Feb

18

No Country for Mortgage Brokers

Filed Under mortgage | 3 Comments

Over the weekend I finally caught the movie, No Country for Old Men. It’s critically acclaimed and several friends recommended that I go see it. At times the movie was boring and slow. At times it was quick witted and interesting. However, most of the time nothing about the movie made sense.

In the current landscape nothing makes sense.

I still get several refinance requests from the internet where people are and getting quoted rates that haven’t existed in years. Moreover, to get a loan closed today is much more difficult than ever before. So for anyone to do a loan at the lowest possible rates doesn’t make any business sense.

Some requests are for home purchases by investors. Every day lenders are limiting their risk by limiting what a mortgage broker can and cannot submit. Every day programs are disappearing. There are very few high risk loans available. It’s only a matter of time before buying a home with no money down will become extinct.

Most of the inquiries I get are questions. Simple questions such as “Is now a good time to ?” or “Will not paying my bills hurt my credit?” The people who ask these don’t give me any information about themselves just a name and an email. That’s like asking your optometrist (eye doc) “Do I have ocular degeneration?” without having him/her/it look at your eyes.

Just like the movie, No Country for Old Men, there is no end in sight to all the madness.

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Jan

11

Pavilions, Argonaut, and more

Filed Under denver | Leave a Comment

Interesting articles from the newspaper conglomerate Post/News :

Denver Pavilions goes on market: The developers of the Pavilions are putting the downtown retail development on the market.

Argonaut Liquor moves: The storied Argonaut, one of the oldest and most successful liquor stores in the area, is getting a new home after about a half-century at its current site on East Colfax Avenue in Capitol Hill.

57-acre Evergreen estate on market for $24 million: entrepreneur Richard Bard is selling a mansion on a 57-acre estate in Evergreen.

Treasury secretary: No simple fix for housing: The Bush administration is working to combat the country’s severe housing crisis but there is no simple solution, Treasury Secretary Henry Paulson said Monday, adding that a correction in the housing market is “inevitable and necessary.”

Efforts to spark economy may be too little, too late: As leaders in Washington turn their attention to efforts to avert a looming downturn, many economists suggest that it may already be too late to change the course of the economy over the first half of the year, if not longer.

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Dec

6

These rates are freezing

Filed Under economy, mortgage, rates | 2 Comments

Five-Year Freeze Looms
Wednesday December 5, 8:42 pm ET
By Martin Crutsinger and Alan Zibel, Associated Press Writers

Bush Plan Will Freeze Certain Subprime Interest Rates for 5 Years WASHINGTON (AP) — The Bush administration has hammered out an agreement to freeze interest rates for certain mortgages for five years to combat a soaring tide of foreclosures, congressional aides said Wednesday.

The aides, who spoke on condition of anonymity because the details have not yet been released, said the five-year moratorium represented a compromise between desires by banking regulators for a longer time frame of up to seven years and industry arguments that the freeze should last only one or two years.

Another person familiar with the matter said the -freeze plan would apply to borrowers with loans made at the start of 2005 through July 30 of this year with rates that are scheduled to rise between Jan. 1, 2008, and July 31, 2010.

The administration said President Bush will speak on the agreement at the White House on Thursday and the Treasury Department announced that Treasury Secretary Henry Paulson and Housing and Urban Development Secretary Alphonso Jackson would hold a joint news conference Thursday afternoon with industry officials.

Treasury also announced there would be a technical briefing to explain more of the proposal’s details.

Paulson, who has been leading the effort to craft a plan, said on Monday that the program would only be available for owner-occupied homes — to ensure the break is not given to speculators.

The plan emerged from talks between Paulson and other banking regulators and banks, investors and consumer groups trying to address an avalanche of foreclosures feared as an estimated 2 million mortgages reset from lower introductory rates to higher rates.

In many cases, the higher rates will boost monthly payments by as much as 30 percent, making it very difficult for many people to keep current with their loans.

The plan is aimed at homeowners who are making payments on time at lower introductory rates but cannot afford a higher adjusted .

Through October, there were about 1.8 million filings nationwide, compared with about 1.3 million in all of 2006, according to Irvine, Calif.-based RealtyTrac Inc. With defaults still rising, the trend is expected to worsen next year.

The plan represents an about-face for Paulson, who until recently had insisted the mortgage crisis could be handled on a case-by-case basis. However, he and other administration officials became convinced the tide of foreclosures threatened by the resets represented such a severe threat that a more sweeping approach was needed. They opted for a proposal that was along the lines of a plan put forward in October by Sheila Bair, head of the Federal Deposit Insurance Corp.

Paulson and other federal regulators began holding talks with some of the country’s biggest mortgage lenders, mortgage service companies, investors who hold -backed securities and nonprofit groups that provide counseling for at-risk homeowners.

Under the typical loan — those offered to borrowers with spotty credit histories — the rates for the first two years were at levels around 7 percent to 8 percent. But after two years, those rates were scheduled to reset to levels around 9 percent to 11 percent.

For a typical $1,200 monthly payment, the reset could add another $350 to the monthly payment, greatly raising the risks of loan defaults by homeowners struggling with the current payment.

The wave of foreclosures threatened to make the most severe slump in housing even worse by dumping more foreclosed properties onto an already glutted market, further depressing home prices and shaking consumer confidence.

The deepening housing slump has already roiled financial markets, starting in August, as investors grew increasingly concerned about billions of dollars of losses being suffered by banks, hedge funds and other investors.

The administration plan is designed to deal with the crisis by letting borrowers who are living in their homes and are current on their payments to avoid a costly reset for five years. The hope is that by that time the housing downturn will have stabilized, clearing out the glut of unsold homes and halting the steep slide in prices that is hitting many parts of the country.

With sales and prices once again rising, the expectation is that homeowners will be able to renegotiate their current adjustable rate mortgages into a more affordable fixed- plan.

The housing crisis has become an issue in the presidential race with Democrats Hillary Rodham Clinton and John Edwards putting forward their own proposals this week that would go further than the administration.

Clinton said her own proposal that would impose a 90-day moratorium on foreclosures and freeze the rates for five years or until they had been converted to fixed- loans was a better approach that would help more people.

“Although the administration is finally giving the crisis the attention it deserves, it seems that President Bush is going to give struggling homeowners far less than they need,” she said in a statement.

Mark Zandi, chief economist for Moody’s Economy.com, called the administration plan a good first step, but said the government eventually will have to go further given the problem’s size and the threat to the economy.

“This is the most serious housing downturn we have seen in the post World War II period,” Zandi said. “It is a threat to the broader economy. The risks of a recession are very high.”

Associated Press reporters Deb Reichmann and Nedra Pickler contributed to this report.

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Oct

12

FHASecure and your Adjustable Rate Mortgage, perfect together?

Filed Under denver post | 4 Comments

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Jan

31

Links: Going broke on medical bills

Filed Under mortgage, personal finance, real estate | Leave a Comment

Here are some interesting articles from across the web:

  • After seeing numerous potential clients who’ve filed bankruptcy to stave off the medical bill collectors, this statement/article is extremely true: “Scholars say medical debt is the No. 1 cause of bankruptcy.”
  • Higher rates, less house explores how increases reduces the amounts people qualify.
  • Dan Green of the Mortgage Reports has a keen mind when it comes to the market. Here are his thoughts on why rates are rising:
    • Mortgage-backed securities lost 84 basis points over 5 days
    • Fed Futures currently price a greater chance that the Fed will raise the FFR in May than it will lower it
    • Since January 5, the Fannie Mae 30-Year 5.5% bond closed worse on 81% of trading days and has worsened in pricing by 146 basis points
    • Since December 5, the same bond has been down on 23 of 36 days, or 63.89% of the time
  • Federal Reserve Chairman Ben Bernacke did well in his first year. Meanwhile his predecessor, Alan Greenspan, is writing a book called “The Age of Turbulence”.
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Dec

11

An analysis of the Denver Real Estate Market

Filed Under denver, real estate | 1 Comment

house2.bmpMark Twain’s quote “Lies, damn lies, and statistics.” is apropos when discussing the real estate market. Real estate statistics for sales are skewed due to the growth in the past five years. Fueled mostly by low interest rates and overly aggressive loan programs, people of all shapes and sizes bought homes. As rates have gone up and the those loan programs have been deemed “too risky” the growth has slowed. However, the statistics will show that the market tanked.

To put things in perspective the market is very similar to the career of Bronco Jake Plummer. Jake has been a steady player who never put up gaudy statistics. The last several years his statistics were better than ever as Jake played at an elite level. This year his play dropped. But did it? On average he throws 15 touchdowns and 15 interceptions every season and this season, if he wasn’t pulled for Jay Cutler, he was set to meet those mediocre statistics.

A thorough statistical analysis should take into account the overall average over time. Recently I came across a blog called the Bubble Buster which presents a complete analysis of major cities. The analysis takes history into account. Today they released their Denver real estate analysis:

The Denver economy is continuing its steady recovery following the bursting of the tech bubble. The past thirty years have seen three real price cycles and the beginning of a fourth in . Including one cycle of TWELVE years in which nominal growth was 32.6%, yet real growth was negative 29.4%. Market cycle time periods have varied from the downturn cycle of twelve years to the prior growth cycle of fourteen years.

What I truly appreciate about this analysis is that it takes into account the growth in Denver during the past quarter, four quarters, year, five years and historical average. According to this analysis, has seen an appreciation of .1% in the last quarter, 2.3% past four quarters , 4.7% last year 2005, 17.6% last five years and 6.3% historically.

The analysis is further broken down:

  • Summary

    • Recent declines in sales activity have increased the number of homes on the market. Further sales declines should be expected due to current local market psychology. However, significant price declines are unlikely as the servicing cost has remained steady.

  • Recent History

    • The past five years have seen fair nominal and real price growth. The Denver mortgage--to-income ratio has remained steady throughout the past five years despite a national increase, indicating there should be little to no concern about an market bubble. Consequently, nominal and real prices should be expected to continue to grow at near historic levels if rates remain at current levels.

  • Price Charts
  • Peaks and Troughs

    • In order to most accurately determine prior market price cycles one must remove the effects of inflation and look at real historical prices. The past thirty years have seen three real price cycles and the beginning of a fourth in . Including one cycle of twelve years in which nominal growth was 32.6%, yet real growth was negative 29.4%. Market cycle time periods have varied from the downturn cycle of twelve years to the prior growth cycle of fourteen years.

  • Forecasts

    • Accurately projecting local prices is a challenging task because so many factors play a part in home prices. rates, inflation, job growth, median income, legislation, migration patterns and market psychology are just a few. Additionally, real estate markets rarely have periods in which they achieve average historical growth. Rather, markets have periods of tremendous growth followed by market decline. Consequently, the tables and charts below present three likely scenarios, rather than one definite path.

Good stuff!

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Nov

21

Good reasons to refinance

Filed Under humor, mortgage | 2 Comments

Refinances usually fall under two categories, /term and cash out:

Rate/Term: You’re reducing the interest , the term (length of your ) or both. This was by far the number one reason to .

Cash Out: The next biggest reason to is because people wanted to get cash at closing to pay for something.

There are countless other reasons to refinance. Below are other “good reasons to ” provided in the comments section when potential borrowers filled out my loan request form. They don’t quite fit into the /term or cash out categories.

Getting divorced, not getting the house. Don’t want to pay for it either.

Need to get out of current loan before rates go up or before I go broke whichever happens first.

I don’t want to pay my to this crappy company anymore.

My husband doesn’t think we need to , can you call him and convince him that we need to.

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Sep

26

A letter from a reader

Filed Under mortgage | Leave a Comment

I get a lot of email. Some are linking requests. Some are spam that somehow get through GMAIL’s spam filter. Some are mortgage requests. Some are mortgage questions. Some are vendors trying to sell me something.

On Sunday, I received a well written argument from a reader who asked me to post his response to the Post article NO MONEY DOWN: A HIGH RISK GAMBLE.

Phil,

I enjoy frequenting your blog, and wanted to be sure to share this with you. I am an independent Mortgage Broker with my own company Source Financial LLC, and I wrote an extended response to The Sunday Post’s lead article from September 17, 2006 entitled “No Money Down: A High-Risk Gamble” [www.denverpost.com/ci_4347686].

I found the Post article to be riddled with misrepresentations, one-sided accountings, and dangerous misinformation, all supporting a traditionalist approach to mortgages that has put two-thirds of all families into home ownership, but yet has led to a situation where the average fifty year-old American is worth negative $7000, only 5% of Americans retire at age 65 in financial dignity, and 9 out of 10 Americans die in .

In reference to my 2000 word response, Denver Post Business Editor Stephen Keating indicated that “I will take the time to read it and digest your observations, and discuss it with the rest of the reporting/editing team here.” Article author and Denver Post Business Writer Greg Grifffin wrote “This is a well-reasoned and well-supported argument. I don’t agree with everything you’ve said, but you’ve managed to get me thinking.” Unfortunately, checking today’s (September 24) Sunday Post and www.denverpost.com, my response remained unpublished…

A Response to “No Money Down: A High-Risk Gamble” – The Sunday Post, September 17, 2006 lead article [www.denverpost.com/ci_4347686]

As an independent Mortgage Broker that owns my own company, Source Financial LLC, in addition to being affiliated with a larger company that handles the processing and servicing of my loans, Lion Financial Corporation, I read the lead article “No Money Down: A High-Risk Gamble” with great interest. Knowing that a lot of folks along the Front Range turn to the Post as an objective source for information, I was shocked and dismayed by much of the information and conclusions that were put forth on a topic that already invokes a fight or flight response among many home owners.

100% financing loans have been an amazing tool that has greatly contributed to the 5% increase over the last twenty years in percentage of homes occupied by the owner. But it is not the lack of equity that is putting these borrowers into jeopardy, it is a lack of a flexible asset base to deal with changes that has been increasing the risk of these folks defaulting. In general, people that utilize 100% financing for home purchases usually are lacking the liquid assets, emergency funds, and overall wiggle room to deal with financial hardship.

Of course lenders usually have guidelines concerning liquid asset reserves that must be held by the borrower in order to qualify for a loan, but often they only require enough to cover two to four months of payments. When people do face catastrophic events rightfully referenced by the Post, “job loss, medical problems and divorce,” those reserves can often quickly disappear.

But having equity in one’s home when faced with these situations does not “give homeowners options when they face financial problems,” because it is precisely when folks are facing such dilemmas that they are quite often unable to qualify for refinancing, as at that point in time they are too high risk of a borrower for lenders to work with. As a Broker I am deeply disturbed by this fact, but unfortunately it is a reality that we all must face when dealing with banks and lenders.

And probably the most misunderstood aspect of homeownership is the fact that equity is a ZERO PERCENT RETURN INVESTMENT. Yet two-thirds of Americans hold the majority of their wealth in , which is a non-liquid asset that gives them absolutely zero return. Many people confuse appreciation, which is the increase in home value due to market trends, with getting some kind of return on their equity, but that is a common misconception. That is why it is so important for homeowners to separate their equity from their home via refinancing, and put those “cashed out” funds into investment vehicles that offer an actual rate of return. In doing so, homeowners increase their overall liquidity, improve their capacity to face emergencies, reduce their financial risk, increase their of return, improve their tax deductions, and diversify their investment portfolio.

Instead of spending their liquid asset base (savings) to finish their basement and send money to their parents, such as in the case of Jose Garcia and Maria Vanderhorst, borrowers with 100% financing have to exercise greater financial discipline. And putting money down and getting into a 30-year fixed would not have improved their situation, as then their down payment would be tied up as equity, which is a non-liquid asset, money that can only be accessed through refinancing or by selling their home.

100% finanacing loans are not dangerous, what is dangerous is borrowers not having a liquid asset base to deal with life’s contingencies. Unfortunately, these are the type of borrowers that tend towards 100% financing, as it really is their only option for home ownership. And tying up their wealth in the straightjacket known as equity is not part of the solution, it is part of the problem. An incredible means to access equity for the purpose of greater fiscal flexbility and all the other goods mentioned above, or “cashing out equity as one goes,” is the Option-ARM loan, which received quite a misguided slamming in the Post article.

The Payment Option Loan gives the borrower four different payment options each and every month: they can make an Interest Only, 30-Year amortized, or 15-Year amortized payment based upon the fully indexed interest rate, or they can make the minimum payment that is based upon a very low “start rate” (usually between 1% and 4%), which involves deferring interest (a.k.a. ), or adding the difference between the Interest Only payment and the minimum payment onto the principal of the loan. Now while most lenders offer the Payment Option Loan with an adjustable fully indexed rate, one that starts adjusting as early as the first month, some lenders offer the Payment Option Loan with a fixed interest for the first five years.

The Payment Option Loan has proven to be a favorite of Real Estate Investors and Agents, as it frees up extra cash flow on a monthly basis for much greater investment opportunities. Knowing that equity is a zero percent return investment is some powerful information to have.

The annecdote concerning Louis and India Harts conflated the fixed “start rate” with the adjustable “fully indexed rate”, such that readers were left with the impression that the Harts’ interest rate went from 2.6% to 8.1%. The start rate, which determines how much the minimum payment will be, is not a “teaser rate” that “quickly shoots up”. Some lenders do gradually increase the minimum payment itself (not its determining start rate) on an annual basis, usually somwhere in the range of 7.5% per year, to keep the borrower from deferring too much interest. But the start rates is always otherwise a fixed rate. It is the fully indexed rate, upon which the Interest Only, 30-Year amortized, or 15-Year amortized payments are based, that is adjustable is this case. And this fact is consistent with the numbers quoted in the article: the minimum payment of $919 the Harts are making would be the combination of $721 (2.6% start on a $180,000 loan) and $198 of escrowed Taxes and Hazard Insurance, which is approximately what they would be for such a home.

In the Harts’ particular case, they are going to have plenty of time to refinance before their loan starts to recast when the principal hits 115% (which would be $207,000 in their situation), as they will be well below that total when their three year penalty period is up. So the answer to Louis’ “I don’t know how we’re going to do it,” is that when those three years are up, they’ll and get themselves into a loan that they feel more comfortable with and educated about. Though given their situation, if properly understood the Payment Option Loan really is their best option.

My question is how can mortgage products themselves be blamed for foreclosures? At best the article points towards a correlation, but demonstrating causation surely requires more than offhanded references to what some unnamed experts stated the next wave of defaults “may” come from. Beyond unpredictable catastrophic occurences like job loss and overwhelming medical bills, foreclosures occur because borrowers are getting into loans that they do not understand, and often they do not know that they do not understand the mortgage product. It is the responsibility of the Mortgage Broker to completely explain all the details of any mortgage product to the borrower. But it is also the responsibility of the borrower to be certain that they understand the terms of loan before signing off on it at closing. Vehicles and guns both kill in the range of 35,000 Americans each year, but it is the human misuse due to lack of education, ignorance or simple negligance that creates this reality, much like in the scenario.

Every different product serves its purpose, and what works for one borrower will not work for another given the specifics of their situation. To label certain categories of loans as “high-risk gambles” or as leaving “no room for slips” ignores the millions of families that are in these loans and find that they very much work for them. It is also a disservice to consumers to mislead them with such one-sided representations.

The true irony of the lead piece in September 17th Sunday Post is that the conclusion that “Option-ARMs… could fuel a surge in foreclosures in the next few years” is the opposite of what we find is actually going on in the mortgage industry, as Payment Option Loans have proven to have the lowest foreclosure rate of any mortgage product currently on the market. World Savings is a bank that specializes in this product, which they refer to as the Pick-A-Pay Loan, as more than 90% of the loans they outfit borrowers with are of the Option-ARM variety. As a lender they have less than a 1% percent ! But World Savings, along with the independent Mortage Brokers like myself that they work with, take on the responsibility of educating the borrowers as to how to properly and smartly manage this incredibly powerful product.

A lot of mortgage brokers I know will not touch Payment Option loans, but I believe that is primarily because they are not all that interested in educating the consumer. Why not just throw them into a 30-year fixed APR mortgage? Everyone pretty much knows how that works. But that is also how banks make of the most money off of borrowers! The “list of higher-risk, alternative mortgages” the article refers to are not only not necessarily higher risk (Payment Option loan has the lowest risk, as discussed above), but they also provide the borrower the opportunity to increase their monthly cash flow by lowering their monthly payments by as much as 40%. In this way consumers are empowered to “become the bank” and grow their own investment portfolio, rather than falling into the trap of handing over their hard earned capital to the banks in the form of a large down payment or paying down principal so that they can have more of a zero percent return investment, equity.

Affiliates of Lion Financial Corporation, like myself through my company Source Financial LLC, do not shy away from the privilege or responsibility of educating our clients how to properly utilize alternative mortgage packages. And why is this? Because when families are taught smart mortgage product and equity management, they learn to utilize their mortgage as a financial tool for building wealth, which easily makes a $500,000 to $1,000,000 difference for the borrower over the next fifteen to twenty years. The affluent have always understood how to leverage their , pay as little down as possible, and keep very low monthly payments in order to increase cash flow for investment purposes. The American middle class is being transformed by engaging in these very same concepts and increasing their fiscal discipline, and I absolutely would not have it any other way.

Brent Ritzel
President/CEO, Source Financial LLC
, , USA
An affiliate of Lion Financial Corporation
303-590-8999
Brent.Ritzel@lionfinance.com

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Mar

14

780 Credit Is Mediocre….

Filed Under mortgage | Leave a Comment

… according to the new scoring model. I have yet to see a credit report reflect the news scores.

Credit Agencies Aim to Simplify Scoring
Tuesday March 14, 11:55 am ET
By Eileen Alt Powell, AP Business Writer

 

Three Large Credit Agencies Adopt Uniform Aimed at Simplifying Loan Process

NEW YORK (AP) — The three major consumer credit reporting agencies announced Tuesday that they have created a new credit scoring system aimed at simplifying the loan process for both lenders and borrowers.The announcement by Equifax, Experian and TransUnion said the new “VantageScore” was “a direct result of market demand for a more consistent and objective approach to credit scoring.”

The agencies in the past each used their own proprietary formulas to create their own scores, meaning that a lender dealing with a consumer’s application for a credit card or a might have to reconcile three widely different scores.

With the new system, a single methodology will be used to create the scores.

“Under the new scoring system, variance between credit reporting companies will be attributed to data differences within each of the three consumer credit files and not to the structure of the scoring model or data interpretation,” the agencies said in a joint statement.

It added that VantageScore “will provide consumers and businesses with a highly predictive, consistent score that is easy to understand and apply.”

Kerry Williams, group president of Experian’s credit services division, told The Associated Press that his agency was making the new scores available immediately to financial institutions and expected wide adoption, but said he did not expect the scores to be rolled out for consumers until later this year.

Credit scores are important because they measure how much a consumer is carrying and how well the consumer keeps up with bills.

The higher the score, the more credit worthy the consumer is considered and the lower the interest the consumer is likely to be charged.

The three credit agencies termed the move to a unified score as “unprecedented.”

The scores will range from 501 to 990. The top end is slightly higher than scores currently in use.

Colleen Tunney, spokeswoman for TransUnion, told a conference call with reporters and credit industry representatives that the new score was created by looking at millions of consumer files at the same time to ensure consistent readings across the three bureaus’ data.

She and spokesmen for Equifax and Experian said it was not immediately clear how quickly the new score would be adopted by institutions.

“Step one is we’re talking to our credit grantors as we speak,” said David Rubinger, spokesman for Experian. He said each agency was marketing the new score to its own customers.

He added: “For any score to have merit in the marketplace, all parties need to be at the table.”

Many lenders, especially those in the business, use FICO scores, which are named for the Minneapolis-based Fair, Isaac Corp. which developed them. Others use proprietary scores from the individual credit bureaus or use the bureau data to generate their own scores.

Spokesmen for Fair, Isaac could not immediately be reached for comment.

Rubinger said the new score was expected to reduce the variance in a consumer’s scores by about 30 percent compared with what it was under the old system. He gave no other details.

He said the score would reflect a consumer’s frequency of borrowing, delinquency in paying bills and other “file content,” but had no specific weights for the components.

In a separate statement, Experian said the new scores will be grouped on “the familiar academic scale.” Experian gave these groupings:

A — 901-990

B — 801-900

C — 701-800

D — 601-700

F — 501-600

Experian said it was hoped that “as consumers increase their awareness of the importance of credit scores and credit reporting, the consistency of VantageScore will provide the type of information they need to evaluate their credit standing and make sound financial decisions.”

VantageScore is being independently marketed and sold separately through each of the three national credit reporting companies via licensing agreements with VantageScore Solutions LLC, the joint announcement said. The spokesmen said that VantageScore was jointly owned by the three credit bureaus. They said it did not yet have a headquarters, although an informational Web site had been set up at http://www.vantagescore.com.

The credit reporting agencies are operated by Equifax Inc. of Atlanta, Experian Information Solutions Inc. of Costa Mesa, Calif., and TransUnion LLC of Chicago.

http://www.equifax.com

http://www.experian.com

http://www.transunion.com

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Mar

8

Adjustable Rate Mortgage Holders Prepare for Increase in Interest Rates

Filed Under economy, mortgage, rates | Leave a Comment

Interest rates are on the rise and many home owners who have adjustable mortgages may see increases in their forthcoming annual adjustments.

Federal Reserve Chairman Alan Greenspan made it clear in 2004 that the Federal Reserve would be increasing short-term interest rates at a measured pace. With the US Dollar at its weakest point in seven years, oil prices unstable and the evaluation of other economic indicators, the Fed Funds Rate was hiked seven times from 1.0% to 2.75% since June 2004 in an effort to curb inflation. Some economists believe it won’t stop until the Fed Fund hits 4.0%.

Consumers with revolving accounts tied to the prime rate have seen the effect through rising interest rate charges, as the rate always rides 3% above the current Fed Funds .

Mortgage interest rates are affected indirectly by these changes. An increase in the Fed Funds has an impact on financial markets as a whole, but rates may go up or down based on the perception investors have of current economic statistics and their reaction to the Federal Reserve’s after-meeting statements.

In general, when economic data indicates we have a slow-down occurring in our economy, investors tend to sell off stocks and reallocate that money to the safe haven of bonds and mortgage-backed securities. The of mortgage-backed securities drives interest rates down. When economic data says there is growth in the economy, the stock market typically rallies and mortgage-backed securities sell off to fuel that stock market rally. This drives interest rates up.

Our current market reflects the reaction of investors reading between the lines on comments made by the Fed, and interest rates are going up. This will have an affect on home owners with adjustable mortgages (ARMs) tied to indexes that are based on short-term interest rates. This includes the 11th District Cost of Funds, 12-Month Treasury Average (MTA), London Inter Bank Offering Rates (LIBOR) and others.

This doesn’t mean that everyone with an adjustable mortgage is in trouble right away. Some indexes are more volatile than others. COFI moves much slower than other adjustable rate indexes, while the LIBOR fluctuates with more volatility. But remember, when an ARM adjusts, the new interest rate is a sum of the borrower’s fixed margin plus the current of the index the is tied to.

Consumers who foresee paying an interest rate that is significantly higher may want to consider refinancing to take advantage of the stability of a fixed .

This is also a good time for borrowers who started out in an adjustable rate loan due to a poor to transition into a fixed loan if they can. Once a track record of making payments on time and in full has been established, this should have a positive effect on the and there is a good chance the borrower may now qualify for a loan with a lower interest .

As with any decision to , it is important to take the terms of the existing loan, the cost of the new loan, and the borrower’s long-term needs into consideration. A qualified professional should help weigh out the options by providing a clear assessment of available loan programs for the consumer.

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