What is really going on behind the scenes? Well, in a shortened version, it started with a bubble caused by the Federal Reserve, Alan Greenspan, during the Clinton Administration that burst in 2001 and we know what happened next - 9/11. Alan Greenspan dropped the short term federal funds rate to super low of 1%. While this doesn't have a direct effect, mortgage rates dropped to 50 year lows fueled by purchases of treasury bonds and mortgage backed securities by foreign countries and hungry investors for high returns.
Wall Streets ingenious plan of packaging subprime loans into mortgage backed securities and collateralized debt obligations to pension funds, institutional investors, etc, and finally came to a crash with the bust of Bear Stearns two hedge funds that went broke. These two hedge funds bought Alt A and subprime loans packaged into securities with loans that were 2 and 3 year Arms, 100% percent no income no asset loans, and all the other stated income, no income, low credit score loans, that nobody ever thought would go bad. Please, WAKE UP!
The same idea that Wall Street sold to investors about Internet company stock prices that would just go up and up and up, with no fundamentals backing them, or earnings being put back into the companies, would last forever, is exactly what happened to the Real Estate market. Now you see the mess that we are in. So what does the government about all the foreclosures on homes from people who couldn't afford them? We borrow and spend more money to get people to borrow more. How does that make sense?
The treasury has spent billions of money that we don't have, that we are just borrowing from the Fed at interest, to temporarily price fix to subsidize mortgage rates to...... ta da, get people to borrow more! If we borrowed and spent to much to get into this mess why would borrow and spending more get us out. Multi billion dollar bailout after bailout will cause inflation to rise, interest rates will go back up, and we'll be still in debt paying interest on that debt at higher and higher interest rates crippling us from the debt load.
So back to the question, can mortgage rates stay this low? They can if demand for mortgage backed securities begins to rise again. Now that the treasury has wained from buying MBS, the FED has stepped in and committed to $500 Billion, of which its spent a good portion of it.
I don't like negative thinking or being a doomsdayer, but this low rate environment can't sustain itself. Back in the hottest moment of subprime loans, 65% of those loans were repackaged and given AAA credit ratings. That is the best credit rating you can get. How is that possible to rate subprime mortgage backed securities with the "best credit" ratings available. Sounds kinda of silly don't it?
So where are we going from here? Could we see another Carter Administration with interest rates in the teens? Probably not but I can tell you one thing. If you are in the market, and can afford to buy a home, now is a wonderful time to purchase with lower home prices and interest rates temporarily low by government subsidies. If you are looking to refinance out of an ARM or payoff high interest debt into a longer term fixed rate mortgage, now is the time.
Guidelines have tightened so be prepared for some surprises along the way. Get your information together and speak with a mortgage professional about your financial situation today.
God Bless
Showing posts with label housing industry. Show all posts
Showing posts with label housing industry. Show all posts
Monday, February 2, 2009
Wednesday, November 26, 2008
Super Low Mortgage Rates - What Happened?
I'm sure all of you have been seeing the news of how bleek the economy is. To me its blah, blah, blah, blah. But now the Treasury is stepping up to the plate in an effort to reduce mortgage rates to the point that people jump into the market and start buying or refinancing. This is going to pull the first time homebuyers back in and start getting some inventory off the market.
The Treasury announced a purchase plan of roughly 600 Billion dollars that they will use to buy mortgage-backed securities and government issued treasuries over the next couple of months. So what does this mean? How long will this last? I'm not sure but for those of you who don't know why this makes rates go down I'll explain briefly.
Mortgage rates are tied to mortgage-backed securities. These are bonds that are issued by Fannie and Freddie which contain securitized mortgage loans. Pools of loans are put together then packaged into securities and sold as bonds. Now there are three areas of risk with these, credit risk (default risk), IR (interest rate exposure), and early redemption (pre-payment). Now as rates go down, pre-payment is more likely because people can refinance into a lower rate. When pricing these bonds for sale we must take into consideration bond convexity. Bond convexity is simply the measure of sensitivity to the duration of a bond to changes in interest rates. So what does this mean? Well it means that to compensate the risk of payoff to investors these bonds are priced at a spread (fixed margin) over government treasuries, usually the 10yr bond.
So in order for the purchase of mortgage-backed securities to work effectively the Treasury will also buy government bonds to drive down their yields resulting in lower spreads, thus resulting in lower mortgage rates. They are hitting this thing from both sides
By purchasing both government and mortgage-backed bonds, the Treasury is essentially subsidizing mortgage rates. As they buy up these bonds, prices go higher resulting in lower yeilds. Lower yeilds mean lower mortgage rates. I can tell you its worked. I've taken eight loan applications over the last two days and I expect it to get better after Thanksgiving.
Keep in mind, when first time homebuyers are not buying homes this leaves the market flooded with inventory. The sellers of this inventory can't buy another home until they sell theirs and so on and so forth. So see the first time homebuyer is essential and will cause a domino effect once they've returned to the market.
Now not all first time homebuyers have vanished but most of them are on the sidelines not sure what to do. I can't stress enough that this is a cycle that we will come out of eventually. The government is doing what they can to stimulate the market and we should see housing begin to stabilize when inventory begins to come back down to healthy levels.
The trends, in some areas, are starting to show positive signs of improvement. The one thing the media leaves out is that there ARE STILL loan options out there and banks are lending. The media makes its sound as if financing has all but vanished. This is simply not true. If you are in the market NOW is the time to jump. Don't wait for it pass by. There has only been a handful of days in four decades where rates have been lower. Rates have dropped about a full point in the last two days. This doesn't mean they will stay down so make a move if you're on the fence.
Realtors start picking up the phones.
Happy Thanksgiving!
Copyright © 2008 by Dustin Swigart
The Treasury announced a purchase plan of roughly 600 Billion dollars that they will use to buy mortgage-backed securities and government issued treasuries over the next couple of months. So what does this mean? How long will this last? I'm not sure but for those of you who don't know why this makes rates go down I'll explain briefly.
Mortgage rates are tied to mortgage-backed securities. These are bonds that are issued by Fannie and Freddie which contain securitized mortgage loans. Pools of loans are put together then packaged into securities and sold as bonds. Now there are three areas of risk with these, credit risk (default risk), IR (interest rate exposure), and early redemption (pre-payment). Now as rates go down, pre-payment is more likely because people can refinance into a lower rate. When pricing these bonds for sale we must take into consideration bond convexity. Bond convexity is simply the measure of sensitivity to the duration of a bond to changes in interest rates. So what does this mean? Well it means that to compensate the risk of payoff to investors these bonds are priced at a spread (fixed margin) over government treasuries, usually the 10yr bond.
So in order for the purchase of mortgage-backed securities to work effectively the Treasury will also buy government bonds to drive down their yields resulting in lower spreads, thus resulting in lower mortgage rates. They are hitting this thing from both sides
By purchasing both government and mortgage-backed bonds, the Treasury is essentially subsidizing mortgage rates. As they buy up these bonds, prices go higher resulting in lower yeilds. Lower yeilds mean lower mortgage rates. I can tell you its worked. I've taken eight loan applications over the last two days and I expect it to get better after Thanksgiving.
Keep in mind, when first time homebuyers are not buying homes this leaves the market flooded with inventory. The sellers of this inventory can't buy another home until they sell theirs and so on and so forth. So see the first time homebuyer is essential and will cause a domino effect once they've returned to the market.
Now not all first time homebuyers have vanished but most of them are on the sidelines not sure what to do. I can't stress enough that this is a cycle that we will come out of eventually. The government is doing what they can to stimulate the market and we should see housing begin to stabilize when inventory begins to come back down to healthy levels.
The trends, in some areas, are starting to show positive signs of improvement. The one thing the media leaves out is that there ARE STILL loan options out there and banks are lending. The media makes its sound as if financing has all but vanished. This is simply not true. If you are in the market NOW is the time to jump. Don't wait for it pass by. There has only been a handful of days in four decades where rates have been lower. Rates have dropped about a full point in the last two days. This doesn't mean they will stay down so make a move if you're on the fence.
Realtors start picking up the phones.
Happy Thanksgiving!
Copyright © 2008 by Dustin Swigart
Saturday, November 15, 2008
Wasn't The Bailout Money for Bad Mortgages?
Well we were all sold the fact the 700 billion dollar bailout was for troubled mortgage related assets. This topic should concern you since you and I will have to fit the bill for this as taxpayers. Now the money is being used to take minority positions in banks and other companies such as AIG.
Now you have the auto industry, city governments, state governments, and everybody else coming with their hands out looking for cash. The big three have been said to be burning through one billion dollars a month a piece. Now they want $25 billion dollars to get them through these troubling times.
Since when do we socialize losses and privatize profits? The TARP or Troubled Asset Relief Program was intended to buy toxic mortgage loans from struggling banks in attempt to help ease the credit crunch. Now the money is being used to take stakes in banks urging them to lend more. Instead banks are not lending and in some instances they are using this money to fund acquisitions of other banks.
Secretary of the Treasury Hank Paulson is now switching gears from his original plan and backed his decision by saying in an interview, "Our assessment at this time is that this is not the most effective way to use TARP funds," he told the nation Wednesday.
So what now? Wasn't the whole problem stemming from the mortgage industry with all these exotic mortgages and mortgage-backed securities? Frustrating as it is we must deal with it now. As you should be concerned about the actions of the government with the use of our taxpayer money I urge you to stay focused on your business.
Just to be clear mortgages have not dried up. Loans are still available to consumers. The percentage of FHA loans being originated is growing rapidly and will continue. These mortgage loans are never talked about by the media. So even though banks are struggling with bad loans on the books, this too shall pass, and the market will stabilize. If you are in the market to purchase a home now is still a great time to buy one.
Look at using FHA financing for purchasing your new home. If you have less than 20% down you will need mortgage insurance, you will come out better with FHA mortgage insurance anyway as this, in some cases, is half the cost monthly. FHA only requires a minimum of 3% down right now, then Jan 1 you will 3.5% down payment.
While conventional loans still have hefty delivery fees for credit score adjustments and loan to value adjustements, FHA rates will be more competitive.
You can find out more by visiting my website at www.53.com/mlo/dustin-swigart. You can also email me at dustin.swigart@53.com
Copyright © 2008 by Dustin Swigart
Now you have the auto industry, city governments, state governments, and everybody else coming with their hands out looking for cash. The big three have been said to be burning through one billion dollars a month a piece. Now they want $25 billion dollars to get them through these troubling times.
Since when do we socialize losses and privatize profits? The TARP or Troubled Asset Relief Program was intended to buy toxic mortgage loans from struggling banks in attempt to help ease the credit crunch. Now the money is being used to take stakes in banks urging them to lend more. Instead banks are not lending and in some instances they are using this money to fund acquisitions of other banks.
Secretary of the Treasury Hank Paulson is now switching gears from his original plan and backed his decision by saying in an interview, "Our assessment at this time is that this is not the most effective way to use TARP funds," he told the nation Wednesday.
So what now? Wasn't the whole problem stemming from the mortgage industry with all these exotic mortgages and mortgage-backed securities? Frustrating as it is we must deal with it now. As you should be concerned about the actions of the government with the use of our taxpayer money I urge you to stay focused on your business.
Just to be clear mortgages have not dried up. Loans are still available to consumers. The percentage of FHA loans being originated is growing rapidly and will continue. These mortgage loans are never talked about by the media. So even though banks are struggling with bad loans on the books, this too shall pass, and the market will stabilize. If you are in the market to purchase a home now is still a great time to buy one.
Look at using FHA financing for purchasing your new home. If you have less than 20% down you will need mortgage insurance, you will come out better with FHA mortgage insurance anyway as this, in some cases, is half the cost monthly. FHA only requires a minimum of 3% down right now, then Jan 1 you will 3.5% down payment.
While conventional loans still have hefty delivery fees for credit score adjustments and loan to value adjustements, FHA rates will be more competitive.
You can find out more by visiting my website at www.53.com/mlo/dustin-swigart. You can also email me at dustin.swigart@53.com
Copyright © 2008 by Dustin Swigart
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