Financial Blog

A lot of people have been wondering why mortgage rates are jumping — even as the Federal Reserve is busy cutting interest rates. This week, Fed Chairman Ben Bernanke makes a special guest appearance at the Answer Desk to help explain what’s going on.

One of the more touching moments of Mr. Bernanke’s two-day testimony on Capitol Hill last week came when Democratic Congressman Luis Gutierrez of Illinois quizzed the Fed Chairman on this very subject.

The Congressman told the Chairman of making a call last month to his daughter, a first-time home buyer, to offer her some fatherly guidance on locking in her mortgage rate.

“I think I gave her good advice: I said, ‘Go and lock it in for as long as you can,’” Guiterrez said. “Because it was like 5-1/2 percent. I said, ‘It’s time, honey.’ And then I checked The Wall Street Journal, and it’s like 6.38 percent. What happened?”

What happened is that mortgage rates jumped by three-quarters of a percentage point in a matter of weeks — reversing a sharp drop that began in the middle of last year.

Here’s Mr. Bernanke’s answer to Congressman Guiterrez from the hearing transcript:

“Even as the Fed has lowered interest rates, and as the general pattern of interest rates has declined, the pressures in the credit markets have caused greater and greater spread, particularly for risky borrowers, like risky firms, for example,” he said. “Our easing is intended to, in some sense, you know, respond to this tightening of credit conditions. And I believe we’ve, you know, succeeded in doing that, but there certainly is some offset that comes from widening spreads. This is what’s happening in the mortgage market.”

The Congressman moved on to another question, leaving the discussion of tightening credit and widening spreads for another time.

But, judging from our mail, the question is still on many readers’ minds these days. How can mortgage rates go up if the Fed is cutting rates? Doesn’t that mean that banks are, in effect, price gouging?

It turns out that lenders don’t control the price of long-term loans any more than consumers do. What’s happened in the past month or so is that, even as the Fed has been aggressively slashing short-term rates — and flooding the banking system with as much money it will take — the global capital markets are still very nervous about the latest headlines on rising foreclosures, a weakening economy and losses from banks and other lenders that have topped $100 billion — so far.

It turns out there are two mechanisms for setting interest rates. All the Fed can do is target the interest rate paid by U.S. banks for overnight loans among themselves. But using short-term loans to back long-term mortgages can be risky.

If National Bank takes out a short-term loan of $200,000 from the Fed and lends it to Jane HomeBuyer for 30 years, it still has to come up with $200,000 right away to pay it back. It could do so with another short-term loan, but then it has to keep doing this over and over, indefinitely “rolling it over.” If, during this process, short term rates go up, the bank loses money.

That’s why mortgage lenders making long-term loans turn to the capital markets — a global network of banks, corporations, institutions, pension funds, governments and individual investors who buy and sell money. When these players lend money for the long term, they agree to get paid back in installments, plus an interest rate that’s usually fixed for the life of the loan. As long as the rate the mortgage lender agrees to pay the investor is lower that the rate it charges its customer, the lender makes money.

Filed under: Mortgage by admin No Comments »

The sharp drop in mortgage rates has sparked a wave of refinancing. But not everyone qualifies.

When Elaine Chen, a 39-year-old marketing executive in New York, saw interest rates falling in January, she called her mortgage broker to see if she could get a lower rate to finance Manhattan condo. She estimated the lower rate could save her $300 per month.

Her broker said she could get a 5.625 percent rate on a 30-year, fixed-rate mortgage if she hurried and paid $5,000 in closing fees. But Chen, suspecting that rates would fall more, didn’t bite. By the time rates fell further, she couldn’t get her busy broker on the phone.

“I never heard back from him,” she said. “I still haven’t decided what I’m going to do. I’m not sure I can act fast enough to catch the best rates.”

Ted Woelken, a 51-year old telecom manager in Sammamish, Wash., said he and his wife decided against refinancing their adjustable rate mortgage, which is not due to reset for two more years. To justify moving to a 30-year fixed loan, Woelken said they would need to get 5.1 percent rate rather than the 5.4 percent rate their lender offered.

“When you have a first and second mortgage, just because rates on 30-year fixed loans are coming down doesn’t mean you’ll benefit right away by converting,” he said. “We have two more years below 5 percent, so we’ll wait and look again.”

Chen and Woelken, like many borrowers, are finding that their options aren’t as attractive as they’d expected. They’re lucky though. With full-time jobs, good credit, and more than 20 percent equity apiece in their properties, refinancing is largely a matter of optimizing affordable loans. Other borrowers with spotty credit or job histories, and those facing adjustable rate mortgage resets or living in a home that’s lost value, will have a harder time refinancing and may face difficult repercussions for failing to do so.

Wondering if you can refinance? Here’s a look at possible scenarios:

You can consider refinancing if …

You have a fixed or adjustable mortgage with an interest rate over 6 percent. With rates on 30-year fixed loans below 6 percent, many homeowners want to lower monthly payments or move from an adjustable to a fixed mortgage. You’ll need to run numbers to see if closing costs justify the new rate’s monthly payment savings, but many lenders say that if you can save 50 basis points (0.5 percent), or even 25 basis points with no closing costs, it might be worthwhile.

Your credit score is over 650. To get a good rate on a non-government loan, your score needs to be at least 650 — maybe 680, depending on the lender and market. It’s worth pulling scores before approaching lenders, as scores help determine your rates.

You live in an expensive urban market and have a mortgage over $417,000. Government-set maximum limits on conforming mortgages, previously capped at $417,000 in most markets, will rise starting in March to $729,750 in California and other pricier markets. If your loan exceeds $417,000, you could refinance from a “non-conforming” to a more desirable “confirming” loan.

Dick Lepre, senior loan officer at Residential Pacific Mortgage in San Francisco, says he expects more than 50 percent of mortgage loans in California have balances that fall in the new, higher range, and thus his state will see what he called “a massive refinancing boom.” Dave Zitting, chief executive of Primary Residential Mortgage in Salt Lake City, agrees, saying: “It’s going to fend off a recession.”

You’re eligible to refinance to an FHA loan. Loans offered by Federal Housing Administration, typically targeted at first-time or smaller-budgeted buyers, are usually offered to people buying a property priced below a local market’s median price. New rules going into effect in March are lifting FHA lending limits to 125 percent of median prices in a local market (up to $729,750 in some markets) and will help many borrowers, says Bob Walters, chief economist for Quicken Loans.

Bill Glavin, special assistant to the FHA commissioner, says FHA refinance loans don’t have strict credit score criteria and those who use them can qualify with as little as 3 percent equity in their property —even in a so-called “declining market” where other lenders demand more equity.

You have at least 10 percent equity in your home and aren’t FHA-eligible. To get good rates, you’ll need to have equity in the home. In most markets, 10 percent equity is a minimum. In more volatile markets like California, lenders want to see as much as 30 percent equity, says David Zugheri, president of First Houston Mortgage, which lends in Texas, Florida and California. If you have minimal equity but have poured work into your home, an appraisal may reveal that remodeling has increased your home value sufficiently to create the equity you need.

Source: msnbc

Filed under: Mortgage by admin No Comments »

Central bank will propose rules on Tuesday to protect mortgage borrowers from banks and brokers.

WASHINGTON (AP) — People taking out home mortgages may gain new protections soon against shady lending practices as the Federal Reserve seeks to back even the riskiest borrowers, already hit hardest by the housing and credit crunches.

Rules expected to be proposed Tuesday would apply to loans made by all types of lenders, including banks and brokers. The plan from the Fed, which has regulatory powers over the nation’s financial system, could be finalized next year. The effective date would be know then.

The Fed is considering:

• barring lenders from penalizing subprime borrowers - those with spotty credit or low incomes - who pay their loans off early.
• forcing lenders to make sure that borrowers, especially subprime borrowers, set aside money to pay for taxes and insurance.
• restricting loans that do not require proof of a borrower’s income.
• examining lenders’ failure, in some cases, to consider a borrower’s ability to repay a home loan.
• improving financial disclosure so people better understand the terms and conditions of their mortgages and get this information when it is most useful.
• curtailing abuses in mortgage advertising.

“We have an obligation to prevent fraud and abusive lending,” the Fed chairman, Ben Bernanke, said earlier this year. “At the same time, we must tread carefully so as not to suppress responsible lending or eliminate refinancing opportunities for subprime borrowers.”

The issue has taken on heightened importance given the meltdown in the housing and credit markets that has led to record numbers of home foreclosures. The crisis has raised the odds that the economy might fall into a recession, roiled Wall Street and has given Democrats and Republicans much fodder to blame each other.

On prepayment penalties, consumer advocates say these deter homeowners from refinancing on more favorable terms. Those penalties can be hard on borrowers who want to get out of adjustable-rate mortgages that reset from a low introductory rate to a much higher one they have trouble paying off.

Mortgage industry representatives say prepayment penalties ensure that lenders receive a minimum return if loans are paid off early. They also say people with mortgages that include such penalties often get a benefit of lower upfront costs or lower interest rates.

Of the nearly 3 million subprime adjustable-rate loans surveyed by the Mortgage Bankers Association from July through September, a record 4.72 percent entered the foreclosure process during those months. At the same time, a record 18.81 percent of the subprime adjustable-rate loans were past due.

When home values weakened, borrowers were left with loans balances that eclipsed the value of their homes. They also were clobbered when their loans reset with much higher interest rates.

As for the idea of setting aside money to cover taxes and insurance, consumer groups worry that subprime borrowers do know about these expenses or might not be able to budget for them. These groups also have raised concerns about lenders quoting subprime borrowers monthly payments that do not include taxes and insurance costs.

The Mortgage Bankers Association has some problems with mandating escrow accounts - where those costs specifically are set aside each month - for borrowers. The association does support efforts to make sure borrowers have the appropriate information about their obligations to pay taxes and insurance.

The Fed says loans to subprime borrowers typically do not include such an account, while loans to people with better credit and lower risk to the lender usually do.

The central bank also says that lenders sometime will make a loan without documenting or verifying a borrower’s income. Lenders may charge higher rates for such loans, the Fed says.

Mortgage lenders say these loans are appropriate for many borrowers, including those who are self-employed and cannot easily document their income. Consumer groups say many borrowers who could document their income are not aware they are getting a loan at a higher interest rate. These loans are sometimes called “liar’s loans” because critics believe they can be used to perpetrate fraud.

Majority Democrats in Congress have been vocal in urging the Fed to act against abusive practices.

Massachusetts Rep. Barney Frank, chairman of the House Financial Services Committee, and other House Democrats said in a recent letter to the Fed that tougher rules are overdue and “needed to help eliminate the kinds of predatory lending practices that exacerbated the current subprime lending crisis.”

The House has passed legislation that would put into law some of the same actions the Fed is considering. A similar bill is pending in the Senate. Supporters are heartened the Fed is moving ahead because they think the Fed might be able to finalize action before Congress does.

Information is taken from:

Filed under: Mortgage by admin No Comments »

The National Association of Realtors reported that its pending home sale index rose to 87.2 in October from a revised reading of 86.7 in September. This is a good sign but that is not enough to make a sigh of relief. Most realtors still believe that home sales will decline in 2008. A year ago home sales index was up more than 19% and this situation makes people worry.

Mike Larson, a real estate analyst for independent research firm Weiss Research said: “Things aren’t getting much worse, but they’re not getting much better either”.
In August, many lenders had to slam the brakes on home loans due to problems in the market for mortgage-backed securities. Then pending home sales index hit a record low of 85.5. With all these bad factors that effect world economics, people may use some benefits of such a situation. Mortgage rates are near a 30 year minimum, so it could be a good idea to buy a house now.
For example, 30 year fixed mortgage is 5.76% now and 15 year fixed mortgage is only 5.33%

Any problem has it benefits, isn’t it?

Filed under: Mortgage by admin No Comments »