Just as I mentioned a couple of days ago in my post Mortgage Rates Updated, I said the Fed will keep the faucet flowing baby and with the news hitting today just a few hours ago, this has been confirmed. The Fed will continue to purchase mortgage bonds to keep rates low and even try to get them lower to fuel demand.
As you can see from the article, now, as different in other announcements, this QE is "open ended" meaning no deadline to stop it. As I mentioned before - call it QE infinite baby!
We're going to continue seeing this as now it's too late to stop it because they won't let the market liquidate all the bad debt and mal investment as this would uncover just how vulnerable alot of corporations really are and how unhealthy the financial system really is.
If they would just let the system liquidate, it would be really bad for awhile, but would quickly bounce back stronger than before; however this strategy of pumping more and more cash into the system, is just going to lead to an even bigger collapse later on.
Ole Ben Bernanke doesn't care. All he's concerned with is keeping his special interests and banker buddies happy. Who benefits from all this? Yea, we have lower mortgage rates (which is good for lower payments but our dollar continues to decline) that are causing a frenzy right now with refinances and new purchases but lenders are not properly staffed which is causing a tremendous amount of backlog and issues getting loans to closing on time for purchases and in a reasonable amount of time for refinances. Some loans are taking 90 days sometimes or longer to close because so many people are refinancing right now under the HARP 2.0 and new FHA streamline refi programs.
According to some reports the Fed is saying they are going to keep rates low until mid 2015! Wow! First it was only a year then 2012, then 2013, now mid 2015. Take a look at the chart below regarding the purchasing power of the dollar since the Fed took over in 1913; the dollar has lost over 96% of the purchasing power it used to have. This isn't going to stop and countries all across the world are following suit of the Fed pumping massive liquidity into their economies to spur demand. The only people really benefiting is the corporations and mega banks of the world as they profit hugely from this.
The stock market sky rocketed today on the news continuting to fuel asset prices. When will it ever stop? Never baby - hold on to your hats and enjoy the ride becasue you ain't seen nothing yet!
The big boys are making all the money and average saver is losing their purchasing power day by day by day while the Fed helps their bank buddies, big boy corporations, and special interests profit hugely by these moves as they are contrived and planned before the announcement to the public is ever made.
We'll definitely get to see some rhetoric from Mitt and strutting peacock Barack I'm sure regarding this which continues to fuel the real life soap opera we call the 2012 Presidential Campaign. The false sense of choice we have between the two candidates is not real choice - it's controlled opposition. But that is another story for another day.
I submitted a post in 2009 regarding mortgage rates and I'm updating it again now. You'll hear all kinds of different perspectives from financial advisors; mortgage gurus; industry groups, etc, but in my opinion rates may have some ebbs and flows as major institutions involved in the MBS market modify their portfolios, but but we've gone past the point of no return.
The Fed is stuck in QE infinite. In other words.... rates are on lockdown and they can't let up on the gas now baby. How can they?
Can you see what would happen if they do let rates rise? Ummm - market chaos. Some are going to read this and say I'm crazy; I'm a conspiracy theorist; I say bull and open your eyes to what is going on.
$16 Trillion in debt; foreign governments defaulting on sovereign debt obligations; war all over; they can't stop the pumping the cash now baby it's all in, all or nothing. Trillions have been spent and trillions more will continue to be spent.
The housing market is a huge part of our economy and they keep stimulating it through controlling the interest rates and driving demand. Stimulus galore!
You want a stimulus package, in my opinion, I would use renovation financing as this is a viable way to keep goods and services flowing through the economy. See my previous post - The New Real Estate Trend. I'm going to do a series of posts on this subject but in short; you can finance the cost of the purchase of the home and the cost of upgrades and/or needed or desired improvements to the property all in one loan with one payment.
You'll hire a contractor to do the work after closing and you can include (depending on the program) anything from light to moderate repairs to major renovations such as additions and foundational work; and even luxury improvements like swimming pools.
Through this loan you're purchasing materials, improving the property you're buying (not to mention turning the home into one you love and not just one you like) and putting people to work, ie contractor and their subs. This is a stimulus package with a private sector approach that really isn't rate sensitive.
Think about it; most improvement loans you get are tied to high interest credit cards or you already own the home and you secure a second mortgage fixed rate loan or what is called a HELOC (home equity line of credit). The difference is these options look at current equity while the renovation loan uses post-renovation value (future equity). More on these differences in my series of posts to come.
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Does that mean you should buy now or wait? I can't answer that, only you can assess your financial situation and make that decision. They call owning a home the American Dream but the American Dream is what your make it. Not everyone is ready, equipped, or can afford to buy right now and that's okay. When the time is right for you you'll know it.
For right now I think the low rate environment isn't going away. Aside for some market adjustments I don't think interest rates are going anywhere - I don't see how they can. The Fed knows this and you can tell when every time ole Benny Bernanke gets in front of Congress and testifies, this guy will not say the pump will stop. He always makes some comment regarding more tools at their disposal and are ready to provide more stimulus if the need is warranted.
Yeah buddy! That means it isn't stopping any time soon.
The mortgage industry has changed quite a bit from a few years and months ago...heck sometimes even just days ago. Changes are the norm so I'm writing this to help you with the application process as this day in age it's documentation, documentation, documentation and for some people this can become annoying and upsetting at times.
Do not get upset or frustrated as the industry, one loan at a time, is trying to restore confidence in the marketplace and to investors. The key to making the process smooth is several fold but the most important thing is your initial file quality at submission on your application for financing.
The more prepared you are upfront...... the better!
When your loan officer asks for something - get it turned in as quickly as possible so there isn't any delays in the process.
There is an extreme amount of pressure put on them to turn things around when documentation is delayed being turned in and will, and does, cause for the need of extensions to your closing. This can be unnerving and complicate things for you.
Stressed!
Everyone's situation is different and sometimes additional documentation is requested.
Realize that there are some issues, concerns, and compliance requirements on the back end that we as consumers don't see or always here about, so underwriters are checking, double checking, and sometimes over conditioning the loan files; but this is an attempt to make sure all compliance rules and regulations, file quality, and documentation requirements are being met.
When making application make sure you have all of your income and bank account information (to all accounts) available. Since each loan is different more documentation maybe requested and this is not all inclusive, so in preparation have ready:
The last three years of income tax returns (make sure page 2 is signed and include business returns if self-employed), w2's (all w2's for all jobs) and a full months of paystubs.
Be prepared to explain any changes in income or if you've had multiple jobs in the last 2 years
Bank statements should be all pages even if one says "intentionally left blank"
Be prepared to explain any credit inquiries you've had recently and if any new debt was acquired from this inquiries. People ask about this all the time but the idea is if more debt it out there that is unknown, this has an impact on your debt-to-income ratios and your ability to repay the mortgage
Be ready to explain any large and unusual deposits into your account (untraceable cash deposits are not acceptable) to prove they are from an acceptable source.
Explain any derogatory or late payments on other credit accounts and collections
Again, this is by no means all inclusive but is a short list of items you'll need and other things to be prepared for when meeting with your loan officer. The better quality your loan file is at submission, the smoother your process will be.
Remember - there are many parts of the process that are not under the control of the lender so communication is key as everyone is working toward the same goal - closing.
What is the next real estate trend? You can ask many and you'll get many answers. As a professional in the business I can tell you that I see renovation as the next trend for the coming years. Why?
Aged inventory - many houses are old, have not been updated which includes kitchens, bathrooms, plumbing, HVAC, and could really use a face lift.
Foreclosures galore! The market is saturated with foreclosed REO properties that need repairs.
Older homes with outdated floor plans or are too small compared to other homes in the area (by the way part of the renovation process can include adding square footage to the property through an addition to home)
Can add a personal touch to make it yours - turn a home you just like into one you love
Many homes with health or safety violations or hazards which can be remedied through renovation
Many many more reasons.
So what can be done about it? Well you can call it a secret (not really) but a program that has been around since the 80's - the 203k (no this isn't like your 401k) - allows the for the purchase of the property plus the cost for repairs to be rolled into one loan, one payment, and your maximum mortgage is based on the post-renovation value. This is a little known loan through FHA and 203k is simply just the section of the act (the National Housing Act) for the program just like the 203B is the "regular" or "normal" FHA loan we've all grown to know very well.
Especially since the housing debacle and Conventional financing has tightened up; more people are getting FHA insured loans.
So you can literally turn this
and even this
into this
and even this
Now you're probably thinking..."yea right, that looks nothing like the other houses." But yes you can do this (turn ugly into stunning).
You can do anything from light to moderate repairs (kitchen and bathroom updates) to more major renovations like foundation work, and even tearing the house down and rebuilding on the same foundation.
With the 203k you just can't do anything consdered "luxury" repairs in nature like a gazebo, hot tub, or install a swimming pool. The key to this is after-improved value - which is the home will be comparable in it's renovated state to other properties in the area.
This doesn't mean build a 6 bedroom home in a 3-4 bedroom market, however if you wanted to change the design and floor plan of the property and make a major renovation you can.
There are so many things you can do with this type of financing. By the way FHA isn't the only one that has this program available. Very close versions of this are available in the Conventional world through Fannie Mae and Freddie Mac but most lenders do not offer this type of financing.
I think you'll see that change as this piece of the market explodes over the next few years.
One word of advice that I caution people looking to obtain this financing:
MAKE SURE you are working with a specialist. The reason is they work with these loans daily and a specialist only originates these loans. You'll have many originators that "dabble" with these loans and only do a few a year vs a specialist who originates these on a daily basis so they are knowledgeable of the intricacies of the program and have a system in place to take you from application to closing with very few, if any, hiccups.
Don't be a guinea pig and search out a specialist. This should be your first question to the loan officer. If they are not a specialist ask if their company has one and if not - move on and don't waste anymore time.
Not all lenders have the same guidelines; some will have what is called credit overlays, meaning they have tighter guidelines than the published FHA guidelines on the program.
I will do a series of blog posts on this, since it will, and already is becoming, a hot topic. There is much to talk about, so you can be prepared and armed with information when approaching your lender for a renovation loan request.
As we get closer to the end of the first time homebuyer tax credit which has helped get first timers back into the market, we ask will it be extended. I'll agree this was badly needed (the first time homebuyers buying that is) because they are the first domino that leads to all the others falling into place. As sellers list properties for sale - they need the first time buyer to come in and buy their homes - which will lead to them buying someone else's, and so on and so forth. It's a domino effect that needs to begin with the first time buyer.
Will the government extend? I'm really not sure. As the residential market begins to stabilize Congress may not extend the credit as it would, yet again, add to the ballooning deficit which ended 2009 fiscal year at 1.42 trillion dollars. Wow! That's an amazing number; but since trillions and billions has been thrown around like a frisbee in the media lately, when you think of the concept of that much money, it just goes in one ear and out the other. This is boat load of money and its being projected by economists, the deficit will continue to rise unless either spending is lowered or taxes are raised or a combination of both. If you ask me I"m tired of taxes.
But any rate - Congress has a tough decision as we reach the final stretch here and we approach the November 30th deadline. Interest rates have been low all year except for a few weeks in May and beginning of June when we saw massive government auctions that took the market by surprise. Record debt flooded the market and buying just couldn't mop up the access - almost like dipping a sponge in a bucket full of water - the market just couldn't absorb it all so selling forced prices downward and yields up (making interest rates rise).
Now that we've enjoyed almost the whole year with low interest rates; what will happen in 2010? Well inevitably rates will have to go up as the FED exits stage left, and the market adapts to a major buyer disappearing, forcing it to stand on its own. With 1.25 trillion in MBS (mortgage-backed securities) the FED will eventually look to unload those securities which will cause even more downward pressure on bond prices equalling higher mortgage rates as a result. All year it seems as if investors have been trading on policy and not spreads. Will the FED hold its positions? Will it sell most or all of its securities? Who knows but the FED.
If you're in the market - now is the time to jump in and buy while historically low rates still remain. But that's not the only reason you should buy right now. As you know home prices have retracted since their highs of 2006 and owning home has many benefits of which building equity is only one. You have tax advantages along with knowing you've made a long term investment that pays dividends for years to come. Not everyone deserves a home and its something that is earned, and in my opinion, not guaranteed.
Inflation numbers are due out tomorrow for the prior month. Expectations are .2% increase but one interesting thing to note. The Bureau of Labor Statistics is going to include the subsidized Cash for Clunkers program $4500 dollar rebate as a way to reduce auto prices by the same amount. Hmmmmm.... now isn't that aggressive use of accounting techniques? Keep in mind the government is the one releasing these numbers and we are in a severe recession that many are calling over, but I just don't see how that's possible. So with a 1.8 trillion dollar deficit due to heavy borrowing, who would benefit from lower interest rates? Bingo! The government would.
See bonds are sensitive to inflation since bonds tie up investor money for long periods of time; but bonds can be resold on the secondary market and if prices are dropping due to inflation fears, investors lose money. The way bonds are calculated for their value is by using simple time value of money calculations. Its quite simple. A dollar today is worth more than a dollar tomorrow. So if an investor is going tie up their money for a longer time, they want a good return - or at least a return that is suitable for current market conditions. In times like this, investors flee to safety - in the form of bonds - which are usually safe investments. If inflation is higher than expected this is not good for bond holders because now their return - inflation adjusted - is much less than originally anticipated. So by the inflation numbers coming out in line or lower, its to much of the benefit of the government who still has to borrow very heavily in order to service the existing debt payments (interest) and the barrage of entitlement and social programs and wasteful stimulus programs.
But how does all this affect mortgage rates? Quite simple actually. MBS (mortgage-backed securities) compete with other bonds for investor cash and are susceptible to inflation worries just as other bonds are. What happens is MBS bonds are priced over treasuries in order to attract dollars and be competitive. Bonds have risk factors that investors have to take into consideration and credit default is just one such risk. MBS add another risk factor - early payoff. Mortgage loans in a low interest rate environment have a high propensity to pay off early. This eats into the returns of investors and therefore they need to be compensated for that risk. So what happens is MBS bonds are priced at a fixed spread over treasury yields in order to attract investors to assume that extra risk.
With gold hitting yet another high of $1,080 an ounce; the dollar is weak, and oil is up, this spells inflation. There are few schools of thought out there with respect to the definition of inflation but I side with the Austrian view of the vast expansion of the money supply that we've seen from the FED over the last 18 months IS inflation. I just don't see an argument here. When you expand the money supply and aggregate demand does not rise equally, and wages do not rise with this, you have inflation and rising prices - period. The price level has to rise in order to balance the increase of money in the system. Back when we were on the gold standard, massive expansion of the money supply could not be done like this because you could exchange your dollars for a fixed weight of gold keeping the FED and our law makers honest.
The first time homebuyer tax credit will likely be extended and maybe inclusive of all homebuyers not just first time. While I've enjoyed the short term benefit of the increase in volume, I know that we are just prolonging the pain that will eventually come. Housing isn't out of the water yet, however if you are in the market to purchase I suggest doing it now. Rates can't stay this low for long. Just one year ago before the FED intervened, interest rates were at almost 7% on a 30 yr and then plummeted to below 5% making the investment into a new home very attractive at this point.
Beginning almost a year ago the FED announced an MBS (mortgage-backed security) purchase program in conjunction with a treasury buying program that would equal roughly 1.25 trillion (yes that's right TRILLION) dollars in subsidies in order to bring mortgage rates down and get people buying homes again. While I've enjoyed the benefits of this action in the short run; I understand the long term effects, and inevitably this action will bring inflation and higher interest rates. The government, along with the FED have been pursuing drastic measures to reinlfate the housing bubble caused by the prior FED chairman Alan Greenspan. This man is considered by most a financial genius. I say hardly so and that statement is completely unsubstantiated.
What Mr. Greenspan was good at was manipulating interest rates, creating bubbles, and bailing out companies when they failed at taking too much risk. Here's the deal; when you have artificially low interest rates this creates malinvestment and encourages excessive risk taking. After the dot com bubble and 9/11, chairman Greenspan needed to "kick start" the economy again. While Fannie and Freddie were in trouble for their accounting scandals, and Mr. Greenspan lowered the FED funds rate to 1%, all hell broke loose in housing. Stated income stated asset loans, no income verification, you name it. Breath on a mirror, you got fog? You got a loan? Got a pulse, got a loan? It didn't matter if you had the capacity or willingness to repay the loan, it was about making as many loans as possible so they can pooled, packaged, and sold to the investors around the world.
Now back to our new bubble causing action from the new "genius" Ben Bernake. What's happening is the FED is printing money to buy bonds issued by, now fully government owned, Fannie and Freddie, in order to drive mortgage rates down. On top of that they are buying $300 billion in treasuries which is what they do when increase the money supply through their open market operations. Now because we operate on a fractional reserve banking system, that $300 billion is multiplied 9 times to create "new" money out of thin air. How does this work? Let me simplify using smaller numbers. It completely boggles my mind when now we're throwing around the word billion and trillion like its nothing. Well wake up, because the FED is printing TRILLIONS of dollars to solve a borrowing and spending problem. That's like telling a junkie to shoot up more to solve their dependency problem, its completely absurd.
But anyway here is how the creation of money occurs. Lets say the FED wants to increase the money supply. They buy $1,000 in treasuries on the open market. That $1,000 is now put into the system. Okay now the FED require most banks, depending on how much they have on deposit, to hold a 10% reserve ratio to deposits on hand. This means that for all the deposits the bank must hold 10% of that in its account at the FED or in conjunction with the FED and its vault. Now if the bank has more than the 10% reserves its considered to have "excess" reserves on which it can loaned out in new money. Now we go back to the $1,000. The bank must hold $100 (10% of $1,000) on deposit and loan out the other $900. Now that customer takes that check and deposits it into their bank. They hold 10% ($90) on deposit and then loan out the other 90% ($810). This cycle repeats until you've multiplied that $1,000 into $100,000.
Mind boggling huh? That means for every deposit the banking system can "create" out of thin air 9 times that amount in new money. Not only that but banks charge interest on that nothing. Not a bad deal huh? Well here's where it gets even more interesting. The FED has made these massive purchases, which really all they've done is printed money that we (YOU and ME) have to pay back AT INTEREST! This is because the government is borrowing indirectly through the FED to make these purchases. Not only that but we'll pay higher prices due to inflation because the FED is inflating our currency away, meaning, the purchasing power is eroding due to the massive inflation of the money supply. The 1.8 trillion dollar deficit is REAL! What's going to happen when interest rates begin to go back up and we have to pay higher interest on our national debt? You've got it! This doesn't even take the cake compared to what it will be like when that happens or even worse....the dollar collapses.
At any rate, the MBS buying program isn't even on the radar to most people but its really more DEBT that has to be paid back and its just another 1.25 trillion on top of the trillions already spend in stimulus, currency swaps, and loans made by the FED to people we don't know and the FED refuses to disclose to us. Now from the agency who is NOT a government entity and is frankly unconstitutional, is taking OUR tax dollars and lending 2 Trillion dollars to somebody and we cant' find out who that is. INSANE!
We need to wake up and fight back. Write your senators and representatives and tell them to support Congressman Ron Paul's HR 1207 bill that requires and audit of the Federal Reserve. This is the first step in pulling away the veil of secrecy surrounding this entity that seems to have no limits to its unconstitutional powers. Then spread the word about the FED. Only through education and understanding can we eventually turn the tide by taking action against the corruption that surrounds the government and the Federal Reserve.
