Forecasting What May Be Ahead for Home Loan Rates

Fairfax, VA – The good news–despite what the Mayan calendar may say–is that the world probably won’t be coming to an end in 2012. But like 2011, this coming year may bring some significant challenges here in the US and around the world. Read on to learn more about what could be ahead for home loan rates.

First, let’s take a minute to recap 2011. While home loan rates finished the year at historically low levels, the housing market did not see a major improvement in the second half of the year as some experts expected. The labor market did make some modest improvements, but it is still persistently weak and this is one area of the economy in particular that we need to see consistent improvement in to help our long-term economic outlook.

Also weighing on consumer confidence and thus the economy in 2011 was the first downgrade of US Debt in history, thanks in part to our very divisive government body. Finally, the worsening and spreading debt crisis in Europe capped a year filled with financial and political uncertainty. The situation in Europe is the perfect place to begin a 2012 outlook.

Eurozone Debt Crisis
What may happen with the US economy and home loan rates in 2012–not to mention with inflation, the housing market, the job market, and even the Presidential election–may be dramatically influenced by how the Eurozone handles their debt crisis. In the simplest of terms, the issue is that like much of the developed economies around the world, Europe has way too much debt. And a lot of this debt sits on the books of the banking sector throughout the Eurozone.

In good economic times, banks could potentially “grow” their way out of their recapitalization problem by doing a lot of business and writing a bunch of loans. But that is not likely to happen with the Eurozone slipping into a recession in the first half of 2012.

Ultimately, Europe needs to provide a large financial backstop for their banks and sovereign debt in order to fix their problems longer-term. And this is something that Germany, who holds the cards in this negotiation, strongly opposes. Germany prefers to have each country shore up their own individual finances, act responsibly, and pay down their debt. Yet, Greece, Italy and other highly indebted countries have struggled to invoke tough austerity measures that would help them do so.

The situation in Europe is definitely a wild card headed into 2012. The bottom line is that as long as the uncertainty continues, the US Dollar and US Bonds should benefit, as investors will see our Bonds (including Mortgage Bonds, upon which home loan rates are based) as a safe haven for their money. This could help keep our home loan rates relatively low in 2012.

Inflation
One factor that we can’t ignore when it comes to home loan rates is inflation. Why? Inflation is the arch enemy of Bonds and home loan rates, because if inflation rises, investors in Bonds demand a higher yield to offset the lost buying power inflation imposes on a fixed payment. And as home loan rates are tied to Mortgage Bonds, this would mean home loan rates move higher. That’s why sometimes even hints or whispers that inflation is on the rise causes Bonds and home loan rates to worsen.

So what’s ahead for inflation in 2012? In the Fed’s Policy Statement from the December 13, 2011 meeting of the Federal Open Market Committee (FOMC), the Fed stated that inflation is moderating…which would be good news for home loan rates. However, it’s important to note that core consumer level inflation actually inched higher in 2011.

Last year, consumer inflation and the expectation of inflation rose as the Fed embarked on a second round of Quantitative Easing (QE2) in the fall of 2010, whereby they bought Mortgage Bonds to help boost the economy and the housing market. If inflation remains at current levels or pulls back a little, the Fed may just do another round of QE3 in the spring. Also paving the way for another round of QE is the change of guard at the Fed. Several hawkish (i.e., tough on inflation) voting members are being replaced by more dovish (i.e., softer on inflation) voting members in 2012.

The bottom line is that if the Fed does another round of QE, this could cause inflation to rise. And if inflation does rise in 2012, it could have a negative impact on home loan rates. However, if the uncertainty out of Europe continues to lead to a safe haven trade in our Bond markets–and remember, this helps Mortgage Bonds and therefore home loan rates–this could essentially balance out the negative impact inflation usually has on Bonds and home loan rates. Only time will tell whether inflation or the events in Europe have a bigger impact on the markets and home loan rates.

The Big Picture
In many ways, 2012 may feel a lot like 2011. Inflation and events in Europe will continue to play a big part in the direction home loan rates move in 2012. What’s more, history has shown that Bonds move higher (which means home loan rates move lower) in anticipation of QE, but then selloff once the official announcement is made…think “buy on the rumor and sell on the news.”

If that does happen, the first half of 2012 could be an especially great time to purchase or refinance a home. But even if the Fed does not move forward with QE3, we begin 2012 with home loan rates near historic lows, which already makes this year a great time to purchase or refinance a home. If you have any questions about how you can benefit from this situation, give me a call at
703-830-9808 or email me at jeff@lendingsolutions.net

Fairfax, VA – FHA lenders had reason for cheer and mirth at the end of last week. “In an effort to continue stabilizing home values and improve conditions in communities experiencing high foreclosure activity, Acting FHA Commissioner Carol Galante will extend FHA’s temporary waiver of the anti-flipping regulations.” With certain exceptions, FHA regulations prohibit insuring a mortgage on a home owned by the seller for less than 90 days, but this rule is waived through December 31, 2012, unless otherwise extended or withdrawn by FHA.  “All other terms of the existing Waiver will remain the same.  The Waiver contains strict conditions and guidelines to prevent the predatory practice of property flipping, in which properties are quickly resold at inflated prices to unsuspecting borrowers.  The Waiver continues to be limited to sales meeting the following conditions: All transactions must be arms-length, with no identity of interest between the buyer and seller or other parties participating in the sales transaction. In cases in which the sales price of the property is 20 percent or more above the seller’s acquisition cost, the Waiver will only apply if the lender meets specific conditions and documents the justification for the increase in value. The Waiver is limited to forward mortgages, and does not apply to the Home Equity Conversion Mortgage (HECM) for purchase program.

Fairfax, VA – When was the last government shutdown? 1995 was the year. What happened? It was very painful to get through, but no one panicked. And we shouldn’t panic this time. I can assure you 1st Commonwealth Bank of Virginia has prepared all of the loans in our pipeline and we preparing for a worst case scenario, so the disruption will be minimal. If a shutdown would occur, these would be the top six areas that can affect us during a government shutdown:  

FHA Case Numbers: For each FHA loan, we are required to order a FHA case number.
This number is generated before an appraisal can even be ordered. With a shutdown, we may not be able to order case numbers. Because of this, it is critical to let us know if there is a contract executed on any loan, so that our office can go ahead and order a case number without risking the loan being on hold during a shutdown. Note: with the new FHA guidelines, a contract must be executed before a case number can be ordered.

(The ability to close FHA loans is questionable, depending if HUD keeps its website running to obtain FHA case numbers and CAIVRS (During the November 1995 shutdown, case numbers could not be obtained, but this was prior to the internet and was a manual process). The shutdown in 1995 mainly caused a delay rather than a drop in FHA loan origination, but if lenders decide to stop accepting FHA applications, it could be a problem. I think we will see delays but not a complete shutdown of the FHA.)
 
4506 IRS Transcripts: Each loan requires the verification of at least one Federal tax return by the IRS to verify the financial numbers that each customer presents us on their tax returns. During a shutdown, this process would be delayed as the IRS wouldn’t be at work to verify the transcripts. (This might be a minimal delay, since the internet / phone fax is used to order tax transcripts.)

Verifying Employment (VOE) of a Government Employee: We are required to verify the employment of each customer. If the customer is a federal government employee, we might not be unable to verify his or her employment during a shutdown. (Again some VOE’s are ordered via the internet, we are not sure if there would be a delay in receiving VOE’s)

FEMA: Homes in a Flood Zone: Homes that are determined to be in a flood zone would not be able to close as flood insurance could not be obtained.

USDA: During a shutdown, the USDA office would be closed because they have government underwriters that insure behind the lender.  With a shutdown, we would see delays with all USDA loans.

VA: Like the FHA, the disruption is possible — but not absolute — during a shutdown. This would all depend on if they continued to allow their website to function. A disruption would cause delays in VA appraisals and the issuing of certificates of eligibility.  If the website was closed during a shutdown, we would see delays in all VA loans.

Fairfax, VA – When the property in question is an FHA flip. Seller has been on title for less than 90 days.

If the sales price is 20% or more above seller’s acquisition cost and the increase in value is due to improvements/renovation to the property: 

1. The appraiser is required to verify the repairs or work to the property in order to substantiate the increase in value.
 
2. The seller must supply a list of improvements made to the property and the appraiser adds the list to the appraisal along with comments to justify the increase.

3. Before and after pictures are welcome.

4. Although not required on FHA flips, most lenders will automatically order a second appraisal to help justify the value.

If the appraiser cannot warrant that legitimate work was done to the property to substantiate the increase in value:

1. Then a second appraisal will be required.
  
2. This part could cause issues: The lower of the two appraisals will be used for the appraised value.

3.  A second appraisal will be required.

If the increase in value is not due to any significant improvements:

1. The appraiser will be required to provide explanations for the increase in
property value.

2. The appraiser must provide sales comparables to support that value increase since the prior title transfer.

3. OR, if the appraiser cannot justify the increase in value, a second appraisal will be required.

4. The lower of the two appraisal values will be used for the appraised value.

Fairfax, VA – The start of summer is nearly here, which means things like baseball, hotdogs, and apple pie are on our minds. But that’s not all the arrival of summer means: 2011 is almost halfway over. That makes now the perfect time of year to make sure your home loan is working for you.

Here are four questions you should ask yourself about your mortgage…before the temperatures start turning colder again.

Question 1: How does my interest rate compare to what’s available today?

The economic realities of the past few years have taught people some valuable lessons. One of which is: It’s not what you make, it’s what you keep, that counts.

Think of it this way: If you discovered that someone was stealing from you, how quickly would you act to stop them from doing it again? Would you act today, in a week, a month, or not at all? The odds are you would act sooner rather than later.

So here’s a question for you to consider. Is your current loan stealing money from you? Could you benefit from refinancing and lowering your interest rate and/or monthly payments on your home loan? Let’s look at some numbers: On a $300,000 mortgage, decreasing your interest one percentage point saves you $3,000 in interest a year, or $250 a month. That’s right, $250 a month!

Today, many major corporations with millions, and in some cases billions, of dollars are taking advantage of these low rates. Shouldn’t you be, too? Perhaps this is one of those times when following the herd isn’t such a bad idea.

Question 2: Do I have the right loan for my personal situation?

Are you one of those people who is planning to stay in your home for the rest of your life? Have you packed and unpacked dozens of boxes, hoping to never hear the whisk of packing tape again? Or, are you excited about downsizing in a few years, once your kids head off to college? Or maybe you’re considering relocating for a career opportunity?

Whatever your situation, the key point to remember is that the length of time you are planning to stay in your home is a big factor in determining whether you have the right loan. For example, if you know you are planning to move in five years, a seven-year adjustable rate mortgage may be a great option for you since it typically offers lower rates than a 30 year fixed loan and since you plan to move before the rate adjusts at the seven-year mark.

Pay attention and be aware as situations arise in your life. They may just help you save money in both the short and long-term.

Question 3: Is my mortgage well integrated into my financial plan?

Before you get excited that you have a low mortgage rate or owe very little to the bank on your mortgage, ask yourself the following questions:
Do I maximize contributions to my retirement plan at work?
Do I carry balances on high interest non-tax-deductible consumer debt?
Do I have a sufficient liquid rainy day fund established?
Remember: Your mortgage is just one element of your financial plan. And while securing a low rate or owing little on your mortgage are great achievements, neither will make you financially secure if you don’t also have a plan in place for retirement or have liquid cash on hand to cover an emergency. And, if you’re making large credit card payments every month–paying more in the long-term in interest on these payments than if you were able to use some of your equity to pay off your debt–than your mortgage is standing on its own, instead of helping you increase your overall worth.

Question 4: Should I pre-pay my mortgage?

Would you rather be house rich and cash poor? Or house poor and cash rich in this current economic environment? Here’s some information to consider.

Home equity accumulates in four ways: the money committed in the original down-payment; any appreciation in the local housing market over time; physical improvements or renovations; and, of course, principal payments on the mortgage itself. While seemingly desirable on its face, this accumulation of wealth in the home has three consequences that you should keep in mind.

First, the cash in your home is “buried.” Not only is it unavailable in the event of a family emergency, it is vulnerable to loss due to periodic downturns in housing values, fire, or natural disasters such as hurricanes (insurance, where available, may not cover the full market value of your home). Perhaps more critical, cash trapped in property is earning zero interest, year after year. No prudent consumer would put money into a savings account or investment plan that yields no rate of return, but many homeowners do exactly that without a second thought when it comes to their mortgage.

The Bottom Line

Everyone’s situation is different and the only right answer is the one that is right for your situation. If you’d like to see how you can make your mortgage work better for you, contact me at 703-830-9808

Fairfax, Virginia: Last month, the world watched in horror as another tsunami brought immense devastation, this time to Japan. In light of the tragic earthquake and subsequent tsunami, I wanted to discuss a topic that’s important to all homeowners: homeowners insurance.

Let’s start with some important questions:

• Do you know what a typical homeowner’s insurance policy covers?
• If you’re currently a homeowner, do you know what your policy does, or more importantly, does not cover?
• Can you afford a higher deductible?

A study released by the National Association of Insurance Commissioners pointed out that typical  Fairfax Virginia property and liability policies do not cover home damage from floods, earthquakes, water line breaks, termites, mold, and several other perils, large and small.

Hurricane Katrina taught us hard lessons about home insurance. One unbelievable story was the loss of home equity experienced by Senator Trent Lott. The Senator’s long time insurance company did not cover his home after it was completely destroyed by Katrina.

The reason?

With hurricane insurance you typically have coverage from high winds, but not water damage. The water surge brought onshore by Katrina is what destroyed his home.

Homeowners need to be properly protected. Plan for the worst, hope for the best is prudent advice here. Mortgages and home equity are a big part of every homeowner’s financial plan and proactive planning is essential!

Going with a higher deductible on your Fairfax, Virginia home increases your out of pocket expense, but it can save you money in the long run through lower yearly permiums.  Insurance companies track claims against a home AND the home owner. Some companies might not renew a policy if too many claims are filed over a certain period of time. Check your budget and if possible increase your deductible and lower your yearly premium.

If you want to discuss your personal situation, please contact me. Don’t wait until after a tragedy happens to learn exactly what type of coverage you have. Then, it may be too late to protect yourself, your home, and your financial future.

FHA Refinance Changes

Fairfax, Virginia: With Mortgagee Letter 11-11, FHA announces changes to refinance transactions. This ML provides guidance on the changes as well as clarification on existing refinance guides and it will be worthwhile to read this ML in its entirety as a refresher.

Here are the 8 things you need to know about these clarifications and changes:

1. Borrower must be current on their mortgage for the month of closing AND the month prior to closing (The payment due the month of closing CAN be included in the payoff).

2. Second liens must be subordinated to the new FHA first in their entirety.

3. For all case numbers on investment property refinances assigned on or after April 15^th, 2011, the borrower must have occupied the subject property for the last 12 months to qualify for maximum streamline financing; if less than 12 months, a full credit-qualifying qualifying regular refinance is required with a maximum LTV of 85%.

4. Effective no later than April 15^th, 2011, the following net tangible benefit scenarios must exist on all streamline refinances in Fairfax, Virginia, Vienna, Virginia and the surrounding northern Virginia area.  A. The total of the new P&I and MI portion of the payment must decrease by at least 5% OR B. Refinancing from an ARM to a fixed product (See chart in ML).

5. Effective no later than April 15^th, 2011, lenders may now use the short Uniform Residential Loan Application (URLA) (standard loan application) for non-credit qualifying streamline refinances ONLY.

6. Effective no later than April 15^th, 2011, lenders no longer have to certify (verify) employment and income on streamline refinances.

7. TOTAL Scorecard (FHA underwriting system) must not be used for streamline refinances

8. Borrowers or Lenders CANNOT add closing costs, discount points, prepaids or other costs to the loan balance on non-credit-qualifying streamline refinances.  Lenders CAN add closing costs and prepaids (not discount points) ONLY through a full-credit-qualifying streamline WITH an appraisal. In other words, if you want to roll in closing costs, you must provide all income and credit documents to your loan officer.

Fairfax, Virginia: Mortgage Rates Return To April 2010 Levels Mortgage rates are surging.

Over the last week or two, interest rates on 30-year fixed mortgages have increased roughly a .25 percent. This is according to Freddie Mac’s weekly Primary Mortgage Market Survey.  It is the largest one week jump in recent history.  The national rate for a 30-year fixed rate mortgage now averages 5.05%.  Compare this to last November when the average rate was in the low 4 percent range.    Rates are headed upward, over the last tw weeks rates have steadily increased.

Google doesn’t give up on much. But it did with this product.

http://www.inman.com/news/2011/01/26/google-drops-real-estate-listings

Interest Rate Update – January 28, 2011

Closing within 5-7 days: LOCK.
Closing within 7-15 days: FLOAT, BUT LOCK LOANS THAT ARE CRITICAL; STILL BEARISH OUTLOOK.
Closing within 15-30 days: FLOAT WITH CAUTION.
Closing within 30+ days: FLOAT WITH CAUTION.
(I realize the advice is redundant, but rates are static so advice doesn’t change)

Fairfax, Virginia: Two very key economic releases at 8:30 this morning. Q4 GDP Gross Domestic Product was expected to be up to 3.6% from +2.6% growth in Q3 2010, the advance report showed growth at 3.2%; the miss occasioned by the biggest drag from inventories in two decades.

Q4 employment cost index was at +0.4% as expected. Those were the headlines but the details revealed better comparisons. Final sales in the fourth quarter increased 7.1%, the best showing in sales since 1984. The employment cost index for all of 2010 at +2.0%, was the second lowest on record at 2.0%, in 2009 the employment cost annual index was up 1.4%. GDP growth in 2010 at +2.9% was the strongest in five years. Household purchases, about 70% of the economy, rose at a 4.4% pace, the most since the first quarter of 2006.

Retailers’ holiday sales in Fairfax and Vienna Virginia jumped 5.5% for the best performance in five years. The report this morning is the first of three that will be released over the next two months before the final GDP hits in March, nevertheless there is little doubt that the economy is recovering at a pace better than what we were expecting, still however, we want to see retail sales data for Jan and Feb for confirmation. That may be a problem though in that Jan will be negatively impacted by many snow storms through the month.

Treasuries and mortgage markets in Fairfax, Virginia were soft into the 8:30 releases, initially weakened more before settling down by 9:00; at 9:00 the 10 yr note -11/32 at 3.43% +4 basis points, mortgage prices down 7/32 (.22 basis points). (see below for 10:00 levels). The economic improvement is increasing the possibility that the six week trading range for the 10 yr and mortgages is going break to higher rates soon. There are two factors that are still holding rates stable; inflation is low and there is nothing out there that suggests it is about to increase, and there is a potential for the equity markets are due for a correction after the huge improvement over the past six months.

The stock indexes opened better at 9:30; DJIA +4 points. The indexes are struggling recently; although improving the equity markets are showing some signs of exhaustion after the very strong rally over the past six months. Most of the optimism that drove stocks higher have now been about completely discounted; the economic rebound has essentially met market expectations. To take the market higher now it will need an infusion of new news and data. Many analysts that remain bullish in the long run are talking about a market correction; a few are looking for as much as 10%. If (when) a correction begins it will support the rate markets on safety moves.

The 10 yr treasury note is still holding in its 25 basis point yield range; mortgages are following along. This week so far the 10 yr note and mortgages are unchanged from last Friday’s closes. So far there isn’t enough momentum to drive the 10 yr note above 3.50%, however recent action is less optimistic. Rallies have been weaker than days when prices fall and yields increase. The rest of the session for the bond and mortgage markets will depend on how stock indexes trade.

 The final economic data point this week; at 9:55 the University of Michigan consumer sentiment index, expected at 73.0 from 72.7. Sentiment came at 74.2; the current conditions index at 81.8 from 79.8 and the 12 month out expectations unchanged at 87.0. No noticeable initial reaction to the report as it was in line with investors thoughts and views on what would be reported.