- Why is this “Credit Crisis” Affecting Mortgage Rates?

January 2008

While TV’s talking heads are screaming about a mortgage meltdown, it’s pretty clear on closer examination that most of the problems — so far — are confined to a fairly narrow segment of the market. However, there has been a real affect on Jumbo mortgage rates. In order to understand the impact, it’s useful to understand where the money comes from that institutions lend to borrowers.
Most mortgage money comes from three places: government agencies, Wall Street investors and depositors in so-called portfolio lenders.
The first and largest pool comes from the quasi-governmental agencies known as Fannie Mae and Freddie Mac. Fannie and Freddie, along with the FHA buy or guarantee close to half the mortgages originated in the United States each year. But those agencies only buy loans that are no larger than $417,000 and conform to a strict set of underwriting guidelines governing the collateral and the borrower’s ability to repay. Consequently, these loans are called Conforming loans. 

 The second big source of mortgage money comes from Wall Street, and indirectly, from individual investors like you and me, when we invest money in mutual funds, money market accounts, insurance policies or hedge funds. Those investors have a larger appetite for risk (and return) than Fannie or Freddie, and are willing to invest in securities backed by riskier mortgages. That might be a loan larger than $417,000, called a Jumbo mortgage; one made to a borrower with spotty credit, called a Sub Prime mortgage, or a loan to a credit worthy borrower that doesn’t meet traditional underwriting guidelines, called Alt/A loan.
The third source big source of mortgage money is so-called Portfolio lenders. Portfolio lenders originate mortgages one at a time, and underwrite them for the long haul, because they intend to retain them in their own portfolio until they’re paid off. 

So, back to the crunch. What’s happening today has little to do with the Conforming market. Fannie Mae and Freddie Mac are well capitalized and have very little exposure to the type of products that is giving Wall Street heartburn. The loans they sell to investors in the form of mortgage backed securities are guaranteed or insured against foreclosure and have been underwritten to stricter standards.
Likewise, smaller, traditional portfolio lenders are in good shape. While they too make a lot of Jumbo loans, they do it one loan at a time, and generally have a very good understanding of what they own. 

That leaves Wall Street, and indirectly individual investors, holding a large bag of Jumbo, Alt/A and Subprime loans. In a functioning market, those loans are packaged, or pooled, by big Wall Street firms and resold to investors in the form of mortgage-backed bonds and other securities. In the past those pools were made up of like kind loans. In other words, the borrowers of these individual loans within the pools were all of approximately the same credit profile… say 30 year fixed rate loans with credit scores above 680. Over the past few years though, that practice has changed.
The big Wall Street firms that “pool” or package these loans began to add Subprime/Alt/A loans to the mix in order to enhance the interest rate the ultimate buyer would receive. And although in general, most pools have a very small part of the total loans as Subprime/Alt/A, foreclosures on those loans within the pool have a huge effect on the final yield the ultimate buyer will get. So what has happened?
Basically, insurance companies, banks, and hedge funds have decided to not buy these loan pools until they better assess the risk associated with the loans within the pools they already own. The end result is that the big lenders supplying these individual loans have raised rates substantially in order to curb loan production. They have also toughened up on their underwriting standards in order to bring up the credit quality of their loans. Many of these large lenders currently have massive pipelines of loans that were originally slated for pooling that they can no longer readily move off their books. To use a familiar analogy, think of this situation as a clogged drain (or maybe another familiar home fixture would better fit). 

The good news is… the plumber is already here. Markets do work, and Wall Street is well on the way to re-assessing the risk associated with these loans. I am sure companies will be designing mortgage pools with only Prime A loans as well as other types of pools related to Prime A ARM and Subprime loans. There will be less mixing of products w/in the pools and the Subprime loans will carry higher rate loans underwritten to tougher standards, lower LTVs, etc...
The bad news is… this will take time. How much time remains to be seen. The press has certainly played a huge roll in vamping up the problems associated with these Sub-prime loans. Rightfully, lending practices need to be monitored and revised. Consumers need to be protected. And illegal or predatory lending needs to be discovered and stopped. Certainly there are many Americans with potential problems looming in their future, but I think it is pre-mature to say that the Sub-prime market woes will affect all mortgage borrowers. To be sure, markets are driven by “expectations” despite the actual size of the underling problems which move them. Panic is never a good thing, but it is also something that doesn’t last. Why? Because, it is rarely warranted.  

The question is “What does this mean for me and my mortgage?” Here are two examples of situations that might require a little “action” on your part. If you have an adjustable rate mortgage that is still in its “fixed” rate period, you need to know when it is going to adjust; what would the potential rate change be and how that will effect your monthly payment. If you are thinking of buying a property that will require you to get a Jumbo loan you need to look closely at the options available in the market place today. In either case we would suggest that you contact your trusted mortgage professional. Rates are still very competitive and there are still many flexible programs available to suit a variety of needs. Don’t wait until the last minute… it is much better to be proactive in this market place and arm yourself with all pertinent information relative to your situation.
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- >All the right moves: Profit in 2008

The 22 best ways to keep safe, spend smart and make your money grow in the year ahead
Wednesday, January 02, 2008

Tumbling home values. Soaring energy prices. A topsy-turvy stock market and a gazillion other financial worries, not the least of which is whether we'll spend the coming year mired in recession.
Considering all the black clouds hanging over the economy, you probably think there's no way you can really expect to prosper in 2008. It will be all you can do just to hang in there. If that is what you're thinking, we're happy to tell you that you're wrong. There will be plenty of opportunities to
make money next year - yes, even in real estate - as well as ways to insulate your finances from the most serious economic challenges ahead. Your home The real estate slump isn't going away soon, so whether you're buying, selling or staying put, deal with it.

Make your house look like a bargain
For sellers: Forget what the ugly house next door sold for last year or even what comparable homes are listed for today. Instead, use the going price of houses that have recently sold as a guide - then price your home even
lower so it looks like a great deal. (Ask your real estate agent for help with this assessment or go to homegain.com or zillow.com for guidance.) Best case: Your aggressive pricing attracts more than one bid, pitting buyers against one another and ultimately lifting the final sale price.

Pay a little to look good
For sellers: You'll pay around $150 a month for a 10-foot-by-15-foot storage unit, a piddling amount compared with the $5,000 more your house might fetch or the three months faster it might sell.
The quickest, most effective way to increase curb appeal: Apply a fresh coat of paint, says Dave Liniger, co-founder of Re/Max International, the real estate franchise.

Offer the right incentive
For sellers: Covering closing costs is a biggie because it may help a buyer who's short on cash pay for a home he otherwise couldn't afford. Or you might offer to kick in homeowners association dues or provide a home warranty covering repairs for the first year.

Lowball your offer
For buyers: If ever there was a time to drive a hard bargain, this is it. Don't be distracted by small stuff like whether the current owners will leave behind their appliances and window treatments.
Focus instead on what's really important: getting the lowest price. Do a little homework and find out what comparable houses have sold for lately. Then start the bidding at 10% to 15% below that recent sale price. Note: This strategy works best if there are several homes on the market in your area around the same price.

Look like a good risk
For buyers: You'll have an easier time getting approval from a lender if you have enough money set aside to put down at least 10% to 15% of a home's purchase price (no- or low-money-down deals have largely disappeared).You'll also need plenty of documentation to prove you can afford a home in the range you're looking at. What lenders will want to see: Your total debt payments shouldn't eat up more than 36% of your income, says Keith Gumbinger of HSH Associates.

Don't jump at a jumbo
For buyers: These days $417,000 is a magic number: If your mortgage exceeds that amount, it's
considered a jumbo, and your interest rate will be about six-tenths of a percentage point higher
than you'd pay on a standard 30-year fixed-rate loan vs. just two-tenths of a point normally.
The gap expanded last summer when the credit crunch hit, and it's likely to remain unusually wide next year. To avoid paying the extra interest, try to come up with a big enough down payment to bring your mortgage below $417,000. Or simply hold out for a less expensive house. Getting a $400,000, 30-year fixed-rate loan instead of a $425,000 jumbo will save you about $325 a month
and more than $92,000 in interest over the life of the loan.

Put down your ARM
For owners: If you have an adjustable-rate mortgage that's due to reset next year, consider refinancing into a fixed-rate mortgage now to avoid future payment shock. Similarly, if you have borrowed heavily against the equity in your home and are feeling squeezed, refinance
your home-equity loan and mortgage into one new fixed-rate loan. A $200,000 mortgage at 6.5%, plus a $100,000 home-equity loan at 8.2%, works out to monthly costs of about $2,500. Roll that entire $300,000 into a 30-year fixed-rate loan at today's rates and your payment will be $1,900 or so, a savings of about $600 a month

Know your home's future
Is a neighborhood you're interested caught up in the housing bust? How do the schools rate?
This information is a few clicks away, click here for public school reports. Whether you're thinking of moving to a new city or just want to know more about what's up in your own backyard, the Web lets you see a town from countless angles. Click here for that information

Scope out the houses
You can start your neighborhood search from miles up at Trulia.com. Type in a town and you can choose a satellite view or street map of the place. You can also choose a "Heat Map" that breaks down the city by neighborhoods and shows you how hot (red) or cold (green) each area is, based on prices, sales or popularity among Trulia users. Click on the map to see homes listed for sale in each nabe. You can also ask other users a question about the area - or just read the discussions.
Curious about the value of your home or the neighbors'? Then check out the similar Zillow.com for an estimate of every house on the block. REMEMBER IT’S AN ESTIMATE NOT MARKET VALUE Satellite maps give you a great look at roofs and backyard pools, but at Microsoft's Maps.Live.com you can often get a bird's-eye view - that is, it's at an angle, so you can see the sides of houses too. And in some neighborhoods Maps.Google.com can even give you a 360° street-level view. (It's cool and a little creepy.) Walkscore.com shows in one screen all amenities - such as coffee shops, drugstores and schools - within walking distance of an address, and scores the neighborhood for "walkability."

Check out the schools
Standard & Poor's SchoolMatters.com has all the basic data on public schools - test scores, school and district demographics - in a clean, easy-to-use interface. NOTE: YOUR LOCAL MULTIPLE LISTINGS SERVICE’S DATA WOULD BE MORE ACCURATE. To request that data click here The not-for-profit GreatSchools.net is less streamlined but does more. It has info on private schools, its own school-rating system and its own writers. Both sites also have parents'
reviews of schools, though GreatSchools seems to have more to read now. Search for local online discussion forums at NeighborhoodBlog.com Parents' groups are often the place to get the real block-byblock 4-1-1 and can be a great way to meet new people. Find groups by searching on keywords like "parents," "kids" or "SAHMs" (as in "stay-at-home moms"). You may have to send a message applying for membership to get in on the discussion. 
 

- Mortgage Rates Kept In Check

January 2008

Mortgage rates tracked by Freddie Mac in its Primary Mortgage Market Survey for the previous week mostly established new 2007 lows. The 30-year fixed-rate mortgage (FRM) lost four basis points from the previous week, averaging 6.14. This was the lowest rate since the week ended December 21. Fees and points were up from 0.4 to 0.5 point. The same week in March, 2006 the average rate was 6.37 percent. The 15-year FRM averaged 5.86 percent, also a new low for the year. The previous week it averaged 5.92 percent. Points were unchanged at 0.5. One year ago the 15-year averaged 6.0 percent. Five-year Treasury-indexed hybrid adjustable rate mortgages (ARMS) also recorded a new low for the year, averaging 5.90 percent, 3 basis points lower than the week before. Fees and points were 0.5 compared to 0.6 the previous week. This is 13 basis points lower than the 5/1 hybrid rate one year ago and the lowest the product has been since February of last year. Another new low for the year was scored by the Treasury-indexed one-year ARM which averaged 5.47 percent compared to 5.49 percent a week ago. Fees and points were unchanged at 0.6. According to Frank Nothaft, Freddie Mac vice president and chief economist, mortgages rates were down this week as volatility in stock markets elsewhere in the world led to concerns about the U.S. economy. "Uncertainties about the strength of the economy dominated the effects of other indicators, such as January's personal income growth and core inflation rate measured through the personal consumption report. Both increased at rates faster than had been expected, and potentially would have put upward pressure on interest rates. But the flight to quality due to the stock market's fall pushed bond yields down instead." "Looking ahead, as excess business inventories are worked off and the drag from residential investment diminishes, we expect real GDP growth to accelerate in the first half of 2007 to 2.6 percent and average 3 percent for the year. That considered we do not foresee significant movements in mortgage rates, with rates on 30-year fixed-rate mortgages averaging between 6.3 and 6.4 percent for the remainder of the year." Rates reported by the Mortgage Bankers Association (MBA) for the week ended March 9 were more mixed than Freddie Mac's. The average contract interest rate for a 30-year FRM decreased from 6.04 to 6.03 percent with points, including the origination fee, increasing to 1.38 from 1.27. Both the 15-year FRM and the one-year ARM increased for the week. The 15-year was up 5 basis points to 5.78 percent with points up to 1.22 from 1.24 while the one-year ARM was up from 5.79 percent to 5.86 percent with points decreasing to 0.76 from 0.8. All rate quotes are for 80 percent loan to value originations. Mortgage activity was up only slightly, increasing 2.8 percent on a seasonally adjusted basis and 3.2 percent unadjusted. However, there was a strong improvement in the level of mortgage originations since the same week in 2006 with volume increasing 19.1 percent. Refinancing as a share of overall activity increased from 46.1 to 46.2 percent and ARMs held their own, increasing to 21.9 from 21.4 percent of all mortgage applications.

- Tips for Buying a house in the Winter

Jan 04, 2008

If you've been thinking about buying a new home, winter is the time to start getting serious. Here are a few reasons to brave the cold and go on a house hunt: The winter season has fewer units on the market, and sellers tend to need to move from their property. You can use that to your advantage to get a favorable deal. Winter has fewer buyers in the market. Looking for a home in the winter can be inconvenient, and people are less likely to move.
Families also tend to be on a September to June cycle because they are unwilling to move their children to a new town in the middle of the school year. Fewer buyers means less competition. Lenders also usually have fewer loans to process and less paperwork to deal with (though this can change quickly if rates fluctuate). With lenders less hassled, you can expect a smoother process to get approved for a mortgage. But, as reported in Bank rate.com, there are exceptions to this rule, most notably in warmer parts of the country (especially Florida), ski towns, and in parts of the country where demand is so strong that it will not slacken during the winter months.

- Mortgage application volume drops 1.5%

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Applications drop as interest rate for traditional 30-year mortgage rises to 6.57%, just shy of year's high
WASHINGTON (AP) -- Mortgage application volume fell 1.5% during the week ended Aug. 8 as fixed interest rates hovered near annual highs, according to the Mortgage Bankers Association's weekly application survey.

The MBA's application index fell to 425.9 from 432.6 a week earlier, according to the trade group's survey.  Application volume declined as fixed interest rates rose. The average rate for traditional, 30-year fixed-rate mortgages rose to 6.57% during the week ended Aug. 8, just shy of the 2008 high of 6.59% set last month.
The average rate for 15-year fixed-rate mortgages, which are often a popular choice for refinancing a home, rose to 6.17% from 6.02%. It was the highest average interest rate for 15-year fixed-rate mortgages this year.
Refinance application volume fell 4.2 % during the week, while purchase volume was flat. Refinance applications accounted for 35.2% of all applications during the week.
The index peaked at 1,856.7 during the week ending May 30, 2003, at the height of the housing boom.
An index value of 100 is equal to the application volume on March 16, 1990, the first week the MBA tracked application volume. A reading of 425.9 means mortgage application activity is 4.259 times higher than it was when the MBA began tracking the data.
The survey provides a snapshot of mortgage lending activity among mortgage bankers, commercial banks and thrifts. It covers about 50% of all residential retail mortgage originations each week.

The average rate for one-year adjustable-rate mortgages declined slightly to 7.15% from 7.17%.