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.

How mortgages practice social distancing

 Loan Guidelines  Comments Off on How mortgages practice social distancing
Mar 272020
 

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

By G. Steven Bray

The realities of social distancing and shelter-in-place orders are impacting the real estate industry.  For those who are trying to buy or refinance a home, those realities could impact your ability to close your loan.  The Federal Housing Finance Agency (FHFA) has taken notice and in response has instructed Fannie Mae and Freddie Mac to ease some of its loan guidelines in two areas.

With respect to appraisals, the FHFA recognized that a standard appraisal in which the appraiser visits and inspects the home is not consistent with virus containment measures.  Instead, Fannie and Freddie have agreed to accept appraisal alternatives with some conditions. For most purchase transactions, if the lender uses what’s called a desktop appraisal – for which the appraiser relies on public records, multiple listing service information, and other third-party data sources to identify the property characteristics – and the estimated value is within limits established by Fannie and Freddie, the lender won’t be held accountable for the value, which means the lender should be willing to close your loan.

With respect to employment, the FHFA recognized that many employers are either shut down or their employees are working remotely.  The traditional verification of employment the lender performs before closing may not be possible. The new guidance allows lenders to accept an email from the borrower’s employer or evidence the employee is still on payroll – such as a recent pay stub or bank statement showing direct deposit of a payroll check.

While these accommodations are great, it’s up to individual lenders to agree to use them.  As lenders still bear some responsibility for loans that default, and given the current economic situation, you may find that your lender isn’t willing to take the risk.

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.

New FICO score may cost you money

 Credit Scoring  Comments Off on New FICO score may cost you money
Jan 292020
 

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

By G. Steven Bray

Fair Issac Corporation is poised to release a new FICO credit scoring model, and for about 40 million American, the changes could cost them money. The new model, FICO 10, will score consumers more strictly for late payments and rising debt levels.

Fair Issac says the new model will help lenders reduce defaults by up to 10%, but for consumers who see their scores drop, it could mean they receive higher interest rates if they qualify at all.

The company says it has further integrated trended data into the model, meaning the models consider not only a consumer’s current account status, but also the account’s payment history for the last 24 months. This should help consumers who are paying more than the minimum monthly payment to reduce their debt. On the negative side, the new model will treat personal loans more harshly, which could hurt consumers who use those loans to consolidate credit card debt.

If you’re planning to buy a home this spring, take a deep breath. It’s highly unlikely you’ll encounter the model while applying for a mortgage. Most of the mortgage industry is stuck in a time capsule – using FICO 4, a model released in 2004. Changing the model requires approval from the Federal Housing Finance Agency, which moves at glacial speed.

While that may sound like good news, keep in mind that FICO 4 has its own issues. FICO 4 scores, what I call “mortgage scores,” tend to be lower than just about any scores available to consumers. Fair Issac has improved its models over the years in ways that also help consumers, and none of those changes are available for mortgage applicants.

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.

Spring homebuying season starts in January

 Real Estate Market  Comments Off on Spring homebuying season starts in January
Jan 142020
 

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

By G. Steven Bray

It used to be that the spring homebuying season was in, well, the springtime. According to Realtor.com, the seasons are a-changing. Homebuyers have started shopping earlier and earlier the last few years. In larger cities this year, the homebuying season may have already started.

This phenomenon is likely the result of the lower number of homes for sale over the last few years. That low inventory combined with rising home prices is leading home shoppers to get an early start. With housing inventory expected to reach record lows this year, Realtor.com says the trend towards early shopping should continue.

The company based its prediction on views of its Web site listings. Jan 2019 was only 1% behind Feb for the highest number of views per listing. That’s a huge change from 2015 when Apr was the top month, and Jan views lagged Apr by 16%.

So, if you plan to buy a home this spring, it’s time to start shopping.

Texas housing market outperforming

 Real Estate Market  Comments Off on Texas housing market outperforming
Jan 132020
 

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

By G. Steven Bray

A survey of 110 economists and real estate experts conducted by Pulsenomics and Zillow forecasts that Austin has the best chance of all major metros to see above-average home price growth this year. Dallas and San Antonio also ranked in the top 10. According to the survey, home prices will grow an average 2.8% this year, but markets in the South are expected to outperform others.

Austin received a likely-to-outperform score of 76 (out of 100). The next closest metro was Charlotte with a score of 59. 83% of respondents said Austin will outperform the average with only 7% saying it will under-perform. (I think those 7% live in a cave somewhere.)

Dallas placed 5th on the list with a score of 34, and San Antonio placed 8th with a score of 32. A positive score means more respondents think the metro will outpeform than under-perform.

So, what does this mean if you’re planning to shop for a home this year? It most likely means higher home prices. Austin’s current inventory of homes for sale is less than 2 months. (Experts say 6 months is a balanced market.) Dallas is under 3 months, and San Antonio is less than 6 months. As the homebuying season ramps up, you can expect a lot of competition for the home of your dreams.

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.

Fed’s plan for higher inflation could raise rates

 Interest Rates  Comments Off on Fed’s plan for higher inflation could raise rates
Dec 162019
 

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

By G. Steven Bray

A recent story in the Financial Times indicated the Federal Reserve is considering a new policy that would encourage higher inflation to make up for periods of low inflation.

The Fed has been frustrated during this recovery by persistently low inflation, lower than its stated target of 2%. This is despite its efforts to prime the economy and expand the money supply and despite record low unemployment, which economic theory suggests should stoke inflation through higher wages.

But super-low inflation sounds good, right? Well, the Fed is concerned that inflation will turn negative, as it has in Japan. Persistently falling prices are a wet blanket on an economy, robbing it of growth, as consumers and businesses postpone purchases in anticipation of lower prices in the future.

So, why should you care? Interest rates primarily have two components. The first component reflects the cost of money, what you pay the lender for the use of its money. The second component reflects expected inflation. Positive inflation means the same amount of money in the future is worth less than it is today.

So, should the Fed announce it’s raising its inflation target, even if the change is not effective, lenders may raise interest rates to account for the possibility of higher future inflation.