The January 2010 Jobs Report May Lead Mortgage Rates And Home Prices Higher

On the first Friday of every month, the U.S. government releases its Non-Farm Payrolls data from the month prior. The data is more commonly known as “the jobs report” and it swings a big stick on Wall Street.

Especially now — many analysts believe job growth is tightly linked to the future of the U.S. economy.

Therefore, when January’s jobs report hits the wires at 8:45 AM ET tomorrow, home buyers would do well to pay attention. A net job reading that is much higher (or lower) than Wall Street’s expectations can make a serious change in home affordability.

Wall Street expects that the economy added 13,000 jobs last month.  It would mark the second time in 3 months that the jobs report showed a net monthly gain.

In November 2008, the economy added 4,000.

Jobs matter to the economy for a lot of reasons, but one of the biggest is that when Americans are working, Americans are buying and consumer spending accounts for 70 percent of the economy.

Job growth spurs the economy and draws money to the stock market. Unfortunately for rate shoppers, that kind of stock market growth happens at the expense of the bond market which is where mortgage rates are made.

Good jobs data usually means higher mortgage rates.

Also, job growth can lead to higher home prices. This is because working homeowners are less likely to default on a mortgage versus non-working homeowners.  In this way, job growth helps hold foreclosures to a minimum which, in turn, suppresses the housing supply.

Less supply means higher prices for home buyers.

Mortgage rates are idling this morning in advance of tomorrow’s data.  If you’re shopping for a mortgage rate, the prudent play may be to lock your rate before the jobs data is released.  A jobs figure that’s higher than the 13,000 expected could cause rate to rise sharply.

Pending Home Sales Predicts A Stronger Spring Market

The Pending Home Sales Index rose slightly in December, climbing 1 percent from November.

A Pending Home Sale is a home that is under contract to sell, but not yet sold. It’s a figure compiled by the National Association of Realtors® using sales data from over 100 regional listing services and more than 60 large brokerages around the country.

Because each pending sale is a true measure of sales activity, the Pending Home Sales Index is purported to be the most reliable forward-looking indicator for housing. 

Recent data supports this hypothesis.

After Pending Home Sales plunged 16 percent in November, Existing Home Sales fell by 17 percent in December.  Based on the most recent Pending Sales Index, therefore, we can expect January’s closed sales to be similarly level.

For home buyers , this is all a bit of good news. Home prices are based on the supply-and-demand balance that exists between buyers and sellers.  When buyers outnumber sellers, like they did through most of 2009, home supplies dip and, in fact, the national home inventory nearly halved during the 12 months ending November 2009.

With fewer homes for sale, multiple-offer situations were almost commonplace and home values rose as result.

Activity has since slowed, however, and fewer buyers are in today’s market. The supply-and-demand equation has shifted back some. In December, home supplies rose for the first time in 7 months and January will likely show the same.

The net result: Home buyers have more homes from which to choose and that can create negotiation leverage for better prices and better concessions.

With mortgage rates still low and a looming deadline on the homebuyer’s tax credit, market activity should be strong between now and April.   Take your time and bid right. And when you’re ready, be ready. The best deals likely won’t last.

Recession or no Recession?

Nonfarm payrolls fell 62k in June, directly in line with expectations, after large downward revisions to both May and June netted an additional loss of 52k jobs.  This is the sixth consecutive monthly decline in payrolls. Total damage: the loss of 438k jobs.

 

Some of the biggest losses were seen in manufacturing, down 33k, construction down 43k and business services down a near-whopping 51k.  Strength came from education and health care industry hiring, up 29k, along with government hiring up 29k.  These areas have been consistently strong all year.  At some point government hiring, particularly local government, should slow because tax revenues are simply not there to support recent job growth. Thus far, however, they continue to hire at the same pace they did when real estate tax receipts were booming. 

 

The unemployment rate remained unexpectedly at 5.5%.  Many thought the unemployment rate would fall in June to reflect a decline in the teenage unemployment rate after an usually sharp increase in May. 

 

Avg. hourly earnings rose 0.3% in June, up 3.4% year-over-year.  Average hourly earnings have drifted down from a cycle high of 4.3% in late 2006 and continue to ease despite rising inflation expectations.  The labor market is simply too soft to support wage growth.  Finally, average hours worked remained unchanged at 33.7.

 

Bottom line: Job losses continued to grow in June, compounding the evidence the economy is in difficult straights.  For the Fed, this aggravates its current dilemma of policy implementation at a time of sluggish economic activity juxtaposed by rising commodity prices.  This morning’s report makes it less likely the Fed will be able to raise interest rates to combat inflationary pressures.  Unlike Trichet, who opted to raise the ECB’s benchmark lending rate by a quarter point this morning to 4.25% despite the risks that higher interest rates will deepen Europe’s downturn, Bernanke is likely to be forced into focusing on the prevention of a deep and prolonged recession. He will have to rely on a global slowdown to combat rising prices. 

Market Update

Paulson is expected to advocate a bigger role for the Fed in overseeing the markets and securities companies. The WSJ says he will push to get this done quickly rather than as part of a comprehensive regulatory reform.

Bloomberg reports on meetings between the Fed and Treasury to plan a framework for emergency lending to securities companies after the Fed closes the Primary Dealer Credit Facility, through which securities companies access the discount window. Bloomberg says Paulson may suggest in his speech today that if the Fed is on the hook for loans to securities companies it should be able to dictate capital requirements and leverage ratios, too.

The loss yesterday posted by FedEx was the first for the company in 11 years, and was primarily the result of the loss of good will at its Kinko’s unit due to a name change. Still, the company cited higher fuel costs and the slowdown in the US economy, too. FedEx is active through all sectors of the economy, making it a particularly useful bellwether.

Fifth-Third has cut its dividend, is raising capital and is selling assets. The announcement, coming on the heels of a Goldman Sachs research piece knocking the whole banking sector, sent financials lower yesterday. Morgan Stanley earnings, described as “ugly” and “broadly disappointing” by analysts and “pretty fricken’ brutal” by the firm’s CEO, added to investors apprehension.

Retail sales in the UK jumped 3.5% in May, the most on record, without anything other than unusually warm weather to explain the strength. The rise lends support to a rate hike in the UK.

In the markets, Chinese stocks fell 6.5% to a 16-month low. Crude is up to $137 on reports of production problems.

Today, jobless claims are expected to fall back to 375k after jumping to 384k last week. The June Philly Fed index is expected to rise from -15.6 to -10.0 and May leading indicators are expected to be flat.

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.

Identity Theft

5 Tips to Protect Your Privacy

The Federal Trade Commission (FTC) estimates that as many as 9 million Americans have their identities stolen each year. This means that an identity is stolen every 3 seconds, costing the average victim nearly $4,000 and nearly 175 hours to straighten out their problems and their credit. How can you protect yourself from the dangers of identity theft? Here are some suggestions.

Conduct a Credit Check-up – Visit www.annualcreditreport.com to obtain a free credit report every 12 months. Review all three of your credit reports and look for any suspicious activity, unusual or inaccurate names or addresses, or any inquiries that were done without your knowledge. In many states, you may place a 90-day “Fraud Alert” on your credit report, which further restricts access to your credit information. Simply call one of the three main credit bureaus to activate the alert. Here are the toll-free numbers: Equifax 1-800-525-6285; Experian® 1-888-397-3742; or TransUnion® 1-800-680-7289.

Don’t Give It Up – Avoid falling prey to phishing scams, both over phone and through email. In a phishing scam, identity thieves pretend to be someone from your bank or a credit institution and simply ask you for your personal information. If someone contacts you and requests any personal information, don’t give it to them. Verify who is requesting the data and why, and then call the institution yourself. One extra phone call could save you a lot of trouble and money.

Stay off the Pharm – While phishing enables thieves to pilfer information from you, pharming is another kind of scam that consists of hijacking your computer and stealing your personal information. A pharming site is designed to look just like the website you’re trying to visit. However, enter your information on this fake site and not only can it track your moves within it, it may also direct your computer to give up other personal information at a later time. Be sure you are visiting the correct site, that the address in the navigation bar is correct before entering any information.

Return to Sender – Some scammers simply fill out a change of address form and divert your mail to another location. Others simply steal the mail they want right from your mailbox. The key to avoiding this scam is to know your statement delivery dates and pay close attention to any unusual delays in delivery. A lot of identity thieves do things the old-fashioned way: They rummage through your trash to collect your information that way. Be sure to shred any junk mail or other documents that may contain your personal information before you throw it away.

Opt-out of Special Offers – Visit www.optoutprescreen.com to cut down on the pre-approved offers from credit card and insurance companies. It’s also good idea to have your clients opt out as well, especially if they’re thinking about buying a home. When people apply for a mortgage, they often become “trigger leads” to the credit bureau, who sell your clients’ information to any number of companies. It only takes a few minutes to opt out, but it could spare your clients a ton of junk mail and could possibly save them from identity theft.

Guns don’t Kill People, People Kill People

This can also be said about home financing.  Loans don’t cause foreclosures, bad decisions cause foreclosures.  The press loves a juicy story and the housing/credit crisis is ripe with tales of woe.  The bottom line, in very simplistic terms, is that there are no bad loans, only bad decisions and advice in choosing a particular type of financing vehicle over another. 

Let’s take a look at the downtrodden Option ARM product.  The Option ARM has taken a great deal of heat in the press and I would put out the challenge that out of every reporter that wrote a negative article on the Option ARM, less than 10% of them truly understand how they work and what place they hold in the financing hierarchy.  No they are not good first time home buyer programs, no they should not be used in conjunction with a 20% second to achieve 100% financing, and NO they should not offer the borrower a 1% pay rate when the fully indexed rate is 6%+ and the maximum negative amortization is only 110% prior to recast.

The tradegy of this program is that stupid, greedy, or inexperienced Originators were allowed to utilize the features of the program to take advantage of the public and reap a fortune in the process.  Originator’s routinely would offer the 1% pay rate at a 1.000 point loan fee.  But that was not enough.  In order to line their pockets further they would buy up the margin to increase the rebate or back end incentive from the funding entity.  On a typical $500,000 loan, it was not uncommon for an Originating entity to receive compensation equal to a 1.000 point origination fee and a 3.000 point rebate amounting to a total of 4.000 points.  That equals a $20,000 pay day on a $500,000 loan and, oh by the way, the Loan Agent probably spent 2 hours total time on the deal.  To cap off the insult, to get the higher rebate they bought up the margin and put the client into a 3 year prepayment penalty. I am probably crossing the line here but the Originator’s that engaged in this type of activity are pieces of S#$% and deserve to be stoned by their borrowders in the town square!

I am on this rant for a simple reason.  As a 23 year veteran of the industry I can look in the mirror and honestly tell myself that I always advised what was in the best interest of my clients.  The black eye this industry has suffered at the hands of a few will cause us to pay the price for years.  Just remember, if you are one of these guys (or gals) your judgement day will come and it won’t be pretty.

There are no bad loans, only bad Loan Agents.  If there are bad loans and no bad Loan Agents, then none of the bad loans would ever get funded and the first sentence of this paragraph would prevail and win the day.  Thanks!

Inflation and the Federal Reserve

President Woodrow Wilson signed into law the Federal Reserve Act in 1913, creating the Federal Reserve, the nation’s central banking system. The Federal Reserve, or Fed, has also been called “the gatekeeper of the US economy” because of its unique power to influence US financial and credit markets.

Comprised of seven presidentially-appointed Board of Governors; the Federal Open Market Committee; 12 Federal Reserve Banks; and private U.S. banks and advisory councils, the Fed’s mandate is “to promote sustainable growth, high levels of employment, stability of prices to help preserve the purchasing power of the dollar, and moderate long-term interest rates.” In other words, the Fed’s job is to regulate the nation’s financial institutions while simultaneously keeping inflation in check.

To accomplish this important yet difficult task, the Fed studies economic indicators, creates, and then implements monetary policy – its specific plan of action or “target” for the economy – based on its findings. And while there are many tools at its disposal, the Fed has three main instruments of monetary policy: open market operations, interest rates, and reserve requirements, all of which can impact the mortgage industry.

Open market operations, the principal tool used by the Fed in its monetary policy, consist of the buying and selling of U.S. government and mortgage-backed securities (treasury bonds, notes, and bills) on the “open market.” Basically, the Fed buys when it wants to increase the flow of money and credit, and sells when it wants to reduce it.

The Fed also controls two important interest rates: the discount rate and the fed funds rate. The discount rate is the interest rate charged by Federal Reserve Banks to commercial banks and other eligible financial institutions on short-term loans. The Federal Reserve Banks offer three discount window programs to depository institutions: primary credit, secondary credit, and seasonal credit, each with its own interest rate. Experts say that changes in the discount rate can serve as a clear announcement of a change in the Fed’s monetary policy. These changes are important because they can impact lending rates for banks and interest rates for the open market.

According to the Federal Reserve, the fed funds rate is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight. Like the federal discount rate, the fed funds rate is another tool the Fed can use to control inflation and other interest rates. This interest rate is often a source of intense speculation whenever the Federal Open Market Committee meets, creating uncertainty that can move the financial markets as well.

Finally, think of reserve requirements, the last of the Fed’s main monetary policy instruments, as the cash deposit requirement for a secured credit card. Reserve requirements represent the specific portion of deposits that banks are obligated by law to keep in non-interest-bearing funds at a Federal Reserve Bank, typically 10%. Consequently, as banks attempt to stay as near to the reserve limit as possible without dropping below, they constantly lend money back and forth to each other. The Fed, interpreting signs of inflation in its economic indicators, may choose to reduce the amount of reserves available to banks by slowing the selling of securities. Generally, this causes interest rates to rise, the economy to slow, and inflation to slow with it. The reverse is generally true when indicators suggest a slowing economy or deflation.