“Record Low Rates” Explained

In what’s becoming a recurring headline, Freddie Mac has once again reported “record low rates.” This headline seems to grab the attention of homeowners and prospective homebuyers alike. But what does it really mean? There’s actually quite a bit to it.

First off, Freddie Mac’s report indicated the “average” rate for the prior week. Right away, this means that by the time Freddie Mac releases their report, rates have already moved the following week. This is exactly what just happened. Freddie Mac reported that the average rate on 30 year fixed mortgages was 3.88% for the prior week. Unfortunately, by the time the media was able to get the word out to the public, interest rates had just experienced three consecutive days of rate increases. The movement in rates was relatively mild, but anyone trying to obtain a true “record low rate” came to find that ship had already sailed before they even knew it existed.

Mortgage rates are tied to the bond market, or more specifically, mortgage-backed securities. Since these are traded on the open market every day, there are daily fluctuations in mortgage rates. These fluctuations are trivialized in a “weekly” average. The fact is that there have been a few small windows of opportunity to obtain an even lower rate that what is measured in a weekly average. The all-time record low for mortgage rates only existed for one day on Thursday, September 22^nd, 2011. This was a very volatile week and rates jumped 0.125% by Friday morning and another 0.125% by Friday afternoon. This type of volatility threw off the weekly averages. One of the reasons we’re seeing sustained record low rates is that the market is being held relatively stable by the Fed’s Operation Twist. The Fed’s steady involvement in purchasing mortgage backed securities is keeping markets calm and enabling these low rates to last for more than a day. This is something that didn’t exist back in September.

One other aspect that Freddie Mac releases in their report in the cost associated with obtaining these rates. It’s always interesting that the media seems to conveniently omit this part of the story. According to Freddie Mac, the average homeowner spent approximately $2,000 in fixed costs (title, escrow…) plus three quarters of a point to obtain these record low rates. On a $400,000 loan, that would be $2,000 in fees plus $3,000 in points for a total of $5,000. Again though, Freddie is reporting an “average,” which means some people are getting even more favorable terms. Well qualified homeowners were able to lock in a 30 year fixed rate 3.875% with absolutely $0 closing costs. In other words, these homeowners are able to get lower rates that what Freddie reports as the “average,” and they’re also able to get it with less closing costs: $0 in some cases.

Back on September 22^nd, these same homeowners would have been able to get 3.75% with $0 closing costs, but not if they waited for the media to talk about it. The most effective way to “time the market” and ensure you’re getting the best rate available is to have an open relationship with your mortgage lender. A true mortgage professional will track the bond market in “real time” and be able to provide up to the minute data on current mortgage rates. This type of relationship and open communication can be the key for homeowners seeking the best deal. 

Arnaud Dufour
Sr. Mortgage Bankeradufour@dljfinancial.com
714-677-4107

CA DRE # 01360217
NMLS # 335758

Paying for the Payroll Tax Credit

As the final curtain fell on the political circus of 2011, congress managed to eke out one last dramatic performance and renew the payroll tax cut. The media has made much ado about the political gamesmanship and party line bickering that took place during the fiasco, but what the media has yet to explain is that the payroll tax extension will be paid for by American homeowners.

In order to fund the payroll tax cut congress raised the guarantee fee (or “g-fee”) for all loans backed by Fannie Mae, Freddie Mac, and Ginnie Mae bonds. The impact will hit all conventional, FHA and VA loans, which combine for roughly 95% of all loans being produced in today’s housing environment. Banks that produce these loans obtain a type of insurance protection against losses by securitizing those loans through one of these agencies. The banks pay a g-fee to these agencies for every loan securitized in this manner. If and when a loan goes bad, it is the agency absorbs the losses, not the bank.

Currently the g-fee stands at 25 basis points (bps), or 0.25%. As part of the measure passed by congress, the g-fee is going to increase to 35 bps, or 0.35%. The end result is that homebuyers and homeowners looking to refinance will have to pay a higher rate for future loans, roughly by 0.10%.

There are many programs which currently offer 30 year fixed financing at 3.75%, so let’s use this as an example. A $250,000 mortgage at 3.75% would feature a monthly payment of $1,157.79 for thirty years. After applying the 10 bps increase and recalculating for a 3.85% interest rate, this same homeowner would see their mortgage payment increase to $1,172.02 for the same $250,000 mortgage. Our homeowner in this example is going to pay $14.23 more on their mortgage so that the payroll tax cut can pass and the average American will pay $40 less per month in taxes. Sounds like a good deal, right?

Wrong. The difference is that the payroll tax cut was only extended for 2 months. So the average American will save $80 as a result of this bill. The increase in the mortgage payment for our sample homeowner is $170.76 per year. Given that the average lifespan of a loan is 7 years, this translates to an increase of $1,195.32. If the homeowner actually kept the loan for all 30 years, they would end up paying $5,122.80 more over the life of the loan just to fund this $80 savings. That just doesn’t sound like a good deal anymore – at least not for homeowners.

Now congress is talking about how to extend the payroll tax cut for the full year. Undoubtedly they’ll look for another source of funds to pay for it. Hopefully they’ll look elsewhere for those funds rather than tap into a real estate market that’s already struggling to recover.

Arnaud Dufour
Sr. Mortgage Banker
adufour@dljfinancial.com
714-677-4107

CA DRE # 01360217
NMLS # 335758

LIBOR on the Rise

The recent acceleration of the European Debt Crisis has made a significant impact on the factors which drive mortgage rates. The effect has been to improve fixed term mortgages, while adjustable rate mortgages have begun what’s projected to be a steady and prolonged increase. For anyone who still has an adjustable rate mortgage, the stars have all aligned to make right now the perfect time to get into a fixed rate product.

Fixed rate mortgages are tied to the bond market. More specifically, each fixed rate product is tied to an individual mortgage backed security, and these securities are traded daily on the open market. As an investment vehicle, mortgage backed securities carry relatively less risk than many other financial vehicles. As a result they are often considered as a “safe haven” trade, very similar to US Treasury bonds. “Safe havens” do especially well when the market is in a state of volatility. Because these assets are traded in US dollars, they do especially well when the dollar strengthens against a foreign currency. As the Euro crisis has deepened, mortgage bonds have benefitted and American homeowners have seen the rate on a 30 year fixed mortgage drop back below 4.0%.

In a sharp contrast, adjustable rate mortgages (ARMs) have risen over the same time frame. This is because ARMs are tied to a different index. The overwhelming majority of ARMs are tied to the 12 month LIBOR. Although the LIBOR has historically been the most stable index as compared to all others, it is a European-based index and has therefore risen in response to the European debt crisis.

The London Interbank Offered Rate, better known by the acronym “LIBOR,” is the rate which London based banks charge each other to borrow funds within their system. The 12 month LIBOR rate has held steady roughly 0.75% for nearly a year, from October of 2010 through August of 2011. But as the European debt problems have emerged, LIBOR has begun to rise. First to 0.8332% in September, then 0.9086% in October, and finally reaching over 1.0% in November, this represents a 0.25% increase in a three month time span. For a rate which has been typically referred to as “stable,” a 0.25% increase in three months represents cause for concern.

Should the European debt crisis spread in 2012 (as many predict it will into Russia and surrounding countries), LIBOR will have nowhere else to go but up. Since the majority of ARMs are tied to this index, those rates will also continue to increase with each adjustment period. For those who still have adjustable rate mortgages, they might be able to ride out the storm if they plan to sell the house before their next adjustment period. But for those who plan to hold their properties long term, now would be the perfect time to get into a fixed rate product.

Arnaud Dufour
Sr. Mortgage Banker
adufour@dljfinancial.com
714-677-4107

CA DRE # 01360217
NMLS # 335758

Stalled in the Senate

The number one most challenging part of my job is that I can’t help everyone. Every day I speak with homeowners who would like to refinance their home into more favorable terms: terms that will help them and their family regain financial stability. As much as I’d like to help them, my desire alone is simply not enough. As a lender, I am limited to providing loans according to the terms set forth by Fannie Mae and Freddie Mac.

A new hope for homeowners came in January of 2011 when Barbara Boxer introduced S.170 into the Senate. Better known as the “Helping Responsible Homeowners Act,” S.170 would replace the current HARP program and make refinancing into more favorable terms a viable option for a much larger percentage of homeowners – especially those with little to no equity.

The current Home Affordable Refinance Program, better known by the acronym “HARP,” has generated a lot of media attention for Fannie and Freddie. It is currently the only program that allows homeowners in a negative equity position to refinance their home. Homeowners who owe between 80 and 95 percent of their house’s value and are eligible to refinance through other programs will find that the HARP program is the most financially beneficial for them. These points have been discussed in great detail by the media.

Although the benefits of this program have been well discussed, the HARP program has significant shortcomings that have been given little to no media coverage. The largest shortfall is that fewer than 5 percent of American homeowners are eligible to benefit from it. This means that the remaining 95 percent of us need to find other alternatives in an already crunched credit market. Homeowners with little to no equity will find their options to be extremely limited. The most challenged are those who owe more than their house is worth. These homeowners simply have no options to refinance if they are not eligible for the HARP program – which very few are. 

Under S.170, many of the restrictions which exist under the current HARP program would be eliminated. The biggest change would be the removal of “loan level adjustments.” Under the current HARP program, homeowners are eligible to refinance even if they owe up to 125% of their property’s value. However, the rates available to these homeowners are not the same as the rates available to those with more equity. Under instructions by Fannie and Freddie, lenders instill these loan level adjustments to provide slightly higher rates to those in a negative equity position.

As proposed, S.170 first eliminates the 125% maximum LTV. This would enable someone to refinance even if the balance on their mortgage was double, or even triple the value of their house. As long as these homeowners had remained current on their mortgage and wanted to refinance, they would be able to under this program. Moreover, S.170 eliminates the practice of loan level adjustments, meaning that this same homeowner would be able to receive the same “best” interest rate afforded to those with more equity.

A second significant improvement afforded by S.170 is the elimination of HARP’s delivery date requirement. Under current legislation, HARP requires a loan to have been delivered to either Fannie Mae or Freddie Mac prior to March of 2009. This effectively means that any loan originated after January of 2009 is ineligible for assistance under the HARP program. The proposed S.170 bill would eliminate this requirement and open the door to all loans owned by Fannie or Freddie regardless of the delivery date.

There are a few smaller changes that S.170 brings, but these two biggies would open the doors wide open for a much larger percentage of American homeowners to refinance into more favorable terms. The benefits would lead to less foreclosures, improved stability in the housing market, and additional disposable income for homeowners to reinvest and stimulate our struggling economy once their mortgage payments have been lowered.

Unfortunately, S.170 is going nowhere. Since its introduction in January of 2011, the bill has been referred to three separate committees and has never been heard from since. It may take a grass-roots movement on the part of the people to get it moving again.

Arnaud Dufour
Sr. Mortgage Bankeradufour@dljfinancial.com
714-677-4107

CA DRE # 01360217
NMLS # 335758

The 20 Year Fixed

When a homeowner applies for a refinance, they almost always ask for either a 30 or a 15 year fixed. Most homeowners are surprised to learn that there’s also a 20 year fixed option that they simply weren’t aware of.

With today’s interest rates at record lows, fixed rate options make more sense than any alternative plan. The advantage of a thirty year fixed is that it features the lowest payment of the fixed term loans, simply because it has the longest amortization period. The only downside to this is that it resets the time to pay off the mortgage back to a new thirty year period. Someone who was already 5 years into their mortgage and only had twenty-five years remaining might appreciate the lower rate of their new refinance, but they might not be as excited about “losing” the five years they’ve invested towards getting their house paid off.

This notion is exactly why shorter term loans are gaining in popularity in recent years. With rates at record lows, individuals have been able to lock in 15 year rates that cause only a slight increase in their monthly payments compared to their old thirty year loan, but get the house paid off in half the time.

For those that want to get their house paid off even faster, there is even a 10 year fixed product. The payments are higher to accommodate the extremely short amortization period, but this is an incredibly popular program for those that can fit the payment into their monthly budget.

For most homeowners the 20 year fixed represents the best of both in that it features a lower rate than the thirty year fixed without the significant increase in payment that the shorter 10 or 15 year terms create.

Here’s a quick example. Someone who got a 30 year fixed five years ago would probably have a rate upwards of 5.0%. For our example, let’s look at a $250,000 loan at 5.25% with monthly payments of $1,380.51. After 5 years, this homeowner will have paid off $19,626 of the original principle. The remaining balance of $230,374 is scheduled to be paid over the remaining 25 years.   

Refinancing this remaining balance of $230,374 into a new 20 year fixed at 3.75% would create a new monthly payment of $1,365.86. The decrease in monthly payment is $14.65, which adds up to $3,516 in savings over the next 20 years. Of course, the big savings comes after the 20^th year when the mortgage no longer exists. Not having a mortgage payment will save the homeowner $16,566.12 per year, equaling $82,830.60 in savings by eliminating those last five years. This creates a total savings of over $85,000 over the 25 year span. Considering most homeowners who pay off their mortgage do so around the same time as their retirement begins, this is a nice way to add a little extra cushion to your nest egg.

Arnaud Dufour
Sr. Mortgage Bankeradufour@dljfinancial.com
714-677-4107

CA DRE # 01360217
NMLS # 335758

The New HARP – Will it Help?

My phone has been ringing off the hook the last few days with people asking if they’ll be able to take advantage of the new revisions to the HARP program which were just announced last week. President Obama’s executive revision of the Home Affordable Refinance program, better known by the acronym “HARP,” has made a lot of headlines. The media coverage has made it seem like this is the magic cure for homeowners who are in a negative equity position and owe more than their house is currently worth. Although this program will help a small percentage of homeowners, the majority of “upside-down” homeowners will find that this program can do nothing to help them.

The primary issue is that the government can only effect change to loans which are part of its own portfolio. The new HARP program is still only available to loans which are backed by Fannie Mae or Freddie Mac. Homeowners who bought at the peak of 2006 and 2007 are likely the ones who are most upside-down today. Unfortunately, they are also the least likely to have a loan backed by a government agency. This same time was also the peak of investment firms’ involvement in mortgage backed securities. Lehman Brothers, Goldman Sachs, Bear Stearns, and even tax giant H & R Block all carried significant mortgage investment as part of their portfolio. Since the government has no control over these agencies, a homeowner with one of these private investors backing their loan was ineligible for assistance under the hold HARP program, and they are still ineligible today. This is the overwhelming majority of mortgages in America.

The second major hurdle to overcome in order to take advantage of this program is the time requirement. Only loans that were delivered to Fannie or Freddie prior to May 31, 2009 are eligible. This means anyone who bought their house or refinanced their existing mortgage after this date remains ineligible. However, having gotten your loan prior to this date does not immediately guaranty your eligibility either. I have actually seen a loan that was originated in 2006, but not sold to Fannie Mae until June of 2009 – three years later! Because the HARP program goes by the date Fannie or Freddie acquired the loan, this homeowner remains ineligible.

So who is eligible? Anyone who’s loan was sold to Fannie Mae or Freddie Mac prior to May 31, 2009 meets the first and most important criteria. This is a three month extension from the old HARP program which required loans to be delivered to Fannie or Freddie prior to March 1, 2009. These extra three months will add some homeowners to the eligibility pool.

A second amendment to the program will help some of the more desperate homeowners. Previously, the program allowed refinancing up to 125% of a property’s value. This means that someone who owed $250,000 on a $200,000 home could get help, but someone who owed $275,000 on that same home could not. Under the new HARP program, there is no maximum. Even someone who owes $400,000 on a home currently valued at $200,000 can, if they would like, refinance under this new program and take advantage of today’s low rates.

This program becomes available December 1, 2011.  

Arnaud Dufour
Sr. Mortgage Bankeradufour@dljfinancial.com
714-677-4107

CA DRE # 01360217
NMLS # 335758

Santa Claus (Rally) is Coming to Town

About this time of year, retailers and the media have us on a countdown to the holidays. This joyous time of year is renowned for family, food and faith. Experienced investors know that this is also the time of Wall Street’s “Santa Claus Rally.”

The concept behind this rally is incredibly simple. Whether you celebrate Christmas, Hanukkah, Quanzaa or even the winter solstice, the holiday season brings about feelings of joy and happiness in all. On Wall Street, there is an overall increase in the collective spirit which fuels optimism towards fellow man. In the investment community, this means putting more faith in companies by investing in stocks. As a result, the stock market generally experiences a lift in the last few weeks of the year. For investors looking to take advantage of this seasonal event, now might be the time to speak with your financial advisor about some potential investment opportunities.

A general rule among financial market factors is that what’s good for stocks is bad for bonds. The additional dollars which are being invested into stocks typically come at the expense of the bond market. As investors shed the safe haven play of treasuries and mortgage bonds for riskier equities, rates go up. The downside to the Santa Claus Rally’s influence is that the pressure on bonds causes mortgage rates to rise.

This means, very simply, that anyone who has a lower mortgage rate on their holiday wish list should move quickly to lock in a rate. As the holidays get closer and the Santa Claus Rally gains momentum, rates are likely to get worse. I guess Santa doesn’t worry about mortgage rates – he must have paid his off a long time ago.

Arnaud Dufour
Sr. Mortgage Banker
adufour@dljfinancial.com
714-677-4107

CA DRE # 01360217
NMLS # 335758