The government has just released its plan to prevent foreclosures. The plan is called Homeowner affordability and stability plan. It contains three parts; part one and part two deals with specific groups of borrowers, and part three deals with mortgage market in general by increasing FannieMae and FreddieMac lending capacity. (The link to the full press release is http://www.treasury.gov/news/index2.html) My summary is as follows.
Part one of the plan deals with borrowers who are unable to refinance today because their property value have dropped. The plan allows these groups of borrowers to refinance up to 105% of the current home value. The way I read it is basically an opportunity for borrowers who cannot refinance because the value of their property has dropped. So the plan set clear guidelines allowing the borrower to refinance up to 105% of the current property value at current interest rates within some income limitations. Financial incentives are created for both the borrower and lenders to keep mortgage payments current and in the future. It does not specifically address how Private Mortgage Insurances affects the loan, or the interest rate, or the specific income calculations to qualify and you don’t have to be delinquent to qualify. The intent of the plan appears to be to solidify the loan for both the borrower and lender, echoing some of my previous blog comments.
Part two deals with loan modification for distressed borrowers. The plan contains various proposals ranging from payment reductions, principle reductions, financial incentives, to allowing the lenders to modify a mortgage to the point where it becomes affordable for the borrower so foreclosure can be avoided. Similar to Part one, it is in keeping with the philosophy that it is better for everyone to prevent an actual foreclosure, that it benefits the borrower, the lender and the community and the overall housing market. This part specifically excludes investors, classifying them in the category including speculators, flippers and irresponsible borrowers. I would argue investors who bought properties with 20% or more in down payment are certainly not irresponsible. There are also provisions in the plan to help people who are displaced by foreclosure by creating support agencies and housing subsidies.
Part three is fairly simple. FannieMae and FreddieMac will get $100 billion injection each from the government. Further implicit and explicit support will be extended to both of these agencies to promote a vibrant and healthy environment of secondary market so rates are kept low and housing activities are not stymied. The involvement of the federal government will be extensive from direct participation of buying and selling of the MBS (mortgage backed security) to allowing bigger lending capacities to create liquidity in the market.
I feel that most of my borrowers will benefit from the third part of the plan. The details of the plan are to be announced by March 4th and we will keep you updated of its implications.
Friday, February 20, 2009
Tuesday, February 17, 2009
Does it make sense to pay points for a lower rate?
As most Borrow123.com customers know, we offer a spread of rates based on paying some points to rebate points. For example, for one loan scenario for 30 years fixed rate mortgage your options could be 4.75 % with 0.75 points or 5 % with 0 points. On a $400k loan the cost of the point is $3000 up front, the monthly payment difference is $60.69/month. So it takes about 50 months to make up for the cost of the 0.75 point. This is a simple calculation, not factoring the future value of the $60.69 /month stream of payments for the next 50 month or the future value of the up front $3000.
So, the decision to pay the points will be based on how long you intend to stay in the house. The trick is to find some instances where the cost of buying down the rate cost less than normal ranges. By this, I mean sometimes it cost less than my example to buy the rates down. Depending on the market, sometime it cost more than 1/2 point to buy the rate down by 1/8%. Sometimes it cost as little as ¼ points to buy down the rate by 1/8%. If the cost of buying down the rate on the above example was 0.375 point, it would only take 24 month to recoup the up front cost. Of course with purchase transactions, take whatever points the sellers are willing to put into the deal, using the same calculations in your negotiations to see if it works out better for you to take price concession or point contribution from the sellers.
I also get questions about the tax write off on the points that you pay. On a refinance transaction, you have to amortize the points over the life of the loan and on the purchase transaction you get to deduct the whole amount in the year of your purchase. This is my current understanding, however I would check with your accountant before making any decisions.
One important consideration when deciding whether to pay points is what are the chances of refinancing again within a few years? If that was an option, then paying points is less attractive. If you are refinancing to a 15 or 10 year loan it probably make more sense to pay the points for a lower rate since is likely you will make the payments for the life of the loan.
So, the decision to pay the points will be based on how long you intend to stay in the house. The trick is to find some instances where the cost of buying down the rate cost less than normal ranges. By this, I mean sometimes it cost less than my example to buy the rates down. Depending on the market, sometime it cost more than 1/2 point to buy the rate down by 1/8%. Sometimes it cost as little as ¼ points to buy down the rate by 1/8%. If the cost of buying down the rate on the above example was 0.375 point, it would only take 24 month to recoup the up front cost. Of course with purchase transactions, take whatever points the sellers are willing to put into the deal, using the same calculations in your negotiations to see if it works out better for you to take price concession or point contribution from the sellers.
I also get questions about the tax write off on the points that you pay. On a refinance transaction, you have to amortize the points over the life of the loan and on the purchase transaction you get to deduct the whole amount in the year of your purchase. This is my current understanding, however I would check with your accountant before making any decisions.
One important consideration when deciding whether to pay points is what are the chances of refinancing again within a few years? If that was an option, then paying points is less attractive. If you are refinancing to a 15 or 10 year loan it probably make more sense to pay the points for a lower rate since is likely you will make the payments for the life of the loan.
Thursday, February 12, 2009
Market Outlook
In the last couple of weeks the mortgage market has been very quiet. Rates trickle up and down a little and applications have slowed down substantially. From what my customers tell me, there are a lot of people still waiting anxiously for the rates to drop so they can follow through on their refinance. In the meantime with all the news of federal stimulus plans and related speculations of how it will affect the market (specifically how it will affect the mortgage rates) have put many borrowers in the hold mode.
A constant theme being reported in the news is that mortgages rates will dip to 4.5%. The different reports have indicated either this is a stated goal or a mandate of some sort by the government. Personally I don’t read it the same way. I see reviving the housing market is a big part of the government’s economic recovery plan. The entire fiscal stimulus plan have far reaching goals and impact affecting employment, capital market, credit market both consumer and business, infrastructure, advancement in education and technology and many other components of the economy driven by government spending.
How much direct impact to mortgage rates remains to be seen. Long term mortgage rates is still a market function today, until the government dictates the actual mortgage rate, the capital market determines the mortgage rates. An active investment community with many sellers and buyers tend to drive long terms rates down.
Using treasuries as the underlining guide, mortgages backed securities will trade within some range of the treasury index. Unfortunately today we have fewer participants in the mortgage backed security (MBS) arena, and can’t quite get the participants back in the game yet. The government has indicated that they will continue to use a variety of methods to revive the market by actively buying and offering guaranties on these securities, but I can’t see them solving the problem by themselves. This is evidenced by the fact that loans over the conforming limit still have no market. I believe in the short term, meaning less than three years, we will have sporadic opportunities for the rates to dip to as low as 4.5% on 30 year loans. Some lucky borrowers will get that rate, most of you will lock in to something between that and 5%.
But when the rates drop the next time, don’t wait. I also believe, eventually, long term mortgages rates, while they maybe low, and will come with many conditions. Conditions being higher loan to value requirements, tighter credit score requirements and maybe prepayment clauses, among others.
Reviving the housing market is definitely a key to reviving the economy. Lower interest rates are definitely a big part of that equation. Since it looks like all the burden is put on the new administration and everyone is waiting anxiously, let’s hope all the planning and implementation will lead us to lower mortgage rates.
A constant theme being reported in the news is that mortgages rates will dip to 4.5%. The different reports have indicated either this is a stated goal or a mandate of some sort by the government. Personally I don’t read it the same way. I see reviving the housing market is a big part of the government’s economic recovery plan. The entire fiscal stimulus plan have far reaching goals and impact affecting employment, capital market, credit market both consumer and business, infrastructure, advancement in education and technology and many other components of the economy driven by government spending.
How much direct impact to mortgage rates remains to be seen. Long term mortgage rates is still a market function today, until the government dictates the actual mortgage rate, the capital market determines the mortgage rates. An active investment community with many sellers and buyers tend to drive long terms rates down.
Using treasuries as the underlining guide, mortgages backed securities will trade within some range of the treasury index. Unfortunately today we have fewer participants in the mortgage backed security (MBS) arena, and can’t quite get the participants back in the game yet. The government has indicated that they will continue to use a variety of methods to revive the market by actively buying and offering guaranties on these securities, but I can’t see them solving the problem by themselves. This is evidenced by the fact that loans over the conforming limit still have no market. I believe in the short term, meaning less than three years, we will have sporadic opportunities for the rates to dip to as low as 4.5% on 30 year loans. Some lucky borrowers will get that rate, most of you will lock in to something between that and 5%.
But when the rates drop the next time, don’t wait. I also believe, eventually, long term mortgages rates, while they maybe low, and will come with many conditions. Conditions being higher loan to value requirements, tighter credit score requirements and maybe prepayment clauses, among others.
Reviving the housing market is definitely a key to reviving the economy. Lower interest rates are definitely a big part of that equation. Since it looks like all the burden is put on the new administration and everyone is waiting anxiously, let’s hope all the planning and implementation will lead us to lower mortgage rates.
Tuesday, February 3, 2009
Rising Rates
In the last two weeks we have seen the rates take a dramatic jump. From the lowest point which was around 4.75% to more than 5.5 % for the 30 years fixed rate. What happened and where is this going? Are we seeing the end of the refinance?
I hope not. Beyond my selfish reason for the refinance to continue, I also think the low rates helps with the economic recovery for the simple reason that any monthly savings one gets from refinancing it may trickle back into the economy as discretionary spending.
The federal government in 2008 used tax rebates of up to $600 per tax payer, up to a certain income, to stimulate the economy. The net effect of homeowners refinancing on the average put more than $200 a month back into the hands of the consumers, substantially higher than $600 a year, this must create some stimulus to the economic month after month!
Another less obvious effect of refinancing is a smooth and orderly way of loan modification. Most distressed mortgages are having a difficult time having the loan modified by the lender, even though most of the time it is to the lenders’ advantage to have a loan modified rather than have it go to foreclosure. The actual loan modification process is mostly a lose/lose proposition for the lenders and borrowers. By refinancing the loan, favorable terms are available to the borrowers, even though these borrowers are not in distress and all have great credit history and are well qualified. With this shaky economy any borrower who can solidify their financial well being by reducing some debt obligation in turn will also solidify the lenders themselves who holds the notes.
Well, it just occurred to me may be the lenders can engage mortgage brokers like us to help then do loan modifications.
So why are the rates are going up? The most direct answer is the long term bonds yield has jumped. Correspondingly, the mortgage rates have also increased by more than 75 basis points. The next question is why did the long term bond yield jump? The most direct answer to this is that there are more sellers of long bonds than buyers.
Now we get to the question of what happens next. I am skipping a whole series of questions related to the who and why of more sellers than buyers since I don’t know the answer, so my prediction of the rates is it will continue to fluctuate because the bond market have always moved up and down. Even in a clear up or down trend there are still fluctuations. Keep watching the rates closely and for those who missed their target rate don’t hesitate too long when the next valley comes around.
I hope not. Beyond my selfish reason for the refinance to continue, I also think the low rates helps with the economic recovery for the simple reason that any monthly savings one gets from refinancing it may trickle back into the economy as discretionary spending.
The federal government in 2008 used tax rebates of up to $600 per tax payer, up to a certain income, to stimulate the economy. The net effect of homeowners refinancing on the average put more than $200 a month back into the hands of the consumers, substantially higher than $600 a year, this must create some stimulus to the economic month after month!
Another less obvious effect of refinancing is a smooth and orderly way of loan modification. Most distressed mortgages are having a difficult time having the loan modified by the lender, even though most of the time it is to the lenders’ advantage to have a loan modified rather than have it go to foreclosure. The actual loan modification process is mostly a lose/lose proposition for the lenders and borrowers. By refinancing the loan, favorable terms are available to the borrowers, even though these borrowers are not in distress and all have great credit history and are well qualified. With this shaky economy any borrower who can solidify their financial well being by reducing some debt obligation in turn will also solidify the lenders themselves who holds the notes.
Well, it just occurred to me may be the lenders can engage mortgage brokers like us to help then do loan modifications.
So why are the rates are going up? The most direct answer is the long term bonds yield has jumped. Correspondingly, the mortgage rates have also increased by more than 75 basis points. The next question is why did the long term bond yield jump? The most direct answer to this is that there are more sellers of long bonds than buyers.
Now we get to the question of what happens next. I am skipping a whole series of questions related to the who and why of more sellers than buyers since I don’t know the answer, so my prediction of the rates is it will continue to fluctuate because the bond market have always moved up and down. Even in a clear up or down trend there are still fluctuations. Keep watching the rates closely and for those who missed their target rate don’t hesitate too long when the next valley comes around.
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