Let’s Twist Again!!!……Mortgage Rates Are At All Time Lows!!…But Will It Last??

The Fed released its statement Wednesday afternoon, and mortgage rates dropped to historical lows soon afterwards.

First, quite simply, the Fed confirmed that there are “significant downside risks” to the US economic outlook. Slower economic growth reduces the chances of inflation, which is good for mortgage-backed securities and Treasury bonds. Also, when economic growth is slow, investors tend to sell growth driven investments like stocks and buy safer investments like mortgaged-backed securities and Treasury bonds. When people buy more bonds, the price of the bonds goes up and the rates go down (Trust me, its bond math!). Because almost all mortgages are funded by mortgage-backed securities, lower rates on mortgage-backed securities lead to lower mortgage rates.

Second, the Fed announced the widely expected Operation Twist program. This program will extend the average maturity of the Fed’s portfolio by purchasing $400 billion of longer-term Treasury securities and selling an equal amount of shorter-term Treasuries. What this does is create extra demand for longer-term Treasury bonds. More demand equals prices going up for Treasury bonds which means that the rates on Treasury bonds goes down. Because mortgage-backed securities are priced from Treasury securities, if Treasury rates go down, the rates on mortgage-backed securities goes down. Because mortgages are funded by mortgage-backed securities, when the rates on the bonds go down, the rates on mortgages go down.

This all sounds great but will it work? The Fed tried this measure in the 1960s with any great success. Economists are predicting that Operation Twist will have little impact on the economy. It may lower rates by 0.1% to 0.2%, but that is unlikely to help economic growth. On the other hand, this benefit was immediately priced into the market and rates dove on Thursday and Friday. In addition, this will help to keep rates low as the Fed begins to carry out this policy.

The third major element from the statement by the Fed was a surprise to investors and will actually have a wider impact on mortgage rates. The Federal Reserve owns a massive amount of mortgage-backed securities. These bonds are backed by thousands of mortgages that have monthly principal payments and prepay when there is a refinance of a mortgage. All these payments of principal by the mortgages underlying the mortgage-backed securities means that there are billions of dollars of principal coming from the mortgage-backed securities that will come back as cash to the Federal Reserve. The big news is that the Fed will begin to reinvest principal payments from its mortgage-backed securities holdings in more mortgage-backed securities. Until now, the Fed has been reinvesting the principal payments in Treasury securities.

With roughly $885 billion in mortgage-backed securities holdings in the Fed’s portfolio, these principal payments will be re-invested into a significant sum of mortgage-backed securities. Along with Operation Twist, this program will create a significant source of more demand for mortgage-backed securities. Just as I said before, more demand for mortgage-backed securities leads to higher prices and ultimately lower mortgage rates. The impact of the announcement was priced in very quickly in the mortgage-backed securities markets and ultimately into lower mortgage rates. Although the Fed has not yet begun to purchase securities under the new programs, investors have already factored in the expected impact of the added demand on mortgage-backed securities prices. Following prior Fed announcements about purchasing mortgage-backed securities, nearly all the benefit took place right away.

This is GREAT! We should see mortgage rates stay low for  some time!!! Now is a great time to refinance or get mortgage financing to buy a home. Rates should stay low for the rest of the year and into next year….MAYBE.

All of these factors are great for mortgage rates on a go forward basis. That being said, there is one reason that we cannot forget. By mid-November, banks and investors begin to look toward the end of the year. Investors want to clean up their books for the end of the year and will stop buying new securities. The people at investment firms start to enjoy the holidays and there are fewer people. This all leads to less buying of mortgage-backed securities. Likewise, banks do not want to lend much more money because they want to close all the loans in their pipeline by the end of the year. With missing staff on holiday, they need to close these loans with fewer people. How do banks limit the volumne of business that they have? They do not shut their doors, they just raise mortgage rates to drive new customers away!! This all leads to less demand for mortgage-backed securities and mortgages. Less demand means that prices fall and rates go up (bond math again!!).

We saw this happen last year when by the end of November rates had gone from record lows to up by 1%. People who were waiting to save 0.125% on a refinance, could not refinance at all. I cannot predict the future of rates (or I would not be here writing this!), but you cannot ignore the impact of the holidays on the mortgage market. If a refinance or home purchase is in your plans for 2011, now is the time to act so you do not miss out.

Source: http://money.cnn.com/2011/09/21/news/economy/federal_reserve_operation_twist/?cnn=yes

The HELOC is Back and Can Decrease Your Down Payment to About 10%…Just be Careful of the Floating Rate Risk!!!

In the past, you could use a Home Equity Line of Credit (HELOC) to structure mortgage financing that served a number of borrower needs. Well, the HELOC is back! As described below, a HELOC can be used so that the borrower can take advantage of the low rates for Conforming Mortgages but still keep their Combined Loan to Value (CLTV) at 80%. With Jumbo rates near 5.50% and a payment of $5,252, the weighted average rate of 4.46% with its $3,327 payment is very attractive. Borrowers need to have enough money in the bank should the floating rate on the HELOC rise suddenly.

Purchase Price	925,000			% Financing
Conforming Mortgage	417,000	45.08%	LTV	56%
HELOC	323,000	80.00%	CLTV	44%
Total Financing	740,000			100%
		Index	Margin	Rate	Payment
Conforming Mortgage	417,000	N/A	N/A	4.25%	2,051
HELOC (Prime Index)	323,000	3.25%	1.49%	4.74%	1,276
Total Financing	740,000			4.46%	3,327

Here is another use of the HELOC. In this case, the borrower wants to avoid a Jumbo loan at 5.50% (payment of $3,407) and raise his CLTV to 89.99%. In this case, the 4.48% rate with a payment of $2,588 is very attractive, and the borrower is putting down almost $60,000 less than a traditional 80% Loan to Value (LTV) Jumbo loan.  Once again, this structure is not for everyone. It is a little safer because only 23% of the financing is floating, but you still need assets in case rates rise.

Purchase Price	600,000			% Financing
Conforming Mortgage	417,000	69.50%	LTV	77%
HELOC	122,950	89.99%	CLTV	23%
Total Financing	539,950			100%
		Index	Margin	Rate	Payment
Conforming Mortgage	417,000	N/A	N/A	4.25%	2,051
HELOC (Prime Index)	122,950	3.25%	1.99%	5.24%	537
Total Financing	539,950			4.48%	2,588

Many folks who have less than 20% for a down payment just dread the thought of mortgage insurance. Instead of using mortgage insurance to get to an 89.99% CLTV, you can get a Conforming Mortgage with a HELOC and avoid mortgage insurance. The structure below would have a payment of $1,312 at a weighted average rate of 4.36% compared to the $1,632 payment with a 4.25% rate and mortgage insurance. Although this financing is safer because only 11% of the financing is floating, you should still be comfortable with the risk of a floating rate HELOC.

Purchase Price	300,000			% Financing
Conforming Mortgage	240,000	80.00%	LTV	89%
HELOC	29,975	89.99%	CLTV	11%
Total Financing	269,975			100%
		Index	Margin	Rate	Payment
Conforming Mortgage	240,000	N/A	N/A	4.25%	1,181
HELOC (Prime Index)	29,975	3.25%	1.99%	5.24%	131
Total Financing	269,975			4.36%	1,312

Rates below are not market rates. They are used simply for presenting an example of how the structures could work. To fully understand the benefits of these structures, you need to consult a mortgage banker to get market rates and Annual Percentage Rates (APR).

Why Pay Mortgage Insurance???….when you can get someone else to do it for you!!

Buyers have several options to pay for mortgage insurance. In addition to the traditional monthly payment option, home buyers can pay for all or a portion of their mortgage insurance by either (a) adding the upfront payment to the loan balance OR (b) having the SELLER PAY FOR IT with SELLER’S CONCESSIONS.

Here are some sample premiums for mortgage insurance payments that are monthly, upfront or split:

Payment Type	Credit Score	Down Payment	Monthly	Upfront	Split Pay Option
Monthly Payment	700+	5%	0.94%	0.00%	0.51%
Upfront Payment	700+	5%	0.00%	2.70%	1.25%
Payment Type	Credit Score	Down Payment	Monthly	Upfront	Split Pay Option
Monthly Payment	680+	10%	0.62%	0.00%	0.18%
Upfront Payment	680+	10%	0.00%	1.60%	1.25%
Payment Type	Credit Score	Down Payment	Monthly	Upfront	Split Pay Option
Monthly Payment	680+	15%	0.38%	0.00%	0.06%
Upfront Payment	680+	15%	0.00%	1.00%	1.25%

Because a buyer with a 5%-15% down payment can receive a minimum of 3% in Seller’s Concessions, buyers can have their mortgage insurance paid by the seller at closing. This benefit applies to loan amounts from $100,000 up to $417,000!

By having the Seller pay for the buyer’s mortgage insurance, buyers can save a significant amount of money on their monthly housing payment. For right or wrong, borrowers are extremely focused on their interest rate and the amount of interest that they pay. In realty, the cost of mortgage insurance is a far more powerful driver of financing cost than the interest rate on the loan.

For example, buyers of a $400,000 home will save nearly four times (4X) as much by having their mortgage insurance paid by Seller Concessions than the same borrower would save in interest payment if their interest rate were reduced by 0.25%. Likewise, these same buyers will save almost two times (2X) as much by not paying mortgage insurance than they would if their interest rate were reduced by 0.50%. The same analysis applies to loan balances as low as $100,000.

Finally, the removal of the monthly mortgage insurance payment from a borrower’s monthly debt calculation could make the buyer eligible for a loan who might not otherwise qualify because his debt-to-income ratio is too high with the mortgage insurance included. By having mortgage insurance paid up front, you should be able to qualify more borrowers to buy larger homes.

To FHA or not FHA, that is the Question….Here are cold hard the facts!

For folks who are looking to buy a home, they are often faced with the question of whether or not to apply for an FHA loan. If you are a first time home buyer or have a couple of bumps on your credit, it sounds like a great idea. You can buy a home with a credit score as low as 640, a down payment as low as 3.5% and have a debt to income ratio that is 50% or even greater.

If you want to buy a new home but do not want to sell you current home, you can use that higher debt to income ratio to support owning two homes at the same time. If you have great credit and enough income, an FHA mortgage will allow you to buy a home with a minimal down payment. You can get your entire down payment as a gift or get up to 6% of the purchase price in seller credits to cover the escrow deposits and closing expenses. If you use seller credits to pay for your upfront mortgage insurance premium, an FHA loan can even be less expensive than a conforming loan.

But what about those rumors that you hear that an FHA loan is the new subprime mortgage???? Are FHA loans for people with bad credit who cannot handle their personal finances???

If you live in a condominium, do you want people with FHA loans living in your building??? Will these folks be defaulting on their loans and condo association dues??? If you are on the Condo Association Board, are you doing the right thing by having your building eligible for FHA borrowers???

FHA BORROWERS ARE GREAT AND YOU WANT THEM IN YOUR BUILDING!!!!!!

Here are the COLD HARD facts about FHA borrowers and FHA eligible buildings:

• FHA insured nearly 40% of all purchase mortgages in 2010…roughly $200 billion
• The average credit score for a home buyer taking out an FHA-insured mortgage in the fourth quarter of 2010 was 701 – these were NOT subprime borrowers
• The maximum loan balance for an FHA loan is $410,000 compared to a maximum loan balance of $417,000 for conforming loans bought by Fannie Mae and Freddie Mac
• FHA mortgages can be used to buy beautiful homes in outstanding neighborhoods
• Currently, FHA mortgage rates are lower than conforming mortgage rates, indicating that the market prefers FHA loans to conforming loans
• FHA loans have been in existence since 1934, a few years longer than conforming loans insured by Fannie Mae – FHA loans are not a new form of lending
• It is easier for a Condo building to become FHA eligible than it is for the building to become eligible for buyers who want conforming loans

In this time of uncertain financial conditions, FHA loans are an opportunity for many decent folks to get access to a home for the first time or to find a larger home for their families. FHA borrowers are successful, responsible home buyers who would make any building a better place.

BUT why would you care to have your building FHA approved?

I know this is an exageration, but an extra 200 BILLION potential buyers for your condominium units should be enough of a reason to get your building FHA approved. To say this more concretely, getting your building FHA approved can open up your building to almost twice as many potential buyers. In this market, even one (1) extra potential buyer is worth the effort. More potential buyers mean more showings, more potential offers, the chance of higher offer prices and more sales in your building. Who does not want that?????

BUT what about the cost of getting your building FHA approved? THERE IS NONE! 

Yes, you need to gather some information together and get some forms filled out, but there are lots of friendly neighborhood bankers (like me!) who can assist you with putting together the application for FREE.

BOTTOM LINE: Today’s FHA borrower is just like you or me. This is NOT the new subprime borrower. In difficult financial times, FHA loans offer opportunities to borrowers with decent credit and good jobs. These are folks that you want as your neighbors. For Condo Associations and condo residents, having your building FHA approved is a “MUST HAVE”. FHA approval for a building opens up the unit to more good quality borrowers. This makes for more potential buyers and who does not want more buyers? All of this comes at a small cost to everyone involved!!

Who’s Who in Chicagoland Real Estate

I’m excited to be included in Chicago Agent Magazine’s 2011 “Who’s Who in Chicagoland Real Estate”.  It’s a stellar list of local real estate professionals – brokers, realtors, lenders, interior designers — who are finding success in spite of the challenging real estate market.  

http://chicagoagentmagazine.com/current-issue/vol-8-2011-2/whos-who-2011/james-pomposelli/

I love my work. My (extensive) background in financial services serves me well in dealing with complex mortgage transactions. The more technical, the better. But at the end of the day, helping realtors help their clients get the best possible mortgage is what makes my job worthwhile.

Hey, Can Someone Tell the Fed Inflation is Driving up Mortgage Rates…

With some good news on target inflation, mortgage rates went down last week for the first time in a few weeks. Honestly, the only person who is not surprised is our beloved Fed Chairman. You see, the Federal Reserve Bank, the institution who tries to manage rates for our economy, has been very much in favor of growing our economy and, for the first time in a long time, having economic growth with an increase in jobs. Unfortunately for the US, most economic recoveries over the last thirty years have not added jobs to the economy. They have been “jobless recoveries”. That happens when all the economic statistics say that they the economy is growing, but the jobs lost in the last recession don’t come back. It’s easy, lower interest rates, companies cut costs (jobs, usually lost overseas), the profits of the company come back from cost cutting and the economy recovers without the jobs coming back (they are still overseas). I will let folks who delve into politics debate if that is a good thing or not. I am here to say the story is different this time.

This time around, our beloved Fed Chairman, Bernard Bernanke, has decided that this economic recovery will have job growth (or at least an increase in real estate prices!). Unlike the past, the Fed Chair has kept rates low even as good economic data has indicated that the economy is recovering. But when I say that the Fed has kept rates low, keep in mind that I mean only short-term rates. You see, the Fed has control only over where banks borrow money in the short-term. Rates with maturities greater than a year are really set by the market, and the market bases its opinion on where rates should be on a number of things including global events, demand for risky or less risky assets, and most of all by INFLATION.

Over a month ago, the primary influence for mortgage rates was global events in Japan and the Middle East. As explained in this article (http://www.bankrate.com/finance/mortgages/japan-crisis-fed-send-mortgage-rates-down.aspx), mortgage rates went down because investors bought treasuries and mortgage-backed securities in a “flight to quality”. Well, after a nice little dip in rates and a bit of calm in the world, investors started to look for signs of inflation and those signs are not hard to find. With raging prices for oil and food (both called commodities), investors are concerned that overall price levels will rise (meaning: inflation). If an investor holds a bond, inflation is her worst enemy. Inflation means that the car you bought for $15,000 yesterday now costs $17,500 to buy the same one today. It is the same for lending. For example, the cash you lent yesterday for a 5% rate now costs you 6%. A bond investor is someone who lends money to a government, corporate, etc. If an investor holds a bond that she bought with a 5% interest rate, and she can lend the same money today at 6%, she is not very happy. In fact, the value of the bond she bought at 5% has just gone down in value because she can lend the same money at 6%. Investors hate inflation!!!!!!

Rising commodity prices have focused attention on the distinction between overall inflation levels and core inflation levels. Core inflation excludes the volatile food and energy components, so it is often viewed as a better indicator of short-term inflation trends by economists and Fed officials. While consumers certainly struggle with higher gas prices, longer-term inflation trends generally are more influenced by other factors such as wages and housing costs, which recently have increased very slowly. That is the Fed’s point of view now. The Fed wants as many jobs as possible so it wants the economy to grow as much as possible. The Fed is looking at core inflation and keeping short-term rates low.

But bond investors, other countries and pretty much everyone else is not buying it. Usually, inflation of commodity prices does not increase core inflation. Commodity prices go up and down but companies are afraid to pass along those costs to consumers for fear that their products will not be bought. But now and then, a long-term increase in commodity prices can lead to an increase in core inflation. If you have bought an airline ticket lately, you know that the increase in oil prices has caused an increase in airplane tickets. Generally, investors fear this is happening…or at least that it could happen. Bond investors are not the only ones who are concerned. Rate hikes in Europe and China to fight inflation raised concerns that the Federal Reserve was falling behind and letting rates stay too low, so mortgage rates moved higher.

In short, stronger than expected demand for commodities and violence in the Middle East have pushed energy prices significantly higher, but Fed officials forecast that this represents a temporary increase in overall inflation levels. Commodity prices are not expected to climb at this pace indefinitely. If food and energy prices stabilize, then the gap between overall and core inflation levels will likely shrink. For this reason the Fed has kept rates low for short-term bonds, but the market has not followed step. The concern that rising commodity prices will increase core inflation has led investors to demand higher rates on treasury bonds and mortgage-backed securities. This has led mortgage rates to inch up instead of staying the same or decreasing. Granted, rates are still historically low, but if you are waiting for that 4.5% 30 year mortgage, it is GONE, probably forever!!!! Investors know that the economy is not quite out of the abyss, but things are looking better and commodity prices make create a rapid increase in inflation.

We had a nice little dip in mortgage rates two weeks ago because the week’s tame inflation data eased some of the market’s concerns. The March Consumer Price Index (CPI) rose 0.5% from February, matching the consensus forecast, and was 2.7% higher than one year ago. Core CPI, which excludes food and energy, increased at a low 1.2% annual rate, which was a little lower than expected. After you get through the economic data lingo, we got some data last week that said that core inflation has not increased from commodity higher prices.

This is definitely good news, it will take much more of the same for investors to stop worrying about inflation. With such inflation concerns by investors, there is really only one way rates can go….UP, UP, UP! So what is the bottom line???????????

Well, if you are in a place to buy a home or refinance, rates seem likely to either stay the same or go down. It is anybody’s guess when an in the increase in rates will gain real momentum and the days of the 5% 30 year mortgage will be gone. If you are ready to buy that home or refinance, PLAY IT SAFE!!! Lock in your rate now because the only direction for rates is either flat or UP. If you are not quite ready, this historically low rate environment might still be here in six months. It could even be here in a year. Do not give up hope!!!!!!

The economy is not out of the woods yet, and there are no real hard figures on inflation. BUT the whole market is looking for any sign of inflation to raise rates AND you do not want to get trapped in a rapidly rising rate environment.

FOR IMMEDIATE RELEASE: Chicago Bancorp Hires Senior Mortgage Banker James Pomposelli

I have moved from Mortgage Direct to Chicago Bancorp. Same great service with lower rates and more programs. Please contact me with questions at 312-339-0024 or jpomposelli@chicagobancorp.com.

Please see press release: FOR IMMEDIATE RELEASE: Chicago Bancorp Hires Senior Mortgage Banker James Pomposelli. http://t.co/8ir2nHg