Welcome to RateWatch for Thursday, August 05, 2010.  Here’s what’s happening:

Employment again is the news of the day, with new claims up another 20,000 or so to 479,000.  Continuing claims were down, though, to 453,700.  That was not as far down as the markets were expecting, however, and that’s meant that bonds have stayed strong.

Not too strong, though.  There really is no upside here.  Unless we get a truly shocking number tomorrow from the unemployment people, showing unemployment at, say 10.5%, there just isn’t any confidence in the bond market to cause a buying wave.

What that means for rates: nothing.  We’re down 6bps, which might just as well be flat.  There is no upside without huge news, and no downside because what news there is is bad.  So we’re hanging out with rates in the 4.5% range.

Anything else?: yep.  Sure is.  The big news today comes out of Washington, surprise surprise, with the Senate passing a bill that changes FHA fees.  Up-front MI will move from the current 2.25% down to 1%, a positive change, but more than made up for by the increase in monthly MI from an annual .55% to .9%, and the FHA gets authority to go all the way to 1.5%.

Bottom line: on a $200,000 loan, you are paying right now $4500 in UFMIP and $91.66/mo in monthly MI.  When these changes take effect, you’ll be paying $2000 UFMIP but $150/mo in MI.  For more commentary on that, see the blog at thechrisjonesgroup.com.

I’m Chris Jones, aka Agent Zero.  That’s RateWatch for today.  Until next time, we’ll be watching the rates.

It might be a great idea.  Can I offer one thing, as a lender in Utah (and the rules are the same everywhere), for you to think about before you go?

If you’re going to refinance or buy a house, do it before you leave your job – before you even mention to anyone that you’re thinking of doing so.  Underwriters are unkind to the self-employed (and even more unkind to those whose verifications of employment come back with “we don’t think he’s staying here very much longer”).  There are no more stated-income loans (well, essentially), so you’re going to have to document all your income, and not with bank statements, either.  It will be tax returns. And those will be verified by an IRS transcript.

You’re going to want to have a long chat with your accountant.  She’ll probably have some suggestions for ways that you can minimize your tax liability while maximizing your adjusted gross income (AGI), and you definitely want to do that.  Underwriting is going to look hard at your AGI, and there are also add-backs for depreciation and amortization, so you can get some tax relief there without hurting your qualifying income.

But the big thing is that if you are self-employed, you have to have two years of tax returns showing this before you can be qualified for a loan under FNMA/FHLMC (Fannie/Freddie) guidelines.  So it’s going to be at least 24 months, and possibly longer, before you’ll qualify, once you leave.  And don’t try to claim that you’re not self-employed just because you get a W2.  If you own more than 25% of the business, you’re self-employed no matter how you get paid.

I’m not saying you shouldn’t do it.  I love self-employment.  I’ve been self-employed for a decade.  Small businesses are the heartbeat of the economy.  But before you go, get your house in order.  Literally.

Welcome to RateWatch for Thursday July 29, I’m your host, Chris Jones, and here’s what’s happening:

Today’s market: The benchmark bond is up 12bps today.  We’re trading in a very narrow channel.  Economic news today was all about employment, as in, there isn’t much of it.  Unemployment benefits have been extended, so continuing claims were up, which did not surprise anyone.  New claims were down, but not very much.  The recovery continues to fail to do the one thing that would really get the economy moving again – create jobs.

What that means to you: rates are holding steady.  It’s generally acknowledged that banks would like to raise rates, but competition is making that very difficult.  Remember, they don’t make money unless they lend it out to people.  Rates are therefore critical to attracting business.  There’s no central rate-making authority in mortgages.  The banks take their cues from the bond market and from each other.  So today’s rates are in the 4.5% range on conventional and FHA, with 15-year rates in the 4% range.

At some point, obviously, this is going to change.  We’ll have a terrorist attack (which would be mixed for bonds) or we’ll have IBM invent cold fusion (which would be very, very bad for bonds), and the market will break out of this channel and start moving, almost certainly upward.  We are trading right now at the bottom of the historical range, as in, it’s never been this good.  Ever.  So it isn’t as if there is a lot farther down we can go.

How long will it last? That’s the billion-dollar question.  Here’s the answer: NO ONE KNOWS.  Only one thing is certain: rates in this range will go away.  Do not wait to talk to a professional.  You can call us.  That’s what we’re here for.

That’s RateWatch for July 29, I’m your host, Chris Jones.  You can find us at thechrisjonesgroup.com or text us at 801-850-378.

Welcome to RateWatch for Thursday July 22, and here’s what’s happening:

Today’s market: The benchmark bond is down 15bps today.  We’re trading in a narrow channel.  It’s a huge day for economic news, with jobless claims coming out worse than expected – at least, worse than the experts expected – and existing home sales numbers showing the housing market still weak but not as weak as expected. All that bad economic news is bad for stocks and good for bonds.

What that means to you is worse mortgage rates, but not very much worse.  We’d need to be down 30-40 bps before banks would react with worse rates.  There’s a certain fatigue on the part of banks, who don’t really want to make loans in the low 4% range, so they’re not going lower on rates unless we have a huge move in the market.  That’s not happening.  Moves higher are very possible, however, so stay tuned.  To you all this means that rates are holding steady in the 4.5% range on most loans, down in the 4% range on 15-year terms.  Those rates are truly ridiculous, by the way.  At 4.5%, you can buy 20% more house than you can at 6% for the same payment.  An example:

6%, $200,000 loan, payment $1200/mo

4.5%, $240,000 loan, payment $1216/mo

So let’s all be grateful.

What’s in it for you? Money.  It’s going to take you 60-90 days to be able to complete a sale, so start the process right now.  For many of you it will take as much as six months.  Sound like a lot?  It isn’t.  And January is traditionally one of the cheapest times of the year to pull the trigger.  Do not wait to talk to a professional.  You can call us.  That’s what we’re here for.

That’s RateWatch for July 22, I’m your host, Chris Jones.  You can find us at thechrisjonesgroup.com or text us at 801-850-3781. ‘Til next time, we’ll be watching the rates.

Last month I wrote about how the expiration of the $8000 and $6500 tax credits for new home buying wouldn’t have much impact on the housing market. Those expired, for the uninitiated, on April 30, and since then sales on new homes have dropped to their lowest levels in history. So that wasn’t one of those really good predictions, and I’m sorry, and I admit I was wrong.

Pundits are saying that the drop is caused by buyers moving their purchases forward to take advantage of the tax credit, so that sales just moved from May to April. That surely took place. But at least here in my shop, there were a good number of people that couldn’t get the deal done in time, and who still are in the process of buying. That should have put some shims under the falling market.

So I have a different explanation for why what happened…happened. See, it wasn’t so much about the money. Markets are really smart. They compensate pretty fast for price-altering events like tax credits and artificial purchase incentives (see “Clunkers, Cash for”). When someone offers $8000 as an incentive for you to purchase a home, then the seller of that home adjusts his price upward to meet the new reality that you have more cash to spend, so most of the $8000 does you no good at all. As an aside, this is what the eggheads call “inflation”.

That did happen in this case, though not by anything like $8000 worth. No, the spike in home buying was not caused by the cash incentive as a dollar amount; rather, it was caused by the application of that dollar amount. As in, the $8000 was not a reduction in the price of the home; it was a boost in cash for down payment and closing costs. Yes, I know the government specifically said that the credit could not be used as a down payment. But, humans being what they are, and being waaaaaaay smarter than the government, they got “gifts” to cover the down payment and closing costs, then repaid those “gifts” with the tax credits. Voila! A temporary reinstatement of the zero-down loan programs the government killed last year.

The reason we’re in the economic mess we’re in is really quite simple: we borrowed too much money, and nobody saved a nickel. Now we can’t make the payments on the things we bought, so they’re being repossessed and foreclosed on. For a business, that means money is drying up and that means firings and layoffs. That exacerbates the personal financial problems, which means people stop spending, which further reduces the money for business, and around and around the mulberry bush.

If you have no cash, you can’t buy a home, because there are no zero-down programs outside of USDA Rural – which, not coincidentally, ran out of money 6 months before the end of the fiscal year – and Veterans’ Administration. But this program made it possible to fudge that, and brought a lot more buyers into the game. Until it ran out.

If you parsed the data, and nobody will actually give it to you so you can do this, but what you would find almost immediately is that the large majority of those tax credits were claimed by people whose down payments were smaller than the $8000 credit. Personally, I would bet that almost half of the loans that closed on which the credit applied were closed with gifts as the means of down payment. That was certainly true in our shop. I have no idea how many of those gifts were legitimate. Perhaps all of them. I hope so. But I doubt it.

Then, of course, the gravy train reached the terminus and everyone had to get off. Immediately, home sales dropped off a cliff. This doesn’t happen in market conditions where nothing hinky is going on. The market simply adjusts – prices fall, in this case – and people move on. Really, folks, the $8000 is not a big deal. It represents a payment increase of only about $40/mo for a borrower at today’s rates. That might have a small depressive effect on the market, but nothing like what we’re seeing.

Conclusion: the $8000 credit had the impact it did because it filled a market niche where there is huge demand, and that is the niche for 100% loans. The loss of the credit has taken out a very large part of the borrowing pool, those people that cannot come up with $7000-10,000 to put down on a house. Until something fills that gap again, don’t expect a huge market rebound.

As I mentioned, borrowers are having trouble qualifying, much as they would have trouble running a 10k.  Some can do it, but those people are almost all those that have been training, saving their money, hoarding their equity, shepherding their credit.  Everyone else?  Well, it’s time for those magical fitness tools, diet and exercise.

There are two difficulties with this.  One, many people don’t know what they need to do, and two, almost everyone needs someone to help them, or they won’t do it correctly, no matter how badly they want to.  This dramatically restricts the pool of borrowers and makes it hard for Realtors and loan originators to make a living.  It sounds terrible.  But it isn’t.  Really, it isn’t.  There’s a fabulous hidden opportunity here.

The good news here is that this means the market is as big as you want it to be.  EVERYONE, or, okay, not absolutely everyone, but functionally everyone, will buy a home at some point.  Right now, true, most of them cannot qualify for a loan to do so.  The solution is simple.  Stop being a track timer, and start being a fitness coach.

By this, I mean that it’s time to stop just taking an application and pulling a credit, and deciding that there’s no deal.  Of COURSE there’s no deal.  That shouldn’t be surprising.  But if you want to make it in a market like this, you’re going to have to do more than issue a denial.

What we do is create a plan.  We train our clients and show them how to get to the point where they do qualify.  More than two-thirds of our clients are people we’ve been working with for more than 90 days.  Almost half of them are people that we’ve been working with for six months and more.  In May, one of our clients opened her file 228 days ago.  But the week before her, we closed a loan for a fellow who opened his file 447 days before the close.

We discovered, looking at our closings, that we had done just as much business in 2009 as we did in 2006, despite the complete market meltdown we saw over that four-year period.  But that happened because in a good market, like the one in 2006, we had no competitive advantage.  Our specialty is rehab, doing the hard work to move a client from unable to qualify into position to get the loan they want.  In a market where everyone can already qualify, in the hundred-yard-dash market, we have no advantages.  But in the 10k market?  We shine.  Rehab and training in this market is not a frivolity.  It’s a necessity.

Anyone can do this.  We happen to be really good at it, and we like it (which is why we’re good at it), but anyone can do it.  I spoke to a loan officer of my acquaintance a few days ago, and he was getting out of the business.  I asked him why.  Was his phone not ringing anymore?  No, he said, it was still ringing, but none of the inquiries was turning into a loan.  “Yet,” I said.  “What?” he said.  “Not a loan yet.  As in, you work with them and eventually they’ll qualify.”  At first he had no idea what I was talking about.  Then he thought that was way too much work.  So now he’s selling cars or something, instead of doing what he really likes and is good at, because he couldn’t change his thinking.

The borrowers are out there.  There are just as many as there ever were.  And we can have a greater impact on their lives than we could ever have had when all they had to do was roll out of bed and get a loan.  All it takes is a little bit of hard work and some patience, and this market can have more opportunities in it than any other.

Here are a couple of clues.

First, and perhaps most importantly, it is really, really hard to sell a house when you owe more on it than you can sell it for.  If you short sell, or send in the keys, your credit will not permit you to become a buyer for a good long while.  There are some million plus people that ordinarily would be prime candidates for purchase that are in this group.  There are tens of millions – some estimates have up to 25% of the homeowners in the US – that are unwilling to trash their credit and therefore cannot sell their homes.  Not all of those people (me, for instance) are interested in moving, but a lot of them are.  That takes some ten million more people out of the market.

But if it were only that, I think the low rates would be having a significant impact.  Unfortunately, there’s something worse happening.

This is the second problem.  Let me use an analogy here.  Getting a mortgage loan is like running.  Once upon a time, say, 2006, getting a loan was a lot like running a 100-yard dash.  Practically anyone can do this.  They might not be very fast, but it is likely that all but the very most obese would be able to run 100 yards without stopping.  Roll out of bed, go to the track, run 100 yards.  Roll out of bed, go to a loan officer, get a loan for a home.  Pretty much, that was that we had four years back.

Fast forward to 2010.  Lenders are terrified.  Foreclosures are everywhere.  10% of the workforce is officially unemployed, with another 10% or more practically so.  The only hiring going on is being done by the US Census.  Homes are underwater.  It’s not a good lending environment.

Add to this something we forget, and that is that low rates are good for BORROWERS, but they suck for LENDERS.  If you’re getting 10% on your money, a higher foreclosure rate won’t kill you.  When you get 4.5%, it does.  So let’s just sum up with “lenders are skittish”.  When they get skittish, they lock down on qualifying.

Roll out of bed.  Go to the track.  Run a 10k.

Um.

Most people cannot do this.  The average Joe and Jane are unable to run 6 miles without stopping.  There is a segment of the population that can, of course.  You know which ones those are, because they are actively running, and quite regularly.  But out of the next 100 people you meet, how many could run 6 consecutive miles?  10? 5?  Not many.  Many people, say another 35-40, could be able to run a 10k in 90 days or so.  They’d have to train, but no major lifestyle changes would be necessary.  The other 50?  They would have to significantly alter their diets, start getting some limited exercise, and train up.  It would take a while.  Six months.  For some, a year.  For some, it would never be possible, whether for health reasons or sheer unwillingness to change.

And that’s where we are with mortgage loans.  There is a segment of the population that can qualify just by showing up.  It’s a small segment now, and it’s the segment that is financially savvy, very careful, saves money, made a sizable down payment and/or bought their house several years ago and never cashed out of it.  That’s 10-15% of the population.  Then there’s another 35% or so that might be able to qualify if they worked at it.  They’d have to pay down some debt, fix up the house, sell a car.  Save some money (this one is the kicker).  Many of these people have credit issues that need fixing.  But a little guidance and they can get there.

Problem is, they don’t get the guidance.  It’s hard to train for a 10k.  It hurts.  You try to do it yourself, you’ll find its quite difficult to do.  If you have a coach, someone that can tell you that those shin splints you’re getting are not going to go away without rest, and “shake it off” is not going to work, then you’re far, far more likely to get where you need to be to run your 6 miles, get your loan.

[AN ASIDE: why did the $8000 tax credit make such a difference?  Because the hardest thing for people to do is to save money.  They cannot come up with a down payment.  Inasmuch as there are only two kinds of 100% loans anymore - USDA Rural (currently out of money with 6 months left to go in the fiscal year) and VA - the $8000 credit allowed a lot of people to get a "gift" from mom and dad (or, let's face it, from Visa), put the cash down on the house, then use Uncle Sam's largesse to pay it back.  PRESTO!  100% financing.  That's gone now, and the pool of buyers is shrinking fast.  It's like having a rabid dog chase you while you're running.  Amazing what you can do in that circumstance.  But it's a short-term thing, and it has negative consequences that show up later.]

Then there are the remainder, the 50% that really need to change radically.  Those people will almost NEVER get there without help.  They need radical credit surgery, a draconian budget, major lifestyle changes.  Without a coach that really cares, and will take the time to design a program that they can stick to, then help them stick to it, they will not be able to qualify in six months to a year.  They will not ever be able to qualify.  That’s HALF of the population.

You want to know where the borrowers are?  They’re stuck in their homes that they wish they could sell.  They’re unable to qualify for loans.

So woe is me, all of us in real estate are doomed.  Or are we?  I have outlined the problem.  There is a solution.  Want to hear it?  It’s really quite simple.

Unfortunately, I have to go do some mortgage work now.  But during Mexico/South Africa tomorrow, I’ll post the answer.

• I have an article in the April edition of the Scotsman Guide, one of the largest mortgage publications in the industry.
• I do not think that the $8000 tax credit’s expiration will have very much effect.  Spring is a much larger factor in the increase in home sales.  Well, Spring and the massive decline in property values.  Markets rebound.  It’s what they do.  If prices are allowed to fall far enough, then buyers will re-enter the market.  It really is that simple.
• My prediction about mortgage rates not exploding when the government stopped buying mortgage- backed securities proved to be right on.  I think this is the first time I’ve made a prediction like that, so I’m gratified to find that I’m not a complete idiot.

Over the past few weeks, in doing a re-evaluation of my business, I’ve come to the conclusion that there really is a “why” to what I do here, and that the business is not just something I do because I get paid.  Others have famously come to that conclusion much earlier than I, but I’m slow, what can I say.  We believe that the way we do business should reflect how we should treat each other as people: we should care more about each other than we do about the next buck, we should be more interested in the long-term health of people’s families than about a quick fix, and we should be willing to extend ourselves to do what we can to help other people be successful.

To that end, we have designed our products and our systems to make sure we are treating people with the utmost respect, that we have available not just mortgage products but avenues to other things that they might need to get themselves financially well, like credit repair, mortgage modification, inspection services, financial and tax advice, etc., and that we always act for the long-term benefit of the client, even if that makes the short run not as pleasant for us.

To do all these things, we close mortgages.  And we are damn good at it.

We’re always a work in progress, but there has been some serious progress recently.  I just noticed, and thought I’d share.

Analysis: Good employment data – we actually have seen some hiring in this report – makes it look more and more likely that the bottom of the recession has come and perhaps gone.  Couple that with looming $3 trillion deficits, and that means that bonds are doomed.  This time, there’s no Fed backstopping things.

So, it turns out that I was wrong, and that the end of the Fed purchases of mortgage-backed securities IS going to have a hugely negative impact on interest rates, as the conventional wisdom said it would.

Action: The only thing to do is to move as quickly as possible.  If you are considering a real-estate transaction (the government goosing of the housing market comes to an end on April 30, FYI), move now.  Nobody can lock your rate without an address, so get a contract in place as soon as you can.

Despite my small joke in the headline, I do know that there’s nothing in the housing markets that is anything like as important as the real events being commemorated this weekend, beginning today with Good Friday and culminating with Easter on Sunday morning.  I recall singing at many Easter sunrise services as a teenager, and the power of the commemoration of the Resurrection is with me as I write this.  RateWatch is about how important the market is, but all things considered, nothing that happens in the market is very important at all.  Take some time this weekend to appreciate how insignificant all this really is compared to the things that really matter.  I know I will.

Cj

801-850-3781