Mortgage rates overcame a terrible Monday last week, climbing back to unchanged by Friday. And like most weeks this year, rates were volatile.
Most interesting about last week, though, was that there a ton of news that should have dragged mortgage rates down, but it didn’t seem to happen.
Instead, a soaring U.S. dollar attracted global funds to Wall Street and a renewed demand for all things denominated in U.S. dollars, helping drive up prices in the mortgage bond market.
When mortgage bond prices move higher, mortgage rates move lower.
Like last week, the path of the dollar will likely determine in which direction mortgage rates move between today and Friday. If the dollar increases in value, mortgage rates should fall. And conversely, if the dollar decreases in value, mortgage rates should rise.
Of all the economic data hitting the wires this week, the only one of major importance is the Producer Price Index – a “Cost of Living” reading for American businesses.
Normally, we’d pay attention to the inflation-predicting PPI because inflation causes mortgage rates to rise. This month, however, we’re ignoring it. Oil prices have fallen 20-plus percent since July highs and the PPI reading from last month doesn’t reflect the “current marketplace”.
So, in the absence of hard data, mortgage rates should move with momentum this week. To follow along at home, keep your eyes on Bloomberg and stay close to your loan officer.
It’s during weeks like this that rates can really move.
(Image courtesy: The Wall Street Journal Online)
With the recent passage of the Housing Recover Act of 2008, FHA eliminated all Seller Funded Down Payment Assistance programs. Yesterday they released an additional statement further defining “when”. Here, with a bit of mortgage-speak, is detailed insight:
A Seller or other interested third party cannot participate in a down payment assistance programs on/after October 1, 2008 unless the borrower is approved by September 30, 2008. FHA confirmed the definition of “borrower approved” as follows:
Eligibility will be determined by the following:
- For loans approved through the Automated Underwriting system the “date of the last scoring event” is used. Any resubmission after 9/30/08 will cancel eligibility.
- For manually underwritten loans, eligibility will be determined by the date of underwriter signature. Note: Backdating not allowed.
In addition to the above the FHA appraisal must be completed and underwriter approved by 9/30/08.
Due to this hard deadline make sure your FHA loans utilizing Seller Funded Down Payment Assistance Programs are fully approved on or before 9/30/08.
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It’s not your imagination — getting approved for a home loan is becoming increasingly more difficult.
Taken from the Federal Reserve’s quarterly survey of 84 banks, it illustrates the changing dynamic of mortgage guidelines.
Most notable is the steep curve for “prime” mortgages, a type of home loan given to applicants exhibiting:
- A well-documented credit history
- High credit scores
- Low debt-to-incomes
Americans have come to expect sub-prime loans to be tougher, but it’s the sharp tightening of prime guidelines shows us that nobody is exempt from the newfound underwriting prudence that banks are exhibiting right now.
If you plan to buy or remortgage a home over the next year, consider a popular expression in financial circles — the trend is your friend.
Know that mortgage guidelines will get tougher before they get easier and applicants on the cusp of being approved today will almost certainly be denied a mortgage three months down the road.
Owning real estate and making sound financial decisions requires a tremendous amount of advance planning and, sometimes, looking at the past is the best way to prepare for what’s coming ahead.
According to the Federal Reserve’s survey, what’s coming ahead more mortgage application scrutiny.
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When home sellers accepts a contract on MLS-listed property, the property’s official status changes from “Active” to “Pending”.
By measuring the number of “Pending” homes nationwide, the National Association of Realtors® publishes its once-monthly Pending Homes Sales Index.
The real estate industry group positions the report as a predictor of future home sales activity, stating that 80 percent of homes under contract will “close” within 60 days, and most others will close in within 120 days.
But, although using the Pending Home Sales report as a crystal ball may be its intended use, it may not its best use.
This is because of the index’s methodology:
- It doesn’t measure new construction homes
- It doesn’t track For Sale By Owner properties
- Its sample set covers just 20 percent of MLS transactions
In addition, in a tough mortgage climate such as the one we’re in now, a greater percentage of pending sales will fail to close at all because of lack of financing.
The Pending Home Sales Index still has its place, however — it’s a terrific look at the buy-side demand for homes.
When the Pending Home Sales Index is rising, we can infer that more buyers in the market for homes and this is a signal of market strength. After all, pending sales can’t happen unless there are buyers out there. And with more buyers competing for homes, home prices tend to rise.
This is why the June’s Pending Home Sales report is so intriguing.
In June — for the second time in three months — the Pending Home Sales Index posted a large gain even as economists were calling for a loss. The inference here is that buyers are not only finding good value in all four regions of the country, but are willing to make bids on homes listed for sale.
Now, again, the uptick doesn’t mean that the pending sales will necessarily close, but it does tell us that more home buyers are finding “now” to be a good time to buy a real estate.
That sort of insight is what make the Pending Home Sales Index worth tracking. When buyer demand is rising, the real estate market isn’t usually far behind.
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In a week packed with mortgage news and economic data, mortgage rates swung hard in both directions last week before settling into the weekend slightly higher across the board.
Adjustable-rate mortgages worsened more than their fixed-rate counterparts and both broke a two-week streak in which mortgage rates had improved.
But, if we look at all of the big stories of last week, there was a dramatic overweight of news that is usually “good for rates”.
Those stories included:
In the end, it turned out that the news was so good, investors decided to jump back into the stock market, propelling the Dow Jones 3.6 percent to a 6-week high. This fevered trading action drew investor money away from the bond market — including bonds of the mortgage-backed variety — and that pressured mortgage rates higher.
And, of course, it didn’t help rates when the two biggest insurers of mortgage-backed debt posted large quarterly losses and warned of more delinquencies ahead.
Turning our attention to this week, make note that it is back-heavy on data. Therefore, expect the positive momentum of Thursday and Friday to carry through Monday and possibly Tuesday.
By Wednesday, however all bets are off — that’s when July’s Retail Sales data is released. Furthermore, Retail Sales is backed up Thursday by the Consumer Price Index, a Cost of Living measurement.
Both data points are correlated with inflation so higher-than-expected readings may cause mortgage rates to rise.
Regardless, given that mortgage rates are now moving more in a hour than they used to in a day, be prepared to get your mortgage rate quotes quickly and be ready to act on them.
Just 90 minutes later, the quote could be expired.
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For the second consecutive meeting, the Federal Open Market Committee left the Fed Funds Rate unchanged at 2.000 percent.
In its press release, the Federal Reserve addresses inflation, saying that it “has been high”, fingering energy and commodity costs as culprits. The Fed does expects inflation to moderate later this year, however.
Regarding recession, the Fed addressed softening labor markets and tightening credit, and said that high energy prices may slow down economic activity in the months ahead.
The key comment, repeated from the June statement, was this:
Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.
Translated, it reads:
The Federal Reserve expects that its policy changes to-date will help the markets find balance and order.
In other words, the Fed is biased towards a Fed Funds rate pause at its September 16, 2008, meeting barring new developments.
Stock markets are reacting favorably to the FOMC statement, bouncing higher after the 2:15 PM ET release. This movement is pulling money away from mortgage bonds and, as a result, rates are at their worst levels of the day.
Source
Parsing the Fed Statement
The Wall Street Journal Online
August 5, 2008
https://online.wsj.com/internal/mdc/info-fedparse0808.html
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Conforming mortgage guidelines are the Home Loan Rule Book, delineating between applicants that approved for a mortgage and those that do not.
Effective today, the rule book just got a little bit tougher.
According to Fannie Mae, homeowners converting their primary residence into a second home or investment property will be subject to additional underwriting scrutiny. Fannie Mae is leery of lending to people that may be over-extended.
The complete underwriting update is available at the Fannie Mae Web site but some of the more important points are summarized below, divided into Second Home and Investment Property.
Second Home Guideline Changes
- Without 30 percent equity in the second home, mortgage applicants must have 6 months worth of PITI reserves for both properties in their bank accounts.
- With 30 percent equity, the PITI reserve can be reduced to 2 months.
Previously, there was no minimum reserve requirement.
Investment Property Guideline Changes
- With 30 percent equity in an investment property, 75% of the monthly rental income can be applied toward the applicant’s monthly household income.
- Without 30 percent equity, rental income may not be applied to the applicant’s monthly household income and 6 months PITI is required for both properties.
Previously, 75% of the rental income was allowable regardless of equity, and minimum reserve requirements were 2 months.
Even though just a small percentage of Americans own second homes or investment properties, the conforming mortgage guideline changes impacts homeowners everywhere.
This is because more restrictive guidlines lead to two separate, but concurrent, outcomes:
- The demand for homes reduces because fewer buyers qualify for mortgages
- The supply of homes increases because fewer sellers can refinance into more affordable home loan
Less demand and more supply places downward pressure on home prices.
Now, remember that mortgage guidelines continuously evolve and what’s accurate as August 1, 2008, may not be accurate six months down the road. In other words, confirm what you’re reading about mortgages online with your loan officer before making any real estate-related decisions.
Dateline: Tucson, AZ, Tyler Ford and Todd Abelson mortgage market update
In a week in which stock markets moved 1 percent or more on four separate days, mortgage markets displayed a relative calmness that helped pull rates lower.
It was the second consecutive week that mortgage rates improved.
Last week’s biggest story came Monday when the housing bill was passed into law. The new law provides lifelines to the housing market’s far-reaching corners including to homeowners, to lenders, and to mortgage-bond securitizers like Fannie Mae.
To the mortgage markets, the law adds stability to the system. Because the severity of losses is likely to reduce, mortgage debt is suddenly more attractive to global investors which includes pension funds, hedge funds, and other nations.
With fewer mortgage-related losses expected, demand for mortgage debt increased and that helped pressure mortgage rates lower.
There was other big news last week, too, and it came in the form of employment data.
For the seventh straight month, the economy lost jobs and it has now shed close to a half-million jobs so far this year — a minuscule one-third-of-one-percent of the entire U.S. workforce.
Despite that smallness, though, unemployment among Americans is a trend worth watching.
When fewer Americans are working, fewer Americans are spending and that can slow down the U.S. economy. For now, this sort of mild slowdown appears to be leading mortgage rates lower but too many lost jobs could reverse the trend.
This week, there are two big events on the calendar — Monday’s Personal Spending and Personal Income figures, and Tuesday’s Federal Open Market Committee meeting.
The Fed is widely expected to hold the Federal Funds Rate at 2.000 percent but — as is always the case — it’s not what the Fed does, it’s what the Fed says. If the Fed talks tough against inflation, expect mortgage rates to rise.
(Images courtesy: The Wall Street Journal Online)
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