Investing Curiouscatblog

Tag: mortgage

  • Fed Funds Rate Changes Don’t Indicate Mortgage Rate Changes

    The recent drastic reductions again emphasize (once again) that changes in the federal funds rate are not correlated with changes in the 30 year fixed mortgage rate. In the last 4 months the discount rate has been reduced nearly 200 basis points, while 30 year fixed mortgage rates have fallen 18 basis points.

    I have update my article showing the historical comparison of 30 year fixed mortgage rates and the federal funds rate. The chart shows the federal funds rate and the 30 year fixed rate mortgage rate from January 2000 through April 2008 (for more details see the article).

    30 year fixed mortgage rates and the federal funds rate 200-2007

    There is not a significant correlation between moves in federal funds rate and 30 year mortgage rates that can be used for those looking to determine short term (over a few days, weeks or months) moves in the 30 year fixed mortgage rates. For example if 30 year rates are at 6% and the federal reserve drops the federal funds rate 50 basis points that tells you little about what the 30 year rate will do. No matter how often those that should know better repeat the belief that there is such a correlation you can look at the actual data in the graph above to see that it is not the case.

    Related: real estate articles – Affect of Fed Funds Rates Changes on Mortgage Rates – How Not to Convert Equity – more posts on financial literacy
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  • How Much Worse Can the Mortgage Crisis Get?

    How bad is the mortgage crisis going to get?

    My preferred metric is the ratio of home prices to rental rates. By that measure, average home prices nationally got way too high. We’ll probably basically retrace all that. So that’s about a 25% decline in overall home prices. Only a fraction of that’s happened so far. Of course, it varies a lot. In places like Houston or Atlanta, where home prices have not risen much compared with underlying rents, the decline will be relatively small. In places like Miami or Los Angeles, you could be looking at 40% or 50% declines.

    This interview of Paul Krugman is worth reading. And it does seem to me the magnitude of the mortgage crisis is very large and likely will result in national declines in home prices of over 15% from the peak. Which is a very large decline. And in local markets declines of 35% seem likely.

    Related: Home Price Declines Exceeding 10% Seen for 20% of Housing Markets (Sep 2007) – Home Values and Rental Rates – Real Estate Median Prices Down 1.5% in the Last Year (Aug 2007) – Real Estate articles

  • Mortgage Rates Rising

    The next shoe to drop in housing

    The national average rate on a 30-year fixed-rate mortgage was 5.96% Thursday, after jumping to 6.08% earlier this week, according to Bankrate.com. Rates on a 30-year fixed mortgage were about 5.90% a week ago. A borrower looking for a 5-year adjustable-rate mortgage would pay 5.71% today, up from around 5.03% a week ago.
    …
    Fannie and Freddie are demanding higher credit scores and charging higher rates for those who don’t have them. Until recently, a borrower with a 620 score might pay the same as one with a 680 score, said Victoria Bingham, chief executive with Pacific Rim Mortgage in Tigard, Ore.

    But now that person might have to pay a half percentage point more. With today’s rates, that translates into 6.75% for a 30-year fixed-rate mortgage instead of 6.25%, or $74 more a month on a $225,000 loan, typical for her client base.

    Borrowers must also put more money down, especially if they don’t have stellar credit. For instance, those with down payments of less than 5% need a credit score of at least 680, said Steven Plaisance, executive vice president of Arvest Mortgage Co. in Tulsa, Ok. Previously, he could make loans to people without big down payments if they had other strong points, such as stable employment.

    Related: Federal Funds Rate and 30 Year Fixed Mortgage Rate – Mortgage Payments by Credit Score (Aug 2007) – learn about mortgage terms – Beginning of the End of Housing Bubble? – How Not to Convert Equity

  • Central Bank Intervention Unprecedented in scale and Scope

    Central bank intervention … unprecedented in scale and scope by Brad Setser

    The Fed though is in the process of a very large change in the composition of its balance sheet, as it will temporarily be holding Agencies as an asset against its liabilities rather than Treasuries. It hasn’t formally bought the Agencies though, only allowed banks and broker dealers with Agencies and certain private mortgage-backed securities on hand to use them as collateral to borrow (temporarily) the Fed’s existing Treasuries.
    …
    As around $900b, the fed’s balance sheet is something like 6-7% of US GDP. With $1600b in foreign assets, the PBoC’s external balance sheet alone is more like 50% of China’s GDP.
    …
    But with Martin Wolf now arguing that scenarios with more than a trillion in credit market losses cannot be ruled out – even more unprecedented central bank — and government — action cannot be entirely ruled out. The scale of the “great unwind” has been stunning. The pace of change in the policy debate only slightly less so.

    Related: Fed takes leap towards the unthinkable – Goldman Sachs Rakes In Profit in Credit Crisis – Misuse of Statistics: Mania in Financial Markets – Why do we Have a Federal Reserve Board?

  • Fed Plans To Curb Mortgage Excesses

    Fed Plans To Curb Mortgage Excesses, way late but at least they may do something.

    Before Ben S. Bernanke became chairman nearly two years ago, “the Fed racked up a long record of neglect in regards to predatory lending,” said Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.), who introduced his version of mortgage-lending reform this week

    Yes the Fed should have taken more aggressive action. But the legislators should not throw stones at others – what have they done? A recent example – they want to lower the down payment required for FHA loans to 1.5%. I can’t take anyone’s opinion, of how others should have behaved seriously, when they vote for such legislation in the midst of a subprime mortgage loan crisis. What are these people thinking. Ok, everyone now says loan standards were to lax, people stopped putting 20% or even 10% down on home purchase. Ok, lets blame the Fed and then lower the down payment required for federal backed mortgages to 1.5% (from the already very low 3%). Did this crazy legislation just barely squeak by? Nope, passed the senate 93-1! Lets have the politicians explain what they have done right before they just criticize others. Their game of blaming others while doing next to nothing positive themselves is sad.

    “If you are too severe or too draconian, you are going to eliminate value in the marketplace,” said Steve O’Connor, senior vice president of government affairs for the Mortgage Bankers Association.

    Another real voice of reason. The Mortgage Bankers Association (MBA) really expects anyone to pay any attention to their opinions. They have someone managed to create a threat to the economy so large that $90 a barrel oil is not the threat to the economy people are worried about. I think anyone that reads these opinions from the MBA and doesn’t see them as self serving statements and nothing else should be ashamed of themselves. Shouldn’t the Washington Post at least include some follow up question on why the public should listen to that organization. What was there senior vice president saying 5 years ago to ensure the economy wasn’t threatened by the reckless action of their members? We seem to have forgotten that individuals and organization should be held accountable for their actions. Quote some people that are not only concerned with their benefits without regard for what it does to everyone else. If that is not what they are doing, lets see 5 policy recommendations they have made in the last 5 years that are good for America and bad for you and your members. I don’t think the rest of us believe what is good for the MBA is good for America.

    Related: Why do we Have a Federal Reserve Board? – Ignorance of Many Mortgage Holders – How Not to Convert Equity – Washington Paying Out Money it Doesn’t Have – Legislation to Address the Worst Credit Card Fee Abuse (Maybe) – Lobbyists Keep Tax Off Billion Dollar Private Equities Deals and On For Our Grandchildren

  • Freezing Mortgage Rates

    “If you owe the bank $100 that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.” J. Paul Getty

    Individual mortgage holders are in the first situation; together they are in the second.

    I want to look into this whole situation of freezing some adjustable rates (that are scheduled to increase for adjustable rate mortgages) more – because I don’t really understand what is actually involved in the “agreement.” But my impression is that the government is paying nothing, giving no other incentives (like reducing taxes owed). With that being the case I can’t see why some people think it is bad. some people are saying it is unfair to people that were careful They don’t get this benefit. That makes little sense to me. One of the things you have to learn about investing and personal finance is there are no guaranties. You enter into mortgages with your best guess about what will happen (as the lender or the one receiving the loan).

    From my very surface understanding of what is involved is that the government used some moral suasion to try and get lenders to step up and provide more favorable terms than originally agreed to. I not that confident such a think we end up happening in practice but I don’t have a problem with the attempt. It is an interesting case where no single mortgage holder owes enough to harm the lenders but together the class does hold enough to harm them. So the lenders have gotten themselves into a situation where the problem is not just one for the mortgage holders but one that could harm them (because they have too much lent to the class – risky residential mortgages).

    The risk of a cascading bad impact. One waive of foreclosures triggers another and another… Thus creating huge losses for lenders. For that reason it makes sense to me that if (which is a huge if) they class of lenders can all agree to sacrifice some to avoid starting the runaway cascade of foreclosures they may benefit. Of course each individual lender would likely benefit if just everyone but them sacrificed.

    It seems to me if there really is some significant amount of freezing of loan rates that will have a significant impact on how much harm the foreclosures do to real estate prices and the economy. And so I can see how such an agreement could benefit everyone. But as I say I really need to read more about all this. And I am skeptical that individual lenders will try to limit there sacrifices and as each cuts back there sacrifice the risk of the cascade increases.

    An actually bailout – government money paying off those that took bad financial risks I would be very reluctant to support.

    Related: How Not to Convert Equity – Housing Inventory Glut – mortgage terms explained – 30 year fixed Mortgage Rates – Homes Entering Foreclosure at Record – Ignorance of Many Mortgage Holders – Beginning of the End of Housing Bubble? (April 2004)
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  • Ignorance of Many Mortgage Holders

    Mortgage ignorance rampant

    In the survey of 1,004 adults conducted by Gfk Roper, homeowners with mortgages were asked what type of mortgage they had. A stunning 34 percent of the homeowners had no idea. “That’s a symptom of the complexity of the mortgage market today,” says Ken Wade, chief executive officer of NeighborWorks America, a nonprofit organization that provides financing and training to neighborhood-based housing organizations.

    Sorry but that is a symptom of massive ignorance. Not knowing an incredible important aspect of your largest financial decision is like not know what days you are suppose to show up for work. There is a minimum amount of knowledge people should have that sign a mortgage. I think at least 34% of mortgage holders need to read this blog. Ok, I probably alienated all of them, so if that is the case then they should read some of the blogs we list in our blogroll.

    Nationwide, 36 percent of homeowners who now have an ARM said they planned to refinance to a fixed-rate loan when their ARM changes. Only 2 percent planned to refinance into another ARM.

    There is a big problem in that logic – it could maybe make sense if you had good reason to believe rates will be lower in the future than when you took out the loan (but that is a very questionable). I don’t know why someone would think that in the last couple of years – the risks have been much better than rates would go up a few hundred basis points than down that much. Basically I can see someone that is very financially savvy using an adjustable mortgage to qualify and if they know they will move in a fairly short period…

    Related: Learning About Mortgages – Mortgage Defaults: Latest Woe for Housing – How Not to Convert Equity – 30 year fixed Mortgage Rates

  • How Not to Convert Equity

    CNNMoney is not exactly intellectual discussion of economic and investing issues but normally it offers fairly good material for the large number of people. Especially those who really don’t want to read Warren Buffett or Brad Setser. Still the following quote in their article, Cashing in on hot real estate is just wrong:

    They also have one extremely valuable asset: a house in the now trendy Silverlake neighborhood of Los Angeles that’s worth $1 million, nearly four times what they paid in 1995. The equity, Handel says, is “lovely,” but it’s not doing them much good right now.
    …
    San Diego-based certified financial planners Christopher Van Slyke and Terry Green recommend an unconventional plan: taking out a new $500,000 ARM.

    Handel and Laport can pay off their existing mortgage before the rate rises and retire their other debts. They can put the remaining $200,000 into stock and bond funds.

    To be sure, borrowing against a house to put the proceeds into the market rarely makes sense. But in Handel and Laport’s case it does because so much of their net worth is tied up in their home, and the super-hot L.A. real estate market looks primed for a fall…

    They can convert equity that might melt away.

    They can what? In no way does increasing their leverage convert equity that might melt away. Any amount of “melting away” will still happen after this increase in leverage – no conversion has happened. They still have a full ownership interest in the real estate. If the value of their house fell $300,000 before or after this supposed “conversion” they would “lose” (on paper) the same amount: $300,000. The investment risk for the house has not changed (for the whole portfolio you could argue it has but that gets complicated and subject to debate).
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