The initial program guidelines have been published for the
new "Conforming Jumbo" loans that FNMA will purchase above
the traditional $417,000 conforming limit and the new,
temporary San Diego limit of $697,500.
Here is a summary of some of the program parameters:
*Maximum Loan Amount: $729,750. San Diego's is $697,500.
*Loan Programs will include 15-year and 30-year fixed rate
loans and 5/1 ARMs (30-year loans fixed for the first five
years). The 5/1 ARMs will allow for interest-only payments
in the first 10 years.
*These loans must be originated by 12/31/2008 under the
current regulation. There is always a chance that Congress
may extend the time period, but there are no proposals to do
so at this time.
*Purchase loans can go as high as 90% Loan-to-Value (LTV) on
a primary residence. Up to 80% LTV requires a credit score
of 660 or higher, between 80%-90% requires a credit score of
700 or higher.
*Purchase loans on second homes or investor properties can be
included up to a 60% LTV maximum with a 660 or higher credit
score.
*Refinances can go to 75% LTV with a credit score of 660 or
higher on primary residences. They will not allow cash-out to
the borrower. Also, consolidation of any second loans into
the new first loan is not allowed. We would have to have the
existing second lender agree to subordinate their loan to
a second position behind the new loan, meaning that the
borrower will have a new first loan and the same second loan
after the refinance.
*Borrowers cannot have any late payments on their existing
mortgage in the last 12 months.
*All loan packages must be full documentation providing proof
of sufficient income and assets to qualify. "Stated income"loans
are not available.
*Property types can include single-family homes, planned unit
development units and condominium units that meet condo
guidelines.
When the announcement was made that FNMA was expanding their
loan purchase amounts as part of the Stimulus Package, we
were all hoping that many of the loans between $417,000 and
$697,500 would be able to improve their situation with tradtional
conforming interest rates and fees.
We are finding that the rates for these "Conforming Jumbo"loans
are being priced higher than the conforming loans, but
not nearly as high as the jumbo loans have risen.
Before the Subprime Crisis and the lack of performance of the
mortgage pools that investors had purchased, the spread
between conforming loans and jumbo loans was only about
.25% to .50%. In other words, if conforming loans were 5.5%,
jumbos were about 6.0%.
Because the investors have no confidence in the quality of
the mortgages that they are purchasing, the spread now between
conforming and jumbo loans has been about 2.0% to 2.5%.
Based on today's pricing with one of our major lenders, conforming
loans were at 5.625%, conforming jumbos were at
6.5% and jumbo loans were at 8.125%. All of these were with
a loan fee of one point.
We are fully expecting some of these guidelines to change
as the lenders/invetors discover the level of risk that they
are willing to accept. If they get too many requests in a
particular category, we may find that they cut back. If they
find that response is less than expected, they may loosen up
the guidelines to accommodate more borrowers.
If you are one of the borrowers that fall in the new loan
limit category, or if you know of others that need to find
out what they can do, please get in touch with me. It is
important to take a look at every request individually and
to research it in light of the current guidelines (and as
they may change from time to time).
That is the only way to make sure that we are not making
assumptions that may cost you the opportunity to improve
your situation.
Wednesday, March 26, 2008
Wednesday, March 12, 2008
The Fed Lowers Rates, But Mortgage Rates Go Up. What's Happening?
Whenever the Fed lowers interest rates, there is always a lot of anticipation, publicity and reaction in the markets.
Most consumers think that the drop by the Fed means that mortgage rates will be lower. There is not a direct cause and effect relationship between these two.
Here are some of the reasons:
The Federal Reserve exerts some control over the interest rate paid by U. S. banks for overnight loans from the Federal Reserve or between banks. These are the Fed Funds rate and the discount rates that get all the press coverage and commentary in the financial news.
The cheaper supply of these funds help banks with liquidity, but it would be very risky for a bank to make a long-term, 30-year mortgage loan that is tied directly to this overnight rate. These rate changes most often will affect the prime rate, and short-term consumer loans and credit cards.
If a bank takes out a short-term loan of $300,000 from the Fed and lends it to a homebuyer for 30 years, the bank still would need to come up with $300,000 to pay the Fed back right away. They could repay by borrowing another $300,000 on a short-term loan, but then it has to continually roll this over. If short-term rates go up, the bank loses money because it has a contract with the borrower for 30 years.
Mortgage lenders that make long-term loans negotiate with the capital markets that include banks, corporations, institutions, pension funds, governments and other investors who buy and sell money. Many times lenders will bundle many mortgages into a package called a Mortgage Backed Security and sell it through Wall Street.
These investors are lending for the long term, so they agree to be paid back in installments which includes an interest rate that is fixed for the life of the loan. As long as the money that the mortgage lender is paying to the investor is lower than the rate it is charging its borrower, the lender will make money.
Long-term lending is based largely on rates paid by the U.S. Treasury when it auctions off new issues. Treasuries are considered very safe - mortgage products would be considered riskier - so the rates on home loans will be higher than the Treasury rates.
In the past, the change in mortgage rates were pegged to changes in the 30-year bond. In recent years, the 10-year bond has been more indicative of investor expectations because a majority of loans get repaid in the first 10 years.
The investors must gauge the risk that they are taking by investing in mortgage products vs. buying the safe Treasury issues. In the past, there was a fairly predictable risk premium over the Treasury values that the investors felt comfortable with.
Recently, because of dropping property values, and the poorer performance on mortgage loans by borrowers, investors have widened the risk premium that they are expecting over the safe Treasury bond yields.
The bond yields are largely influenced by fear (or lack of fear) of inflation. When inflation is forecast, Treasury yields will move higher because investors do not want to buy a Treasury bond today that will will be worth substantially less in the future because inflation has eroded the value of the dollar. When inflation is less of a concern, we see that the Treasury yields go lower and mortgage rates follow that pattern.
So, when the Fed eases interest rates, it has the tendency to make the money supply increase, which will fuel inflation concerns. This money will leave the bond market with its fixed rate of return and go into the stock market where growth, stimulated by the new money supply, is anticipated.
As a result, the Federal Treasury still needs money to operate and will offer new Treasury bonds at higher and higher rates until it attracts the money that it needs.
This dynamic creates the situation that seems so puzzling: the Fed reduces interest rates and mortgage rates go up.
As John Schoen of MSNBC summarized - "...the Fed could cut short-term rates to zero, and it wouldn't cut the cost of long-term mortgage rates".
If you want to monitor the direction that mortgage rates are anticipated to go, you can check the 10-year bond yield periodically. I use http://money.cnn.com/markets/bondcenter/.
It is important that you focus on the direction that the yield is going. Do not focus on the direction that the price is headed, because bond prices and bond yields work in opposite directions.
I'm sure that most of you don't want to become market technicians, but think how people will respond to you at your next cocktail party when you share this information!
Most consumers think that the drop by the Fed means that mortgage rates will be lower. There is not a direct cause and effect relationship between these two.
Here are some of the reasons:
The Federal Reserve exerts some control over the interest rate paid by U. S. banks for overnight loans from the Federal Reserve or between banks. These are the Fed Funds rate and the discount rates that get all the press coverage and commentary in the financial news.
The cheaper supply of these funds help banks with liquidity, but it would be very risky for a bank to make a long-term, 30-year mortgage loan that is tied directly to this overnight rate. These rate changes most often will affect the prime rate, and short-term consumer loans and credit cards.
If a bank takes out a short-term loan of $300,000 from the Fed and lends it to a homebuyer for 30 years, the bank still would need to come up with $300,000 to pay the Fed back right away. They could repay by borrowing another $300,000 on a short-term loan, but then it has to continually roll this over. If short-term rates go up, the bank loses money because it has a contract with the borrower for 30 years.
Mortgage lenders that make long-term loans negotiate with the capital markets that include banks, corporations, institutions, pension funds, governments and other investors who buy and sell money. Many times lenders will bundle many mortgages into a package called a Mortgage Backed Security and sell it through Wall Street.
These investors are lending for the long term, so they agree to be paid back in installments which includes an interest rate that is fixed for the life of the loan. As long as the money that the mortgage lender is paying to the investor is lower than the rate it is charging its borrower, the lender will make money.
Long-term lending is based largely on rates paid by the U.S. Treasury when it auctions off new issues. Treasuries are considered very safe - mortgage products would be considered riskier - so the rates on home loans will be higher than the Treasury rates.
In the past, the change in mortgage rates were pegged to changes in the 30-year bond. In recent years, the 10-year bond has been more indicative of investor expectations because a majority of loans get repaid in the first 10 years.
The investors must gauge the risk that they are taking by investing in mortgage products vs. buying the safe Treasury issues. In the past, there was a fairly predictable risk premium over the Treasury values that the investors felt comfortable with.
Recently, because of dropping property values, and the poorer performance on mortgage loans by borrowers, investors have widened the risk premium that they are expecting over the safe Treasury bond yields.
The bond yields are largely influenced by fear (or lack of fear) of inflation. When inflation is forecast, Treasury yields will move higher because investors do not want to buy a Treasury bond today that will will be worth substantially less in the future because inflation has eroded the value of the dollar. When inflation is less of a concern, we see that the Treasury yields go lower and mortgage rates follow that pattern.
So, when the Fed eases interest rates, it has the tendency to make the money supply increase, which will fuel inflation concerns. This money will leave the bond market with its fixed rate of return and go into the stock market where growth, stimulated by the new money supply, is anticipated.
As a result, the Federal Treasury still needs money to operate and will offer new Treasury bonds at higher and higher rates until it attracts the money that it needs.
This dynamic creates the situation that seems so puzzling: the Fed reduces interest rates and mortgage rates go up.
As John Schoen of MSNBC summarized - "...the Fed could cut short-term rates to zero, and it wouldn't cut the cost of long-term mortgage rates".
If you want to monitor the direction that mortgage rates are anticipated to go, you can check the 10-year bond yield periodically. I use http://money.cnn.com/markets/bondcenter/.
It is important that you focus on the direction that the yield is going. Do not focus on the direction that the price is headed, because bond prices and bond yields work in opposite directions.
I'm sure that most of you don't want to become market technicians, but think how people will respond to you at your next cocktail party when you share this information!
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