How Does a Flight to the Middle East Impact Your Mortgage Rate?? It Is a Flight to Quality!!

We have all seen the turmoil in Tunisia, Egypt, and Jordan as people in those nations have rebelled against their governments. Have you noticed how Treasury and mortgage rates have fallen while the stock market has swooned.

We have seen this before when the debt in Europe was under extreme distress. People sold risky assets such as stocks and emerging markets debt and bought US government guaranteed Treasury securities and mortgage-backed securities.

It is called a “Flight to Quality”. Although the US government has significant trade and fiscal deficits, the U.S. still has the largest and most robust economy in the world. When chaos and conflict arise in the world, domestic and international investors sell their other holdings and buy US Treasuries and mortgage-backed securities.

How does this impact your mortgage rate???

Actually, it is quite simple. The people who buy mortgage-backed securities, the lower the rate on those bonds. When there is more demand than supply for something, its price goes up. When the price goes up, the bond yield goes down. Why does this make sense?  It is simple if you think about it in the opposite. If you hold a bond that has a 5% rate and a new bond is issued that has a rate of 6%, the bond that you own is worth less because the newly issued one has a higher rate.

Following that logic, if mortgage-backed securities prices go up because of demand, the rates on these bonds goes down. Now, most of the mortgage loans that banks originate are sold to Fannie Mae or Freddie Mac, two US government-owned organizations who were setup up to buy mortgages from banks and re-package them into mortgage-backed securities. Because banks fund their mortgages in mortgage-backed securities, a decrease in the yield of those bonds allows banks to drop their rates.

So with all the turmoil in the Middle East, investors bought mortgage-backed securities and sold US stocks. If you have watched the market since last Friday, mortgage rates went down 0.250% to 0.375% from this flight to quality. The good news is that this flight to quality saved borrowers who were ready to fill out mortgage applications, lock in rates and deliver documents. The bad news is that the stability that has begun in Egypt has led rates to creep up. This is because investors are now buying riskier assets such as emerging markets debt and US stocks. What has also led to an increase in rates is that the US economy has begun to strengthen. Indices on manufacturing production have crept up and the latest ADP payroll numbers exceeded expectation. When the economy looks good, people buy stocks and not bonds.

Bottom Line: So what does that mean to you if you have not refinanced or purchased a home. It means that it is best to fill out an application and gather your income and asset documents so that you can quickly take advantage of another “flight to quality”. At that time, you can lock in an attractive rate. We never know when a world event will cause this “flight to quality”, so it is BEST TO BE READY!!!!!

When Banks Compete, You Win….Most of the Time!!!

The popular slogan is that “When Banks Compete, You Win”. In the current lending environment where there are many more bankers than there are loans, this is definitely the case. Consumers are getting lower rates, paying no points and getting discounts on closing fees (I am offering a $500 reduction on closing costs in January!).

Sounds good! But does the consumer always win when competition is so vicious.  I would say that this is true, MOST OF THE TIME….BUT NOT ALWAYS.

Well, how could this be? Here are some examples where extreme competition and an aggressive consumer may lead to no good:

How Mortgage Bankers Get Paid
There are a few ways that bankers get paid….sort of. First, the banker receives a percentage of the loan balance from the lender that corresponds to a certain rate that the consumer receives.  A banker may earn 1% of the loan balance for a 5.00% rate and 0.5% of the loan balance for a 4.75% rate from the lender. Bankers can also charge upfront origination points, but in this environment no consumer should have to pay points. Instead, bankers are paying money out of their pockets to cut closing costs to attract borrowers. What does that mean to the consumer? You need to get the cost of your loan locked upfront because markets move. You need to get your rate lock in writing in a lock agreement. Quotes over the phone or in an email may not withstand a market move.

The Rate is the Rate
Consumers are well-informed and have the internet to get up to the minute rates, so bankers have to put out their best rate right away. If you do not put out your best offer first, someone else gets the business. This is the same for upfront costs and the credits that bankers will give you to lower the costs. In addition, all the exotic products have been thrown out of the marketplace (this is a good thing!!). Why is this important to consumers? Well, this means that the market is more transparent and efficient. The product you are getting is the same regardless of the banker or lender. This means that you can focus your energy on finding a banker who has the same important characteristics that you would look for in any other service provider: honesty, integrity, intelligence, experience, accessibility, work ethic and a personality that you like. Every purchase loan or mortgage refinance is one of the most important financial transactions of your life! With rates and products being very similar, the consumer needs to really get to know his banker. Check out her website, LinkedIn page, Facebook page and other online content. If you can, MEET the person! Over a 15 minute cup of coffee you can tell a great deal about a person. Would you buy a car without meeting with the owner or dealer? Would you buy a house with meeting with your realtor? Some folks know their hair stylist better than their mortgage banker…..

Do Not Lose $1,000+ to Save $100
Because the market is SO competitive, some consumers pick a banker based on a savings of $100. Always going with the lowest cost may get you the worst service. Professionals who have pride in their work and a list of happy customers will not work for free. Bankers who are desperate for business will do anything to get that deal. Who would you rather have working on such an important transaction: Professional vs Desperate? If you do not check out your banker and just go with the lowest cost, a banker of lesser ability and experience may ruin your transaction and this can cost you thousands of dollars.

You Get What You Pay For
Since the burst of the mortgage bubble, mortgage bankers are making probably 20% of what they did per deal. There is no great public outcry of sympathy for the lot of us, but you just do not make as much and actually have to do 4X the work. It is a volunteer army, but the compression on margins means that bankers will compete heavily on every loan opportunity. The danger of this for the consumer is that if the banker is making so little there is less of an incentive to do a good job. Personally, I work hard on every loan because it is the right thing to do. Not everyone behaves in that way. When you are asking someone to work 10-20 hours to earn $250, that is not the type of incentive that will bring out the best from everyone. As a consumer, sometimes you are better served getting “a really low” rate and fees and not the “lowest” rate and fees.

If It Sounds to Good To Be True, It Is
I have gotten hundreds of calls where a borrower is quoting a rate from a competitor that is 1%-2% lower than the market rate. Guess what, this is probably not the same product or pricing that the borrower thinks he is getting. The bottom line: GET IT IN WRITING. A Good Faith Estimate has to tell you the upfront fees on a deal and if they come in higher the lender pays. A lock agreement binds the banker to give you the rate that you requested. If the banker violates these agreements, you have the right to file a complaint….and you should. Some folks in this market are getting outright desperate. If that deal of the century is laid out in writing with the rate, product (fixed vs ARM), upfront fees and other closing costs, then grab it. Often you will find that the product is not what you thought or there are upfront points added to the deal. Also be careful of what you see on the internet. These sites are seldom actual lenders and do not have the heavy regulatory oversight that a banker has. If you can, use a referral from a friend and not a website application. At least you know that the banker has done one transaction correctly.

Bottom Line: Rates are great! Fees are low! With too many bankers and not enough loans, it is a huge opportunity for consumers. Just keep in mind that there is more to getting a good refinance or purchase mortgage then just rates and fees. You are purchasing a service and you have to make sure that the provider of that service will give you the level of professionalism, integrity, honesty, experience, intelligence and work ethic that you deserve as a consumer.

The State of Illinois dropped 40% of its mortgage bankers last year with more departures everyday. At some point, there will be enough mortgages for all the bankers and the competition will lessen. You may want to consider taking advantage of this disequilibrium now!

Enough with the Doom and Gloom About Homeownership – 10 Reasons to Buy a Home

Enough with the doom and gloom about homeownership.

Sure, maybe we have not hit the bottom of the housing market….or have we? The housing bubble burst almost five years ago and you have to believe that the healing process has begun.  Plus, you cannot time the bottom of the housing market just like none of us were able to time the stock market and lost our shirts in the financial crisis. 

The market will change. Will your opinion of the market change with it? So here are 10 reasons why it’s good to buy a home.

1. You can get a good deal. Especially if you play hardball. This is a buyer’s market. Most of the other buyers have now vanished, as the tax credits on purchases have expired. We’re four to five years into the biggest housing bust in modern history. And prices have come down a long way– about 30% from their peak, according to Standard & Poor’s Case-Shiller Index, which tracks home prices in 20 big cities. Will prices fall further? Sure, they could. Just like you cannot time the stock or interest rate markets, you cannot time the bottom of the housing market. It is sheer luck to find the absolute bottom of the market, but you can buy now with a high level of confidence that you are near the bottom of the market

Where is fair value? Fund manager Jeremy Grantham at GMO, who predicted the bust with remarkable accuracy, said two years ago that home prices needed to fall another 17% to reach fair value in relation to household incomes. Case-Shiller since then: Down 18%.

2. Mortgages are cheap. You can get a 30-year loan for around 5.0%. What’s not to like? These are some of the lowest rates on record. As recently as two years ago they were about 6.3%. That drop slashes your monthly repayment by a fifth. If inflation picks up, you won’t see these mortgage rates again in your lifetime. And if we get deflation, and rates fall further, you can do a no cost refinance.

3. You’ll save on taxes. You can deduct the mortgage interest from your income taxes. You can deduct your real estate taxes. And you’ll get a tax break on capital gains–if any–when you sell. Sure, you’ll need to do your math. You’ll only get the income tax break if you itemize your deductions, and many people may be better off taking the standard deduction instead. The breaks are more valuable the more you earn, and the bigger your mortgage. But many people will find that these tax breaks mean owning costs them less, often a lot less, than renting.

4. It’ll be yours. You can have the kitchen and bathrooms you want. You can move the walls, build an extension–zoning permitted–or paint everything bright orange. Few landlords are so indulgent; for renters, these types of changes are often impossible. You’ll feel better about your own place if you own it than if you rent. People take better care of a building or neighborhood where most of the folks are owners. Renters just don’t have skin in the game.

5. You’ll get a better home. In many parts of the country it can be really hard to find a good rental. All the best places are sold as condos. Money talks. Once again, this is a case by case issue: In Miami now there are so many vacant luxury condos that owners will rent them out for a fraction of the cost of owning. But few places are so favored. Generally speaking, if you want the best home in the best neighborhood, you’re better off buying.

6. It offers some inflation protection. No, it’s not perfect. But studies by Professor Karl “Chip” Case (of Case-Shiller), and others, suggest that over the long-term housing has tended to beat inflation by a couple of percentage points a year. That’s valuable inflation insurance, especially if you’re young and raising a family and thinking about the next 30 or 40 years. Do you have a better place to put your money now?

7. It’s risk capital. No, your home isn’t the stock market and you shouldn’t view it as the way to get rich. But if the economy does surprise us all and start booming, sooner or later real estate prices will head up again, too. One lesson from the last few years is that stocks are incredibly hard for most normal people to own in large quantities–for practical as well as psychological reasons. Equity in a home is another way of linking part of your portfolio to the long-term growth of the economy–if it happens–and still managing to sleep at night.

8. It’s forced savings. If you can rent an apartment for $2,000 month instead of buying one for $2,400 a month, renting may make sense. But will you save that $400 for your future? A lot of people won’t. Once again, you have to do your math, but the part of your mortgage payment that goes to principal repayment isn’t a cost. You’re just paying yourself by building equity. As a forced monthly saving, it’s a good discipline. Plus, if you can take advantage of the tax benefits, that is immediate savings versus renting.

9. There is a lot to choose from. There is a glut of homes in most of the country. The National Association of Realtors puts the current inventory at around 4 million homes. That’s below last year’s peak, but well above typical levels, and enough for about a year’s worth of sales. More keeping coming onto the market, too, as the banks slowly unload their inventory of unsold properties. That means great choice, as well as great prices.

10. Sooner or later, the market will clear. Demand and supply will meet. The population is forecast to grow by more than 100 million people over the next 40 years. That means maybe 40 million new households looking for homes. Meanwhile, this housing glut will work itself out. Many of the homes will be bought. But many more will simply be destroyed–either deliberately, or by inaction. Demand will eventually outrun supply and raise prices.

Un-Happy New Year….that 4.5% rate in 2010 is probably GONE in 2011.

Because we have a growing economy, the 4.0%-4.5% rates of 2010 are probably gone forever. With a sluggish job market and depressed real estate prices, rates are unlikely to shoot up either.

With a nice little rate dip to start 2011, now may be the best time of the year to refinance your mortgage or accelerate on that home purchase. Only time will tell, but if you are looking for rates to drop, you are betting against history!

During 2010, mortgage rates dropped to record low levels. Despite the record lows, rates moved higher over the last two months of the year because of positive growth numbers and the overall conservatism of banks and investors heading into the holidays.

The primary reason for the recent increase in mortgage rates has been stronger economic growth, and the reports released last week continued the trend. Weekly Jobless Claims (number of unemployed people) unexpectedly fell below 400K to the lowest level since July 2008. On top of that, the minutes of the last Federal Reserve meeting show that the Fed has no intentions to alter its$600 billion Quantitative Easing program (Fed’s program to buy government bonds to drive mortgage rates down).

The National Association of Realtors (NAR) released their forecast for next year. Overall, they see a steady improvement from 2010. The NAR projects that existing home sales will increase 8% in 2011. New Home Sales are expected to rise 24%, and Housing Starts will increase 21%. According to the NAR, “All the indicator trends are pointing to a gradual housing recovery.” Supporting the NAR forecast, mortgage rates will start 2011 at the lowest level to begin any year in decades.

So are rates heading to the moon?

Given that we still have a jobless recovery with real estate prices at extremely depressed levels, it is doubtful that rates will go up in the short term.

So why should you do anything about the refinance of your mortgage or purchase a home? Why not just hang out and hope rates will drop?

First, if you recall when rates where at 4.0%-4.5%, there were some folks who waited for rates to drop to 4.0%-3.5%. They never did, and many borrowers lost out on historically low rates and wished they had not tried to time the market for the lowest rate. By waiting for a lower rate, you may end up missing up on the historically low rates that are out there now. We just had a nice little dip in rates today that would save almost anyone 0.125%, but you do not know if that will be there tomorrow.

Second, you have to look at history. Over the last ten (10) years, rates have never been as low as 2010 with an average rate of 4.69%. The graph below shows where weekly and average rates have ranged over the last ten years. Not even in 2008, 2009 or the dot.com bubble burst of 2000 have we had annual average rates below 5%. Could we have an average lower rate in 2011? Sure, but history says no. Also, you cannot forget that super-prime borrowers last year were willing to give their right arm for a 4.875% 30-year fixed rate.

Bottom line: You can wait for the perfect rate, but more likely than not you will end up with a higher rate than exists today. If you are ready to refinance or buy a home, you have more downside from waiting compared to the upside of getting a rate that may never come back again!

If you want to shoot down a good rate, your gun has to be loaded!!

As rates remain stable, you are going to want to grab a good rate if mortgage rates dip in early January 2011. To lock in that rate, you need to be ready to move. You need to have your credit pulled, your documents ready, and your application completed.

After reaching historical lows, rates have risen rapidly since November. We have received a small reprieve, but what will rates look like in January. I believe that rates will not go down significantly unless there is a good reason to drive them down. This could take the form of the Federal Reserve Bank stepping in to lower rates in the mortgage-backed securities .market, the way most mortgages are funded, and thereby lowering rates for mortgages.

But the Fed has not explained its plan to cut rates for mortgages, and has given little indication how its Quantitative Easing program will work (a fancy term that describes the Fed buying long term treasuries to pull down treasury rates and  the rates on mortgage-backed securities and mortgages). So there is no good reason rates would go down. That being said, there is no real reason why rates should climb.

Although economic growth and production data continues to slowly improve, the economy has not created a significant number of jobs and the real estate markets have yet to bounce back. The  Administration and the Fed are intent on boosting job growth and stimulating the real estate markets.

As described above, the Fed is not willing and/or able to outline its plan on reducing rates, therefore creating no incentive for rates to drop. Likewise, the Administration and Congress are unlikely to develop any concrete strategy to repair the economy in the near term. This should keep rates from rising due to inflation concerns (If inflation is a concern, investors want a higher rate to compensate them for the expected rise in inflation).

So rates should stay about he same going forward….for the most part. The only real wild card is that rates rose drastically in part because we entered the holiday the season and banks became very conservative with their rate offerings. Now that we are about to enter 2011 and there is a chance (not a guarantee), that rates will dip in the beginning of 2011 as the markets come back to full strength and banks become more aggressive for loan growth in the new year.

But how do you make sure that you can grab that rate? Even if you can keep track of the markets, how can you make sure that you can lock the low rate when it happens. Because even if you can make a call to your banker to lock the low rate, how can you make sure that you get that rate at closing.

To make sure that you receive the rate that you were promised, it is best if your banker has the following information before you lock the loan:

• Full credit report;
• W-2s, tax returns, pay stubs, bank statements and any other information to verify your income and assets; and
• Completed and signed loan application.

Not all rate locks are created equally. By having as much information as possible handed into your banker, there will be fewer chances that circumstances under which you received the lock will change.  This means no rate changes due to surprises!!!! Also, by having in as much information in as possible, you can have your loan locked for 25-30 days instead of 40-45 days, and this will save you 0.125% on your rate. Similarly, if you are ready to go with your application, there is less chance that your rate lock will break because of time wasted putting it the information and application together. If your lock breaks, it could cost you 0.125%-0.250% on your rate!!

Bottom line: If you plan to refinance your mortgage or buy a new home in early 2011, you have the best bet of getting your rate if you have completed the loan application process and are prepared to grab that good rate when it comes. Your gun has to be loaded to shoot down that great rate!!!!

Mortgage Rates Could be Going UP, UP and AWAY!!!

After reaching the lowest levels in decades, mortgage rates have shot higher over the past two weeks. There is not a simple explanation for why this happened, but when you look at the economy and the markets as a whole it does make some sense.

The bottom line is when investors look ahead, they see few reasons for mortgage rates to move lower and MANY possible causes for them to move higher.

The major negatives include the following:

• stronger than expected economic growth,
• domestic and foreign opposition to Quantitative Easing, and
• concerns about lower foreign demand for US securities.

Beginning in late August, the Fed hinted that they would start a new stimulus program to buy Treasury securities, which is known as Quantitative Easing. Because mortgage-backed securities (MBS) are priced from Treasuries, the demand for MBS increased dramatically. In anticipation of this added demand, investors purchased MBS, which pushed mortgage rates lower. Because most mortgage loans are financed by MBS, that allowed banks to decrease their mortgage rates.

OK. That sounds good, BUT WHAT HAPPENED!

A couple of days later, mortgage rates begin to move higher for a variety of reasons. First, stronger than expected economic data caused investors to raise their outlook for economic growth. Stronger growth decreases the need for more Fed stimulus, and it generally leads to higher inflation. If investors fee inflation, MBS rates will go up to keep steady with inflation expectations.

In addition, practically no one liked the Quantitative Easing program except for the Fed. The European community was in the process of tightening their belts and the Chinese were flying out of recession. Both did not like the idea of lower rates. Likewise economists, politicians and policy makers from the center to the right were against the idea for various reasons. Quantitative Easing was just not a workable idea, so foreign and domestic investors stopped buying as many Treasuries and MBS…..and RATES WENT UP!!!

Even though there seems to be NO threat of inflation and the economy is clearly not creating jobs or stabilizing the real estate markets, the perception could remain that rates are low enough.

When mortgage rates reached such extremely low levels, it left them in a place to reverse direction very quickly. Now looking forward into 2011, can we expect rates to go up, stay the same or go down. Well, until we know more about the economy, it is hard to guess if rates stay the same or go up.

One thing I can say is that it will take a good REASON for them to go down!!!

What does this mean for you? Well, if you were waiting to refinance to get a rate of 4.125%, that rate may not be there for you next year. You really need to take a look at how much you would save for a refinance at current rates and see if it is enough for the refinance to be worth your time (usually 0.5% savings if there are no upfront fees). If you are purchasing a home, do not count on rates at the bottom, but between declining real estate prices and rates that are still low, you will be OK.

With low rates in uncharted territory, why have people not refinanced?? FACT & FICTION!!!!

After months of hovering near 50-year lows, mortgage rates have fallen even further, into uncharted territory and to a level lenders say is finally igniting more homeowner refinancing.

The average interest rate on new 30-year fixed-rate mortgages was 4.44% for the week ended Thursday, according to mortgage giant Freddie Mac, which said mortgage rates were lower at than anytime since it began tracking them in 1971. This week’s rate was down from 4.49% a week earlier and 5.2% in early April.

For weeks, economists have puzzled over why falling mortgage rates haven’t ignited a wave of refinancing activity.

In conversations that I have had with dozens of borrowers, there are many reasons that people have not refinanced. Some of them are quite legitimate and others reflect general myths about the mortgage markets.

• FACT: Many folks who are not paid by salaries just don’t have the documented income to get a mortgage. In many instances, this is true. In the good old days, if you did not have a salary, you just told your banker how much money you made and it counted. Those days are gone. Now you need two years of taxable income documented from your tax returns. Well, if you wrote off every expense imaginable as part of your business, you do not have the income required. Also, if you were laid off and just took the plunge to begin that second career, you just don’t have the tax returns necessary for a loan.
• FICTION: No one who is self-employed can get a mortgage. This is definitely not true! If you have two years of tax returns to show your income, you are a great candidate for a mortgage. Income from self-employment or working as an independent contractor is a valid source of income as long as it is documented.
• FACT: As a couple, we should be basing my mortgage payment on what we can afford with a single income. This is an extremely valid approach to managing your finances. Prior to the mortgage bubble, people bought the largest house that they could afford with two incomes. It was easy to do because the value of the property was “guaranteed” to rise. However, before the bubble, most families bought a home based on a single income. If you can afford a home on a single income, it is an excellent time to buy.
• FICTION: If I do not have a 20% down payment, I cannot buy home. Nothing could be farther from the truth! Right now you can get a mortgage with as little as 3.5% for a mortgage guaranteed by the Federal Housing Authority (“FHA”) or as little as 5% down for a conforming loan. Now, these programs do have costs for mortgage insurance, but with rates so low the cost of mortgage insurance still can keep the true cost of the mortgage just over 5%. Historically, that is a very low rate!
• FACT: You need a good credit score to get or refinance a mortgage. This is true, but you do not have to have a perfect credit score to be eligible for a loan. For an FHA loan, your credit score can be as low as 640. If you put 20% down, you can have a credit score as low as 620. True subprime mortgages do not exist, but these are credit scores that someone with troubled credit may have. You can find your credit score at www.transunion.com, www.experian.com, or www.equifax.com. 
• FICTION: If you have bad credit, there is nothing that you can do. This is definitely not true. If you credit score is close to 620 or 640, you may raise your score by paying down a high balance credit card by a few hundred dollars. Larger jumps in your credit score can occur with larger payments on your cards. To get a 3.5% FHA loan, payment of $1,000 to $3,000 on your credit cards can save your far more money than you are using to pay down your cards. Whatever you do, consult an expert. At our firm, we have access to a “What If” calculator that will tell a borrower just how much her credit score will move for the payment of a credit card balance.
• FACT: There is no such thing as a “no fee refinance”. The upfront fees required to refinance your home are paid in one of three ways: (a) in cash by the borrower, (b) from the proceeds of the loan which will increase your loan balance, or (c) by the mortgage banker/broker. Keep in mind that if the banker/broker pays for your upfront fees, she will likely increase your rate to offset the loss in profit from paying the fees. There is no free lunch. The best thing to do is to have an open conversation with your banker/broker on what you are paying for the mortgage and what your banker/broker is being paid for her services.
• FICTION:  Getting the best rate will get me the best deal. It would be sad to say that the only value you can get from a mortgage is a low rate. The person and company that you are working with can make the biggest difference in the cost of your loan. Unfortunately, there are still people out there who will quote you a rate upfront but it changes at closing. You should take some time to check the professional that you will be working with. I never understand how people who are making the largest financial decision of their lives interview their realtor and attorney, but never meet their mortgage banker. People will literally pick a mortgage banker just because he has the lowest rate and fees without considering that person’s experience and approach. If something goes wrong on a deal, having someone there who communicates well and can creatively solve problems is very important. Isn’t that worth paying $200-$300 for the service. Remember, you get what you pay for. If you push someone too low on fees, he might just lose interest in your loan.

Despite this obstacles in the market, mortgage bankers said borrower interest was finally picking up. “We’re flat out busy,” said Michael Menatian, president of Sanborn Mortgage Corp. in West Hartford, Conn.

One reason activity could grow stronger is that today’s rates are not only lower, but refinancing has become cheaper. That is because investors have begun paying more for mortgage bonds than in the past, enabling lenders to use this additional money to cover some refinancing costs that borrowers would traditionally bear.

“Usually you have to balance the lower rate with the cost of refinancing because you’ve got to pay the fees. That’s changing,” Mr. Menatian said. “This could open the door for the vast majority of people who can qualify.”

Still, even with the stepped-up refinance volume, analysts say new loan activity will be restrained because many borrowers can’t qualify under loan standards that are near their tightest levels in more than a decade.

“The irony is that it’s terrific for people who have jobs—it’s real economic stimulus. But for the guy who is struggling, he’s un-lendable,” said Brian Wickert, a mortgage banker in Butler, Wis.

Many borrowers may face trouble qualifying for loans because their credit score has taken a hit, they have lost their job or faced a reduction in income, or they don’t have enough equity in their home. “People who were underwater at higher rates one year ago are still underwater. People who had credit problems at higher rates still have credit problems,” said Douglas Duncan, chief economist at Fannie Mae.

Around 60% of all borrowers with a 30-year fixed-rate loan could lower their rate by one percentage point given current rates, said Mahesh Swaminathan, senior mortgage strategist at Credit Suisse. But only about 38% could actually qualify for a refinanced loan because of the stricter loan standards, he said.

It isn’t clear how much low mortgage rates will stimulate the economy. Mortgage bankers and economists say that many of the borrowers who are most likely to refinance are those who have already done so in the past 18 months.

A borrower with a $300,000 30-year loan who refinanced last year at 5.25%, for example, could lower monthly payments by around $150 by refinancing today at 4.44%. “Low rates are helping the same people we helped last year,” said John Cannon, a loan officer in San Mateo, Calif.

While refinancing can put money into borrowers’ pockets, some homeowners are using low rates to pay off their debt faster, by refinancing into loans with shorter terms and knocking off several years of loan payments. During the second quarter, some 30% of borrowers who refinanced and had a 30-year fixed-rate loan refinanced into a 15- or 20-year loan, according to Freddie Mac, the highest share of such borrowers in six years.

“Many folks are simply paying off their debts,” said Patrick Newport, an economist at IHS Global Insight. “There’s some impact, but it’s not going to be quantitatively that important.”

James Alissi is refinancing his 30-year mortgage, which has a 6% fixed-rate, into a 15-year loan that carries a 4% rate. His monthly payments will be slightly lower than they were before. “It was a no brainer. I’ll be done in 15 years as opposed to 23,” said Mr. Alissi, a 43-year-old lawyer who has strong credit and lots of equity in his West Hartford home.

Other potential borrowers who could benefit by refinancing are those who have adjustable-rate mortgages that are about to reset at higher levels. They could trade their variable rate for a fixed rate.

Low rates tend to trigger much bigger jumps in refinance activity than new home purchases, and around four out of five loan applications last week were for a refinance, according to the Mortgage Bankers Association.

While low interest rates help boost purchase activity because more potential buyers qualify for loans, other factors, such as home prices and employment security, are also big drivers of demand.

Home-buying activity has plunged over the past two months following the expiration of tax credits worth up to $8,000 for some home purchases. “Where’s the demand going to come from? Until employment comes back, it’s hard to tell,” said Mr. Duncan, the Fannie Mae economist.

http://online.wsj.com/article/SB10001424052748703723504575425793949599842.html?mod=djemRealEstate_t

Historically LOW rates and cheap housing make investing in your home a great idea…even if your house is underwater…especially compared to stocks and bonds

The housing crash has left at least 11 million people in the unenviable position of owing more on their homes than they are worth—and many more millions with properties worth far less than they paid for them.

But some might not be as trapped as they think!

Record-low mortgage rates and a new slump in home prices are presenting unusual opportunities in the housing market these days—even for so-called underwater borrowers—to invest in their homes and not in other asset classes that are not offering real returns.

Larry and Mary Schuck paid about $29,000 to refinance into a 15-year mortgage at a rate of just 4.5%. That’s like an investment return of about 10% a year over five years on their $29,000 investment. They also reduced their total interest payment by more than $95,000.

Some savvy homeowners are intentionally taking a loss on their current house—and writing a big check to retire their old mortgage—in order to buy twice the home for not much more money. Others, eschewing conventional personal-finance advice, are even opting for “cash-in” refinancings, paying thousands of dollars out-of-pocket to settle old loans—and then taking out new mortgages with lower payments, shorter durations or both. Quite often, these homeowners are trading out of higher rate Jumbo loans to cheaper conforming loans with a balance less than $417,000.

Are these people crazy to be tying up even more of their cash in their homes, in effect doubling down on what has been a losing bet thus far? After all, any number of variables, from the employment picture to the credit markets, could weigh on housing for years to come.

Yet economists say trading up to new homes or refinancing existing ones can be smart—even if it means plunking down more cash to get out of old mortgages. People living in less-desirable neighborhoods might be able to find better homes in more upscale neighborhoods that offer better appreciation potential. And with mortgage rates so low, such buyers can keep their monthly payments manageable, even though the new homes are more expensive.

“If you are trading up, what better time than when interest rates are at record lows and the cost of the trade-up is much less than it used to be?” says Christopher J. Mayer, a Columbia Business School economist.

Freddie Mac reported that long-term mortgage rates moved south again last week. Interest on 30-year fixed loans hit a new low of 4.49 percent, compared to 4.54 percent last week and 5.22 percent a year ago; and the 15-year mortgage landed at 3.95 percent, down from 4 percent last week and 4.63 percent a year ago.

Rates have remained at or near record lows as the Treasury market has rallied amid stock-market volatility. A rally in Treasurys pushes yields lower, and mortgage rates generally track those yields.

The refinancing equation is changing, too. Thanks to rock-bottom interest rates and liberal lending terms for Federal Housing Administration loans, a person who plunks down cash to retire a higher-rate mortgage might be able to cut his monthly payments, even as he shortens his loan term to 20, 15 or 10 years.

In the past, financial planners typically recommended that homeowners devote as little cash to real estate as possible, and to invest it in the financial markets instead. But with stocks essentially where they were 11 years ago and market volatility seemingly on the rise, people are rethinking that wisdom. Devoting extra cash to repay a mortgage early is among the safest ways to produce an investment return.

“At this point,” says Jay Brinkmann, chief economist of the Mortgage Bankers Association in Washington, “if they don’t have anything else that is bringing a tremendous return, then they are buying themselves an annuity by paying their house off sooner than they needed to.”

During the fourth quarter of 2009, 33% of refinancings were of the cash-in variety, the highest percentage since Freddie Mac began tracking the characteristics of refinance transactions in 1985. Figures for the second quarter are due next week.

“Historically high percentages of borrowers are paying down their principal when they refinance their mortgages,” says Brad German, a Freddie Mac spokesman.

It helps that interest rates are lower than they have been in decades. The average rate on a 30-year fixed-rate loan was about 4.74% on July 21, according to Bankrate.com. That is down from 5.26% in January. Rates on 15-year loans averaged about 4.18%.

The Mortgage Bankers Association said Wednesday that low-interest rates sent the volume of mortgage applications 7.6% higher during the week ended July 16. Purchase applications increased for just the second time since the expiration of a temporary federal tax break in May. Refinance applications grew 8.6%, to the highest level since May 2009.

The attractive terms are spurring people like Scott Ayler, 35 years old, into action. He and his wife, Jaclyn, 33, recently decided to trade up to a larger home in their native Denver, despite taking a loss on their current house. In 2004, they paid $234,000 for a three-bedroom, 2½-bath house built that same year in Green Valley Ranch, a subdivision that has among the highest foreclosure rates in the city and lacks upscale amenities. They are in contract to sell the home for about $204,000.

Their new home, built this year, cost about $323,000, comes with four bedrooms and three baths, and sits on a corner lot overlooking a reservoir. The house, which was initially listed at $379,000, is in Denver’s desirable Cherry Creek area, known for excellent schools, plentiful amenities and few foreclosures.

With $195,000 remaining on their original 6.625%, 30-year fixed-rate loan, the Aylers estimate their total paper loss will be around $45,000. They are putting down only $11,500 on the new house. But because the new FHA loan carries a 4.5% rate, their monthly payment will rise by only $290 a month.

They say they expect better price appreciation in their new home. And with a young daughter and plans for another child, they need more space anyway.

“We don’t want to wait for the market to come back,” says Mr. Ayler, general counsel for an energy company. “We wanted a better quality of life now.”

In Minneapolis, real-estate agent Jason Walgrave says he recently helped a couple buy a 2,800 square-foot home in nearby Plymouth, Minn., an affluent suburb, for $325,000. To get there, they sold for $175,000 a 1,500 square-foot house for which they had paid $190,000 in 2005. Their existing home is financed with a 7.5% mortgage; they will get 4.5% on the new one.

The couple is bringing $25,000 to the closing table to pay off the old loan and closing costs. “They want to take advantage of the bigger house at a lower price and the lower interest rate,” Mr. Walgrave says. Now, for an extra $390 a month, they are getting almost twice as much house.

The conventional wisdom surrounding refinancing is changing is this new real estate market. Time was when the only question about a refinance deal was how much money the homeowner could take out of the house. From the 1980s through the mid-2000s, the so-called cash-out refinance became an easy way for homeowners to spend beyond their means.

Now, some homeowners are doing the opposite: writing big checks to pay off their old mortgages and taking out new ones with far lower interest rates, shorter repayment terms or both.

Executive officer and founder of loan broker LoanDepot.com, says that because home values have fallen so much, many people have to bring cash to qualify for refinancing these days. “Surprisingly to us, they are willing to do it,” he says.

Skeptics question why people would throw more cash at a depreciated asset. But according to Prof. Mayer, the Columbia economist, the decision centers on whether the homeowner thinks he or she can find better ways to invest the cash being sunk into housing.

During most of the 1980s and 1990s, the answer was unquestionably yes. The stock market was rising, and investing in housing seemed comparatively dull. During those years, personal-finance experts even argued against paying “points” on a mortgage to cut the interest rate. With banks lending at 7% to 8% throughout much of the period and the stock market returning more, it was foolish to devote more cash to housing than was necessary.

But since 2000, stocks have essentially gone nowhere. Meanwhile, the recent recession gave new currency to the idea of living as close to debt-free as possible, a process economists call deleveraging. “Today, people are a lot more conservative,” Mr. Hsieh says.

Larry Schuck, 60, a semiretired security consultant, is among them. Mr. Schuck is opting to pay money out of his own pocket to refinance into a shorter-term mortgage. The goal: to cut his total interest payments over the life of the loan and ultimately be able to own his home.

He and his wife, Mary, 56, like their Winston, Ga., community and plan to stay there. They bought their home in December 2008 for $246,000, and it appraised recently at $228,000.

Mr. Schuck this month paid $29,000 in principal and closing costs to refinance his 30-year fixed-rate mortgage, which carried a 5.87% interest rate, into a 20-year loan at 4.5%. The deal will save him more than $95,000 in interest charges over the life of the loan, he estimates, while lowering his monthly payment by $147. In investment terms, the deal produces a return of about 10% a year for five years, which about as long as most people keep a mortgage, according to Paul Habibi, professor of real estate at the UCLA Anderson School of Business. In addition, he will own his home in twenty years.

“You are lucky if you get 1% interest in your savings account,” he says. The average savings account pays interest of 0.21%, says Greg McBride of Bankrate.com.

Economist Laurence Kotlikoff, a professor at Boston University and president of Economic Security Planning, a financial-planning software company, calculates that by refinancing the mortgage to a lower rate and a shorter term, Mr. Schuck and his wife were able to increase the amount of money they can spend during retirement by about 3% each year. The short-term cost: a four-year period of belt-tightening resulting from their forgoing the ability to spend the $29,000 they paid for the new loan.

“Even though things will be a little bit tight for the next four years, on balance it was a good move,” Prof. Kotlikoff says.

For scores of other homeowners, investing in their home is the best investment opportunity that they have available to them given the poor performance of the global stock market and low-interest rates on bonds. This analysis does not even mention the more subjective benefits such as more space and a better neighborhood.

Source: Wall Street Journal

Source: Wall Street Journal

Source: Realtor Magazine

Psych!!! Rates have probably gone as LOW as they are going to go, but will probably stay there

Remember about a month ago when mortgage rates  dropped every time the U.S. treasury rate dropped. The slightest bad economic data or scare about a European nation dropped both treasury rates and the mortgage rates. For folks looking to refinance or buy a home, mortgage rates just kept dropping and dropping. We have now hit the lowest mortgage rates since the depths of the financial crisis when Lehman Brothers, Bear Stearns, AIG, General Motors, Countrywide and WAMU all collapsed. If you recall, we thought Citibank and Bank of America were next!

U.S. government bond and mortgage-backed securities rates fell dramatically. With decent credit and verifiable income, you could get a mortgage rate at 4.5%.

It felt like mortgage rates would keep falling as long as the U.S. economy did not start to grow rapidly and Europe kept stumbling. As the mortgage rates kept dropping, the stock market kept tumbling and tumbling. Every bad piece of news dropped the stock market like hot potato. Investors in the capital markets were escaping risky assets like stocks and purchasing U.S. government bonds or mortgage-backed securities, which fund most home mortgages. The prices of government bonds and mortgage-backed securities flew up and the rates on government bonds and mortgage-backed securities went down (I promise to explain why bond rates go down when bond prices go up someday). But why did this nice little arrangement slow down.

PSYCH!!!!

That is right. I believe that mortgage rates have not fell drastically below the 4.5% level because of market psychology. As poor data has continued to come out on the U.S. economy, investors in the capital markets have not jumped into mortgage-backed securities driving rates below the lows of the financial crisis. Instead, the stock market has rebounded nicely despite the economic news. Consumer sentiment is below expectations, housing data is a mixed bag, and employment news is just terrible. Added to the poor U.S. economic data is that European economies are not really performing very well.

HOW HAS MARKET PSYCHOLOGY PLAYED A ROLE?

In addition to fundamentals, markets react to hope, fear, anger and joy. The capital markets are driven by market psychology. In my opinion, investors are not diving into U.S. government bonds and mortgage-backed securities when bad news comes out.

Why????? Well, if rates go below where they were in the depths of the financial crisis, that would imply that both the markets and the economy have fallen to worse depths than during the financial crisis. I fully believe that investors just do not feel that we have descended below the financial abyss that was the financial crisis. Basically, investors have put a floor on government bonds and mortgage-backed securities. That floor has led to home mortgage rates that are staying around the 4.5% level. Instead, investors are putting money in more risky assets like stocks.

In layman’s terms, things are just not bad enough out there to have rates dramatically lower than 4.5%!

Now, should we expect rates to rise in the near term. In my opinion, rates will likely stay at this level as long as economic news continues to be poor. There is no real reason rates will rise. The irony is that stock prices are just as likely to rise steadily as long as investors have interest in riskier assets and corporate profits continue to perform. But how long will this last?

It really sounds like the best of both worlds! If you have the credit, income and money to buy a home, now is a great time to refinance or buy a new home. Rates will likely remain low, BUT there are no guarantees, and in my opinion, market psychology will make sure that mortgage rates will linger around 4.5%.

Home sales in the U.S. are wobbly, but does this me that the Chicago real estate market is still heading down….Not really!

If you read the articles in the national press, the real estate market is floundering. The national data on home sales after the April 30 deadline for the Federal housing credit has been poor at best. There has been very little positive news on the U.S. home market. Just take a look at some of the negative news that has come out. But is this the case with Chicagoland? Not at all!!!

May existing home sales fell 2.2% to a lower-than-expected annual sales rate of 5.66 million (April revised slightly higher to 5.79 million). The drop in existing home sales was not the only disappointment in this report as the decline of housing inventory has slowed. Supply on the market fell only slightly in May and is very heavy at 8.3 months of housing inventory, and it compares with seven-month supply during the buying surge late last year, a surge that was fed by first-round stimulus. The high supply of homes will continue to keep prices down because there are just more sellers than buyers.

The news was not much better for new home sales. New home sales plunged 33%in May to an annual rate of 300,000, the lowest rate going back to 1963. Making matters worse are very deep down revisions in the number of new home sales to the stimulus-fed months of April and March, revisions totaling 108,000.

The bad national housing news continues. Supply on the market, due to the drop in sales, surged to 8.5 months from April’s 5.8 months, which is certain to slow construction and related jobs because of the glut of houses out there. Heavy supply will also hurt prices which fell 1.0% to a median $200,900. Year-on-year there’s no recovery for prices, down a median 9.6%.

Following a surge driven by the home buyer tax credit, pending home sales fell in May with the expiration of the deadline for qualified buyers to sign a purchase contract, according to the National Association of Realtors

The Pending Home Sales Index, a forward-looking indicator, dropped 30.0% to 77.6 based on contracts signed in May from a reading of 110.9 in April, and is 15.9% below May 2009 when it was 92.3. The falloff comes on the heels of three strong monthly gains as home buyers rushed to take advantage of the tax credit. With the tax credit gone, the bottom has fallen out of the home sales market…..OR has it?????

Believe it or not, but more homes were sold in Chicago in May than a year earlier, marking the ninth month in a row of year-over-year gains. The Illinois Association of Realtors® reported that May’s sales of 2,057 single-family houses and condominiums represented a 32.1% increase from May 2009 sales. The median price also rose, up 2.2% to $230,000, from the same month last year.

This is not exactly what is happening in the rest of the country!!!!

The city’s May sales uptick was also seen in the greater Chicago area, where 33.6% more homes were sold. Illinois home sales were up 27.1%. The median price of the 11,638 homes sold statewide last month was $157,000, a slight increase from the $156,000 median of May 2009.

Home sales in the metro Chicago real estate market increased 40% during the first five months of 2010 compared to the same period of 2009. A major beneficiary has been the “move-up” segment of the market consisting of larger single-family homes, the kind people buy as their second or third home and often stay in until retirement.

The move-up segment of the metro Chicago market shrank from 35% of detached home sales in 2006 to just 20% in 2009. This year, move-up homes are selling in greater numbers, with sales during the January-May period 37% higher than last year though they represent only a slightly larger share of total sales.    

The price of move-up homes varies widely across the metro market, starting at $225,000 in some areas but rising to as much as $900,000 in others.

So what does this all mean?

First, the housing market in Chicagoland is not nearly as bad as the real estate markets throughout the country. Whether it is the move-up segment of the market or just the slow rise of the Chicagoland market from the depths of the financial crisis, the housing market is firming up and slowly growing.

Second, there are still values to be gotten in the Chicagoland real estate market. Sales are picking up, home inventory is getting lower, but pricing have not yet risen in step. There are numerous opportunities to buy the home that you have always wanted but at a much lower price.

Finally, prices have started to go up. Now, I do not want to sound like a used car salesman, but the opportunity to buy a home at these prices may not last forever. Housing activity is picking up in Chicago which means that home prices will ultimately go up….not like the days before the financial crisis, but enough so that the bargains of today may no longer exist. We all know that no one can predict when the real estate market will bounce back, but I can definitely say that no one is in a place to pick the exact moment when the home market has hit bottom and is beginning to rise. You cannot time markets…..stock, real estate, interest rate or any other market.

So what is the bottom line: Well, when you get rid of the “used car salesman” stuff, there are good opportunities to find a home that is attractively priced. The opportunity may well be there tomorrow, but if you have the financial capacity to buy a home, now could be an excellent time . Mortgage rates are near record lows, and there is value in the home market. Prices could go lower, but it is impossible to predict the bottom. As always, if you have enough income, good credit and are feeling comfortable with your financial position, now may be the right time to buy a home.

By the way, I don’t think I would make a good used car salesman! I don’t have the right suits or the haircut!!

Source: Daily Real Estate News, Pending Home Sales Drop as Expected

Source: Wall Street Journal, New Home Sales

Source: Wall Street Journal, Existing Home Sales

Source: Crain’s Chicago Business

Source: Yahoo News