Mortgage Insights Blog

Ask any economist these days and they’ll tell you that housing recovery is the key to economic recovery in this country, and history has always proven this. So with this week’s announcement by the Fed that it would purchase mortgage-backed securities from Fannie Mae, Freddie Mac, and Ginnie Mae for up to $500 billion, we’re seeing some more renewed hope to a quick housing recovery in 2009.

The Plan

The Fed’s plan is to purchase another $500 billion in mortgage-backed securities, which consist of mortgage loans that are packaged together and sold to investors. These securities, viewed as toxic now because so many mortgages are going unpaid, are at the heart of what’s weighing down troubled banks. Purchasing them is intended to free up bank lending, which would spur the economy.

In addition, Secretary Paulson said Treasury will provide $20 billion of credit protection to the Fed from last month’s $700 billion financial rescue package. The protection will be part of a new Fed program that could lend as much as $200 billion to investors in securities backed by credit card, auto and other loans.

Compounding the problem, he said, was that “credit card rates are climbing, making it more expensive for families to finance everyday purchases. This lack of affordable consumer credit undermines consumer spending (and) as a result weakens our economy.”

The Intended Results

The supporters of the Fed decision say that it will directly bring down long-term interest rates because it will give banks renewed resources to lend and investors reason to start buying mortgage backed securities again. And as we’ve seen in past recessions, home sales rise when mortgage interest rates fall.

With long-term treasury bonds sinking to all new lows, investors will reach a point where they will demand higher returns, and right now the only other securities offering higher returns are mortgage backed securities. But this has been the heart of the problem all along – investors have been reluctant to invest in these securities because of the recent history of many of these securities going unpaid by borrowers.

If the Fed starts to directly purchase these underperforming securities from the GSE’s and their investors, the hope is that it will stimulate investor confidence to purchase more and help bring liquidity back to the mortgage market. And with an increase to the level of investment, it should be aggressive enough to bring interest rates down in a meaningful manner.

Lawrence Yun, NAR chief economist, said purchasing debt obligations of Fannie and Freddie is an important move. “We commend the Fed decision because it will directly bring down long-term interest rates,” he said. “The level of investment should be aggressive enough to bring interest rates down in a meaningful manner and if we see mortgage interest rates drop by even 1 percentage point, it could increase homes sales by up to 500,000 units. That should help to draw inventory down and stabilize prices.”

Yun said higher home sales are critical now to absorb inventory and stabilize prices. “Only with stabilization in home prices can we have a healthy housing and economic recovery.”

For more information on the possible impact for our local housing industry I have provided a linkt to the San Jose Mercury’s news article distributed this morning - http://www.mercurynews.com/ci_11133357

Nothing gets the stock market more excited than the government talking about and taking initiative to lower interest rates to record levels. Between their plan that would have the Treasury buying up loans from Fannie & Freddie in efforts to artificially lower mortgage rates below 4.5% to the Federal Reserve dropping their key interest rate to below 0.25%, the government’s latest intervention has caused quite a stir that we have not seen for some time in the real estate markets.

Many questions remain though - for example, who would be eligible for these low interest loans? Preliminary information is suggesting that that these loans would be available for purchases only. And then the government could further restrict these low interest loans to only those homebuyers with the best credit, or maybe to just first-time buyers and/or low-to-moderate income buyers. And of course, the rates would only be available for 30 year fixed rate mortgages with conforming loan amounts (Less than $417,000) and the new high cost conforming loan amounts (between $417,001 and $625,500).

More importantly, what would this plan do for interest rates offered for other loans such as refinances? We may not ultimately know the answer but we have seen recent speculation create downward pressure on interest rates currently offered on 30 year fixed mortgages for both purchases and refinances offered on conforming loan amounts that qualify to be purchased by Fannie and Freddie. Interest Rates have finally hit a level seen only a few times in the past several decades.

Why? With the government stepping up and backing loans secured by real estate, it gives the investment markets confidence to start buying mortgage backed securities again. So, in essence, the markets are already reacting to the possibility and the general public can already take advantage of these great rates. But keep in mind that it is no certainty that the governments proposal to artificially drive rates below 4.5% will even come to fruition. Bottom-line: the recent fall in interest rates is prompting many homeowners to act right now – don’t get left out, have a real estate financing professional look into your options.

What alternatives exist for those who do not qualify for the current mortgage rates? There could be another housing stimulus coming out early next year when congress resumes their next term. Speculation has already been made about creating refinances that do not require appraisals and even allow for lenders to write down their loan balances. But we’ll have to wait and see how things turn out in early 2009.

Already available for homeowners who are suffering form increased mortgage payments due to rate adjustments – Fannie Mae has just implemented a “streamlined loan modification” program that should help many renegotiate the terms of their mortgage – some homeowners have already benefited from reduced interest rates (even reduced below 4.5%) and principal reductions.

To learn more about loan modifications please follow the link on my website.

With interest rates dropping to new historic lows (this time “FOR REAL”) many homeowners are trying to figure out if now is the right time to refinance or not. I have put together an easy way to determine if it makes sense to refinance with today’s low rates.

The best way to figure out if it is worthwhile to incur the cost of another refinance is to first determine the potential monthly savings you will receive with a lower interest rate and compare those savings to the cost of the refinance. Then just apply simple division and you can determine how long it will take to recapture the cost of the refinance – and as long as you plan to keep this new mortgage for at least as long as it takes to recapture the cost, then it may be a wise decision to mover forward with the refinance.

To help you quickly estimate the possible monthly savings based on your current interest rate and loan balance, I have provided the following table:

TABLE: Reduction in Interest Rate and corresponding Monthly Payment Savings

For above table, monthly mortgage payments are fully amortizing and based on the savings you would receive with the applicable decrease in interest rate, from 0.25% to a 2.0% decrease in rate. Monthly savings based on fully amortizing payments at 5% interest rate.

Examples:

• If you owed $600,000 and currently had an interest rate of 7% and had the opportunity to lower your rate to 5% (a rate reduction of 2%), then you would recognize an approximate monthly savings of $771, or $9,252 per year.
• Accordingly, if you owed $350,000 at 6.5% and could refinance to lower your rate to 5.5%, then you would recognize a monthly savings of approximately $225, or $2,700 per year.

Other Considerations

In the midst of what seems to be the start of a possible refinancing boom, borrowers are discovering that there are a few things to take into consideration first:

• Qualifying guidelines have become much more stringent and the lowest interest rates are only available for borrowers that have impeccable credit, a good amount of equity in their homes, and that can fully document their incomes.
• The low rates are only available on 30 year fixed mortgage programs with fully amortizing payments.
• Mortgage programs offering short-term fixed rates, which usually have substantially lower interest rates when compared to longer term fixed rate mortgages, or loans that give the borrower the option to pay only the outstanding accrued interest (interest only programs) are currently priced higher than their fully amortizing 30 fixed rate counterparts.