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April 10, 2009

How To Take Advantage of Low Mortgage Rates
by Mike Shedlock

President Obama declares "good news" and says Timing right for millions to refinance.

Declaring "good news" in the midst of an economic meltdown, President Barack Obama on Thursday urged families to take advantage of near-record low mortgage rates by refinancing their home loans

"We are at a time where people can really take advantage of this," Obama said, seated with a handful of homeowners who have already lowered their bills.

But he also warned people to watch out for scam artists, cautioning, "If somebody is asking you for money up front before they help you with your refinancing, it's probably a scam."

Rates on 30-year mortgages inched upward this week but remain near the lowest level in decades, allowing borrowers with strong credit and stable jobs to save money if they refinance.

The average rate on a 30-year fixed-rate mortgage rose to 4.87 percent this week, up from 4.78 percent last week, Freddie Mac reported Thursday. That was the lowest in the history of the survey, which dates back to 1971.

Low rates have sparked a surge in refinancing activity, with nearly 80 percent of new home loan applications coming from borrowers seeking to refinance. Freddie Mac's sibling company, Fannie Mae, refinanced $77 billion in loans last month, nearly double February's volume.

"The main message we want to send today is there are 7 to 9 million people across the country who right now could be taking advantage of lower mortgage rates," Obama said in a photo opportunity in the Roosevelt Room. "That is money in their pocket."

What's The Rate?

Inquiring minds are asking "What's the rate?"

The above table is courtesy of Bloomberg. The quotes are from Bankrate.

What's The Real Rate?

The above table is an interesting but not particularly accurate reflection of the mortgage market.

A Certified Mortgage Planning Specialist who I respect a great deal (let's call him "MJ") informs me he was locking loans yesterday at 4.5% with 1 point interest. Today the rate was 1/8 point higher at 4.625%.

A second mortgage broker who I trust is David Donhoff at NoBullFinancial. Email: David at NoBullFinancial.

David Donhoff tells me that yesterday he could get rates as low as 4.25% on a 30 year fixed with 1 point (1%). Today the buydown would be 1.8%. In other words, rates change all the time.

Shop The Broker, Not The Rate

The best way to lock in a rate is to work with a knowledgeable broker who understands the business. That person can work for you (rather than for himself) and and will be willing to lock in a rate for you on dips. In other words, shop the broker not the rate.

Someone shopping rates will have to keep at it every day and still might miss the lows because rates change intraday. Furthermore, one needs to keep track of details like buydown points. The difference between a 1.8% buydown and 1% buydown can be a huge dollar savings on a big mortgage.

Finally, rates change based on FICO scores and other factors on a day to day basis as well. Someone shopping rates may not be able to sort this all out unless they are very familiar with the mortgage market.

Currently, FICO scores above 660 are needed and to get the best rate FICO scores above 680 are needed. Donhoff informs me that there is no additional benefit for FICO scores above 740.

Loan rate details can change at any time.

Extremely Attractive Rates

These rates are extremely attractive. But they are skewed. For example, interest only loans are close to 6.25% while 30 year rates are as much as 2% lower. This spread is unprecedented, as are 30 year rates at 4.25-4.5%. Both Donhoff and "MJ" think this is the bottom (or at least close to it) for mortgage rates.

Artificially Low Rates

Rates are low and people should take advantage of them while they can. But it's important to understand why rates are low. Please consider the following chart.

Fannie Mae 30 Year 4% Debt

Fannie Mae debt is on a tear. Remember that yield and price move in inverse fashion. Thus a price rally in bonds equates to lower yields. "MJ" notes that mortgage rates are 150 basis points (1.5%) better than November.

However, these prices are artificial. The government is buying Fannie Mae and Freddie Mac debt to force down yields.

30 Year Rate Lowest On Record

Bloomberg is reporting U.S. MBA Mortgage Applications Index Rose 4.7 Percent Last Week.

Mortgage applications in the U.S. rose last week to the highest level in three months as borrowing costs near record lows boosted home sales and refinancing.

The Mortgage Bankers Association's index of applications to purchase a home or refinance a loan increased 4.7 percent to 1,250.6 in the week ended April 3, a fifth straight gain, from 1.194.4 the prior week. The group's refinancing gauge rose 3.2 percent and its purchase measure jumped 11 percent.

The average rate on a 30-year fixed loan rose to 4.73 percent from 4.61 percent the prior week that was the lowest level since the group began records in 1990.

At the current 30-year rate, monthly borrowing costs for each $100,000 of a loan would be $520.44, or $65 less than the same week a year earlier, when the rate was 5.78 percent.

$750 Billion Commitment

The Fed has committed to buying $750 billion in mortgage-backed bonds. Furthermore, Fannie and Freddie are willing to refinance at up to 105% the value of the home. 100% loans will come at a higher rate or with higher fees and points but the key point is the risk of default is now being forced on the backs of taxpayers.

Nonetheless, for those with good credit who meet the required conditions of the “Making Home Affordable" program, now is a great time to be taking advantage of these historically low rates.

Eligibility Requirements

You are the owner occupant of a one to four unit home.
The loan on your property is owned or securitized by Fannie Mae or Freddie Mac.
At the time you apply, you are current on your mortgage payments (current means that you haven't been more than 30-days late on your mortgage payment in the last 12 months or, if you have had the loan for less than 12 months, you have never missed a payment).
You believe that the amount you owe on your first mortgage is about the same or slightly less than the current value of your house.
You have income sufficient to support the new mortgage payments.
The refinance improves the long term affordability or stability of your loan.

The "Making Home Affordable" program is a huge moral hazard that is going to cause further taxpayer bailouts down the road. However, if you meet the above conditions, you may as well take advantage. And even if you don't meet those conditions, it will not hurt to see if you can get a better deal than the one you are in.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Michael "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Visit http://www.sitkapacific.com/ to learn more about wealth management for investors seeking strong performance with low volatility.