Refinancing just got more expensive

 Regulations, Residential Mortgage  Comments Off on Refinancing just got more expensive
Aug 172020
 

By G. Steven Bray

Wednesday evening, the Federal Housing Finance Agency (FHFA), the regulator for Fannie Mae and Freddie Mac, announced a tax to be charged on every refinance loan it purchases beginning Sep 1st. The “tax” is a fee equal to 0.5% of the loan amount.  So, a $300k loan will incur a $1500 fee.

Given that it generally takes a few weeks for Fannie and Freddie to purchase loans from lenders, this means that starting immediately, refinancing your mortgage just got more expensive.

FHFA calls the fee an “adverse market fee” due to the risk and economic uncertainty caused by the Wuhan virus. That explanation might be more believable had FHFA also applied the fee to purchase loans. Refinance loans are less risky than purchase loans because they usually reduce a homeowner’s housing payment.

Instead, it looks more like a money grab. It’s certain that FHFA knows that right now wholesale lenders have fat margins on refinance loans because mortgage rates have not kept pace with the rest of the bond market. Based on the way this fee was imposed, it seems FHFA thinks it needs a “piece of the action.”

Like most misguided government policies, this probably was the brainchild of some bureaucrats who are clueless how the mortgage marketplace really works.  They probably thought consumers would be insulated from the fee, that they’d just be fleecing lenders.  Instead, refinance rates Thursday morning were about a quarter point higher.

It’s really disappointing that in a time of national crisis, when refinancing to get a lower housing payment might help so many families survive, that these supercilious people thought the best course of action was yet another tax.

Rate Update: What will lead to more record low mortgage rates

 Interest Rates, Residential Mortgage  Comments Off on Rate Update: What will lead to more record low mortgage rates
Jun 272020
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

We hit record low mortgage rates a week ago on headlines about a possible second wave of the coronavirus. Rates had been trending higher this month after the amazingly strong May jobs report. That positive news was reinforced by private reports of increasing economic activity. The coronavirus news was a wet blanket that thrashed the stock market and caused flight to safety bond buying.

So, Treasury rates have returned to what I call their “covid range.” We saw little movement this week as investors seem to be waiting for more definitive information about the reopening of the economy. That’s been good news for mortgage rates because, as we’ve discussed before, mortgage rates have been suffering from a “risk premium” effect. That premium is slowly evaporating, and as it does, mortgage rates fall just a bit more.

If you haven’t refinanced yet or you’re thinking about buying a home, you may wonder if this means mortgage rates are destined to hit new record lows in the weeks ahead. Unfortunately, my crystal ball is clouded, so I can’t give you a definite answer. But we can discuss the factors that could lead to new record lows.

Simply put, it’s covid headlines.  Last week’s stock market swoon was driven by fears that the covid damage wasn’t done. Headlines about spiking virus cases will stoke that fear. For now, the fear seems to be balanced against the recent positive economic data, leaving rates stuck in their current range. Should the data begin to deteriorate, or should the headlines become more dire, rates could fall further.

But keep in mind that every new record low is a little harder to achieve.  For bonds, the rate is inversely proportional to the bond’s price. Thus, when we have record low rates, we have record high prices. Each time we hit a record high price, more bond investors are likely to view it as “the one,” sell their bonds and take their profits. If there are more sellers than buyers, rates rise.

Explaining the chances of lower mortgage rates

 Interest Rates, Residential Mortgage  Comments Off on Explaining the chances of lower mortgage rates
Apr 212020
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

A question I keep getting asked – are mortgage rates going to drop any further?  I wish I had a crystal ball so I could give everyone a definitive answer.  Instead, I’ve tried to educate the questioners about the finer points of the mortgage bond market, but I find they usually fall asleep before I get to the tenth slide.

So, after trying to answer this question so many times, I think I have winnowed out the minutiae and will try to defend a simple answer.  I think there’s about a 75% chance mortgage rates will go lower, and here’s why I believe that.

Mortgage rates tend to follow the 10-year Treasury bond.  I say “tend to” because the correlation isn’t perfect, and current times are a good example.  If mortgage rates had followed 10-year Treasuries perfectly to their current very low levels, 30-year mortgage rates would be around 2.5%.  Instead, they’re hanging in the mid-3% range.

That begs the question why.  We’ve discussed some of the reasons previously, but it seems the most tractable one is the CARES Act.  The Act gave homeowners with a mortgage the right to request a forbearance from mortgage payments for up to 12 months with seemingly no penalty to the homeowner.  Unfortunately, loan servicers, the companies to which you send your mortgage payment, still have to pay the investors who bought those mortgages, as well as pay property taxes and insurance premiums for homeowners who escrow.  The Mortgage Bankers Association estimates servicers may need to come up with $100 billion (that’s billion with a B) to cover the forborne payments, and the Act didn’t provide servicers with any assistance.  As a result, the bond market is requiring higher mortgage rates to account for this risk.

A number of Congressmen and Senators as well as trade associations have asked the Executive Branch to do what Congress failed to do – provide a borrowing program for mortgage servicers.  Rumor has it that the Treasury Dept has heard them, and something is in the works.

For mortgage rates, the questions then become:

  • whether markets think the program will be effective, thus relaxing what is essentially a risk premium currently built into mortgage rates; and
  • how quickly will it happen?

The risk for those waiting for lower rates is that the economy ramps up again, allowing rates to rise naturally, before markets eliminate the risk premium, allowing rates to fall.  But if your mortgage needs are more urgent, or you’re more risk averse, the current 3.5% mortgage rate really is pretty sweet.

Rate update: It’s the government’s fault

 Interest Rates, Residential Mortgage  Comments Off on Rate update: It’s the government’s fault
Mar 262020
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Quite simply, mortgage rates are all over the place right now, and the market is a mess.  Despite conspiracy theories you may be reading on social media, the government isn’t keeping rates artificially high to help Wall Street make a fat profit.  In fact, it’s because of government involvement that rates are as low as they are.

Let’s take a short look back.  It was only about 20 days ago that mortgage rates hit all time lows.  Those lows lasted all of a couple hours one morning – and then rates started moving quickly higher.  I discussed in my last blog some of the reasons that happened. In the simplest sense, it was due to basic economics.  There were a LOT of mortgage bonds to sell due to the record low rates, and there were very few buyers of those bonds due to market turmoil surrounding the coronavirus.  In order to clear the market, mortgage rates shot up over 5% in short order.

Since then, rates have been extremely volatile, falling back below 4% some days, then jumping back above 5%.  But I said the government has been keeping rates low. How does that jive with the volatility?

Well, this weekend, the Federal Reserve basically wrote a blank check – indicating it would purchase an almost unlimited amount of mortgage bonds to restore liquidity to the market.  That means markets can trade on the certainty that there will be a buyer for mortgage bonds. Now, that doesn’t guarantee low rates because the Fed is not setting the rates of the mortgages it buys.  Instead, it allows the market to set rates knowing there will be a buyer.

The desired result – which I think we’re beginning to see – is more restrained volatility.  Thirty-year rates were back below 4% the last couple days for most lenders, and despite continued volatility, have remained there.

Mar 162020
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Over the weekend, the Federal Reserve cut the federal funds rate to zero, and it seems the whole world is asking today, “Where can I get that free money?”  And, unfortunately, you can’t. The reasons are a little complex, but let’s see if we can break it down a little.

First, you have to realize that the federal funds rate, and in fact all the rates the Fed directly sets, are very short-term rates.  Mortgage rates are long-term rates. They respond to different factors, and often move higher when the Fed rates are moving lower.

So, mortgage rates have been on a wild ride the last couple weeks with rates falling to record lows, then bouncing 25% higher in just one week.  The reason they fell so quickly is the same as the reason the Fed acted this weekend: the pandemic is slowing our economy. But it looks like the virus is going to be with us for a while, so why didn’t rates remain at record lows?  Let’s analyze the causes and predict what will happen over the coming weeks.

Mortgage rates are a reflection of the price investors are willing to pay for mortgage-backed securities – basically, your mortgage bundled with a bunch of others as an investment.  That price is influenced by a number of factors. We discuss some of those factors regularly, such as expectations for economic growth and expectations of inflation. It’s economic growth expectations that caused rates to plummet a couple weeks ago.

But we had other negative factors come into play last week.

  • – One of those factors we call runoff.  As we’ve discussed before, investors buy mortgage bonds expecting to earn interest over a number of years.  When mortgages pay off early, such as through refinance, investors actually may lose money. In response, investors lower the price they’re willing to pay for mortgage securities, which results in higher rates.
  • – A second factor is basic economics:  supply and demand. The drop in rates generated an enormous number of mortgage applications.  We didn’t have enough investors to absorb all that supply. On top of that, investors didn’t seem to be the mood to buy much of anything last week as prices dropped in most markets.
  • – Finally, lenders’ systems were overwhelmed with the volume of new applications, and many of them raised their rates as a means of throttling that volume.

So, what’s next?  While the federal funds rate announcement isn’t going to lead to lower rates, one of the Fed’s other actions may.  The Fed is stepping into the market to buy a small amount of mortgage-backed securities. It appears this is returning liquidity to the market as rates have dropped a little today.

It probably will take a few weeks to dissipate the other negative factors, but I suspect the positive factors, slowing economy and negligible inflation, will still be in place.  And once that happens, we could see record low mortgage rates again.

Rate update: Virus outbreak leads to lower mortgage rates

 Interest Rates, Residential Mortgage  Comments Off on Rate update: Virus outbreak leads to lower mortgage rates
Jan 282020
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Tragedy can lead to uncertainty, and uncertainty is good for lower interest rates. The outbreak of the coronavirus in China has unsettled global markets, and investors are running to the safety of Treasury bonds. Investors are concerned the virus will seriously impact global growth. One analyst already is predicting the virus will shave 0.4% off global GDP, and the outbreak seems to be growing.

The effect on stock and Treasury bond prices has been much more significant than the effect on mortgage rates. Even so, mortgage rates are the lowest they’ve been in over 3 years.

If you’ve been watching for low interest rates, don’t procrastinate. As quickly as these rates have appeared they could evaporate. If the number of new cases of the virus starts to decline, markets may conclude the effects will be limited, and rates will snap back.

In that case, we’re back to watching economic data and events, which ramp up this week. The Federal Reserve meets today and tomorrow. While no one expects the Fed to change its current policy – no rate hikes or cuts until inflation or unemployment change significantly – investors love to parse the post-meeting statements for hidden meanings.

Next week we get the ISM reports and the Jan jobs report. The service sector of the economy has remained strong despite the trade disputes, but pundits have been predicting its deterioration for many months. Should the ISM report hint a downturn, rates could improve further. Likewise, should the jobs report deviate from its current trend, that could gets rates moving.

Rate update: Markets shrug off war drums

 Interest Rates, Residential Mortgage  Comments Off on Rate update: Markets shrug off war drums
Jan 082020
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

When I predict whether rates will rise or fall, I always issue the caveat “absent unexpected headlines.” Well, the past few days have provided a case in point. Rates dropped quickly following the US drone strike last week on the Iranian general and rose just as quickly today following the President’s address that suggested the crisis has passed.

Where does that leave us? Rates are stuck in the range again and waiting for inspiration. Potential sources for that inspiration are many, but let’s focus on a few of them.

First and foremost, if the Iranians don’t “stand down” as the President suggests, rates are certain to fall again. Renewed hostilities will make investors more cautious, and that caution will lead to lower interest rates.

Assuming that doesn’t happen, and markets currently seem confident it won’t, the next big event is this week’s jobs report. Recession whisperers were headliners on cable news last fall when it appeared the jobs market was softening. That changed with Dec’s blowout jobs report. Markets expect another strong report this Fri. Because of this expectation, its verification is unlikely to change rates much. Should the report disappoint, rates should improve a little.

Trade is the other major source of inspiration. The Senate is expected to pass the new trade deal with Mexico and Canada soon, and the President said he expects to sign a Phase 1 deal with China mid-month. Markets widely expect this to happen, so when it does, it’s unlikely to change market sentiment. Rates seem to be experiencing some slight upward pressure, and that probably would continue. However, should we experience a hiccup in either deal, we’d likely see at least a short-term drop in rates.

FHA loan limit tops $400,000 in Austin, DFW

 Loan Guidelines, Residential Mortgage  Comments Off on FHA loan limit tops $400,000 in Austin, DFW
Dec 142019
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Just before Thanksgiving, we found out the 2020 conforming loan limit increased to $510,400. Late last week, FHA released its 2020 loan limits. By statute, the minimum FHA loan limit is 65% of the conforming limit, or $331,760 for a single-family home.

However, FHA allows higher limits in areas where 115% of the median home price exceeds the minimum. In TX, higher limits apply once again in the Austin, San Antonio, Dallas-Ft. Worth, and Midland metros. Higher limits no longer apply for the Houston metro and Gillespie Co (city of Fredericksburg).

The San Antonio metro took the prize for the greatest increase this year both in dollar amount and percentage rise. The limit rose more than $33,000, or 9.3%, to $393,300.

The Midland area limit also rose significantly, by $23,000 or 7.2%, to $341,550.

The limit in the Austin and DFW metros both rose to $404,800, the highest in the state. The Austin limit was 3.8% higher than last year. The DFW limit was only 2.3% higher.

Remember that these limits apply to all the counties in the metro, not just the cities themselves. Also, these limits apply to single-family homes. Higher limits apply for two- to four-unit properties.

Rate update: Trade deal blues

 Interest Rates, Residential Mortgage  Comments Off on Rate update: Trade deal blues
Dec 132019
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

In the last week, bond markets pretty much have confirmed that the only thing that matters is the trade dispute with China. Last Fri, we got a blowout jobs report. In previous times, rates might have jumped at least an eighth of a point in response. This time – nothing. Wed, Fed head Powell said the Federal Reserve won’t raise short-term rates unless inflation moves up significantly. Given that inflation seems mired below the Fed’s target rate, that comment should have caused jubilation in bond world leading to lower rates. Did it? Nope.

Now to be totally honest, both events did cause short term ripples within the markets, but rates never left their current range. It seems pretty obvious that traders are waiting for something before placing their bets on higher or lower rates.

That something is real factual news about the trade dispute. New tariffs are scheduled to begin this Sunday, and this time the tariffs target consumer products.

You can understand traders’ reluctance to pick a side. Many analysts believe the new tariffs, as proposed, will sap consumer demand. The American consumer has been the sustaining force in the economy this year. It doesn’t matter how good the economic data was last month. If the tariffs go into effect, it’s possible the data turns negative next month.

Now, it’s certain that the Trump Administration recognizes this. It’s also certain that the Chinese recognize the intense pain the tariffs could cause it’s already faltering economy. Thus, both sides have an incentive to announce a last minute reprieve, and it appears today they’ve done so. But the bigger question still remains: Will we get a trade deal?

Congress eliminates VA loan limits

 Loan Guidelines, Residential Mortgage  Comments Off on Congress eliminates VA loan limits
Dec 072019
 

For more information, please contact me at (512) 261-1542 or steve@LoneStarLending.com.

By G. Steven Bray

Starting Jan 1st, Veterans and servicemembers who are entitled to VA loan benefits are eligible for 100% financing regardless of the home’s price. The Blue Water Navy Act, passed by Congress earlier this year, has removed the loan limit for a VA loan.

Previously, federal law tied the maximum guaranty amount for a VA loan to the Freddie Mac conforming loan limit. This meant that in 2019 if a veteran wanted to purchase a home priced greater than the loan limit (just north of $484,000), the Veteran was responsible for 25% of the amount above that limit.

With the change, Veterans with full VA loan entitlement now can borrow the full amount of the purchase price without needing to factor a down payment. However, for Veterans with diminished entitlement, either from having an active loan or a default on a previous VA loan, VA still calculates their remaining entitlement based on the Freddie Mac loan limit.

The Act also changes the VA funding fee. Starting Jan 1st, the no down payment Funding Fee will be 2.3% for first-time use for all Veterans, whether Regular Military, National Guard, or Reserves. This is a slight increase for Regular Military, but a decrease for others. For subsequent VA loans, the Funding Fee rises to 3.6% for all. Congress intended the increase to fund other benefits that are part of the Act.

The Act also provides a new Funding Fee exemption for active duty servicemembers who have been awarded a Purple Heart.