May 232017

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By G. Steven Bray

There’s nothing like a little political hysteria to get the bond market rallying. Last week’s impeachment headlines dropped mortgage rates to the lows for the year. Of course, as the silliness faded into reality, rates edged back up. Where they go from here depends on several factors.

First and foremost is Washington drama. If additional leaks reignite last week’s panic, rates could rally further; however, with the appointment of the special counsel, I think that source of inspiration has been muted.

Recent economic data, especially inflation data, has been rate friendly. Notably, the core consumer price index in Apr fell below 2% again, which is the Fed’s stated target. That may reduce the urgency of the Fed to raise short term interest rates.

Overseas headlines, like the terror attack in the UK, can create momentum for lower rates, but based on recent experience, it would take an extreme headline to break the market’s focus on our final factor.

That factor is expectations for the Trump agenda. Markets seem once again to be focused on the prospects for tax and regulatory reform. In particular, equity markets are banking on a lower corporate tax rate, and if Congress is able to make headway on this issue, the “risk off” trade should pressure rates back up into the range they’ve occupied most of this year.

May 092017

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By G. Steven Bray

Interest rates continue to drift slowly higher as the Xanax kicks in on the markets. The French election outcome provided confidence the European Union won’t take any more hits in the short term, and the health care vote in Congress eased concerns about the Trump agenda. Rates have returned to their post-election range looking for a source of inspiration.

A possible source is the Federal Reserve. Fed governors, through public speeches, have signaled more hikes of short-term rates are likely this year, and an increasingly loud chorus is suggesting the Fed will start to unwind its monstrous bond portfolio. I think the former is pretty much baked into current rates, but the latter could shoot rates higher.

A countervailing force may be recent economic data that showed inflation, particularly wage inflation, is subsiding again. The jobs report last week bested expectations, but the wage data suggests the jobs added may be lower paying ones. While I don’t expect the Fed will see this data as a reason to hold back rate hikes, this may give it pause concerning its bond portfolio, and words of caution may creep back into the Fed’s vocabulary. While I doubt this would be enough to spark another bond rally, these factors could contain rates within their current range.

Rate update: Happy juice flows; Rates rise

 Interest Rates, Residential Mortgage  Comments Off on Rate update: Happy juice flows; Rates rise
Apr 242017

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By G. Steven Bray

Investors seem to have found their swagger again. After spending a couple weeks fretting over the many uncertainties in the world, and as a result pushing bond yields lower, they’re casting their fears aside and back on the happy juice. The inspirations for this change in sentiment seem to be the outcome of the French election and expectations for a Trump tax plan.

Interestingly, the French election results were as expected: the establishment candidate bested the “scary” nationalist candidate Le Pen by a couple points, and they will meet in a runoff election in a couple weeks. What seems to have quelled fears is that Le Pen didn’t outperform pre-election polls, and those polls predict a drubbing for her in the runoff. The EU is safe again – for now.

I’m not sure that would have been enough to turn market sentiment if it wasn’t for the Trump talk. Investors had started therapy sessions over the failed advance of the Trump agenda, but the depression lifted last Fri when Trump promised details of his tax reform plan this week. Never mind that it faces a still divided Republican House. Tax cuts are like crack for investors causing them to ignore the difficult week ahead culminating with a potential government shutdown.

While I think we could see some further pressure on interest rates for the next few weeks, the crystal ball beyond that period is cloudy. Recent US economic data has been surprisingly weak, especially inflation data, and it’s still unclear whether Congress can find consensus. Balance that against central bankers’ urge to normalize monetary policy. The resulting mixed picture leaves rates without much direction and subject to headline abuse.

LLC-financed rental homes won’t prevent use of Fannie loan

 Investment, Loan Guidelines, Residential Mortgage  Comments Off on LLC-financed rental homes won’t prevent use of Fannie loan
Apr 172017

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By G. Steven Bray

One of the more frustrating loan guidelines encountered by rental property owners is the limit on the number of financed properties. Fannie Mae limits the number to 10 – 4 for best-rate financing. While Fannie hasn’t changed that guideline, it has changed which properties count towards it. Previously, properties financed through an LLC counted towards the limit. Now, if the borrower financed the property through an LLC so that the borrower is not personally liable on the mortgage, Fannie excludes the property from the total.

This should be a nice change for investors who use multiple financing tools to manage their properties. Investors often use shorter-term bank loans to finance the initial acquisition of a property, and bank portfolio loans often will allow a seasoned LLC to sign the note. Now, if the investor wants to roll a property into long-term, lower-rate, conventional financing, those short-term loans won’t get in the way.

Keep in mind that financed primary residences and vacation homes still count towards the total. Also keep in mind that some lenders will count a spouse’s financed properties towards the total even if the spouse isn’t on the new loan. Finally, remember that the limit only includes one-to-four-unit residential properties. Anything else, including land, commercial properties, and timeshares, do not count towards the total.

Rate update: News headlines will push rates lower

 Interest Rates, Residential Mortgage  Comments Off on Rate update: News headlines will push rates lower
Apr 122017

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By G. Steven Bray

Investors abhor uncertainty, and last week certainly provided plenty of it. Will the response to the Syrian gas attacks lead to more US involvement in that country’s civil war? How are the Russians and Iranians going to react? Are North Korea’s threats more than chest-thumping? What’s the US carrier group doing in the Sea of Japan?

When investors see uncertainty, they tend to buy safe assets, and US government bonds are among the safest. Lots of bond buyers leads to lower bond rates, and because the US government backs most US mortgages, we also get lower mortgage rates – in fact, the lowest rates of the year.

So, are we seeing a sea change with rates heading lower, or will they bounce higher again. The chances for still lower rates are real, but that probably depends on continued headlines to churn investor sentiment. The President set markets on fire again today with comments suggesting the dollar is too strong.

Rates rose after the election largely because of expectations for the Trump agenda. While markets seem to have realized the agenda will take time to implement, positive movement on policies such as health care and tax reform could keep some pressure on rates.

More concerning for those wanting lower rates is the voices of the Federal Reserve. The Fed has a huge portfolio of mortgage bonds, and it replenishes that portfolio by buying more bonds with the money from paid-off mortgages. Fed governors have been talking about reducing the portfolio. Pundits are convinced mortgage rates will have to rise to find bond buyers to replace the Fed, and the market will start pricing in those higher rates long before the Fed pulls the trigger.

Rate update: Politics, inflation, and mortgage rates

 Interest Rates, Residential Mortgage  Comments Off on Rate update: Politics, inflation, and mortgage rates
Apr 042017

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By G. Steven Bray

Mortgage rates pulled back a little last week as markets came to terms with political realities. However, volatility remains as the path forward for Trump’s policies remains very unclear.

While we may not get political clarity this week, economic data could trump that concern and set the direction for short term rate movement. Last week’s inflation data, the Personal Consumption Expenditures index, came in slightly hotter than expected, and wage inflation seems to be building. This week is a jobs report week, which gives us another read on wage inflation this Fri.

A maybe more anticipated event this week is the release Wed of the minutes from the last Fed meeting. The Fed has indicated these minutes will include a new forecasting format. It seems the panic surrounding potential rate hikes has subsided, but I’m sure markets will scrutinize the new charts for hints that the panic was justified.

The week is full of other economic reports, and we also have the ongoing political gymnastics in Washington and overseas. I think it’s most likely this will result in push-me/pull-me action on rates this week. However, if any one of them suggests unexpected political certainty, economic strength, or inflationary pressures, it could move rates quickly higher.

Rate update: Health care’s doom could be homebuyers’ gain

 Interest Rates, Residential Mortgage  Comments Off on Rate update: Health care’s doom could be homebuyers’ gain
Mar 292017

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By G. Steven Bray

The bond market is a little nervous. Since the election last fall, bond yields have been on a tear, assuming that the new administration would push through policies that would make the economy soar or at least push up inflation.

Last week’s health care bill fiasco was like electro-shock treatment. Markets realized that campaign fantasies are not equivalent to Washington realities, and it may take a significant amount of time for the proposed policies, in particular tax reform and government spending increases, to come to fruition.

The market reaction so far this week has followed the headlines. Monday, rates fell as investors fretted. Tuesday, rates rose as it seemed like the health care bill might rise again like a phoenix. On the whole, I do sense an at least a temporary return of cautious sentiment. Talking heads are discussing the difficulty of passing a tax reform bill, and an impasse there would be the ultimate disappointment to markets.

Floating your interest rate could be a reasonable plan this week, but be prepared to lock if rates start drifting higher again. The week is full of speeches by Federal Reserve governors, and any one of them could drop a bomb about rate hikes that upsets markets. In addition, Friday brings the Personal Consumption Expenditures index, one of the Fed’s favorite inflation metrics. A hot inflation reading could overcome cautious sentiment very quickly.

Fannie sweetens HomeReady mortgage program

 Loan Programs, Residential Mortgage  Comments Off on Fannie sweetens HomeReady mortgage program
Mar 272017

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By G. Steven Bray

In an effort to encourage homeownership for lower-income consumers, Fannie Mae has expanded its HomeReady loan program. The program allows as little as 3% down payment and sweetens the interest rate for those who qualify.

The program has income limits in most areas, and until recently the limit was 80% of median income in many areas. Fannie raised the limit to 100% of an area’s median income, and in special low-income census tracts, the program has no income limit.

Fannie also changed the program to allow borrowers to own another home. This may be appealing for those who currently own a home and don’t want to wait for it to sell before closing on their new home.

The program is attractive for a couple reasons:

– First, the program allows for a higher debt ratio, up to 50% of a borrower’s income. In addition, the income of a roommate or significant other can be considered for qualifying even if that person is not on the loan.

– Second, Fannie absorbs some of the risk premium usually associated with low down payment loans. Fannie requires a lower mortgage insurance rate and allows a lower interest rate than is usually associated with these loans.

HomeReady borrowers are required to complete a homebuyer education course, and one naturally wonders whether that compensates for the lower risk premium assigned by Fannie. Time will tell whether the default rate on these loans justifies the favorable treatment.

Rate update: Health care bill to decide fate of mortgage rates

 Interest Rates, Residential Mortgage  Comments Off on Rate update: Health care bill to decide fate of mortgage rates
Mar 222017

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By G. Steven Bray

As we’ve discussed many times, when the Federal Reserve hikes short term interest rates, it doesn’t necessarily mean mortgage rates are going up. Such was the case again last week. The Fed hiked the federal funds rate by a quarter-point last Wed, and mortgage rates have improved every day since.

Markets really weren’t interested in the rate hike itself as the Fed had telegraphed that for weeks. They were interested in the “dot plot” – the Fed governors’ predictions of future rate hikes. Those predictions were much tamer than markets had expected, apparently meaning the Fed doesn’t see the economy revving up as much as investors had speculated. This let the air out of the bond market balloon, and rates relaxed back into their recent, familiar range.

Another factor pressuring rates this year has been speculation about the effects of the Trump agenda on the economy. Exuberance would inadequately describe the reaction of investors to the various policy prescriptives. However, as the first and highly anticipated action, health care reform, stumbled this week, rates slid further.

The House is scheduled to vote tomorrow on the health care bill. If the bill fails or the vote is delayed, I look for rates to make further gains, possibly setting new lows for the year. Alternatively, if Ryan is able to pull the bill across the finish line, rates could bounce quickly higher.

Rate update: Look out for the Fed

 Interest Rates, Residential Mortgage  Comments Off on Rate update: Look out for the Fed
Mar 062017

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By G. Steven Bray

Interest rates moved back to the high end of their recent range last week, but this time they may not be moving lower real soon. The move higher was in reaction to statements from Fed governors that suggest it’s all but certain the Fed will hike short-term rates at its meeting next week.

As we’ve discussed in the past, the Fed sets very short-term rates, and just because those rates rise doesn’t mean longer-term rates, like mortgage rates, will rise. However, when the Fed hikes rates, it creates some momentum that filters up the rate curve, at least temporarily. In addition, a rate hike suggests the Fed thinks the economy continues to recover, which supports higher rates.

Once we get out of the shadow of the Fed meeting, mortgage rates are more likely to return focus to the prospects for inflation and geopolitical uncertainties for inspiration. Recent inflation data, while still tame, has ticked up just a tad. If inflation measures maintain a positive slope, nervous investors could push rates up quickly.

With respect to the latter source of inspiration, the French presidential election is just around the corner, and the disrupter candidate Le Pen leads in recent polls. A Le Pen victory in the first round of balloting could give markets temporary heartburn, which should be positive for rates.

I have one wildcard this week. The Fed has a huge portfolio of mortgage bonds. While the Fed isn’t adding to this portfolio anymore, it is using the proceeds from mortgages that pay off to purchase new ones to the tune of about $8 billion a week. When the Fed stops these reinvestments, the concern is it will take higher interest rates to clear the market. Any hint of a timeline for this tapering emanating from the Fed meeting could push rates up.