Rates Are Staying Low - Don't Miss Out

At the end of March, the Federal Reserve followed
through on its promise to stop buying mortgage-
backed securities.

At the time, I was of the opinion that rates would
go up. My reasoning was that when private
investors - institutional investors, pension funds -
were asked to fill the gap from the Fed leaving
the market that they would insist on higher
rates of return that what the government was
willing to accept.

Prior to the end of March, the Fed was creating
and controlling a closed system:

They were keeping rates low to allow for as much
recovery as possible.

So that lenders who created these low interest
rate loans did not have to deal with the risk
that these loans would become money losers in
the future, they enabled FNMA and FHLMC to
purchase these loans. FHA and VA have also
expanded their programs,, and those loans are
generally sold to GNMA (Government National
Mortgage Association). FNMA, FHLMC, & GNMA
are all government-related and sponsored entities.

FNMA, FHLMC, and GNMA all bundle pools of
mortgages into mortgage-backed-securities (MBS)
and sell them. The Federal Reserve was the primary
purchaser of these MBS issues earlier in the year.

Once they pulled out of the market, I thought that
the private investors would insist on higher yields
to be interested in buying these MBS issues. If that
were true, interest rates would go up.

But that has not happened. Rates are at historical
lows right now.

What has developed is that the Fed has continued
to keep rates low, as evidenced by Treasury issues:
T-bills, Treasury Notes and Treasury bonds. These
investments are desirable because they carry low
risk since they are backed by the U. S. Government.

Even though MBS issues are higher risk than Treasury
issues, they are not significantly more risky in this
environment. Because loan underwriting has tightened
so stringently, the new loans created over the last 1 1/2
to 2 years are nowhere near as risky as the ones that
were created in the "anything goes" era.

So the choices for an investor to keep their risk low
is to either invest in Treasury issues where the rates
are really low, or to accept a higher rate of return
by investing in MBS issues that are better quality
than they were a few years ago.

It works out well for borrowers and for the mortgage
business that rates are staying low. I'm glad that
things have not worked out as I predicted.

The reality is that instead of investors dictating the
interest rates under which they would purchase
MBS issues - driving up rates - the government is
dictating the rates at which mortgages are offered
and telling the investors to make a choice: buy
really low, really safe Treasury issues or obtain a
higher rate of return with MBS issues where the
risk has been minimized with tighter underwriting
guidelines.

We never know how long these dynamics will continue.
Make sure that you take advantage of these rates
while they are low. Converting adjustable rates to
fixed rates would probably be a good long-term move
right now. Contact me and we can work through the
details.

Knowledge is Power (and can save you misery!)

Last week, I was reminded once again how important
it is for clients to know the features of the home loans
that they receive.

I had helped a client about 6 years ago with a new
loan. These were people I had known and helped
many times for the last 28 years. They were
important friends and clients for me.

The loan I had done for them was a 30-year fixed
rate loan with a rate of 6.875%. About a year later,
that lender came to my client and offered them a
modification of the loan which reduced the interest
rate.

As part of this modification, the lender changed the
loan from a 30-year fixed rate to a 5-year balloon
payment loan. This means that at the end of the
five year period that the entire loan balance is due,
and that the client either needs to pay it in full
from their cash assets, or arrange for another
loan to refinance it.

My borrower is self-employed and their financial
statements did not support a refinance at this
time. Of course, since underwriting has changed
so much in the last three years, this borrower
could have obtained a loan previously, but not
in this environment.

Things were looking bleak for helping them save
their home. If they did not arrive at a solution,
the lender would be in a position to foreclose on
them for non-payment of the balloon payment
loan.

As part of my consultation with them, since I
could not help with a new loan, I offered to
review their loan documents to see what was
possible.

The silver lining was that they did receive an
offer from the existing lender for another
modification. There was a number of stipulations
for qualifying for this. They included that the
home had to be their primary residence (it was),
they could not have been late on any payment
in the last 12 months by more than 30 days
(they were not late) and that their could not
be any secondary financing on the home (they
had a line of credit).

There was a footnote to this last condition. It
said that it would not apply if their first loan
modification documents did not also stipulate
those terms.

So, we went through their stack of loan papers.
Most of you know how daunting that can be
for anyone who is not used to that confusing
paperwork. The good thing is that my client
had all of those papers in an easily-accessible
place.

I found the original note and an addendum to
the note. I found the clauses that spelled out
the conditions that had to be in place for a
future modification. These closely paralleled
the letter that they had received.

The good news was that the note did not say
that they could not have secondary financing.
The clause in the letter that we thought would
defeat their opportunity to modify the loan did
not exist in the note.

I made sure that the borrower had the important
pages and clauses well-marked for when he
would have his discussion with the lenders'
representative. They agreed that they would
call me after they had discussed it the lender.

The next day I got the call. They said that they
were OK'd for new modification and that they
were offered a rate of 4.75%. I told them to
move quickly to get the terms finalized.

But, the call to the lender was not that smooth.
When they called, the lender's representative
said that they did not qualify because they had
secondary financing on the home. Because we
had taken the time to familiarize ourselves with
the terms of the loan, the borrower knew what
to do next.

He insisted that the representative look at his
note from the modification. It took a few minutes
but the representative located a copy and they
went through it together. The representative
was able to agree that the borrower was correct
and that they were eligible for the modification.

It was really gratifying to help them find a
solution. I was happy to help my friends by
educating them and giving them the ammunition
to get what they deserved.

I want to leave you with a couple of important
thoughts.

1. You need to know what you are getting when
you obtain your loan. My friends did not
realize that the modification that provided
the low interest rate from 5 years ago also
included a balloon payment clause. This could
have been catastrophic for them.

2. If you are not working with someone who has
earned your trust, you have to educate yourself
and be smarter than the people you are dealing
with. The lender representative could have put
my friends in a terrible position by not researching
things properly. If they had accepted the first "no"
they could have been on a path leading to fore-
closure.

3. Surround yourself with people you can trust.
I have built my career over the last 33 years by
listening to my clients, educating them, and telling
them the truth. It works for me and it works for
my clients.