Market Update 5/30

Bloomberg reports that government efforts to forestall foreclosures are working, but that the number of people going into foreclosure is nonetheless rising twice as fast as those getting back on track with payments. In the meantime, banks are accelerating the process, so that a 64% increase in foreclosures from last year resulted in a more than doubling of the number of homes seized by banks.

The WSJ reports that Fed President Geithner is at the center of the storm of criticism over the Fed’s rescue of Bear Stearns. Geithner was convinced a deal had to be done after the NY Fed staff ran simulations of the probable outcome of a bankruptcy filing. In a related story, Fed Vice Chairman Kohn told a New York audience last night that the Fed may keep the discount window open for securities companies, but that tighter regulation would be required in exchange. The lack of regulation and difficulty pinpointing counterparty risk in the CDS market was likely the chief reason the Fed felt it necessary to prevent the bankruptcy of Bear.

The WSJ says the recent underperformance of Ford’s credit union is evidence that car loans are starting to perform like home loans. Many are upside down, with the loan exceeding the value of the underlying asset, and delinquencies are rising. The credit union did not make mortgages.

The CFTC is conducting a nationwide probe of trading in the oil futures market in response to political pressure, according to the WSJ, but few expect they will find anything material. Oil prices have fallen more than $5 in the past two days, to below $125.70 last night. The Dec 2016 contract has fallen even more, from $142.09 to $128.34 since peaking on Wednesday last week. The break in futures has been so violent that an increasing number of analysts say it likely signals the start of an even bigger move down in spot prices.

Last night, Japan’s household spending fell 2.7% in April, the most in 19 months, while retail spending in Germany fell unexpectedly for the second consecutive month. In the UK, consumer confidence fell to its lowest level since 1990.

Today, consumer spending is expected to have risen 0.2% in April, which means it likely fell 0.1% in real terms, while income is expected to have risen 0.1%. the Chicago PMI is expected to be little changed at 48.5 and the University of Michigan consumer sentiment index is expected to be unchanged from preliminary May readings of 59.5, a level that was the lowest since 1980.

Credit Crisis Update

There have been a number of announcements and positive developments over the last couple of weeks that give us all hope in regards to the “Great Credit Freeze” of ’07 and ’08!  Is it finally over? Not by a long shot; but there are signs of a slight thaw!

 

• ­     Fannie Mae announced last week that they would begin securitizing the “Agency Jumbo” product (conforming loans in excess of $417,000) the same as standard conforming loans.  While Fannie and Freddie do not have complete price control, this has had a huge impact on these loans in the price arena.  Whereas the spread in price between loans <$417,000 and those >$417,000 was as high as .75% in rate, today it is only a .125% rate differential (up to the maximum allowed loan of $729,750 in some areas).  This will help ease the rate pain for those borrowers needing financing over the traditional conforming limit and also wanting the security of a fixed rate loan.

• ­     The second announcement came late yesterday (5/16) and brought additional good news for potential home buyers.  Fannie Mae released an announcement that they would go back to 97% financing options for loans that receive an approve response through the automated underwriting system without any consideration or maximum financing reductions for declining markets.  There is at least one MI company that has followed suit and we should see this benefit filter into the market within the next 2 weeks.  It is unclear from the announcement if this will increase maximum financing for the “Agency Jumbo” product but I will update you as soon as I know the answer.

• ­     Lastly, we saw a nice end of the week rally on the Mortgage Backed Securities market which has helped to finally put some downward pressure on rates.  The market is still extremely volatile and subject to intense mood swings an a daily basis.  But if you look at the chart on this page, you can see that we have broken through some key levels of resistance and if the rally can maintain momentum, we may have a small window of attractive rates.  If you are anticipating the need for any financing, act quickly as these windows of opportunity tend to disappear quickly.

 

Thank you for your time and please do not hesitate to contact me if I can ever be of service.

 

What is an APR???

Annual Percentage Rate (APR) is a tool that consumers can use as a starting point to compare loan programs. However, it’s important to keep in mind that APR is not a perfect system, and not all lenders calculate APR in the same way. While the Federal Truth-in-Lending Act does require any mortgage broker or lender to disclose APR to the consumer, there is no rule written in stone for calculating this number that each and every lender agrees upon.

The point of calculating APR is to let the consumer know what the actual cost of their financing is in the form of a yearly rate. APR factors in certain closing costs and fees associated with the loan, and spreads this total over the life of the loan along with the actual note rate. The objective is to give the consumer a clearer picture of what their actual costs are, and this inhibits lenders from hiding fees or upfront costs behind low interest rates in their advertising.

Fees that are generally included in the APR calculation are points, pre-paid interest, loan processing fees, underwriting fees, document preparation fees, and private mortgage insurance. On occasion, lenders will include a loan application fee and/or credit life insurance. Fees that are normally not included in the APR calculation are fees from Title, Escrow, attorney, notary, document preparation, home inspection, recording, transfer taxes, credit report and appraisal.

Remember, all lenders do not perform the calculation the same way. Moreover, APR does not consider the possibility of making pre-payments, moving or refinancing. Unless the interest rate is tied to a fixed instrument, APR is even more confusing. Calculating APRs on adjustable rate and balloon mortgages is more complex because we really have no way of knowing what future rates will be.

If all lenders calculated APR the same way, we could make easy comparisons when deciding on what loan program to go with. Since they don’t, the consumer should know that APR is simply a starting point for comparison. They should rely on the skills of a well-versed loan professional to assist them in obtaining the loan that meets their specific needs. The more important things to consider are how long the loan is needed. What are the long-term goals of the borrower? If the homebuyer only expects to stay in the home for five years, there’s not a lot of sense in looking exclusively at 30-Year Fixed rates because the APR seems more reasonable. If a young couple is buying a home, knowing they will refinance in eight years to pay for their son’s college education, then once again, APR is not a realistic factor to take into consideration.

The Loan Executive should be prepared to answer questions about APR once the lender provides the Truth-in-Lending Disclosure Statement (Reg Z), such as why the “amount financed” listed in Box C is not the same as the actual loan amount, and why the APR is higher than the interest rate on the loan in most cases. The consumer will get a clear definition about the fees associated with their loan in the good-faith estimate, but the Truth-in-Lending Disclosure is often an area that is confusing to the borrower.