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Archives for November 2015

Casey Fleming November 30, 2015 2 Comments

How Will the Fed’s Increase of Interest Rates Affect You?

No one will know until we all know, but most analysts agree and investors are betting that the “Feds” – the Board of Governors of the Federal Reserve Bank – will raise interest rates when they meet on December 15th and 16th. How will this impact you?

Will the Feds raise rates on December 16th?

Will the Feds raise rates on December 16th?

First, let’s talk about what interest rates they control, and just as importantly what interest rates they do not control.

The Feds control only two rates: the Discount Rate, and the Target, or Overnight Rate.

The Discount Rate is the rate at which the Federal Reserve lends money to banks for short-term needs to meet liquidity requirements. Banks cannot lend out every last penny in their vault, because they would be at risk of not being able to pay depositors back if many of them wanted to withdraw money at the same time. They have to keep a certain amount of money liquid and available for depositors.

When a bank has a very good month lending, they might be short on reserves. If so, they can borrow money from the Feds for a very short time at the current Discount Rate in order to have the minimum required reserves available. What is that rate today? 0.00%. That is correct, banks can borrow money from the Fed (if they are short on reserves) for free.

The Overnight Rate is not technically set by the Feds, but the Target Rate is. The Feds establish a target interest rate for banks to lend to each other for overnight needs for the same challenge – a shortage of reserves. The target rate today is 0.25%. It is infinitely higher than the Discount Rate, but still not a bad deal.

Notice that in this discussion mortgage rates are missing.

These are the only two things that the Feds can directly control. Most analysts agree that in December the Feds will raise the Discount Rate, which will naturally increase the cost of short-term borrowing by banks. The projected increase is 0.25%.

Credit Card Debt Interest Rates

Credit card rates are definitely going up

How will this impact you? Any interest rates that must reflect the short-term cost of funds for banks will have to increase by the same amount. The two types of loans that fall into this category would be equity lines and credit cards – both types of lending meant to be short-term.

The most commonly-recognized index for both types of cards is the Prime Rate. This is the interest rate that banks charge their most credit-worthy corporate clients, but it is also the index that almost all equity lines (including Home Equity Lines of Credit and Business Lines) and credit cards are tied to.

The most immediate impact that you will see, therefore, is the Prime Rate will increase by the same amount the Feds increase the Discount Rate and the interest rate on your equity line and credit cards will increase by the same amount too.

The interest rates on car loans are also likely to increase a little, because they are short-ish in term. However, if you already have one chances are it’s a fixed rate, and the interest rates for car loans written after December are likely to come back down over time due to competition.

If you want a general rule of thumb to figure out whether in interest rate will increase or not, here it is: If the loan is meant to be short-term and is made from the bank’s own deposits, then the interest rate is likely to go up.

Mortgage rates are not short-term, and while they are funded from the bank’s deposits (in most cases) they are immediately sold to Fannie Mae, Freddie Mac, or Wall Street investment bankers who create large funds to invest in mortgages. Since it is not their own money they are lending, the short-term cost of funds to the bank have no impact on mortgage rates.

It's Coming!

It’s Coming!

Having said that, the Feds can influence mortgage rates through the purchase of Mortgage-Backed Securities using money borrowed from the U.S. Treasury. I covered the use of Quantitative Easing back in June in this article: How Quantitative Easing Affects Mortgage Rates

But for now, watch for an announcement from the Feds on December 16th.

Casey Fleming, Author The Loan Guide: How to Get the Best Possible Mortgage (On Amazon)
Mortgage Advisor, C2 FINANCIAL CORPORATION
408-348-3442 mobile
 
My Blog: www.loanguide.com
Facebook: C2 Financial Corp.
Facebook: The Loan Guide Book
Follow me on Twitter for interest rate updates: @TheLoanGuide
 
Loanguide@outlook.com
NMLS 344375 / DRE 00889527

Filed Under: Interest Rates Tagged With: Fed Funds Rate, Federal Reserve, FOMC, Home Financing, Interest Rates, Mortgage Rates, Real Estate, Refinance, silicon valley real estate

Casey Fleming November 25, 2015 Leave a Comment

Interest Rates Remain Steady, Poised to Drop

On November 7th I wrote that interest rates had jumped up at the end of the first week of November, and that they would probably settle back down slowly. That is indeed what has happened.

Interest rates jumped in early November, are settling down now

Interest rates jumped in early November, are settling down now

There is movement every day, but all this month the movement in interest rates (no matter which measurement you use) has been quite small compared to the long term trends.

Suffice it to say that investors appear to be in a holding pattern waiting for the Fed to drop the short-term interest rate shoe in December. (The Board of Governors will meet December 15th and 16th.) Investors appear to be quite certain at this point that the Feds will raise short-term interest rates when they meet next month.

Remember that when they do, they only control one short-term rate, and that mortgage rates are driven by the market.

When projecting interest rates I look at the underlying yields investors appear to be demanding as well as retail interest rates – the rates that you are actually offered. Mortgage lenders rarely follow movement in the bond market quickly when they are on their way down, as you never know when the market is going to turn. Thus, interest rates jump up, and settle down.

Yields on Treasury bonds which compete with mortgage bonds – red line above – failed to crest highs for the year.  Yields on the Fannie Mae 60-day yields, which reflect what Fannie Mae needs to earn to pay the yields investors demand has also turned back down.  (See blue line in the above chart.)  Actual interest rates on loans locked in the last two weeks has declined a little bit since the highs hit in early November.  (Green line in the above chart.)

Barring unusually good economic news we should expect small improvement in rates until the Fed meeting.

If I’m wrong, I’ll delete this post. Ha ha! All right, no I won’t, but don’t fry me for taking risks.

Casey Fleming, Author The Loan Guide: How to Get the Best Possible Mortgage (On Amazon)
Mortgage Advisor, C2 FINANCIAL CORPORATION
408-348-3442 mobile
 
My Blog: www.loanguide.com
Facebook: C2 Financial Corp.
Facebook: The Loan Guide Book
Follow me on Twitter for interest rate updates: @TheLoanGuide
 
Loanguide@outlook.com
NMLS 344375 / DRE 00889527

Filed Under: Interest Rates Tagged With: 30-Year Fixed, Fannie Mae, Fed Funds Rate, Federal Reserve, FOMC, Home Financing, Interest Rates, Mortgage Rates, personal finance, silicon valley mortgage

Casey Fleming November 17, 2015 Leave a Comment

Will 2016 Bring a Housing Bubble?

Most of us still remember the housing crash of 2008 – vividly. Housing prices, driven by ever-more-creative financing and frenzied demand skyrocketed higher and higher in a positive feedback loop that everyone knew would crash one day, but few knew where to jump off. Today’s market feels “frothy” (as Alan Greenspan would say) like the market running up to 2008. So are we in a new housing bubble?

Not according to a new study conducted by the San Francisco District of the Federal Reserve. To examine this, economists Reuven Glick, Kevin Lansing and Daniel Molitor looked at two key measures that give us some insight into the underlying components of housing values.

The Mortgage Debt to Income ratio tells us how the cost of carrying homes on the aggregate compares to incomes as an aggregate, and thus speaks to the affordability of homes at any given point in time.

The House Price to Rent ratio speaks to what I call the foundational monthly value of housing – what renters must pay to occupy the space each month. This speaks to the investment value of a home, measured by monthly cash flow.

Is a new housing bubble looming?

Is a new housing bubble looming?

If you look to the chart on the right, you’ll see that the amount of income each household had to commit to mortgage debt every month rose precipitously during the early 2000’s all the way through 2008. Logically, at some point there is a limit. You can only pay so much of your income towards your monthly mortgage payment. When we hit that limit, housing prices simply have to level off or go down (unless incomes rise precipitously too.)

Note, however, that since 2008 the ratio has been in steady decline. While there are many factors, certainly a good portion of it is due to lower interest rates, and therefore lower mortgage payments. A lot of the toxic loans (which tended to have much higher payments once they adjusted or re-casted) were foreclosed on, modified, or refinanced, all of which also helped alleviate high aggregate monthly mortgage debt.

In the same graphic you’ll also see that the price of homes relative to the rental value also spiked leading up to the financial crisis. This peaked and started downward earlier primarily because rents began to rise after many years of stagnation. This ratio didn’t really start moving up again until home prices started spiking in 2012.

Both of these factors are significantly below their peak in 2008 at this time. By these measures, housing values do not appear to be inflated at all – yet.

Remember toxic loans?

Remember toxic loans?

What this means is that housing prices – relative to their monthly rental value and relative to the income required to support them – are at about the same price level as they were in 2002. Without “creative” (OK, stupid, toxic, insane) financing to help support rising values we won’t (thankfully) reach the same relative levels that we did in 2008.

Housing prices are driven by many factors, but one of them is the desire for housing. When home buyers feel that they need to “get in at any cost” housing prices can get frothy. When home buyers feel that housing might not be a good investment they stay away in droves, and relative values decline. (See chart again, 2008 through 2012.)

Desire for housing  has certainly come back (how quickly we forget about the crash.)

However, while the perception that housing is a good investment again has obviously made a comeback, Millenials are struggling with weak income and high student loan debt, and have famously turned their backs on home ownership (for now.) Further, interest rates are bound to rise sooner or later, and when they do that changes the Mortgage Debt to Income Ratio, holding prices down a little.

What this tells me – and predictions are risky – is that values relative to rent and income are about right today. As long as income and rents continue to rise values should rise at about the same pace. Because there are still so few listings values may outpace incomes for a short while, but this would be mitigate by rising interest rates.

If these things are all true, housing prices should basically keep pace with inflation from now on, and inflation is very mild. Have we returned to “normal?”

The full article can be read here.

Casey Fleming, Author The Loan Guide: How to Get the Best Possible Mortgage (On Amazon)
Mortgage Advisor, C2 FINANCIAL CORPORATION
408-348-3442 mobile
 
My Blog: www.loanguide.com
Facebook: C2 Financial Corp.
Facebook: The Loan Guide Book
Follow me on Twitter for interest rate updates: @TheLoanGuide
 
Loanguide@outlook.com
NMLS 344375 / DRE 00889527

 

Filed Under: Housing Analysis Tagged With: Federal Reserve, Home Buying, Home Selling, Home Values, Real Estate, silicon valley real estate

Casey Fleming November 16, 2015 Leave a Comment

$124 mm in Mortgage Settlement Money Disappears in Texas

The "too big to fail" banks were ordered to pay...

The “too big to fail” banks were ordered to pay…

When the “too big to fail” banks were caught red-handed cheating consumers out of billions through intentionally bad underwriting, forging documents, foreclosing while telling consumers they were in the process of modifying their mortgages and robo-signing (among other malfeasance) the CFPB fined them billions of dollars collectively.

Most of the mortgage settlement money was earmarked to give to the states so that they would use it to help homeowners avoid foreclosure or get resettled. California, for example, used the money to establish Keep Your Home California, which provides mortgage payment assistance during unemployment, principal reduction, counseling and relocation services to homeowners who were affected by the financial downturn.

Yup.  they just took it.

Yup. They just took it.

An affiliate of ABC News reports that the State of Texas had other plans. Well, not “plans” so much as they just didn’t want to use the money for the purpose for which it was intended. So they took it.

Yes, that’s correct – they just put the money in the general fund. They just, well, took it.

In the meantime, thousands of Texans have lost their homes or are in foreclosure now, including many of the victims of the illegal activity on the part of the Big Banks.

Texas steals mortgage settlement money

The great state of Texas

State Rep. Yvonne Davis, (D) sponsored a bill this year that earmarked those funds to help homeowners, as the money was supposed to do. (The settlement between the CFPB and the Big Banks specifically earmarked the money to help homeowners.) Rep. Davis’ bill passed in May, but the state has so far not released the funds. There is now a lawsuit pending against the state accusing it of illegally diverting the funds.

(Since the funds were forfeited by the bank by court order and the order stated the purpose of the funds, Texas is technically in violation of a court order.)

Why is this important? It’s not – it’s just interesting. Wall Street Investment Banks created toxic loan products and sold them through – among others – the Big Banks. When the mortgages blew up taxpayers had to fork over hundreds of billions of dollars to save the banks that got us into the mess. When they finally had their hands slapped they paid out pennies on the dollar in fines, and now the little money they did pay out has been absconded by bureaucrats.

It’s enough to make you think the system is rigged…

The original source of the story was ABC News.

Casey Fleming, Author The Loan Guide: How to Get the Best Possible Mortgage (On Amazon)
Mortgage Advisor, C2 FINANCIAL CORPORATION
408-348-3442 mobile
 
My Blog: www.loanguide.com
Facebook: C2 Financial Corp.
Facebook: The Loan Guide Book
Follow me on Twitter for interest rate updates: @TheLoanGuide
 
Loanguide@outlook.com
NMLS 344375 / DRE 00889527

Filed Under: Foreclosure Tagged With: Foreclosure

Casey Fleming November 7, 2015 Leave a Comment

Interest Rates Jump – What’s Next?

A surprisingly strong jobs report on Friday got a lot of media attention for pushing interest rates up, and interest rates did indeed take a bit of a jump up on Friday. But if you take a look at the chart below you’ll see they’ve actually been rising sharply for two weeks. We can ask two questions:

Is this the beginning of a sharp jump?

Is this the beginning of a sharp jump?

  • What happened? (And why?)
  • What is likely to happen in the coming weeks? (And why?)

Let’s start by reminding ourselves that interest rates tend to jump up on news stories, and settle down as the impact of those stories are carefully considered.

Remember that interest rates are set by investors who buy securities backed by mortgages. These investors have to anticipate what inflation will be in the future. (If they earn less on their money than the inflation rate, they are getting back dollars that are worth less then they invested.)

Consequently, they are always looking ahead for signs of potential inflation. Most of the major economic reports this week were unsurprising; all of them came out at right about where economists had predicted, and most were slightly negative or neutral. The only strongly positive exception was non-farm private sector job growth (271,000 compared with 180,000 expected.)

Why is this important? If more folks are employed full time then inflation could be a problem in the future, as families begin to spend again and compete for goods and services, thus driving demand for goods up, and putting pressure on prices.

The other side of the price equation is supply, so another important economic report is the cost of labor, known as Unit Labor Costs. This rose by 1.4% (annualized, and adjusted for inflation.) If the cost of producing goods goes up, businesses have to raise prices.

This pressure can be mitigated somewhat, however, by increased productivity; if your workers earn more but also produce more the cost of production doesn’t rise that much, or maybe at all.

Productivity, it turns out, increased at a 1.6% annual rate in the third quarter, but it was expected to decrease by 0.2%. This comes on top of a second-quarter rise in productivity at a 3.5% annualized gain. In other words, American workers are making surprising gains in how much they produce for each hour they work.

At the same time, hours worked fell in the third quarter by 0.5%. (If workers produce more you can send them home earlier.)

What does all this mean?

More people are employed, and they are earning more per hour. (Yay, but that’s inflationary.) However, they worked fewer hours on average and produced more goods. (Bummer, and yay, but those both mitigate inflationary pressures.)

It does not all boil down to just these four reports. The economy has millions of knobs, levers and buttons being pushed by millions of invisible hands with no conductor. But this week’s jump in rates can very clearly be attributed to the anticipation of a strong jobs report, and then the reality of it. Once the news is digested and analyzed, investors are likely to relax, and once again accept a lower return on their investments.

This coming week has a rare mid-week holiday. On Veterans Day, a federal holiday, most banks are closed and there will be no releases of economic reports. On Monday no major reports are scheduled for release, and on Tuesday no reports are scheduled that are typically market movers. The first significant reports – Jobless claims, producer price index and consumer sentiment – are due on Thursday and Friday.

So, investors have a lot of time to chew on this last week’s unusually strong jobs report and the mitigating factors that will drive what happens in the next few weeks. That usually bodes well for rates, barring more unusually good news.

Rates jumped up this week, but are still low

Rates jumped up this week, but are still low

Finally, let’s put this week in perspective. Look at the chart to the left. You’ll notice the 10-Year bond (red line) is rising rapidly but is still below the highs of the year. It has made several runs at this high this year and has failed to cross it every time. If it does cross this threshold in the next few weeks, we might finally see those higher rates we’ve been expecting for a long time. If it doesn’t, look for it to start working its way back down.

The Fannie Mae 60-day yield (blue line) shows that mortgage-backed securities tend to track the 10-year bond fairly well.  (Mortgage-backed securities are the vehicle through which investors invest in pools of mortgages, and so drive the interest rates that you are offered.)  Note that it is still well below the highs of the year, however. This tells me that mortgage-backed security investors are not that worried at this point about inflation. Of course, that could change.

Freddie Mac’s survey of locked loans (rates real people actually got this week) jumped up as expected. (green line)

Given the nature of the market reacting to news and then settling down, and given that no significant news is due until Thursday, look for interest rates to improve slightly at the beginning of this coming week. It’s hard to project more than a day or two, but my sense is that we will see slight improvement all week long. We’ll have to revisit this again towards the end of this coming week.

And remember, Don’t Panic! (Yet.)

Significant input for this article came from economic calendar reports by Marketwatch.com, and from analysis at the Calculated Risk Blog.

Casey Fleming, Author The Loan Guide: How to Get the Best Possible Mortgage (On Amazon)
Mortgage Advisor, C2 FINANCIAL CORPORATION
408-348-3442 mobile
 
My Blog: www.loanguide.com
Facebook: C2 Financial Corp.
Facebook: The Loan Guide Book
Follow me on Twitter for interest rate updates: @TheLoanGuide
 
Loanguide@outlook.com
NMLS 344375 / DRE 00889527

Filed Under: Interest Rates Tagged With: 30-Year Fixed, Fannie Mae, Federal Reserve, FOMC, Freddie Mac, Home Financing, Interest Rates, Mortgage, Mortgage Rates, personal finance, Real Estate, Refinance, silicon valley mortgage, silicon valley real estate

Casey Fleming November 4, 2015 Leave a Comment

Is the Mortgage Broker Taking Back the Business?

I have always believed that the mortgage broker is the best thing that ever happened to mortgage consumers. If a consumer chooses to use a mortgage broker then they have access to dozens of lenders who compete for their business with a combination of price, speed and customer service. If a consumer chooses to work with a bank, then the bank has to compete with the broker channel, so the consumer wins either way.

After the financial crisis began hundreds of wholesale mortgage lenders (the source that funds loans for the mortgage broker) crashed and the “Big Banks” stopped accepting applications from brokers, claiming that the brokers were responsible for the bad lending. (To avoid another one of my rants, let’s just say that it turned out the bad lending practices were pretty evenly distributed among channels.)

The mortgage broker makes a comeback!

The mortgage broker makes a comeback!

However, a mortgage broker had a more nimble, less expensive cost structure, so the big banks did their best to eliminate brokers. At one point only five banks were writing over 60% of the mortgages in the United States. (This should have scared the heck out of everyone, but didn’t.) See the blue line in the chart to the right.

In fact, in the late 1980s small independently-owned mortgage brokers originated nearly 80% of all mortgages in the U.S., and then sold them through mortgage lenders or commercial banks to Fannie or Freddie or institutional lenders. By 2008, brokers originated barely 10% of all mortgages in the U.S. (The green line in the chart to the right.) This was a fundamental change in the way that consumers shopped for mortgages.

Eventually the wholesale channel (lenders who offer their products through brokers) started to make a comeback, and brokers now have a competitive slate of products and pricing to offer again.

Good news came out last week from Freddie Mac. Since 2008 the share of mortgage originations by independent mortgage companies (the mortgage broker and small mortgage lenders) increased from 10% of the total to 42.4% of the total. The top 5 “big banks”, meanwhile, saw their market share of originations drop from 62% to 33.8% of total originations, despite massive advertising campaigns and lobbying efforts to keep them exempt from the same lending rules they claimed mortgage companies needed to follow.

This means more consumer choice

This means more consumer choice

Delineated in a different way, you can see the commercial banks in general have gone from a 44.5% market share in 2013 to a 36.1% share in 2014. (Light blue line in chart to the left) Meanwhile, independent mortgage companies (the mortgage broker and mortgage companies) have increased market share from 34.5% to 43.1% over the same time period. (Dark blue line)

Credit unions, community banks and subsidiary mortgage companies have stayed about the same and account for only a small portion of the total.

What does all this mean for you?

It means that you have more choices now than you’ve had since before the financial crisis began in 2008. Dealing with new regulations has increased the cost of some services, to be sure, but low global interest rates and stronger competition for your business have had a much bigger impact on the cost of borrowing, keeping interest rates low for far longer than anyone anticipated.

When you add in the new disclosure rules, which make it much easier for you to compare loan offers and to understand what you’re paying for, the consumer is taking back control of the mortgage market. And it’s a good thing.

Graphics and data from Freddie Mac’s newsletter Insight and Outlook, October 26, 2015. To read the full report, click here and read pages 7-9.

Casey Fleming, Author The Loan Guide: How to Get the Best Possible Mortgage (On Amazon)
Mortgage Advisor, C2 FINANCIAL CORPORATION
408-348-3442 mobile
 
My Blog: www.loanguide.com
Facebook: C2 Financial Corp.
Facebook: The Loan Guide Book
Follow me on Twitter for interest rate updates: @TheLoanGuide
 
Loanguide@outlook.com
NMLS 344375 / DRE 00889527

 

 

Filed Under: Real Estate Trends Tagged With: Fannie Mae, Freddie Mac, Home Buying, Home Financing, Interest Rates, Mortgage, Mortgage Rates, personal finance, Real Estate, silicon valley mortgage, silicon valley real estate


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