years. An ARM can be an excellent choice if the homeowner who is planning on owning a home for ten years or less. The Federal Reserve Board of Governors has already stated that it will not raise rates well into 2014. Economists are also pointing to continued turbulence and weakness in Europe. Thus it is likely mortgage rates will remain low for well over a year—and perhaps longer. Finally, the affordability index is at its most attractive levels in recent times. With home prices well off their highs from five or more years ago—and interest rates at or near record lows—now is a great time to buy a home. Bill Starrels lives in Georgetown and is a mortgage loan officer who specializes in refinance and purchase mortgages. He can be reached at 703-625-7355 or bill.starrels@gmail.com

Where Is Common Sense Underwriting?

2011 was quite the year in the mortgage industry. Underwriting standards got even tougher even for the most qualified consumers. The mortgage industry has gone from one bad extreme to another. Before the housing and financial crisis hit, there was little quality control. If a potential customer was alive, had a social security number, one could get a mortgage. Income did not have to be verified, and sometimes assets didn’t have to be verified either. Basic standards had to be improved. There are four major components needed to qualify for a mortgage. First, sufficient income is needed to obtain good ratios. A customer had to have a mortgage that requires no more than 40 percent of one’s income. Second is good credit. Third is decent equity, which means a decent loan to value (LTV). Fourth are adequate assets. What is happening in today’s over-regulated mortgage environment are underwriting and auditing standards which are out of control. One can have perfect credit, strong income and assets a low LTV, and your loan will still be scrutinized for the most minor of details. Virtually all of your non-payroll deposits will require letters of explanation. If you make the “mistake” of depositing that $200 reimbursement check from your son for concert tickets you will have to write a “letter of explanation” as to where the $200 came from. If you received $400 for some side job, you have to write a letter of explanation. You get the idea. Why is this required? Good question. If you have any credit inquiries on your credit report, you will have to write a letter of explanation. The best advice is to plan ahead of time. Avoid non-payroll deposits for 60 days leading up to your mortgage application. Do not apply for any additional credit up to and during the mortgage process, your credit will be checked prior to approval. The days of common sense underwriting are over for mortgages. Will common sense underwriting standards come back one day? Hopefully. It’s going to take some thoughtful lobbying from consumers and bank executives alike. Today’s standards are simply inappropriately tough. Bill Starrels lives in Georgetown and is a mortgage loan officer who specializes in residential refinance and purchase mortgages. He can be reached at 703-625-7355 or bill.starrels@gmail.com .

Let’s Have Some Refinance Relief for FHA Mortgage Loan Holders

On April 18, 2011 the mortgage insurance premiums (MIP) were increased on all Federal Housing Administration mortgages.  The old monthly premium was .55 percent.  The new premium is 1.1 percent, or double the older ratio. This change means an increase in premiums for those looking for purchase money loans, plus existing FHA mortgage holders interested in refinancing. The increase affects FHA-to-FHA refinances. If the president is serious about encouraging refinances of government-backed FHA mortgages, then the rules need to be relaxed on refinances.  The rule now means that individuals who have an FHA mortgage that pre-dates the MIP increase are subject to the much higher MIP if they want to refinance. The 100-percent increase negates most of the savings on refinances. From 2006 to 2010, there were approximately 3,200,000 FHA mortgage loans taken out (excluding reverse mortgages).  All these mortgage holders would be subject to the higher MIP if they refinanced today.   On a 300,000 mortgage, the older monthly mortgage insurance premium on a 95-percent FHA loan would increase by $140 a month. Unless the customer is coming down from a very high mortgage interest rate, the higher MIP would all but wipe out the savings of the lower rate. The government should grandfather the older MIP formula for customers who have been paying on time with their older FHA loans. The rules need to be modified for these folks. The rational for the premium increase was to bolster the reserves used for FHA mortgages that result in default.  The default rate for FHA mortgages has been in the eight- to nine-percent range for the last few years.  The percentages of defaults have lessened some because of the higher quality of originations, due to vigorous underwriting standards.   This rule fix should be a priority for the president and Congress when they tackle economic issues this year. It is a simple fix that would help tens of millions of homeowners who hold government-sponsored FHA mortgages. If 40 percent of the mortgage holders from 2006 to 2010 refinanced and the average savings was $250 a month, this would amount to a “stimulus” to the tune of just under $500,000.00 with little cost to the government.   Bill Starrels lives in Georgetown and is a mortgage loan officer specializing in refinances and purchase mortgages. He can be reached at 703-625-7355 or bill.starrels@gmail.com