The Mortgage Moment

Yesterday, the stock market suffered its largest one-day point loss since September 17, 2001, and its sixth-largest point loss in history.

Not everyone got punished, however. Two groups of people, in particular, welcomed yesterday’s losses:

1. Home buyers out shopping for a mortgage
2. Homeowners that snoozed through last week’s mortgage rate drop

See, as the stock market dropped yesterday, investors anxiously moved their money away from risky investments like stocks and into the safe haven of government-backed debt.

This includes mortgage-backed debt, of course.

As traders poured into bonds, bond prices rose. They did so beginning at Market Open, all the way into Market Close. And, because mortgage rates move in the opposite direction of mortgage bonds prices, mortgage rates fell Monday. A lot.

Today, the Federal Open Market Committee meets, adjourning from its scheduled conference at 2:15 P.M. ET. In the Fed’s press release, among other things, markets expect Ben Bernanke & Co. to address the financial system’s stability — or lack thereof — that helped to fuel Monday’s selling action.

If markets find the Fed sympathetic, expect stock markets to rally, and mortgage rates to rise.

In a week overdone with market-altering news, conforming mortgage rates shed a quarter-percent overall last week. It was the third straight week in which rates improved.

The biggest story, by far, was the government’s takeover of Fannie Mae and Freddie Mac.

The two quasi-government agencies were nationalized into bona fide government agencies, converted mortgage-backed debt into risk-free, government debt.

Instantly, conforming mortgage rates fell.

But, once the news settled in, mortgage markets returned to normal and, like in weeks prior, rates mirrored the path of the U.S. dollar.

Early in the week, the dollar was helped by economic trouble in Europe and optimism about the U.S. economy. Currency traders flocked to the dollar, helping to push mortgage rates down for Americans.

But, as the week continued, dollar enthusiasm waned and mortgage rates increased. Then, Friday afternoon, the dollar — and mortgage rates — got shellshocked by a combination of news contributed to the dollar’s worst one-day decline in six months:

• Hurricane Ike threatened oil supplies from Texas
• Back-to-school sales were weak nationwide
• Lehman Brothers teetered on collapse

This week, without much economic data to digest. Wall Street’s attention will be focused on Tuesday’s Federal Open Market Committee meeting. Ben Bernanke & Co. are widely expected to hold the Fed Funds Rate at 2.000 percent.

But, it won’t be what the Fed does to the Fed Funds Rate that will be so important Tuesday. It will be what the Fed says.

If the Fed shows worry over medium- or long-term inflation in the economy, mortgage rates should rise because inflation is the enemy of the mortgage market. Sometimes, even an off-hand reference to inflation can make that happen. By contrast, if the Fed shows little concern for inflation, it may cause mortgage rates to fall.

The FOMC adjourns and issues its press release at 2:15 P.M. ET Tuesday.

On all principal + interest home loans, the first few years of payments include a lot more money going to interest than to principal.

This is because mortgage repayment schedules are front-loaded with interest, meaning large-volume principal reduction won’t occur until late in the mortgage’s lifecycle.

Comparing products at a 6% mortgage rate, did you know that after 15 years:

• A 15-year mortgage will be paid in full
• A 20-year mortgage will have 41.21% of its loan balance remaining
• A 30-year mortgage will have 73.19% of its loan balance remaining

Of course, this doesn’t mean that 15-year mortgages are better than their 20-year or 30-year brethren. It just means that 15-year mortgages pay off faster.

Yet, there are reasons for homeowners to avoid 15-year mortgages.

For example, versus 20-year or 30-year products, 15-year mortgages require the highest monthly payment because the payback period is compressed to a shorter time frame. In addition, mortgage interest tax deductions to which most homeowners are entitled are reduced on a 15-year product.

So, just because the 15-year pays off quickly doesn’t mean that it’s best for everyone.

Conforming mortgages are limited by loan size, based on “typical” housing costs around the country. Since 1980, as home prices have increased, so have conforming loan limits.

The current conforming limit on a single-unit property is $417,000.

Earlier this year, as part of the Economic Stimulus Act of 2008, Congress authorized conforming loan limits increase in “high-cost” areas around the country. In Los Angeles County, for example, a mortgage can be as large as $729,750 and still be considered “conforming”.

But beginning in 2009, those increases roll-back. Effective January 1, conforming mortgage in high-cost areas will be limited to $625,500.

Changes to conforming loan limits impact everyone with a stake in real estate, even if their neighborhoods are not considered “high-cost”. This is because conforming mortgages offer the widest selection of home loan products, and often at the lowest rates. The widespread availability of conforming mortgages helps to support home sales nationwide ands provide ample refinancing options for homeowners that need it.

Starting with the New Year, fewer people will be eligible.

To lookup the conforming loan limits in your neighborhood, visit the HUD Web site. If you have specific questions related to your home or an upcoming purchase, contact me directly anytime.

In its last act as a semi-independent company, Fannie Mae altered mortgage guidelines for real estate investors last Friday. It was Fannie’s 22nd update this year.

The first part of the guideline change limits the number of properties owned by any one person.

Fannie Mae will now decline any mortgage application for a second home or investment property if the mortgage applicant already finances, or will finance, more than 4 properties in total.

The former guidelines allowed for 10.

There is a loophole, however. Fannie Mae will not count properties against the 4-property limit if they are held in the name of a corporation. This holds even if the real estate investor is the sole owner of said corporation.

Investors, therefore, should consider moving their properties into a corporate structure to avoid triggering Fannie Mae’s 4-property limit. Investors often take this step for liability and taxation reasons, but it’s now a good idea for mortgage approval reasons, too.

The second part of the guideline change cannot be so easily avoided. Fannie Mae is assessing new, loan-to-value based loan fees on all investment property mortgages.

• Loan-to-value less than 75 percent : 1.75% loan fee
• Loan-to-value 75.01-80.00 percent : 3.00% loan fee
• Loan-to-value 80.01-90.00 percent : 3.75% loan fee

These fees are mandatory and are in addition to any whatever other risk-based loan fees Fannie Mae may assess. Currently, those fees amount to a half-percent at minimum for real estate investors.

Since its Fannie/Freddie takeover, government officials have not addressed whether mortgage guidelines will be rolled back to “a looser time”. If they are, it would be a big deal for real estate investors because, as many are finding out, low rates don’t matter much if you can’t qualify for them.

If you’re currently in the market for an investment property (or two), consider that it may be cheaper and simpler to purchase over the near-term versus the long-term. And consider moving your existing properties into a corporate structure first.

When comparing two investments with equal risk, a rational person will choose the investment with a higher rate of return.

This behavior is called Risk Aversion and is a basic tenet of personal investing.

An off-shoot of Risk Aversion is that a rational person will only invest in an instrument of greater risk if the returns are greater, too.

The chart at right illustrates this concept, comparing return rates on two investments:

• U.S. Government bonds
• Mortgage-backed bonds

The difference in investment return rates is sometimes called a “spread” and the historical spread between government debt and mortgage debt is somewhere near 1.5 percent.

However, notice how the spread started to grow starting in July 2007.

July 2007 marked the “official” start of the Credit Crunch and as mortgage delinquencies grew nationwide, so did the market’s perceived risk of investing in them.

By the start of this month, the spread had nearly doubled.

But that all changed Sunday. When the government announced its takeover of Fannie Mae and Freddie Mac, it put the same “risk-free guarantee” on mortgage debt that has helped keep U.S. government debt so cheap to finance and the spread immediately shrunk.

This is one reason why mortgage rates fell Monday and why they should continue to stay low over the near-term. With the U.S. government backing the mortgage market, there’s no room for the risk premium that helped keep rates high this past year.

It doesn’t mean more people will qualify for conforming home loans, but for the ones that do, financing should be cheaper.

Mortgage markets improved last week on Hurricane Gustav’s less-than-expected damages and a strengthening U.S. dollar.

Even factoring in Friday’s 0.125 percent run-up on most mortgage products, rates improved overall.

It’s the second straight week in which mortgage rates improved.

But for all the news that we could dissect from last week, it should be the news from this week that proves most interesting.

This is because on Sunday, the U.S. government assumed control of Fannie Mae and Freddie Mac.

So far, the papers have done a terrific job talking about the political perspective of the takeover, and the economic perspective of the takeover, but very few have addressed the key news for homeowners — mortgage rates are plummeting.

Mortgage rates are improved this morning because of Fannie Mae and Freddie Mac’s collective role in the U.S. mortgage market.

1. They guarantee about half of the nation’s $12.1 trillion in mortgages
2. They purchased and securitized four-fifths of the nation’s home loans as recently as six months ago

See, earlier this year, Wall Street punished Fannie Mae and Freddie Mac for their weak balance sheets and increasing number of mortgage delinquencies. This led to Wall Street to raise the borrowing costs for the two firms across the board which, in turn, led to higher mortgage rates for Americans.

But today, with their balance sheets backed by the U.S. government, Fannie and Freddie are now viewed as “safe” by the eyes of Wall Street. Their borrowing costs have been lowered, therefore, and mortgage rates are falling in response.

This week is light on economic data but it shouldn’t really matter. Mortgage rates should close the week lower than where they started for the four-fifths of the country that uses Fannie or Freddie’s conventional mortgages.

For everyone else, keep an eye on the U.S. dollar. Its strength continues to have positive consequences on the mortgage markets.

Reprinted from Fannie Mae:

As Mudd spoke in New Orleans, a key Senate panel approved a $300 billion homeowner rescue plan to provide cheaper, government-backed mortgages to as many as 500,000 struggling borrowers. The legislation also includes tougher federal oversight of Fannie Mae and its smaller government-sponsored sibling, Freddie Mac (FRE, Fortune 500).

Fannie (FNM, Fortune 500) shares declined $1.20, or about 4%, to $27.75 in early afternoon trading Tuesday. Freddie’s stock slipped 50 cents, or around 2%, to $26.51.

On the first Friday of every month, the government releases its Non-Farm Payrolls report.

More commonly called the “jobs report”, the two-page analysis examines the nooks and crannies of the U.S. economy to see which industries are hiring and which are firing.

The August jobs report was released this morning and it shows that the U.S. economy shed 81,000 jobs in August.

This marks the eighth straight month in which payrolls declined and puts the annual job loss total at 605,000. The Unemployment Rate jumped to 6.1% — its highest level in 5 years.

For American workers, this is bad news. But, for American home buyers, the news couldn’t be better.

Mortgage rates are improved this morning on weak jobs data.

If this seems counter-intuitive, remember that earlier this year, lingering concerns about inflation in the U.S. economy caused mortgage rates to rise to their highest levels in more than 5 years.

Lately, however, those fears are subsiding and as today’s jobs report shows worse-than-expected weakness, it’s one more reason for markets to put inflation concerns to rest. With fewer Americans working, there are fewer dollars are available to propel the economy forward, after all.

So, today’s jobs data is good for mortgage rates because it reduces inflationary pressures on the economy and as inflation levels fall, mortgage rates tend to do the same.

A home inspection is a complete, top-to-bottom, visual check-up of the structure and systems of a house.

It is meant to be an objective determination of a home’s condition.

A home inspection usually takes 3-6 hours to complete, depending on the size of the home.

During the inspection process, the inspector will examine all of the following components of a home:

• Home exterior including doors, decks, and vegetation
• Heating and cooling systems for leaks and efficiency
• Electrical systems for safety and soundness of design
• Plumbing systems for venting, distribution, and drainage

In addition, the inspector will review the roofing system, the home’s interior, and several other parts of the property.

A home inspection may be ordered by a home owner or by a home buyer.

For a home owner, an inspection can detail a home’s shortcomings and provide a roadmap for repairs. This can help a person prepare his home for sale because “major issues” can be addressed in advance of listing.

For a home buyer, a home inspection physically reviews a home under contract, identifying structural flaws that may impact the home’s desirability. This is essential for the negotiation process because no home is “perfect” — even new ones!

A home inspection highlights potential long-term trouble spots and the likelihood for expensive home repairs. This is why real estate professionals often recommend inspecting a home immediately after signing a purchase contract.

To find a qualified home inspector in your area, ask your real estate agent for a referral, or visit the American Society of Home Inspectors Web site.

Source
American Society of Home Inspectors
Frequently Asked Questions on Home Inspections
http://www.homeinspector.org