Archive for October, 2008

Keeping an eye on the Feds

October 29, 2008

 

Everyone is keeping an eye on the Feds today.  Rumor has it another half-point rate cut is in the works, which would bring the federal funding rate down to 1.000%.  The federal funding rate hasn’t been this low since June 2003.  What will all of this mean for interest rates?  Well, it isn’t good news.  

Taking a break from ruling Middle Earth, even Sauron wants to know what the Feds do today.

Taking a break from ruling Middle Earth, Sauron has his eye on the Feds.

Interest rates have climed recently due to other factors that include: 

          The credit crisis has forced investment funds to sell off their mortgage backed security (MBS) bonds to raise capital.  More bonds available in the market means their value decreases.  As we know from previous posts, when bond prices sink, interest rates rise.

          MBS bonds, once a safe-haven from stocks, are now seen as a higher risk.  Investors are moving into Treasury bonds and selling off MBS bonds.  Not to sound repetitive, but more bonds in the market decreases their value and increases interest rates.

          The emergency cut to the federal funding rate just three weeks ago has also hurt interest rates.  Since the rate cut, the MBS bond market is down almost 200 points and interest rates moved from 5.5% to 6.25%. 

 

Needless to say, another half-point cut today (which is a very strong possibility) will not be the best news for interest rates.  As the federal funding rate decreases, mortgage rates increase.  Considering all of these variables, things are not looking great for interest rates.

 

That said the initial reaction could be interesting.  MBS bonds have endured a beating over the past few days and stocks enjoyed their second best day EVER on Tuesday.  Because of those events, the initial reaction to the cut could have the opposite affect.  While today may be a descent day for interest rates, the next week or two does not look as promising. 

 

Anyone sitting on the fence for a refinance OR hoping for rates to improve before locking in on a purchase should consider locking their rate sooner rather than later.

Clay Jeffreys is a Mortgage Consultant with Hillside Lending, LLC and writer for “Blog Pertaining to the Acquisition of a Mortgage to Purchase a Domicile.” Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing. For more information about available programs and interest rates, please visit www.hillsidelending.com.

 
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Shaping interest rates

October 14, 2008

 

Everyone wants to know what the interest rates are for the day, but what shapes interest rates?  What factor or factors do lenders use to determine interest rates?

 

 

I’ve heard several theories on factors that shape interest rates such as being the end of the week, the beginning of the week, lenders “needing” to do loans before the end of the year, lenders “wanting” to do loans at the beginning of the year, seasonal changes, etc. Rates change everyday, but it doesn’t have anything to do with it being a “Monday” or a “Friday.”

 

The dominant factor in shaping interest rates is the mortgage-backed security bond market.  Interest rates are based on the value of mortgage-backed security bonds, and they share an inverse relationship.  As the value of those bonds rise, mortgage rates fall, and vice-versa.

 

Lenders create rate sheets based on the first two hours of bond performance everyday.  If bond prices have gone up from the previous day, interest rates go down.  If bond prices plummeted from the previous day, interest rates go up. 

 

I watch the market everyday, and sure enough, this is not a correlation.  In fact, let me give you an example.

 

– Say bonds prices have a sharp decrease in value after lenders release their interest rates for the day. Under that scenario, I would quickly receive updated rate sheets with higher interest rates. 

– If bonds prices radically improve during the day, then I would receive an updated rate sheets with lower interest rates.

 

So bonds determine rates.  OK, that’s great. Now a better question, what determines the value of bonds?  Let’s take a look at a few of them.

 

Stocks:  We all know there is a limited supply of money.  Therefore, if money is going into stocks, then there is less money available to go into bonds.  Stock prices rise, and bond prices go down – this scenario would cause rates to increase.

 

Inflation:  Bonds hate inflation.  Investors buy bonds because they are a safer investment.  The rate of return is lower, but so is the risk when compared to stocks.  However, high inflation reduces the return value of a bond, which pushes their value down – this would cause rates to increase.

 

Economic News:  Everyone knows investors pay close attention to all economic news releases.  Bad economy = less money available = less to invest = be careful how one invests. When there is bad news for the economy, investors typically take money out of stocks (higher risk) and put them into bonds (lower risk) – this would cause rates to decrease.

 

Technical Aspects:  When there is little economic news, stocks and bonds take their cues from the technicalities of trading – where is the 200 day moving average?… are stocks overbought?… are bonds overbought?….  It’s anyone’s guess on what will happen on these days, but stocks and bonds may experience a calm day of trading when this occurs – a “calm” day would cause rates to stay flat.

 

You may be thinking “if this is true, why doesn’t stocks or inflation determine rate?” While there may be a correlation between some of those and changes in interest rates, correlation does not imply causationAs bond prices move, rates move, but…

 

– Do bonds always have a bad day if stocks are having a good day? 

– Do bonds always lose their value with bad news concerning inflation? 

 

The answer is no.  This past year has shown that even in times of higher inflation (like we are now experiencing), bond prices may fluctuate but ultimately hold their current high-level of value, which is keeping mortgage rates near historic lows — currently under 6% for a 30 year fixed mortgage.

 

While there are several factors that indirectly influence interest rates, only one thing directly shapes rates – mortgage-backed security bonds.  The difference between bonds and the other factors is causation.  Interest rates may or may not move due to stock performances or economic news, but they will always move as bond prices move.

 

Clay Jeffreys is a Mortgage Consultant with Hillside Lending, LLC and writer for “Blog Pertaining to the Acquisition of a Mortgage to Purchase a Domicile.” Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing. For more information about available programs and interest rates, please visit www.hillsidelending.com.

Bailout plan – the facts

October 9, 2008

After a few bumps in the road, the Bailout plan was approved in the Senate, then the House, and signed by President Bush.  The purpose of the plan is to provide immediate and substantial relief to the financial system, stimulate the economy, increase liquidity in the market, and improve investor confidence.

That sounds great, but what are some of the facts in this 451-page plan and will it achieve any of its intended goals?

– The core of the revised plan is the same as the original 3-page proposal rejected by the House.  The Bush administration proposed a plan to buy troubled mortgages that are clogging up the financial system.  The plan allows for up to $700 billion to be used to buy these troubled loans.

– The plan provides an immediate $250 billion to buy some of the troubled loans in the system.  President Bush has the authority to release an additional $100 billion.  Above that, Congress must approve any use of the remaining $350 billion. The cap is set at $700 billion.

– There is a temporary raise of the FDIC insurance amount of $100,000 to $250,000. 

– The approved bill contained an additional $150 billion (a total now of $850 billion).  These additional measures included more tax breaks for individuals and businesses using renewable energy, yet another year exemption of the Alternative Minumum Tax (AMT) that helps those who “have” avoid paying more taxes, and continues some other expiring tax breaks.

Those are some of the major facts contained in the bill.  I highly doubt everyone agrees with each aspect of the bill, but most people would agree that something needed to be done.  As they are written, these measures do seem as if they will achieve some of the intended goals – mainly, stabilizing the market.  However, there are some troubling facts that came with the updated plan. 

First, mostly conservatives attacked and voted “no” on the original bill because $700 billion was too much money, but approved it once $150 billion in “sweeteners” were added.  Some of those measures provide more help to the “haves” instead of the “have-nots.”  I guess to get it passed, you have to do what you have to do, but it is still frustrating if you are in the “have-not” category.

Second, the bill was originally 3-pages and expanded to 451-pages.  When legislation gets this detailed, bills becomes cumbersome and unnecessarily complex.  It increases the difficulty of interpreting and enacting laws.  Not saying this will slow things down, but it definitely want speed it up!

Third, this continues the ugly trend of borrowing money now and passing the bill on to our children and grandchildren.  I don’t have an alternative option to propose, but the borrowing and spending habits of our government is scarily similar to the habits that got us into this mess.  If borrowing too much money to buy a house one can’t afford is a bad idea, how good of an idea is it for the government to continue borrowing and borrowing money that they don’t have?   Eventually, those bills come due.

Again, there are some great aspects of the bailout plan, but there are also concerns.  One thing seemed clear, something had to be done, and this seemed to be one of the better proposed ideas.  Let’s hope this plays out better than some of the previous decisions that were made in the past several years.

Clay Jeffreys is a Mortgage Consultant with Hillside Lending, LLC and writer for “Blog Pertaining to the Acquisition of a Mortgage to Purchase a Domicile.” Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing. For more information about available programs and interest rates, please visit www.hillsidelending.com.

Déjà Vu – again

October 8, 2008
Yes Neo, you have been in this blog before

Yes Neo, you have been in this blog before

The Federal Reserve issued an emergency 1/2 point rate cut to the Federal Funding Rate this morning. This brings the Federal Funding rate down to 1.5%, which is the lowest it has been since the months following 9/11. 

Today’s action by the Federal Reserve was part of a global effort coordinated with other countries who also lowered their rates in hopes of stimulating the market.  The European Central Bank (Euro) and the Bank of England (Pound) cut their rates by a half a point.  Switzerland, Canada, and Sweden also made cuts to their rates.

The coordinated effort is just another step in a series of actions by the Federal Reserve and the government to help stem the financial crisis that is now impacting the entire global market.  Steps thus far include the Federal Reserve slowly cutting the Federal Funding Rate (beginning 08/07), the Economic Stimulus package (05/08), the Housing Bill (08/08), and the recent Bailout plan.

The Federal Reserve and the government have worked tirelessly to assist the economy in hopes of preventing a long downturn (recession and/or depression).  You may not agree with all of the decisions (I don’t), and you may not even like some of them, but keep this in mind.  This is NOT the Hoover administration of the late 1920s that refused to assist after the stock market crash.  The turning point of getting out of the Great Depression didn’t begin until FDR’s New Deal was enacted in 1933.  Government involvement didn’t solve problems overnight, but it was the start of the recovery.

That said, now let’s change directions and discuss the impact of the recent moves in regards to how they will affect mortgage rates.  Will mortgage rates improve or suffer from these moves?

– Fed rate cuts help stocks, not bonds.  Stock prices go up, and bond prices go down.  As the value of bonds go down, mortgage rates go up.

– Mortage rates are negatively influenced by inflation, and cuts to the Federal Funding Rate spurs inflation.

– The Bailout Plan focuses on injecting liquidity back into the market for investing in stocks.  It’s design is to stimulate the economy and get it running again.  Good economic news is actually bad for interest rates.

This would lead one to believe that there will be a negative long term impact on mortgage rates, and will likely happen over the next few days and weeks.  A negative impact would be the typical reaction, but needless to say, nothing has been typical in this market. 

Clay Jeffreys is a Mortgage Consultant with Hillside Lending, LLC and writer for “Blog Pertaining to the Acquisition of a Mortgage to Purchase a Domicile.” Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing. For more information about available programs and interest rates, please visit www.hillsidelending.com.

who to blame?

October 1, 2008

Having someone to blame has its advantages.  For instance, I blamed my little brother for everything I could think of when we were young.  Since he couldn’t talk, he was unable to present his side of an argument, and I was able to get away with a few things.  The system worked great UNTIL he was old enough to talk.  My convenient excuse disappeared and I had to find other things to blame when I did something wrong.

 

In some ways, we don’t really change as we get older.  Even as adults, we tend to look for someone to blame without shouldering any responsibility for our actions on ourselves.  It is just human nature.  We avoid “pain” and seek “pleasure.” 

 

The current financial crisis provides a perfect example.  We want to avoid any pain (foreclosures, dwindling retirement portfolios, reduced stock dividends) while reaping pleasure (owning more home than we can afford, maxing out credit to live a certain lifestyle).  We continue down this path until something happens, and then we play the blame game.

 

And what a large group of people we have playing the blame game today.  It is good there are so many people playing because there is plenty of blame to go around!  Turn on the news and you will hear politicians, lenders, banks, stock holders, borrowers, etc. blaming someone for this mess instead of owning up for their part in it. 

 

How is it everyone’s fault?  Well, it isn’t everyone’s fault, but there are plenty of people and entities that contributed and here are a few.

 

          Wall Street:  The housing market was hot and everyone was trying to cash-in and make money.  That is what Wall Street does.  If it finds something that is hot, hops on board to make as much as possible before it cools off.  No one tends to complain when they are making money.

          Shareholders:  These are individuals who invest in companies to make money.  Again, the housing market was hot and they want to profit from it.  Shareholders pressure the company to make more money, and companies find new ways to do it.

          Politicians:  Home ownership was pushed hard as a political agenda over the past decade.  For instance, see this article about President Bush encouraging home ownership as the key to a secure America. To achieve this goal, Fannie and Freddie were encouraged to make money more readily available for people to borrower to buy homes.

          Fannie and Freddie: Facing pressure from politicians, shareholders wanting to make more money, and their own financial gain, Fannie and Freddie lowered the qualifications needed to be approved for a conventional loan making it easier for people to buy homes.  The eased guidelines included 100% financing, lower credit score requirements, higher debt-to-income ratios allowed, etc.

          Lenders:  Guidelines were lowered across the board and this increased the number of borrowers who qualified for subprime loans, which are not Fannie and Freddie approved. BUT lenders didn’t stop there.  With so many homes being built and on the market, new ways to lend money was created even if they were not remotely in-line with Fannie and Freddie guidelines.   

          Loan programs:  subprime, no-documentation loans, MTA loans (also known as “pick your payment”), negative amortization loans, etc. began appearing on many lender’s books.  These loans made it VERY easy to borrow money.

          Foreign Countries:  Loans that cannot be purchased by Fannie and Freddie MUST still be purchased somewhere in the secondary market.  If loans are not sold, lenders run out of money to lend and close their doors (see IndyMac and Homebanc).  These new high risk and subprime loan programs needed to be sold and foreign investors who were eager to make money on the housing market in the U.S. bought them on the secondary market.  With those loans off of the books, lenders could go out and issue more bad loans.

          Borrowers:  Individuals began buying more home than they could afford through some of the “creative” adjustable rate mortgage (ARM) programs.  Some borrowers did this in hopes of flipping the home for a profit. Others did it to have a larger home.  Regardless of the motive, at the moment of closing, many borrowers were in over their heads with the loan they used to buy the home.  As the loans began adjusting, the foreclosures began.

 

As I said, there is a LOT of blame to go around and by no means is that an exhaustive list.  Some will argue that appraisers, underwriter, closing attorneys, mortgage brokers, and real estate agents are at fault too.

 

Bottom line, it really doesn’t matter who’s at fault OR who is to blame.   The truth is the financial crisis is now EVERYONE’S problem.  As we wait for round two of a financial bailout plan to emerge from D.C., let’s take a moment to reflect and see what we each did to cause this and what steps we can take to prevent it from happening again. 


Congress can make new laws, provisions can be written into the bailout plan, new monitoring agencies can be created to watch Wall Street, but unless WE each acknowledge where WE went wrong, this is only going to repeat itself at some point in the future.  Maybe I am pessimistic, but I don’t think our world will shift away from the blame game anytime soon.

 

 

Clay Jeffreys is a Mortgage Consultant with Hillside Lending, LLC and writer for “Blog Pertaining to the Acquisition of a Mortgage to Purchase a Domicile.”  Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing.  For more information about available programs and interest rates, please visit www.hillsidelending.com.