Monday afternoon, the U.S. House of Representatives defeated the $700 billion “Bailout Bill”, surprising Wall Street and the world.
The Dow Jones Industrial Average responded by falling 777.68 points — its largest one-day loss in history and, this morning, every newspaper in America is covering the story as front page news.
Lost in the coverage, however, is how the “No” vote created a terrific opportunity for home buyers and mortgage rate shoppers.
Yesterday, as money fled the tanking stock market, most of it ended up getting parked in the relative safety of government-backed bonds which includes, of course, the mortgage bonds. This rising demand for mortgage bonds caused rates to fall, improving home affordability.
To investors, stock markets represent risk and bond markets represent safety. So, when market sentiment changes, as it did yesterday, Wall Street players often shift their dollars from one forum to the other. This is why yesterday’s stock sell-off was good news for mortgage rate shoppers — the added demand for “safe” securities drove down rates.
Conforming mortgage rates were lower by about an eighth-percent Monday.
Now, today, mortgage rates are opening flat, suggesting that markets are in a Wait-and-See Mode. Wall Streets knows that the defeated bill will re-emerge later this week and, when it does, expect traders to respond accordingly.
If the new-look bill is viewed as favorable to U.S. businesses without harming taxpayers, expect stock markets to improve and mortgage rates to rise. If the bill fails to accomplish that goal, however, expect mortgage rates to improve.
While home electronics advance, the basic extension cord has been slow to catch up.
This has created a size mismatch because today’s devices tend to carry large size plugs, but the standard 6-outlet power strip is only meant for “skinny” ones.
Pictured at right: the solution.
Matching form and function, the ezSpace UFO provides 6 outlets in a recessed, circular pattern, eliminating the need for multiple power strips in a home or workplace environment.
In additon, the UFO’s On/Off switch is located on its bottom instead of on top. This makes it far less prone to accidental shut-offs than a traditional power strip device.
The device retails for about $30.
Thursday, federal regulators seized mortgage lender Washington Mutual. The Seattle-based thrift became the third “big name” lender to close its doors since July, joining IndyMac and Lehman Brothers.
In 2007, these 3 lenders represented about 10 percent of the mortgage market and their subsequent failures are confusing American homeowners.
The most prevalent question:
If my mortgage lender fails, are my payments still due?
And the answer is an unequivocal “yes”. If a mortgage lender is seized, goes bankrupt, or is otherwise closed, it doesn’t change the terms of the bank’s mortgages whatsoever — just maybe the mailing address.
This is because a mortgage (and its corresponding note) is a legal contract between the lender and the lendee, signed on the date of closing. It is binding and cannot be altered by either party. The only way to “end” the contract is to pay the loan in full.
This can happen in one of 3 ways:
- The home is sold and the mortgage is repaid
- The home is refinanced and the mortgage is repaid
- The home loan is paid down to $0 balance by the homeowners
So, when a mortgage company fails, its loans are paid-off in full and, therefore, all of the failed company’s mortgage contracts remain in effect. Payments are still due.
When this happens, failed lenders will usually transfer their mortgage assets to a new lender’s servicing department. This means that homeowners will write the same check for the same mortgage but to a different company.
To reduce confusion around transactions like this, the government puts two safeguards in place. First, it requires the former lender to send a 15-day advance notice of the change to the homeowner. And second, it requires the new lender to do the same.
In situations like this, the onus is ultimately on the homeowner to open and read his mail, and make changes accordingly. It’s especially important for people who pay their bills online as opposed by paying them manually; you likely won’t get notified if you’re sending payments to the wrong place.
The August Existing Home Sales report was released Wednesday, showing a decline in the number of homes sold nationwide, and a reduction in the median sales price.
Not surprisingly, the media singled these two statistics out, playing them as a big negative.
The decline in sales wasn’t good, but it wasn’t terrible, either — sales were actually up in half of the regions around the country.
And, citing “median sales price” is somewhat pointless because median sales price only measures the price point at which half the homes sold for more, and half sold for less.
No, it’s the third statistic in the report that deserves as much — if not more — attention that the previous two. According to yesterday’s press release, the national home supply is decreasing.
This is terrific news for home sellers.
In its report, the National Association of REALTORS said that the nation’s existing supply of homes for sale fell by 7 percent in August.
At the current pace of sales, that represents a 10.4-month supply, down from 10.9 months in July. With a reduced supply of homes for sale, all things equal, home prices would increase.
This is Supply and Demand in its most basic form.
Economists and experts have long noted that reducing the housing supply is one of the key elements to a sustainable housing recovery and we’ve seen several indications that this is happening, including builders not building as much.
Longer-term, this is good news for home sellers because a reduction in housing supply tends to lead to higher prices.
Earlier this year — and for the first time in its history — the FHA changed its funding fees and mortgage insurance structure.
Effective October 1, 2008, it’s repealing those changes.
Partly to keep FHA home loans affordable, and partly to comply with new laws, the FHA is rolling back its up-front fees and ongoing mortgage insurance requirements and replacing them with new ones.
The new up-front FHA fees are as follows:
- 1.750% : All purchase and “standard” refinances
- 1.500% : All “streamline” refinances
- 3.000% : All FHASecure programs for delinquent mortgagors
These fees are paid as a one-time cost at closing, and are calculated by multiplying the loan size by the fee. A $200,000 FHA purchase, for example, now carries a $3,500 one-time charge.
Ongoing mortgage insurance requirements have changed, too. These changes are based on the loan type and the amount of equity in the home.
- 15-year fixed with 90% borrowed or less: 0.000% annually
- 15-year fixed with more than 90% borrowed: 0.250% annually
- 30-year fixed with 95% borrowed or less: 0.500% annually
- 30-year fixed with more than 95% borrowed: 0.550% annually
Mortgage insurance premiums are calculated by multiplying the initial loan size by the annual premium. The same $200,000 FHA purchase outlined above, using a 95% 30-year fixed mortgage, would require a monthly mortgage payment add-on of $83.33 until the loan is paid in full.
FHA-insured mortgages have grown in popularity this year because, while the guidelines of other mortgage products have tightened, FHA guidelines have remained relatively loose. FHA allows 3.500 percent downpayments on purchases, for example, and allows “cash out” refinances to 95 percent.
Fannie Mae and Freddie Mac do not.
Crude oil prices jumped $25 at one point Monday, ending the day up by 16 percent.
This is an unwelcome development for home buyers and homeowners alike because higher oil prices means higher commuting costs, putting renewed pressure on household budgets.
But the budgetary strains are not isolated to just oil prices. Mortgage rates are spiking, too.
Yesterday, conforming mortgage rates rose by a quarter-percent which — when added to the recent run-up — brings the 5-day, mortgage rate increase to 0.750 percent.
A three-quarter percent increase equates to $576 extra per $100,000 borrowed per year.
When functioning properly, gutters can extend the life of a home. By directing water away from the physical structure, gutters protect a home’s foundation, its siding, and its landscaping.
The key to reliable gutter performance is simple — keep them clean. Twice annually, experts recommend a thorough gutter cleaning and the project can be a do-it-yourselfer, if you’re so inclined.
The basic toolset is likely already on hand:
- A ladder
- A scoop
- A trash bag
- A garden hose
- Protective gear
Watch the video above for a quick tutorial, or if DIY is not your thing, reach out to me anytime. I’d be happy to refer you to a reliable professional in the neighborhood.
Getting a great, low mortgage rate is often a combination of luck and preparation.
Consider what happened in conforming mortgages this week:
- Monday, mortgage rates plunged to their lowest levels of the year
- Tuesday, they bounced back in full
- Wednesday, they clicked higher by a eighth-percent
- Thursday, they clicked higher by another eighth-percent
And so, here we on are Friday, four days after the best rates of the year, and the mortgage market barely resembles itself. Despite what the papers tell you, mortgage rates are not low anymore.
That’s the luck element — you can’t plan for rates moving up and down.
But, if you missed Monday’s plunge, and don’t want to miss the next one, all you have to do is get prepared. Then, you’re waiting for luck when it happens.
There are 4 basic steps to prepare for low rates and the key is to follow them before rates plunge, not during. That way, you’re ready to pounce on low rates at the moment they present themselves.
The first step is to contact your loan officer.
If you don’t have a loan officer, or your loan officer is no longer in the business, ask a friend for a referral. Do not call the 800-number on your mortgage statement — you’ll almost always get a better “offer” from a live person than from a call center representative.
Next, give your loan officer a complete mortgage application, including a “credit pull”. Be honest and accurate and don’t worry about the credit check harming your score — the bureaus protect it for a period of 30 days.
Then, ask your loan officer what supporting documentation will be required to approve your eventual home loan. Whatever it is, gather it and send it in — either by fax or email.
And lastly, be ready to act when your loan officer calls with the good news. If rates have dipped to lower-than-normal levels, it likely won’t last long.
This preparation process is very similar to what home buyers do before making an offer on a home. Getting ready for a refinance is like getting pre-approved, but instead of waiting to pick out a home, it’s waiting to pick out a rate.
So, to summarize:
- Contact your loan officer
- Give a complete application
- Gather and submit supporting documentation
- Be ready to act
Mortgage rates don’t plunge often, but when they do, it’s usually short-lived. If you’re prepared for when it happens, you can lock in the best mortgage rate available at the best possible time.
It will be your lucky day and you will have been ready for it.
In August, home builders broke ground on the fewest number of homes since January 1991.
It was the 16th straight month in which Housing Starts declined.
But, although the press labels these statistics indicative of a recession, home sellers nationwide quietly applaud them.
With fewer new homes coming on the market, home sellers are finding that there’s less competition for buyers, helping them to command higher prices for their homes.
It’s Supply and Demand in its most basic form.
But that’s not all that home buyers have to worry about. The most recent Existing Home Sales report showed an increase in sales nationwide, plus a reduction in the number of single-family homes for sale.
Again, Supply and Demand. Good for sellers, bad for buyers.
However, we should keep in mind that real estate is local. What we see in national and regional trends are not as important as what’s happening in your town, your neighborhood, and your street. But, if we learn one thing from the chart above, it’s this: builders are rational.
If homes won’t sell, builders will stop building them. And, sooner or later, the market — and home prices — will catch up.
For the third consecutive meeting, the Federal Open Market Committee left the Fed Funds Rate unchanged at 2.000 percent.
Of interest to mortgage rate shoppers, the FOMC led its press release with comments about the health of the financial and labor markets, calling them “strained” and “weakened”, respectively. The relative weakness in both of these areas has contributed to low mortgage rates of late.
The FOMC also noted in its release that, although economic growth has slowed this year, the historically-low 2.000% Fed Funds Rate should foster “moderate economic growth” in the future.
In the wake of the announcement, Wall Street is rallying. Investors like what the Fed had to say and this is attracting money to the stock market at the expense of bonds.
Mortgage rates have given up all of Monday’s gains, and then some.
Parsing the Fed Statement
The Wall Street Journal Online
September 16, 2008