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.

Feb 242018

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By G. Steven Bray

Fannie Mae says consumers are stoked about housing. Does this portend an active spring home season?

Fannie’s Home Purchase Sentiment Index rose to an all-time high in Jan with 5 of the 6 survey components improving. Interestingly, the only component that didn’t improve was the percentage of households saying their income rose significantly over the last year. That result may change as the tax cuts kick in.

Of the components that rose, the main driver was respondents’ belief that home prices will keep rising. 58% said prices will rise whereas only 6% believe they will fall.

Respondents also believe this is a good time to buy a home (by a 59% to 32% margin) and a good time to sell (by a 65% to 27% margin). The good time to sell reading was also an all-time survey high. It will be interesting to see if this translates into more housing inventory this spring.

Finally, I thought it was interesting given the recent rise in mortgage rates that the share of respondents thinking rates will rise remained fairly constant. I suspect that component also may change in the coming months.

Mortgage insurance companies tighten credit

 Loan Guidelines, Residential Mortgage  Comments Off on Mortgage insurance companies tighten credit
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

 Interest Rates, Residential Mortgage  Comments Off on Rate update: The case against higher interest rates
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?

 Interest Rates, Residential Mortgage  Comments Off on Rate update: Inflation: fear or reality?
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

 Interest Rates, Residential Mortgage  Comments Off on Rate update: The gift of volatility
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.

Important news before you get a HELOC

 Owner-occupied, Regulations  Comments Off on Important news before you get a HELOC
Feb 052018

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By G. Steven Bray

With rising home prices, you may be eyeing your increasing home equity with plans for remodeling or some other important need. However, before you do, take a few minutes to consider how the changes to the mortgage interest deduction might affect your tax bill.

It’s been well-reported that the new tax law reduces the max mortgage that qualifies for the mortgage interest deduction from $1m to $750k. For most of us, that’s not a big deal. The bigger deal is that starting this year, interest paid on a home equity line of credit (HELOC) no longer will be eligible for the deduction.

When you take cash out of your home, you have a couple options if you have an existing first mortgage. You can refinance the first mortgage adding to the balance the amount of cash you want, a so-called cash-out refinance, or you can use a HELOC, which typically is a 2nd lien on your home that leaves the existing first mortgage in place. Many folks prefer a HELOC because they have a really low rate for their existing first mortgage.

With the new tax law, the interest paid on a cash-out refinance is still eligible for the mortgage interest deduction. The interest paid on a HELOC is not.

So, before you decide which option to use, consider whether getting a new first mortgage would allow you to itemize your deductions. If it does, then you may find it’s a better financial decision to cash-out refinance your existing mortgage even though you may end up with a slightly higher interest rate.

Moving mortgaged rental property to LLC is okay

 Investment, Loan Guidelines  Comments Off on Moving mortgaged rental property to LLC is okay
Jan 292018

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By G. Steven Bray

Investors in residential real estate have long been dogged by the “due on sale” clause in the standard promissory note. It states that the lender may call the note due upon the sale or transfer of ownership of the property. A preferred vehicle for ownership of investment properties is a limited liability company because it provides some legal separation between the property and the investor’s other assets.

Fannie Mae requires that a borrower be personally liable on a note, meaning the borrower must sign the note in his/her name. Fannie won’t allow the name on the property’s title to be different from the name on the note, so investors sometimes quit claim the property title to their LLC after closing. However, this could trigger the due on sale clause if the loan servicer chooses to enforce it.

I have great news! Late last year, Fannie changed its servicing guidelines so that a change of ownership to an LLC in which the borrower owns a majority interest is acceptable and does NOT violate the terms of the note.

A couple important caveats:

– The change applies only to loans purchased by Fannie after 6/1/16; and

– The title must revert to the borrower prior to refinancing.

Fannie still will not allow the LLC to sign the note, and it still requires the property’s title to match the borrower’s name. However, Fannie will allow the time the property was held in the LLC to count towards the 6-month seasoning period for a cash-out refinance.

I did check with Freddie Mac, and it has not followed Fannie’s lead on this issue.