Could The Top Already Be In For Rates?

(Most of this newsletter lays out a counterpoint to the fairly dominant theme of “higher rates in 2018.” Please note: this is just the bright side of the debate. There’s still a dark side, but we’re giving it the week off for Spring Break!)

It’s no secret that late 2017 and early 2018 were anything but pleasant for fans of low rates. Average mortgage rates and Treasury yields shot higher at their fastest pace since the 2016 presidential election. Even after that spike, there are still plenty of reasons to fear rates may continue higher, and that’s exactly why they could go lower.
The emphasis is very much on “could.” At the risk of bursting any bubbles, rates “could” always move higher or lower from wherever they are right now, and traders are constantly trying to adjust today’s rates to reflect future probabilities. In other words, whatever can be accurately known about the future is generally already priced-in to current rate levels. This is actually the foundation of our rate-friendly narrative this week, but first, let’s recap the data and market movement.

Housing-Related Data Recap
The National Association of Realtors reported a 3.1% improvement in Pending Home Sales, a measurement of home purchase contract activity. This follows a 5% decline in the previous month and helps to contain the year-over-year declines seen in the lower section of the following chart.

The Mortgage Bankers Association released its weekly update on mortgage applications, which showed another nice gain for purchases and a token improvement for refis. The good news is that we haven’t even hit peak season for purchase apps (June). When we do, the numbers should be even better.

Persistent homebuying demand + low inventory = higher and higher prices. The Case-Shiller price index echoed other recent home price reports with a move up to 6.4% for January–not quite as high as FHFA’s January numbers, but 0.2% higher than was forecast for this report. Moreover, in seasonally-adjusted terms, this week’s “20-city price index” hit new record highs.

Market Movements and Rate Outlook
Rates dropped at their fastest pace of the year* this week, and for the 3rd week in a row! That makes 6 out of the past 7 weeks with rates closing at lower levels than the previous week. Granted, some of those victories involved rates essentially remaining flat, but after the rapid spike earlier in the year, we’ll take any victory we can get!

Because financial news outlets are decidedly stock-focused, much of the available commentary on rates ends up involving stocks. The conventional wisdom seems to be that heavy losses in stocks get credit for noticeable declines in rates. There is SOME truth to this, but the correlation guaranteed.

In fact, the biggest moves tend to happen when rates are doing their own thing. For instance, in the chart below, the big drop at the beginning of 2015 was due to the onset of the European Central Bank’s bond buying program (more bond-buying = lower rates). The big spike in late 2016 was due to bond traders fearing increased Treasury issuance (more supply = more to sell = higher rates) after the election. And if all that isn’t enough to hammer home the fact that stock/rate correlation varies quite a bit, just use the lower pane of the chart to re-calibrate your assumptions as needed.

Since the previous chart offered 2 good examples of bonds/rates doing their own thing regardless of the stock market, what might turn out to be the current motivation for the next big move? Interestingly enough, stocks could actually play a pretty big role this time. The higher they’ve gone, and the longer they’ve gone without a bear market, the greater the fear of a massive correction. Most analysts would agree that February and March would end up looking like a small warning shot relative to such a correction. To whatever extent that drama begins to unfold, rates couldn’t help but improve simply because so much money from the stock market would be seeking safe havens.

Were I to argue against the “safe haven” idea, I would point out that the current environment is not conducive to rates moving lower for two, maybe three big reasons:
1. Fed rate hike expectations suggest short-term rates will be high enough in the future that long-term rates (the stuff we care about in the mortgage/housing market) will have to go somewhat higher.
2. Increased government bond issuance (to pay for stuff like infrastructure and the tax bill) will create more and more supply. Higher bond market supply = higher rates.
3. Fiscal policies may promote additional economic growth and inflation–both of which are traditionally bad for rates.
All of the above points are valid, but there’s one important counterpoint back on the optimistic side of the rate argument, and it goes back to the beginning of the newsletter: “whatever can be accurately known about the future is generally already priced-in to current rate levels.”
With that in mind, anything that impacts the accuracy of the outlook creates opportunities for rates to do “something different.” Uncertainty about the true cost of the tax bill over time means uncertainty about how much debt will be issued to pay for it. If the tax bill actually ramps up revenues as much as some of its proponents think it might, bond markets likely overestimated the government’s future borrowing needs. And again, anything that decreases those borrowing needs is a net-benefit for rates.
Bottom line: adjusting for the effects of the tax bill presented a moving target for bond markets. At the same time, traders were also adjusting to a slightly accelerated Fed rate hike outlook. The juxtaposition of these 2 themes advocated caution among traders. Because of that, it made more sense to push rates higher first and ask questions later.
Now, those questions might be starting to get asked. Did we assume a worst-case scenario for Treasury issuance without planning on much relief from revenues? Is the Fed really going to end up hiking as fast as their forecasts indicate? With the tax bill effects already priced in, any rethinking of Fed rate hike expectations is more free to have a positive effect on today’s longer-term rates. We may already be seeing signs that the trajectory is leveling off (lower pane of the following chart).

*One final caveat for mortgage rates specifically. This one is a blessing and a curse. On the one hand, mortgage rates have been much less volatile than Treasury yields recently. On the other hand, keep in mind that mortgages don’t tend to benefit as quickly when bond markets are improving overall. If Treasury yields continue lower, mortgages will eventually follow, but it will take time, and the gains will need to stabilize for weeks before lenders begin to close the gap.

National Average Mortgage Rates
Rate Change Points

Mortgage News Daily
30 Yr. Fixed 4.51% -0.01 0.40
15 Yr. Fixed 3.89% -0.01 0.40
30 Yr. Jumbo 4.54% -0.01 0.00

Freddie Mac
30 Yr. Fixed 4.44% +0.49 0.50
15 Yr. Fixed 3.90% +0.59 0.50
5/1 ARM 3.66% +0.45 0.40

Mortgage Bankers Assoc.
30 Yr. Fixed 4.68% -0.01 0.46
15 Yr. Fixed 4.12% +0.05 0.51
30 Yr. Jumbo 4.55% 0.00 0.37
Rates as of: 3/28

MBS and Treasury Market Data
Price / Yield Change
MBS FNMA 3.5 100.20 +0.20
MBS GNMA 3.5 100.94 +0.17
10 YR Treasury 2.7407 -0.0418
30 YR Treasury 2.9729 -0.0485
Pricing as of: 3/29 1:48PM EST

Recent Housing Data
Value Change
Mortgage Apps Dec 27 368.6 -2.8%
Building Permits Jul 1.22M -4.08%
Housing Starts Jul 1.16M -4.78%
New Home Sales Jul 571K -9.37%
Existing Home Sales Jul 5.44M -1.27%
Builder Confidence Aug 68 +6.25%

CONTACT ME

• – www.cranbrookloans.com
• – Cranbrook Loans
• – Michael Ayoub
• – 586-649-2350

Fannie/Freddie Need Your Money Again, But Not Like They Used To

Stellar Home Sales and Tax Bill’s Effect on Housing Newsletter 01012018

Newsletter 12212017

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Loan Risk Table

Loan To Value Risk Analysis

This table shows the risk level to lenders based on the loan balance compared to your homes value.  For example if you apply for a 50k loan and the home is worth 100k the loan to value ratio would be 50% and would be considered extremely low risk.

Credit Score Risk Table

The credit score risk table shows the risk level to the lender based on your credit score.

You now may be able to get a mortgage even if your FICO score isn’t great

By Kenneth R. Harney August 26
If you’ve got a low FICO credit score but believe you can handle monthly mortgage payments instead of rent, here’s some potentially good news: The government is willing to give you a better shot at obtaining a low-down-payment home loan from the Federal Housing Administration.

Under a key policy change that took effect last week, lenders nationwide have more leeway to approve mortgages to borrowers who qualify under FHA’s underwriting guidelines but may have below-par FICO scores. Some analysts say the revised approach could create a pathway for as many as 75,000 to 100,000 new loans a year to borrowers who are now frozen out of consideration.

FICO credit scores run from 300, considered the highest risk of default, to 850, the lowest risk. Though FHA for years has accepted applicants who have FICO scores in the 500s, the practical reality has been that most lenders ignore borrowers whose scores are under 620 or even 640. Lenders have avoided low-FICO borrowers in large part because FHA itself has employed a statistical evaluation system that scrutinizes — and sometimes severely penalizes — banks and mortgage companies that make what FHA considers too many “high-risk” loans compared with other lenders active within the same geographic area.

Under the revised policy, lenders will be judged under a fairer metric. This will allow companies located in communities with large concentrations of people with below-average FICO scores — these people tend to include young, first-time buyers, minority households and moderate-income working families — to make loans without fear of being penalized solely because of their business focus.

[Ken Harney: Already full of complications, closings may soon grow even more worrisome]

“This is going to really open the doors — I think it’s a huge step in the right direction,” says Clem Ziroli Jr., president of First Mortgage Corp. in Ontario, Calif. “There are a lot of people out there who have good credit but low FICO scores simply because they lost their jobs during the recession” and got behind on paying bills. “They are working two jobs. They’ve been slowly rebuilding their credit and have been saving money for a down payment. They are good risks” — they’re not going to mess up on mortgage payments. Equally important, Ziroli told me, they are eager “to build wealth by owning a home” rather than paying rent to a landlord. Ziroli’s company originates roughly 7,000 FHA-insured loans a year, many to Latino and African American first-time buyers.

David H. Stevens, president and chief executive of the Mortgage Bankers Association and a former head of the FHA, says the revised policy should help some borrowers whose FICO scores in the low 600s and upper 500s have barred them from obtaining any type of mortgage, FHA or otherwise. But those who fully qualify under FHA’s regular underwriting standards — reliable income, acceptable debt-to-income ratios, solid ability to repay — “will now be more likely to find some lenders who will do their mortgages.”
That’s significant, he said. Even so, many lenders will not rush in and immediately start doing more low-FICO loans. They’re going to wait and watch how FHA treats lenders that do increased volumes of these mortgages.

[Ken Harney: Saying yes to a new car can make a mortgage lender more likely to say no]

“So this emphasizes the importance of shopping,” Stevens said in an interview. If the first couple of lenders say no, mortgage applicants should keep shopping until they locate a lender that — encouraged by the new flexibility from FHA — says yes.

Why is the government opening FHA’s doors wider for buyers who previously would have been rejected? In large part it’s because just about everybody — including Federal Reserve Chair Janet Yellen, prominent economists and financial experts — agrees that credit standards have gotten too strict in the years since the bust, especially given the recent payment performances of borrowers.

Brian Chappelle, a principal at the housing consulting firm Potomac Partners and a nationally known expert on FHA, told me via e-mail that mortgages with low FICO scores originated during the past two years “are performing better than the total mix of FHA business [including loans with much higher scores] from 1999 through 2011.” Serious delinquencies of 90 days or more where applicants had FICOs below 640 were at just 1.82 percent as of June 30.

The takeaway here: Just because your credit reports and scores continue to bear the wounds of the recession and financial crisis, don’t assume you can’t buy a house. Shop aggressively among FHA lenders in the coming weeks and months, and you’re likely to find a better reception than you might have feared.

Appraisal Condition Rating Definitions

Freddie Mac and Fannie Mae have an ongoing effort in place to enhance accuracy and quality of loan data. One piece of this effort is to standardize the way properties are characterized during an appraisal. The categories below outline the new standards for documenting the condition of a dwelling during the appraisal process.

View Factor(s)
Appraisers must now provide one rating and at least one, but no more than two view factors to describe the overall effect on value and marketability of the view associated with the property.

Bathroom(s) Count
Appraisers must enter the total number of full baths and partial baths above grade by separating the full bath count from the half bath count with a period (.). ie. 3.2 = 3 full baths and 2 half baths above grade.

Condition Rating
Appraiser must select one rating that best describes the overall condition of the subject property and each comparable property. In addition, the appraiser must indicate if there has been any material work done to the kitchen or bathrooms in the prior 15 years. Overall condition ratings are summarized below:

Kitchen and bathroom ratings must also be rated with Not Updated, Updated or Remodeled along with a timeframe in which work was completed.

Description Location:
The appraiser must provide one rating and at least one, but not more than two location factors to describe the overall effect on value and marketability of the location factors associated with the property.

Quality of Construction Rating
The appraiser must select one rating that best describes the quality of the property and each comparable property.

An appraisal is an opinion of value at the time the home is reviewed by an appraiser and is typically valid for four months. The condition of the housing market and comparable dwellings that have recently sold can affect how appraisals are rated at any given time.

ARM vs Fixed Rate Blog

A Fixed-Rate Mortgage or Fixed Rate Loan applies the same interest rate toward monthly loan payments for the life of the loan. Fixed-Rate Loans are more straightforward and easier to understand than Adjustable Rate Mortgages (ARMs) or ARM mortgages. They are also more secure for the buyer, and are popular with first-time homebuyers looking for home mortgage loans. Since the lender takes a higher risk, fixed-rate mortgages generally have higher interest rates than ARM mortgages. For example, a lender of home mortgage loans can offer a 30-year fixed rate loan to a homebuyer at a 7.0% interest rate. The fixed rate loan is locked in to the 7.0% interest rate, even if the market interest rate rises to 9.0%. Conversely, if the market interest rate decreases to 5.5% for home mortgage loans, you, as the borrower, will continue to pay the 7% interest rate.

Fixed-Rate Loan benefits include:

No change in monthly principal and interest payments regardless of fluctuations in interest rates
More stability may give you “peace-of-mind”
Fixed-Rate Loan disadvantages include:

Higher initial monthly payments compared to those of adjustable rate mortgages
Less flexibility
An adjustable rate mortgage, which may qualify as a second mortgage loan, does not apply the same interest rate toward monthly payments for the life of the loan. Throughout the life of that loan, the homebuyer’s principal and interest payment for second mortgage loans will adjust periodically based on fluctuations in the interest rate.

For example, a lender of second mortgage loans could offer a 30-year adjustable rate mortgage loan to a homebuyer at an initial 6.5% interest rate. During an adjustment period for the ARM Mortgage loan, the market interest rate could rise to 8.0, resulting in a significantly larger interest payment. Similarly, the market interest rate could decrease to 6.0%, resulting in lower interest payments.

ARM Mortgage benefits include:

Initial payments lower due to lower beginning interest rate, usually about 2 percentage points below the fixed rate
Ability to qualify for a higher loan amount due to lower initial interest rates
Lower interest payments if the interest rate drops over time
Interest rate caps limit the maximum interest payment allowed for the loan
ARM Mortgage disadvantages include:

Initial lower interest rate and monthly payments are temporary and apply to the first adjustment period. Typically, the interest rate will rise after the initial adjustment period.
Higher interest payments if the interest rate rises over time.

– See more at: https://cranbrookloans.com/about-us/#sthash.SPV00J6J.dpuf

Links

Real Estate Agencies
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