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.

The Government Shutdown and the Effect on Mortgages

The short-term agreement that ended the partial government shutdown and raised the debt limit ceiling, reached by Congress and signed by President Barack Obama, was greeted by a collective sigh of relieve by the mortgage industry. The immediate reaction by mortgage markets saw an immediate moderation in mortgage rates. Conventional mortgage rates for 30-year fixed rate mortgages were up to 4.625 percent before the agreement was reached. After the agreement was inked, the rates on 30-year fixed rate mortgages came down to 4.25 percent with no points. FHA mortgages were pricing around 4.25 percent to 4.375 percent before the agreement. Post debt-ceiling gridlock, FHA rates on 30-year fixed money was around 3.75 percent. This represented an improvement of more than 50 basis points. If the debt ceiling was not raised, and the government defaulted on its debt, the markets would have been turned on their heads. Interest rates would have skyrocket that quickly. The only folks who disagreed with this dire assessment were the self-proclaimed economists of the Tea Party, which engineered the shut down and the threat of default. The serious consequences of what default would have meant to the economy of the United States and to the world was one of the few conclusions that virtually all economists could agree on. During the shutdown of the government, there were issues for folks trying to close on their loans and move into their new homes. Verification of employment was problematic for many banks which were doing what was once routine. Verifications of government workers buying new homes with a mortgage was a problem. Tax transcripts were unavailable during the shutdown. Some banks put a temporary waiver on this requirement. Rural loan products were stopped during the shutdown. There were many home buyers who could not perform on their contractual dates due to the above circumstances. There are no provisions in contracts that deal with unexpected government shutdowns. How some of these played out will be interesting. Perhaps Sen. Ted Cruz, R-Texas, who engineered the shutdown could explain to these innocent homebuyers what they were supposed to do. Everyone hopes that there will not be a repeat performance by Congress in January. The ramifications on when someone can or cannot close on a home is far reaching for our economy, and this shows how “local” politics can be.

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 .

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.


A couple of years ago, if a homeowner was offered a jumbo-sized mortgage for a home in Washington for 4.375% they would beg for the loan to be locked. In fact, the customer would probably think the mortgage loan officer was misquoting his or her rate sheet. But that was 2009. Today clients sometimes let greed take over. A lot of borrowers are taking their time in making the decision to move forward in anticipation of even lower rates. Remember 2008 – 2009? The sky was falling. Banks were failing by the hundreds. The Treasury Department headed by Henry Paulson, formerly of Goldman Sachs, launched the TARP program under President George W. Bush in order to stabilize the financial system. Fast forward to the recent midterm elections. Democrats lost the House to the Republicans because many voters believed that among other things that the Democrats were the architects of TARP and that TARP did not work. TARP did pass with the help of Democrats and TARP did salvage the banking system. In fact the Government may make a profit from TARP. The country is climbing out of the deep recession slowly. The recovery is proving to be a slow one that will take time. In reaction to the slow pace of the recovery, the Federal Reserve Bank announced “Quantitative Easing 2,” or “QE2,” which entails the buying of $600 billion dollars of Treasury bills in order to stimulate the economy by keeping Treasury prices at lower levels. With the stimulus program, the Feds also are attempting to keep interest rates down. In early November, before the Treasury started its pre-announced buyback, rates reached the lowest levels that the markets have seen since the 1950s. Unfortunately, even when interest rates hit new lows, perspective mortgage clients can let greed take over. Some folks are always hoping for still lower rates. There are a few reasons why rates have moved higher since the Treasury buyback was announced. First, everyone on Wall Street and elsewhere knew what the Federal Reserve and its Chairman Ben Bernanke were planning on doing. The prices of the 10-year Treasuries and those of the mortgage market reflected the anticipated program. Others are talking about the potential inflationary effects of a devalued dollar. Since the buy back program was announced, the rate on the 10-Year Treasures has gone up and interest rates have also ticked up. Interest rates should stay in a relatively narrow range for the near term. If you can save hundreds of dollars now, go ahead and pull the interest rate trigger. Your next worry will be how to spend the money you will be saving. Bill Starrels lives in Georgetown and is a mortgage loan officer. He can be reached at 703 625 7355 or by email, bill.Starrels@gmail.com

Mortgages at Record Low

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.

Not Out of the Woods YetMay 2, 2012

The real estate market and mortgage rates have come together, forming a perfect time to be buying a home in Georgetown or in greater D.C. The nation?s economy is still recovering from the recession of a few years ago. If one remembers, the housing sector crashed, which was one of the catalysts for the collapse of Wall Street. Credit came to a halt and the Federal Reserve Board of Governors slashed interest rates in an effort to keep the economy from going into a depression. As a result, house prices collapsed in many markets (including some outlying areas of the Washington metropolitan area). Interest rates fell and continue to drift lower. Overall, the housing markets are showing some signs of recovery nation-wide, but the Fed?s statement warned that the housing sector still remains depressed. The D.C. market remains more stable then most. In the Federal Reserve Board?s most recent meeting in late April, the Fed did not deviate from its more recent statements on the outlook for the economy. The Fed is holding firm on interest rates. According to Merrill Lynch, the markets are not looking for any rate hikes until May 2014 at the earliest. Typically predictions longer than 24 months out are very rare and very hard to forecast. Mortgage rates continue to flirt with historic lows. As we close out the month of April, 30-year purchase mortgage rates ranges in the Freddie Mac Survey showed 30-year fixed rate money averaging 3.8 percent with 0.7 of a point, and 15-year money averaging 3.18 percent with 0.6 of a point. Conforming money is for loan amounts up to $417,000. High conforming purchase money (up to $629,000 for conforming money and $729,000 on FHA money) rates are higher. Jumbo money rates are still higher. Rates on ARMs (adjustable rate money) are around 3 percent or lower. If one is buying a home with firm plans to move in the next four or five years, an ARM can be an attractive option. With house prices close to historic lows, and mortgage rates close to historic lows, it is a perfect time to look at buying a house. The cost of housing is very attractive. Housing prices are likely to go higher in the future. In order to get approved, a customer has to be able to show income documentation and source of funds. Low documentation loans are not available. With decent credit, some cash for a down payment (3.5 percent down for an FHA loan to $729,000) one can take advantage of today?s perfect storm. ***Bill Starrels is a mortgage loan officer who lives in Georgetown. He specializes in purchase and refinance mortgages. He can be called at 703-625-7355, email, bill.starrels@gmail.com***

Tax Time — It’s Either You or Your Uncle

Did you know that if you pay $10,000 in taxes this year it could easily amount to over $26,000 in wealth over 25 years? Far too often I see clients who unnecessarily give away money, both in taxes and lost earnings that could have earned them a sizeable rate of return over their lifetimes — and a sizeable fortune for many investors. As the end of the year approaches, now is the last chance for many to reduce their 2015 tax burden. Unfortunately, many investors focus on getting a one- or two-percent higher return on their portfolio or perfecting the target price on their stock while leaving the 20 to 30 percent of what they can control on the table for their accountant to handle. We all know we can’t control the markets, interest rates, the economy or numerous other life events that can wreak havoc on our portfolios. But what we can control is how many of our hard-earned dollars we give away each year to Uncle Sam — and our ability to control this typically diminishes as we age. There are many lists and articles out there extolling the top five things you can do to reduce taxes by year-end, such as maximizing retirement contributions, paying January’s mortgage payment in December, bunching medical deductions in one year and tax-loss harvesting. But here are a few other suggestions that may be new to you. • If you have inherited a Roth IRA or an IRA and you don’t take a required minimum distribution like those individuals over 70, you will be subject to a 50-percent penalty. • Medical expense deductions have risen to 10 percent of your adjusted gross income versus 7.5 percent for certain income groups (other than retirees). • If you are a military family, you are eligible to put your Servicemembers Group Life Insurance benefits in a Roth IRA. • If you have lost a family member who was receiving a federal government pension, your unrecovered after-tax contributions are deductible in the year of death. This is a huge benefit commonly overlooked, especially in our community. • If you have made a statement of charitable intent or a promised future gift, consider setting up a charitable gift fund in a high-income year, even though the gift can be made over time. • Finally, beware of the hidden tax inside your mutual funds. In a volatile year like 2015, many investors will see their portfolio lose value, then wake up April 15 to a surprise: a tax liability. “The hardest thing to understand is the income tax,” said Albert Einstein. About this, and so many other things, he was right. So this holiday season, take a few minutes to seek out the help of a professional — or go online and look up “overlooked tax mistakes.” Because once it’s gone, it’s gone. Author of “Take Back Your Money” and “The Ten Truths of Wealth Creation,” John E. Girouard is a registered principal of Cambridge Investment Research and an Investment Advisor Representative of Capital Investment Advisors in Bethesda, Maryland.

Rent or Buy?

  -With mortgage interest rates low these days and the rental market in the Georgetown area stubbornly high, many prospective renters are taking the time to examine if the time is right to purchase a property. Rates on mortgages range from around 4 percent for adjustable rate mortgages to 5 percent or slightly higher for fixed rate conforming mortgages. A conforming mortgage is a mortgage backed by Freddie Mac or Fannie Mae, which can range up to $729,000 in Washington, D.C. The District is a high-cost area that allows for this high mortgage limit. Rates are about the same for government-backed FHA mortgages. Loan limits for FHA loans also go up to $729,000 in the District. The required down payment, if the house is a primary or second home, ranges from 10 percent on conventional mortgages to as little as 3.5 percent on FHA-backed mortgages. What would the payments look like? Per every $100,000 borrowed at 4 percent, the payment would be $477 a month for a principle and interest loan. The payment on an interest-only would be even lower: $333 a month. These figures do not include taxes or insurance. Appreciation is another motivation for buying instead of renting. Georgetown area real estate has held up well during the Great Recession. A lot of real estate watchers think that prices have stabilized and prices will likely go higher over the next few years. Tax incentives are another motivator. The mortgage interest deduction is alive and well in America. One can deduct the mortgage interest expenses on a primary or secondary home. Investment properties also have a lot of tax advantages. In recent years, parents of some university students in Washington have even bought houses instead of paying rent for their sons and daughters. If one buys a house for their son or daughter and rents other parts of the home to four or five other students, it is not too hard to produce adequate, after-tax cash flow. If a mortgage is around $4,000 a month and one has four renters, in addition to their son or daughter living on the property, the numbers can work. This is one of the reasons for the number of rental houses around area universities. Up until a few years ago one could buy a house in the Georgetown area and in four years sell the home at a handsome profit. The days of a guaranteed profit have not yet returned. If the money for a down payment and closing costs is not a problem, then buying a house can be a smart alternative to renting. Even amid a volatile stock market, Washington area real estate is stabilizing, which makes putting money into local real estate an attractive option. As one should do when looking at any other investment, consult your financial professional when making this type of decision. Bill Starrels lives in Georgetown. He is a mortgage loan officer who specializes in purchase and refinances mortgages. He can be reached at 703-625-7355 or by e-mail at bill.starrels@gmail.com.

Mortgage Checkup

Interest rates continue to be in a narrow range, being pulled in different directions depending on the events of the week. Generally speaking, turmoil and unrest in the world create anxiety. Anxiety causes the markets to gravitate to bonds, which tends to help rates go down. When the markets highlight the strengths in the economy, rates tick up. When the markets concentrate on political instability, then bonds and rates gain favor. When events in Egypt quieted down and Libya, although far from settled, seemed manageable, the events painted a picture of relative stability for investors. This triggered a flight to stocks and money came out of the bond markets. So rates started to move higher again. The housing markets continue to sputter. House prices are stable to moving slightly higher in the Washington, DC marketplace. Once outside of the DC metropolitan area, the housing markets tend to be less stable, with prices stable to declining. Condominium pricing is still trying to find stability. One trouble spot for condos these days are the strict rules Fannie Mae and Freddie Mac have on approving condominiums. When owners have a difficult time selling their unit, many owners turn their condos into investment/rental units. If too many apartments turn into rental units then the investor ratio can get out of whack. If this happens it can be difficult for Fannie Mae or Freddie Mac to write mortgages on the property. Another item one has to keep in mind is the budget for the condominium can be put at risk if there are any delinquencies in the property. This can temporarily wreck condominiums reserves. Underwriting standards remain strict. Full documentation is required on almost all loans these days and account for most of the mortgages being underrated today. Standards do remain strict. Credit standards remain high. In order to get the back rates on conventional loans it takes a credit score of 770 or higher to get the best rates. When credit scores get significantly lower then the fees and ultimately the pricing is more expensive. This is why it is a good idea for a homeowner to get a copy of their credit report every couple of years or so. If there is a problem with the credit report, a consumer can get it repaired. If problems are left alone the credit scores will continue to stay low or go lower. Housing continues to lag. The Federal Reserve noted that the real estate markets showed “some gains from still weak levels”. Oil prices may prove to be a drag on the overall strength of the economic recovery. It will be interesting to see how the spike in oil will affect interest rates. Stay tuned. Bill Starrels lives in Georgetown. He is a mortgage banker who specializes in purchase and refinance money. He can be reached at 703 625 7355, Bill.Starrels@gmail.com