As I write this email there is a good chance the 30 year fixed rates will change again, yesterday morning they were at 6.25; by the end of the day they were at 6.00. For the last 45 days or so – since all of the turmoil within the financial markets fixed rates have been extremely volatile, changing as much as .375% in a single day. As volatile as the stock market and just as eratic, wiping out all presumptions of the correlation between stock prices and mortgage rates or Fed Rate changes and mortgage rates. And Adjustable Rate Mortgages are non–existent (actually they exist – just not economically beneficial), the 3 year and 5 year ARMS are priced higher than the 30 year fixed rates. WHY?
To borrow a phrase from a mentor of mine, Brian Sacks, it’s the ‘Elephant’ in the room…. What is the ‘Elephant’ in the room? The ‘Elephant’ - is the economy, and more specifically, the dreaded “R” word – Recession. I don’t need to tell you – you know on a national basis - foreclosures are at an all time high, some of the largest banks, wall street giants, and insurance companies are either being sold, taken over, or bailed out by the government, people are losing their jobs and unemployment is climbing. Wall Street is reeling and investor confidence is shaken. It is the topic of every newscast – TV, Radio, Internet; every magazine and newspaper. You are talking about, your clients are talking about, your friends, families and neighbors. It is unavoidable. The difference is our attitudes about it. We can either sit and whine or moan – or we can get out and try to make the best of what we have. Set goals and pursue those goals. As Zig Ziglar (the grandfather of all motivational speakers) says – “Motivation – it is like a bath – you have to have it every day!”
First you need to know what got us here – then we all need to figure our own way out of it. Below is my understanding of how we got where we are. Then, it’s going to take all of us, working together, to get us out of it. It will mean we will all have to get involved and to make sure it doesn’t happen again.
Approximately 71% of all educated Americans were against the $700 Billion Bailout – Probably all 100% of you, who are reading this. Why – Because it is human nature not to Buy into or Believe what we do not understand. I am one of them. I really get upset, as I am sure most of you are – to think – we the taxpayers are going to have pay for the greed and abuse of the financial system that took place. How did it happen? It did not happen overnight – it took years and years –
First, since the early 80’s the leaders of our Government (Every President – Every Congress) has been pushing to develop methods to enable more Americans to achieve the American Dream – Homeownership. A noble cause we all believe in. All through the 80’s and early 90’s underwriting guidelines for mortgage loans did not waiver much and for the most part the real estate market had healthy growth. In 1998 leaders began the process of loosening the regulations with FannieMae and FreddieMac to develop more loan programs to help more moderate income buyers obtain the dream of homeownership. But then came the historically low, low rates in the early 2000’s. Pressure became greater to get more people into more homes with these low rates, and the real estate market began to really heat up. Now comes 2003 with Homes appreciating in the heavily populated, California, Florida, Georgia, Nevada, and Arizona markets in double digit numbers – Wall street got involved (greed and big numbers) and created mortgage loan programs with very lenient guidelines but at a higher interest rate due to the credit risk. To offset the higher payment rate they came up with the option ARM. A sub-prime mortgage product that allowed for interest rates in 6-8% range to start on a 3 year or 5 year ARM – but the borrower had the option of only paying 2% interest only on annual basis and you could get 100% financing on this product. The problem is there is negative amortization (unpaid interest is added to the principle amount of the loan) of at least 4% per year of the mortgaged amount – meaning as long as there was double digit appreciation the math works – and it did for 3 years – then the ARMS rates change to 10 – 14 %. There was even a 100% Investor loan in this mix with a minimum credit score of only 580 to be approved (of course in California, Nevada and Florida only) with this same loan product. Get the picture. To better understand look at the info below.
Retail banks, Mortgage Brokers, Mortgage Bankers make loans to Borrowers – These loans are sold to the Primary Banks (Citi, Countrywide, Wells Fargo, Bank of America, etc.) The Primary Banks categorize the loans by product type and sell them according to product type:
1. A Paper, Conventional, Conforming loans - sell these to FNMA and Freddie Mac who turn around and sell them as Mortgage Back Securities
2. Government loans – FHA –VA, RD – the Primary Banks sell these to Ginnie Mae – who also sells them as Mortgage Back Securities
3. Jumbo loans (over $417,000), Alt – A (A paper, good credit - but doesn’t meet conforming loan guidelines), and Subprime loans (B, C, and D paper – bad credit) – sell these to Wall Street (Lehman Bros, Bear Stearns, etc) who sells them as mortgage back securities also, but with higher returns because of the interest rate are able to get demand in them from the regulated industries looking to earn greater profits (Fannie, Freddie, insurance companies, pension funds etc.)
Wall Street created the products to meet the “DEMAND” and turn subprime loans into AAA rated bonds that are then bought by guess who – Fannie, Freddie, the larger banks, pension funds, international pension funds (Icelandic Teachers fund, etc.). What they did – they packaged these securities where the assets were the promissory notes of these crazy mortgage loans – and sold them in 100 million dollar packages – Their theory was that only 1 out of every 5 loans had to perform as promised to meet the guarantee of a AAA bond rating (here is the lack of government oversight) and could be sold to regulated industries (National Banks, Pension Funds, FNMA – therefore earning premium commissions and fees. Another 1 in 5 to perform to meet the BBB bond rating, And lastly, the other 60% to perform to meet their guarantees to the other Mortgage Backed Security (Bonds) Buyers. We then have an implosion – the bonds don’t perform as promised – and it shrieks all the way back to the AAA bond buyers, FNMA, Freddie, Insurance Companies and big banks who then have huge losses.
What went wrong? Home prices moderated, losses built up, confidence in the market evaporated and the value of the Mortgage backed securities plummeted. They were selling paper on the sole premise that the real estate market in those highly appreciating states would continue to maintain that high rate of appreciation. – So they all crash and burn and credit becomes tight across the board.
Where do we go from here? Slow and steady – We will get through this –here in South Louisiana we are lucky – we have job growth – we have healthy real estate markets overall, and we have the readily available mortgage loan products for the qualified purchaser/homeowner.
What are rates going to do? That’s the Million Dollar question – Rates fluctuate with economic data – and Economic Data comes in 2 Flavors – Economic Growth (don’t have any right now – in a recession – will help keep rates low) and Inflation (not much now either). A slowing economy and low inflation go hand in hand and help put a downward pressure on long term fixed rates. The factor most influencing rates now is not either one – not the economy nor fear of inflation – it’s the unknown – the uncertainty and lack of confidence the investors have in buying the mortgage backed securities and the available supply of money to invest to buy the mortgage backed securities. The Government is having to borrow huge sums to cover the over $1 Trillion now in all of the bailouts over the last 4 months – therefore with the governments additional demand for investment dollars puts pressure for higher rates. Hopefully, the lack of inflationary pressures and the slowing economy offsetting the pressure from the supply demand will keep the rates pretty much in check. They will however, be extremely volatile within a fairly tight range as we have seen these last 45 days. As supply, confidence, and confidence in the markets change – so too will interest rates. I predict that rates will jump between 5.50% and 6.50% for the next 30 to 60 days.
Surrounded by all this negativity, your prospects and clients can’t help but be affected. It’s human nature to react with caution and cut back on spending … or at least be more careful. No matter how hard you try, unless you’re hiding under a rock, you can’t escape the ‘Elephant’ in the room. So what do you do about it? The correct strategy for everyone would be – if you are in the market to buy or refinance – do it – AND do it now. Pick a rate you are comfortable with and lock it – even if you got 6.5% - historically that is a tremendous rate – then if rates drop during the processing of the loan – renegotiate a new lock at the lower rate – many lenders are allowing that today in our current environment. I do it with every borrower I have. If the lender I lock with does not allow for a renegotiation – then I just move the borrower and file to a whole new lender and relock at the lower rate. It is a win, win, win. This is the only way to insure you are getting the best and appropriate rate for your credit risk. And, you can’t lock anything unless you have a property address. Also – don’t believe what you read in the newspapers!!!
It’s a great time to buy or refinance for qualified borrowers!!!
Mike Bienvenu
Active Mortgage LLC
504-297-4668
mbienvenu@activemtg.com
http://www.activemtg.com/
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