How Covid -19 has impacted mortgage markets

This is an excerpt from MBS Highway and market expert Barry and Dan Habib.  This is an extremely extensive overview on how the mortgage market works and all of the issues that Covid – 19 has had on the industry.

The current Coronavirus crisis is having a critical impact on the Mortgage Industry, which could potentially make the 2008 financial crisis pale in comparison. The pressing issue centers around capital that’s required by Mortgage Lenders to be able to function and meet covenants that are required for them to continue to lend.

Here’s How the Mortgage Market Works

Let’s begin with the mortgage process. A borrower goes to a Mortgage Originator to obtain a mortgage. Once closed, the loan is handled by a Servicer, which may or may not be the same company that originated the loan. The borrower submits payments to the Servicer, however, the Servicer does not own the loan, they are simply maintaining the loan. This means collecting payments and forwarding them to the investor, paying taxes and insurance, answering questions, etc. While they maintain or “service” the loan, the asset itself is sold to an aggregator or directly to a government agency like Fannie Mae (FNMA), Freddie Mac (FHLMC), or Ginnie Mae (GNMA). The loan then gets placed inside a large bundle, which is put in the hands of an Investment Banker. That Investment Banker converts those loans into a Mortgage Backed Security (MBS) that can be sold to the public. This shows up in different investments like Mutual Funds, Insurance Plans, and Retirement Accounts.

The Servicer’s role is very critical. In order to obtain the right to service loans, the Servicer will typically pay 1% of the loan amount up front. The Servicer then receives a monthly payment or “strip” equal to about 30 basis points (bp) per year. Because they paid about 1% to obtain the servicing rights and receive roughly 30bp in annual income, the breakeven period is approximately 3 years. The longer that loan remains on the books, the more money that Servicer makes. In many cases, the Servicer might want to use leverage to increase their level of income. Therefore, they may often finance half of the cost of acquiring the loan and pay the rest in cash.
Servicing runoff, or even the anticipation of it, can adversely impact the market valuation of a servicing portfolio.

Servicer Dilemma

As you can imagine, when interest rates drop dramatically, there is an increased incentive for many people to refinance their loans more rapidly. This causes the loans that a Servicer had on their books to pay off sooner…often before that 3-year breakeven period. This servicing runoff creates losses for that Mortgage Lender who is servicing the loan. The more loans in a Mortgage Lender’s portfolio, the greater the loss. Servicing runoff, or even the anticipation of it, can adversely impact the market valuation of a servicing portfolio. But at the same time, Lenders typically experience an increase in new loan activity because of the decline in interest rates. This gives them additional income to help overcome the losses in their servicing portfolio.

But the Coronavirus has caused a virtual shutdown of the US economy, which has created an unprecedented amount of job losses. This adds a new risk to the servicer because borrowers may have difficulty paying their mortgage in a timely manner. And although the Servicer does not own the asset, they have the responsibility to make the payment to the investor, even if they have not yet received it from the borrower. Under normal circumstances, the Servicer has plenty of cushion to account for this. But an extreme level of delinquency puts the Servicer in an unmanageable position.

I’m From the Government and I’m Here to Help

In the Government’s effort to help those who have lost their jobs because of the Coronavirus shutdown, they have granted forbearance of mortgage payments for affected individuals. This presents an enormous obstacle for Servicers who are obligated to forward the mortgage payment to the investor, even though they have not yet received it. Fortunately, there is a new facility set up to help Mortgage Servicers bridge the gap to the investor. However, it is unclear as to how long it will take for Servicers to access this facility.

But what has not been yet contemplated is the fact that a borrower who does not make their very first mortgage payment causes that loan to be ineligible to be sold to an investor. This means that the Servicer must hold onto the asset itself, which ties up their available credit. And with so many new loans being originated of late, the amount of transactions that will not qualify for sale is significant. This restricts the Lender’s ability to clear their pipeline and get reimbursed with cash so they can now fund new transactions.
The Fed’s desire to bring mortgage rates down isn’t just damaging servicing portfolios because of prepayments, it’s also wreaking chaos in Lenders’ ability to hedge their risk.

Mark to Market

This week, due to accelerated prepayments and the uncertainty of repayment, the value of servicing was slashed in half from 1% to 0.5%. This drastic decrease in value prompted margin calls for the many Servicers who financed their acquisition of servicing. Additionally, the decreased value of a Lender’s servicing portfolio reduces the Lender’s overall net worth. Since the amount a Lender can lend is based on a multiple of their net worth, the decrease in value of their servicing portfolio asset, along with the cash paid for margin calls, reduces their capacity to lend.

Unintended Consequences

The Fed’s desire to bring mortgage rates down isn’t just damaging servicing portfolios because of prepayments, it’s also wreaking chaos in Lenders’ ability to hedge their risk. Let’s look at what happens when a borrower locks in their mortgage rate with a Mortgage Lender. Mortgage rates are based on the trading of Mortgage Backed Securities (MBS). As Mortgage Backed Securities rise in price, interest rates improve and move lower. A locked rate on a mortgage is nothing more than a Lender promising to hold an interest rate, for a period of time, or until the transaction closes. The Lender is at risk for any MBS price changes in the marketplace between the time they agreed to grant the lock and the time that the loan closes.

If rates were to rise because MBS prices declined, the Lender would be obligated to buy down the borrower’s mortgage rate to the level they were promised. And since the Lender doesn’t want to be in a position of gambling, they hedge their locked loans by shorting Mortgage Backed Securities. Therefore, should MBS drop in price, causing rates to rise, the Lender’s cost to buy down the borrower’s rate is offset by the Lender’s gains of their short positions in MBS.

Now think about what happens when MBS prices rise or improve, causing mortgage rates to decline. On paper, the Lender should be able to close the mortgage loan at a better price than promised to the borrower, giving the Lender additional profits. However, the Lender’s losses on their short position negate any additional profits from the improvement in MBS pricing. This hedging system works well to deliver the borrower what was promised, while removing market risk from the Lender.

But in an effort to reduce mortgage rates, the Fed has been purchasing an incredible amount of Mortgage Backed Securities, causing their price to rise dramatically and swiftly. This, in turn, causes the Lenders’ hedged short positions of MBS to show huge losses. These losses appear to be offset, on paper, by the potential market gains on the loans that the lender hopes to close in the future. But the Broker Dealer will not wait on the possibility of future loans closing and demands an immediate margin call. The recent amount that these Lenders are paying in margin calls is staggering. They run in the tens of millions of dollars. All this on top of the aforementioned stresses that Lenders are having to endure. So, while the Fed believes they are stimulating lending, their actions are resulting in the exact opposite. The market for Government Loans, Jumbo Loans, and loans that don’t fit ideal parameters, have all but dried up. And many Lenders have no choice but to slow their intake of transactions by throttling mortgage rates higher and by reducing the term that they are willing to guarantee a rate lock.

Furthering the Fed’s unintended consequences was the announcement to cut interest rates on the Fed Funds Rate by 1% to virtually zero. Because the Fed’s communication failed to educate the general public that the Fed Funds Rate is very different than mortgage rates, it prompted borrowers in process to break their locks and try to jump ship to a lower rate. This dramatically increased hedging losses from loans that didn’t end up closing.
It’s been said that the Stock market will do the most damage, to the most people, at the worst time.
Even Stephen King Could Not Have Scripted This

It’s been said that the Stock market will do the most damage, to the most people, at the worst time. And the current mortgage market is experiencing the most perfect storm. Just when volume levels were at the highest in history, servicing runoff at its peak, and pipelines hedged more than ever, the Coronavirus arrived.

Lenders need to clear their pipelines, but social distancing is making it more difficult for transactions to be processed. And those loans that are about to close require that employment be verified. As you can imagine, with millions of individuals losing their jobs, those mortgages are unable to fund, leaving lenders with more hedging losses and no income to offset it.

What Needs to Be Done Now

Fortunately, there are many smart people in the Mortgage Industry who are doing everything they can to navigate through these perilous times. But the Fed and our Government needs to stop making it more difficult. The Fed must temporarily slow MBS purchases to allow pipelines to clear. Lawmakers need to allow for first payment defaults, due to forbearance, to be saleable. And finally, the Fed must more clearly communicate that Mortgage Rates and the Fed Funds Rate are not the same.

We have faith that the effects of the Coronavirus will subside and that things will become more normalized in the upcoming months.

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4 Predictions for Real Estate in 2019

4 Predictions for Real Estate in 2019

 

What will 2019 bring?  What will rates do?  Will home values go up or down?  I anticipate a lot of the current trends to carry over into 2019.  Here are the top 4 things to expect:

 

  1. The winter months typically see a rise in home inventory and we see a shift more towards a “buyer’s” market. Once the spring hits, this isn’t likely to last.  We will see more buyers hit the market and sellers will benefit from a lack of inventory.  If you are thinking of buying, you will still get the best deal through the winter.  2019 is likely to still favor sellers.

 

  1. Rates will continue to increase. 2018 started with an average 30-year fixed rate below 4%.  Rates now hover right around 5% on the average.  This will cause the purchasing power for some homeowners to decrease, however, home sales should still trend at the same pace.  The rate of employment and rent rates correlate more closely with home sales than the actual mortgage interest rates so this may not hurt sales much.  The exception will be areas where there is a lower median income and higher unemployment.

 

  1. Values will continue to rise. When we have demand outweighing supply there is an upward pressure on home prices.  We will see much bigger movement in the areas where employment and income are strong and increasing since there will be more buyers in a position to buy at the increased prices.  Most pundits have said that purchase mortgages will dominate the market over refinances, however, my opinion is that while that is true, these newfound equity positions will still make it a strong market to refinance in.  There are people that have needed access to money (consumer debt, home upgrades, etc.) that haven’t been able to access it for years.  Even though rates at 5% may be higher than they currently have, it may make sense to accomplish their other financial goals.

 

  1. Mortgage underwriting will loosen. Bottom line is that banks need to make money.  If rates go up and that lowers refinances, inventory is low and that lowers home purchases, they will come up with new programs and less stringent guidelines to make up that shortfall.

 

Do you have questions about buying or refinancing your current home and want to know the best course of action?  Contact us anytime at brian@teamhuntonmortgage.com or (978) 575-3053.

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November market update

We are headed into the colder part of the year, the kids are back in school, and the holidays will soon be upon us.  If you watch the news they will tell you that housing inventory is back up and the market is turning to be more buyer friendly.  That’s always followed up with, “are we do for another crash?”

The main indicator of where things are headed is labor and the overall economy.  Right now we have a strong labor market and steady economic growth so this lowers the probability of a crash.  However, we have had significant up ticks in mortgage rates in the last three weeks.  This is squeezing housing affordability down for the lower end of the housing market so these geographic areas will see a bit more stagnation than others.  Overall, real estate is still anticipated to appreciate around 3% on average next year.

Areas to watch are those surrounding Worcester.  There have been major investments into the city itself which should bring the housing prices in the city and immediate suburbs up at a faster rate.

Advice for the month:  If you are serious about buying and want to get a better deal, now is the time.  Spring will likely have the same houses you see now selling at a higher price and rates will make these same homes more expensive when we get there.

Reminder:  One of the things we keep running into are clients getting gifts from family without the proper documentation.  If you know you are going to be needing a gift, please let us know before you even get the first penny.  That will make everything much easier to document and get through underwriting.

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Tips for your home before winter

Even though we are still enjoying a few nice Autumn days, we all know that the weather in New England can change in a flash.  I feel like the hardest season to be a homeowner is winter.  It’s a constant battle against the damage that ice, cold, and snow can cause.

Here are some tips to help you prevent and prepare:

  1. Disconnect garden hoses, drain them, and drain sprinklers/sprinkler systems.
  2. Winterize your pressure washer.
  3. Clean attic venting to help prevent ice dams.
  4. Check/Clean your gutters & chimney.
  5. Empty flower pots.
  6. Cut the power to Central AC units & Protect the AC compressor from falling ice.
  7. Install or replace weather stripping on all doors and windows.
  8. Swap out the gas in small engines and recreation vehicles to avoid carburetor damage.

These are some of the things most often overlooked until it is too late. There is always more to do, for additional tips click here. If you want to know more about why you should do any of these tasks, or would like a referral to a qualified professional to help you, just let us know.

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Market update for homebuyers – September 2019

I will start off with the most important thing for you to take away from this update.  NOW is the time to get a house.  Mortgage rates are at their highest point in 7 years and are continuing to go up so the cost of the money will not be going down.  However, we are finally starting to see some more inventory for houses come on the market.  This is the reason you aren’t seeing houses gone in one or two days anymore.  There are finally some extra houses for people to look at.  This is a typical trend late in the year from September to October.  This additional inventory means buyers will have a more optimal negotiation with sellers making this the BEST part of the year to buy throughout Massachusetts.

What happens if you wait until Spring?  Later this year when the snow is flying many houses will come off the market in preparation for Spring.  Then they will get put back on at a higher price at that time.  Since that is the beginning of the hottest time of the year to buy (closing prices peak in summer from sales negotiated in the spring) the price of the house will be up and there will be more competition for the home.

Thinking now is the time to buy for you?  Let us know and we can refresh your pre-approval, run new numbers for you, or if you are a new client we can help get you into position to find the next home for you.

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The “Miracle” of Compound Interest

Ok, so it’s not really a miracle. That just happens to be what the financial specialists like to call it. However, compound interest plays an important part of how you manage your mortgage, so this month we are going to focus on how this concepts plays into your long term plan.

Compound interest is interest added to the principal of a deposit or loan so that the added interest also earns interest from then on. This addition of interest to the principal is called compounding. A bank account, for example, may have its interest compounded every year: in this case, an account with $1000 initial principal and 20% interest per year would have a balance of $1200 at the end of the first year, $1440 at the end of the second year, $1728 at the end of the third year, and so on.

Your financial future depends on this concept. Unless you are someone that thinks the government will take care of you into old age, you need to save money. You need to have money for living expenses, you need to have insurances for the unexpected, you need to have funds set aside for emergencies, you need to have money put away for when you reach the point where you are no longer physically able to work. If you save money and that money is compounding interest you obviously have less to save to reach the point where you have that comfort level. If that passive income then earns more money for you by compounding additional interest you are making your money work for you.

Why does this affect me in the mortgage world? Most people I deal with for mortgages are focused on their mortgage rate and how to eradicate that mortgage as quickly as possible. People see their Truth in Lending disclosure and the ridiculous amount of interest they will pay over the course of the loan and all of their focus shifts on avoiding that. For example, if you are 25 years old and you take out a $200,000 loan you will pay $143,739 over the course of 30 years. I could write a whole different newsletter about why paying all of that interest still outweighs renting but the point I want to drive home today is that if your focus is on saving money instead of earning more you will not be able to outpace spending. Also, every extra payment you make to the mortgage lender gives them the leverage advantage until the day you pay off that mortgage in full.   If you have been paying extra money towards principal and then get hurt at work, fired, laid off, etc. how will you pay your mortgage? If you are not insured properly and don’t have enough liquidity you may end up going through the foreclosure process and all of that money that you put into that house will no longer be yours. After all, which house do you think a lender will be more patient on during the foreclosure process? The one with 10k in equity or the one with 100k?

Does this mean that paying extra on your mortgage is a bad idea? Absolutely not. What it means is that you have to prioritize your plan. Do you have savings? Do you have an emergency fund? Do you have disability insurance? Do you have life insurance? Are you max funding your retirement accounts? If you said no to any of those questions your focus should not be on paying additional to the principal on your mortgage. If your answer was no to any of those questions you may need to work with a financial professional to help get that part of your plan on track. If that is the case please let me know. I work with several financial planners and would be glad to match you up with someone.

Thank you for taking the time to read this month’s newsletter. If you have any questions or suggestions for future topics feel free to reach out to me at brian@teamhuntonmortgage.com.

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Is it time to Refinance?

But the TV says it’s a good time to refinance….

When we have a mortgage interest rate dip it apparently makes for good news. Good Morning America had a segment on NOW being a great time to refinance because of how great the rates are and my wife asked me (for about the 100th time), “Why don’t we refinance?”  After I explained the reasons why it doesn’t make sense for us I got the inspiration to tell everyone when the best time to refinance really is.

Here’s the answer. The market has no bearing on if it’s a great time to refinance.It is all relevant to your overall goals and financial strategy. Refinancing has so much more to do than with interest rates. Getting a lower interest rate could be what some people’s goal is but it is just one of the motivations.

You can look at refinancing for…
a lower rate,
for a fixed rate,
for a shorter term or a longer term,
for equity harvest for a number of reasons
for debt consolidation,
among other strategies.

The point is that each person has their own unique factors in their life that may have a different motivation and getting a lower rate isn’t necessarily the best idea.

Here’s an example.I had a client come to me that had gotten in over their head with some poor credit card decisions that affected their credit score. They had a 5% rate on their mortgage (which was low to the market at that time) and equity in their home. Their concern was that they didn’t want to give up their rate but at the same time were worried that their cash flow issues would wind them up in foreclosure. We came up with a two part plan to help them save their home and lower their stress.

First, we refinanced the house and used their equity (which was an unused asset) and consolidated their payments. Their new mortgage had an 8% interest rate because of their credit score but overall their payments were lower than what they had been putting out in total payments prior to the refinance. This also took their debt, in their circumstance their bad debt, and made it tax advantaged debt. The second part of the plan was credit repair so their goal over the next 12 months was to make sure that they recovered from their bad decisions.

Once we got to the point where their credit had been repaired about 14 months later, we refinanced them back into a 5% rate and lowered their payment again. This plan didn’t negate the debt they had accumulated but had positioned it so that they were able to apply more to principal to lower that debt more quickly and also to save their home.

When is it a good time to refinance? There is only one way to know. Get an evaluation. With minimal information I can look at your current loan and evaluate your situation to let you know what things are open to you. Right now is a GREAT time to take advantage of that. Rates are low but also very volatile and could move higher at any time and capturing that lower rate may be the key to opening up some options for you. The last quarter of 2014 saw a huge amount of new purchases that brought values up in many areas so if you need a little more equity to have a refinance make sense for you it might be there now.

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Resolution to change or to embrace who you are?

Resolution to change

or to embrace who you are?

After seven seasons, this past fall Sons of Anarchy had its series finale.  If you liked this show then you never missed an episode and the rest of you think I’m crazy for starting this newsletter talking about a television show that centered on a fictional outlaw motorcycle club.  The protagonist spent the better part of the seven seasons trying to get his club away from being outlaws and into legitimate business.  He spent every season committing some pretty heinous crimes to get to that point but nonetheless this was the stated purpose.  In the last episode he states to his father figure that he thought he could change but he really can’t and that at the end of the day he will always be a criminal so he embraced it.

As I watched this episode I was feeling pretty burnt out from working 50-60 hour work weeks.  I felt like I never had the time to sit back and enjoy life because whenever I slow down I feel like I should be doing more work which then ruins that down time for me.  I thought back to my first newsletter of 2014 where I told everyone that 2014 would be THE year that I finally took it easy and enjoyed the life that my wife and I have built together.   I talked about more time with family, more vacations, and more dinners out.  I sat back and thought that evening that I just need to embrace who I am.  I am always going to be the guy that works around the clock.  I am always going to be the guy that isn’t satisfied with any modicum of success with what I do and will always strive for more.  I just need to understand that’s who I am and embrace it.

At the end of the day though, there has to be a moral to the story.  The moral is that no matter what it is you need to embrace, be happy doing it.  Every person thinks they will be happy “after” something is achieved or “if” their circumstances change in some way.  My advice is to take the “after” and the “ifs” out of your life.  Be happy now.  If your goal is to lose weight and think you will be happy after you do try to be happy with the person you are already and that you have ability to reach more goals.  Happiness is a mindset not a goal.  Enjoy all the time you have now and focus on the present you.  Keep that perspective and see how it changes your relationships and helps you reach your goals.

Since we have established that my New Year’s resolution is to embrace being a workaholic, give me a call so I can help you strategize on how to buy your new home this year or save money on the mortgage you already have.  Please don’t let me have any down time; I’m looking forward to 2015 being even greater than last year.

Happy New Year!

All the best to you, your family, and your organization,
Brian
Brian Hunton
MBA Mortgage – Team Hunton
Licensed Massachusetts Mortgage Broker- MBA Mortgage Corporation Athol Branch identification #401084- License #MB2880-100. Licensed by the Massachusetts Division of Banks. License #MB2880 Licensed by the New Hampshire Banking Department. License #11440-MBR Licensed by the Rhode Island Division of Banking. License #20072210LB FHA Approved Broker Licensed by the Department of Housing & Urban Development. License #28012-0000-2 NMLS #2880
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Reasons to Buy & Sell in Winter !

Buying in the winter… 
 
  
 

Traditionally, fewer homes are sold during the winter months of December, January and February nationwide.

Astute home buyers can take advantage of this drop-off, and potentially find a “better deal”.
There are a few reasons why.

 

1. There are fewer homebuyers in the winter, this means you have more time to make solid informed offers on properties you really like.

2. House prices traditionally are at their lowest in December. Sellers who are serious about selling and have had their homes on the market since spring may be anxious to accept an offer they may not have considered earlier.

3.  Mortgage Processing can go quicker during the winter months. With less volume, paperwork tends to be processed smoother and faster. Meaning your closing could happen faster than in the spring or summer time.

4. Realtors typically have more time int he winter to really navigate your housing wants and needs, meaning you get more personalized attention. 

5. You will be able to see how well the heating system is working. Most buyers don’t realize a homes heating system is sub standard until the winter after they buy. You can also get a good idea of how well the home is insulated and any other winter home concerns!

 

 

Selling in the Winter 
You know buyers in the winter are serious! There are steps you can take to brighten your home and make the showing pleasant and enjoyable for your buyers.  

1. Manage the Snow –

  • Continually shovel a path through the snow, especially if it’s still falling.
  • Footprints on freshly fallen snow will turn to ice if the temperature is low enough, so scrape the walk.
  • Sprinkle a layer of sand over the sidewalk and steps to ensure your buyers’ stable footing.
  • Remember to open a path from the street to the sidewalk so visitors aren’t forced to crawl over snowdrifts.

2. Use Natural Light – 

  • Pull up the blinds, open the shutters, push back the drapes on every window.
  • Turn on every light in the house, including appliance lights and closet lights.
  • Brighten dark rooms with few windows by placing spotlights on the floor behind furniture.
3. Heat up –
  • Pump up that thermostat. It’s better to heat the house a degree or two warmer than usual and then set the temperature at normal. This prevents the heat from kicking on when the buyer is present, because some HVAC systems are loud.
  • You want the temperature inside to be comfortable and to give the buyer more of a reason to linger, especially on a cold day.
  • Light the fireplace, but open the damper, place a grate in front of it and don’t leave it unattended for very long. You don’t want your house to catch fire!

4. Serve & Make Smells of Winter Foods at Open Houses

  • Don’t serve muffins or any other kind of food that can be popped into the mouth because you want buyers to stay for a while and notice elements they might otherwise miss.
  • Hot soups such as tortilla, potato or squash are delicious on a cold day.
  • Chili or stew is a great alternative to soup, but leave a receptacle for disposal of the paper bowls and spoons.
  • Hot apple cider or cups of cocoa make great beverage choices.
5. Provide Info about things
  • Attach printed cards to items and in rooms that provide further information the buyer might miss or might not know. You have so little time to make an impression.
  • If you have an antique chandelier in your dining room, put a card on it that discloses its age and other important details.
  • If you have removed the washer and dryer from the laundry room, attach a card to the wall describing the room.
  • If your basement stairs are steep, attach a card to the railing that cautions buyers to watch their step.
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Four Reasons Why Mortgage Rates Could Go Up (and why it matters to you)

Can you afford to lose $175/month?

Did you know that the monthly payment on a $200,000 30 year mortgage would go up by a whopping $175 per month if mortgage rates go up slightly from 3.5% to 5.0% like they were just 3 short years ago?!

 

Here are four reasons why mortgage rates could go back up, costing you at least $175/month:

 

#1 – End of the Fed’s $2 Trillion “Quantitative Easing” Programs

Here’s a chart showing how $2 trillion of government intervention drove 30 year mortgage rates down by over 2% in the last few years:

 

The Fed’s unprecedented intervention in the bond market was known as “Quantitative Easing” because the Fed increased the “quantity” of the US money supply by purchasing over $2 Trillion of mortgage bonds and US Treasuries. This enormous government intervention in the markets (known as QE1 and QE2) has consistently kept mortgage rates down below 5% during the last few years.

 

 

As unemployment lessens and the economy recovers, the Fed will stop their intervention.  In fact, they have indicated that in the future, they may even decide to SELL some of the $2 trillion in bonds that they have purchased over the past few years. This leaves us wondering, “What happens when the bond market loses its biggest buyer?” Further, “What happens when the biggest buyer becomes the biggest seller?” This undoubtedly means that interest rates are more likely to be higher than lower in this scenario.

 

#2 – Uncertainty Surrounding Fannie, Freddie, and the FHA

 

From 1996-2003, the government was steadily involved in 85-90% of mortgages.  From 2003-2008 we saw the rise of the sub-prime mortgage and the government’s involvement dropped to about 60% of mortgages.  After the mortgage crisis, the government’s involvement has risen to almost 100% of all mortgage transactions.  If you track interest rates over these same periods you can see the largest spread between interest rates (government vs non-government) was during the period with the least amount of government involvement.

 

The government’s involvement in the mortgage markets is part of the reason why mortgage rates are so low today. In fact, mortgages that don’t include any government involvement (like jumbo mortgages) carry interest rates that are 0.25% – 2% higher than mortgages that do include government involvement (like conforming and FHA mortgages).  There are many proposals on the table now to reduce the role of Fannie Mae, Freddie Mac, and the FHA in the US mortgage markets so there is the potential to see rates go higher by .25% to 2% depending on what the final outcome of the government’s involvement in the mortgage process is determined to be.

 

#3 – Over-Regulation of the Mortgage Market

The Dodd-Frank financial reform law and other regulations have resulted in tougher lending standards and higher legal costs for the mortgage industry. As you can expect, many mortgage lenders will be passing these higher costs along to the borrowers who borrow money from them.

 

For example, one of the new rules mandates that all mortgages that aren’t considered “qualified” will carry higher interest rates.  There is a lot of debate going on right now about the definition of “qualified”, but generally you can expect that most adjustable rate mortgages, interest-only mortgages, and loans that involve less than a 20% down payment will carry higher interest rates in the future than they do today.

 

#4 – Skyrocketing US Government Debt

There are two ways that the ballooning US government debt situation will drive mortgage rates higher:

 

1 – More Supply than Demand

More government debt = more supply of bonds in the market

More supply of bonds = lower bond prices

Lower bond prices = higher interest rates

 

2 – Risk of More Inflation

More government debt = higher risk of inflation

Higher risk of inflation = higher mortgage rates

 

The main question is not whether interest rates are likely to go up in the future… that answer is obvious. The main question is what can you do about it RIGHT NOW?

 

What should do with your current mortgage?

 

What are your options when it comes to buying a new house and locking in a low interest rate?

 

How can you take advantage of the clearance sale going on in the mortgage and housing market without risking your family’s financial future?

 

My clients face tough questions like these every day. That’s why we are here to help people like you make the right decisions.  If you need advice, or know someone who does, please contact us so that we can help you.

 

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