Mar 072018

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By G. Steven Bray

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The good thing I can say about interest rates is they’ve stayed in a pretty narrow range for the last couple weeks. Unfortunately, that range is about 3/4 of a point higher than it was a few months ago, and market forces seem aligned to keep it from falling.

We took a run at lower rates last week with the President’s announcement of tariffs. However, the lower rates lasted less than 24 hours and really didn’t break below their recent range. At this point, markets seem to have completely discounted the possible negative effects of the tariffs and have returned to the upper end of the range.

So, what are the forces? One that pundits continue to cite is expectations for higher inflation. On that, it’s instructive to look at the most recent data. Last week, we got the Federal Reserve’s favored inflation index, the PCE Deflator. It was flat and matched expectations with the headline number showing 1.7% inflation. The core index, which strips out food and energy costs, was 1.5%. The Fed’s target is 2%, so one could argue that inflation remains stubbornly subdued. Markets barely noticed.

This week, we get the Feb jobs report and with it a look at wage inflation. The Jan report showed wages increasing at the fastest pace in years, albeit matching economists’ expectations. I’d wager markets are going to be far more interested in this report than they were the PCE report.

Mar 062018

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By G. Steven Bray

With mortgage rates up about 3/4 of a point since last fall, industry waggers are starting to wonder how higher rates are going to affect the housing market. The conclusions of a recent survey by Redfin say not much.

Redfin asked prospective homebuyers what they would do if rates rise above 5%. Only 6% said they would stop looking for a home. An additional 27% said it would slow their plans. However, that was almost balanced by the 21% who said it would speed up their search, and another 21% said they would keep looking, but would look at cheaper homes.

This result indicating higher rates will have a limited effect is consistent with historical evidence. Freddie Mac reviewed the six instances since 1990 that mortgage rates have risen at least 1%. On average, existing home sales fell only 5% and housing starts fell 11%. During one period, sales and starts actually rose.

The conclusion is that rising mortgage rates by themselves have a limited effect on the demand for homeownership. Home seekers at the margins, especially first-time homeowners, may no longer be able to qualify, but most potential homebuyers just adjust their plans and keep looking for their dream homes.

One note: the Freddie review didn’t consider instances of rising mortgage rates coupled with rapidly rising home prices, the situation that exists in a number of metro areas today.

Feb 272018

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By G. Steven Bray

For mortgage rates, the highlight of this week already has passed. It was the semi-annual testimony of the Fed Chair to Congress. This was Chairman Jerome Powell’s first experience at this dog-and-pony show, and he made it through mostly unscathed. Given the newness of his tenure, markets were watching carefully for anything that might suggest a change of course.

Unfortunately, Powell gave them something – probably unintentionally. He candidly stated that he thought the economy had strengthened since the Dec. That really shouldn’t be headline news, but markets interpreted his statement to mean the Fed is going to hike interest rates more than expected. Market rates immediately took off.

Was it a knee-jerk reaction? Probably. Rates recovered a little in the afternoon. Will we regain what we lost? Who knows? On the positive side, rates topped out at the top of their recent range before retreating a little. This gives us hope that markets have established a ceiling for now.

The rest of the week offers some more juicy economic data including 4th quarter GDP and consumer sentiment. However, I suspect rate movement is more likely to be dominated by end-of-month trade-flows, which can be unpredictable. If your rate isn’t locked, float cautiously. If rates break higher, I think we could lose another 1/8% fairly quickly.

Mortgage insurance companies tighten credit

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Feb 232018

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By G. Steven Bray

As you’re probably aware, when buying a home, if your down payment is less than 20%, your mortgage payment will include mortgage insurance. This insurance is the lender’s way sharing some of the risk associated with more highly leveraged loans.

We call companies that specialize in this form of insurance mortgage insurance or MI companies – pretty clever, huh – and they often have special guidelines that apply to loans that require their product.

Recently, the MI companies expressed concern about Fannie Mae and Freddie Mac increasing the amount of debt they’re willing to accept for a borrower receiving a conventional loan. Both now accept loans for which the borrower’s debts equal up to 50% of the borrower’s gross income.

Four of the MI companies announced that starting next month, they will require a 700 credit score anytime the borrower’s debt exceeds 45% of gross income. One company further is requiring a min 5% down payment in such cases. (Recall that it’s possible to get a conventional loan with as little as 3% down.)

I don’t expect this will affect a huge number of borrowers as most folks having lower credit scores and making small down payments find it more advantageous to use the FHA program. However, it does represent the first tightening of credit standards I’ve seen in a while.

Rate update: The case against higher interest rates

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Feb 212018

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By G. Steven Bray

Last week’s inflation report validated investors’ fears about inflation. It ticked up ever so slightly. Interest rates took notice and resumed their march higher.

Here’s what I find interesting about the recent rally in bond yields. The only thing that’s really changed in the last couple months, economically speaking, is the tax plan. While that may add to the Federal debt, we doubled the Federal debt over the last ten years, and markets seemed to shrug. I find it hard to believe they’ve suddenly found religion on the matter.

Some pundits also like to cite Trump’s infrastructure plan as ballooning the debt. It might or it might not, but right now it’s nothing more than policy position. I don’t think it can explain the big jump in rates.

So, that brings us back to inflation. Reported inflation did tick up, but the core rate still is under 2%. It’s likely the uptick is a result of a roughly 50% increase in the price of crude oil since last summer.

I’m not suggesting that you sit around waiting for rates to fall again. However, I am suggesting that the rise has more to do with market action than with economic fundamentals. If I’m correct, that at least gives us hope that the forces for higher rates will abate soon.

Rate update: Inflation: fear or reality?

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Feb 132018

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By G. Steven Bray

After rising to the highest levels in over 4 years, interest rates are catching their breath, but I think it’s temporary. As we’ve discussed, the rapid rise seems to be predicated to a large extent on fears that inflation finally will come out of hibernation. Remember that inflation erodes the value of a currency. Thus, investors insist upon higher yields when they anticipate it.

I don’t think the fears are wholly irrational for reasons we’ve discussed, but the reality is we’ve seen very few signs of inflation so far. That could change tomorrow with the release of the Consumer Price Index. This isn’t the Fed’s preferred inflation metric, but being the granddaddy of inflation reports, it’s probably the one markets watch most keenly.

Unfortunately, I’m afraid the downside risk for this report is greater than the upside gain. By that, I mean if the reported value shows even a tenth of a percent increase, rates could quickly rise another 1/8%. If the reading is level or even slightly lower than last month, it should be positive for rates, but I don’t think they’re likely to fall very quickly. Markets seem convinced that inflation is out there hiding somewhere. I think it would take a few more months of continued tame inflation readings before markets will believe again that inflation is not a concern.

So, if you haven’t locked your interest rate, floating through tomorrow carries an outsized risk. If your outlook is a couple months into the future, there’s still hope. The longer inflation doesn’t materialize to validate market fears, the better the chances rates will find a ceiling and provide us with a bounce lower.

Rate update: The gift of volatility

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Feb 072018

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By G. Steven Bray

The stock market whipsaw has given mortgage rates a respite from their recent, dramatic rise, but I’m afraid the pause may be all too brief.

Interest rates have been on a tear of late rising a half percent in the last two months. Talking heads, who mostly ignored this until very recently, have been crawling all over each other trying to explain it. Their conclusion – it’s inflation. The only problem is economic reports still show inflation trending below the Fed’s target.

So, maybe it’s the expectations for future inflation. The problem with that is measures of inflation expectations have been rooted. The inflation component of inflation-adjusted Treasury rates rose a bit last fall (when we first started talking about inflation), but it really hasn’t changed in the last month.

So, maybe it’s just silly season stuff. If that’s true, then it’s quite possible the inflation hysteria will fade away over time, allowing rates to slowly trend back down.

So, how should you play this? If you need to close soon, I would favor locking your rate. This just doesn’t feel like the “big correction,” and I think rates still could go higher.

If your time horizon is a few months out, here’s what I would watch.

– The jobs report last Fri showed the highest wage growth since 2009. That’s great news, but the growth rate, 2.9%, matched expectations. Markets already should have accounted for it. However, watch this rate going forward. If it keeps rising, it could foretell rising inflation.

– The Fed has said it will raise short term rates 3 times this year. If the Fed signals a change of heart, it will affect interest rates.

– The Atlanta Fed shows 1st quarter GDP up over 5%. If this number holds, it could put pressure on the big Fed to change its rate hike plans.

– Finally, the Fed is buying fewer bonds, meaning other buyers will have to pick up the slack. So far, this seems to be affecting sentiment more than market demand. However, as the Fed continues to taper its buying, at some point it could put pressure on rates. Additionally, traders are convinced that central bankers worldwide are ready to follow the Fed’s lead. So far, bankers are denying it, but the eventual end of easy money will affect rates.

Rate update: Pick a bail-out point

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Jan 232018

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By G. Steven Bray

Mortgage rates are the highest they’ve been in about 9 months. That sounds alarming until you remember that we’re still only a percentage point away from the all-time low 30y rate. However, given that rates have been so low for so long, it’s rational to wonder if we’ve seen the end of historically low rates.

First, let’s look again at what seems to be driving the rate increase. The biggest source of inspiration is expectations – expectations for inflation and economic growth. Expectations influence the actions of bond investors. Those expectations started shifting last fall and became more positive with passage of tax reform. Markets expect US growth to accelerate this year, and given labor market conditions and recent corporate announcements of higher employee pay, it’s reasonable to conclude inflation may shift higher. As we know, inflation is the mortal enemy of low interest rates.

Rates also respond to supply and demand. As part of its quantitative easing program, the Federal Reserve has been the biggest buyer of mortgage bonds. Last fall, the Fed announced it would start tapering those purchases. It could take higher rates to entice other buyers to pick up the supply the Fed was buying.

All this makes it sound like higher rates are inevitable, and for the short term, that may be true. However, the Fed still is befuddled why inflation has been subdued for so long. A couple factors that have kept a lid on inflation, falling commodity prices and concerns about the global economy, could push rates lower again.

So, what to do if you need to lock your mortgage rate? Even when rates are in an uptrend, we often see temporary dips that are good locking opportunities, and we saw one today. Take advantage of a dip if you can, but pick your bail out point. If rates hit it, lock and cut your losses. I’m concerned that if rates start rising again this week, they won’t stop until they’re 1/4% to 3/8% higher.

Equifax data breach prompts Fannie to change guidelines

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Jan 202018

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By G. Steven Bray

The recent Equifax data breach affected millions of consumers. One of the remedies suggested by cybersecurity experts was for consumers to freeze their credit files with Equifax. The credit bureau made it easy for consumers to initiate the freeze, so many followed the advice.

Unfortunately, cybersecurity experts aren’t mortgage experts, so they didn’t realize the potential ramifications of freezing one’s credit. Mortgage guidelines require a lender to obtain credit information from all three major credit bureaus. If credit has been frozen, the applicant must unfreeze the file before the lender can approve the loan.

Fannie Mae recognized the potentially significant impact of this situation and changed its guidelines. For now, if a borrower’s credit file is frozen at one credit bureau, a lender can proceed as long as credit data is available from the other two bureaus and at least one of them reports a score.

Rising home prices lead to higher loan limits

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Jan 172018

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By G. Steven Bray

Rising home prices have prompted regulators to increase loan limits for standard loan programs. Fannie Mae and Freddie Mac raised the limit for their conventional, conforming loans by almost 7% to $453,100. This limit applies to all areas of TX and is in effect now.

FHA also raised its loan limit, but the limit varies by county. FHA sets the limit to 115% of the median home price in an area with a ceiling of $679,650 and a floor of $294,515. The floor applies to areas where 115% of the median home price does not reach that level.

TX home prices haven’t reached levels at which the ceiling would apply; however, four TX metros do have a limit greater than the floor. Austin’s limit rose $23k to $384,100 for a single-family home. The DFW limit rose about the same amount to $386,400, still the highest in the state. San Antonio’s limit rose by the greatest amount, over $32k, to $359,950. Houston, still recovering from the oil industry downturn, didn’t see any change, with the limit remaining $331,200. Remember that these limits apply to all the counties in the metro, not just the cities themselves.

The limit for the VA program mirrors the Fannie/Freddie limit at $453,100. USDA programs shouldn’t be affected because loan size is driven by annual income limits, not median home prices.

These limits apply to single-family homes. Higher limits apply for two- to four-unit properties.