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Mortgage Rates Not Impressed By Market Volatility

October 15, 2018


Mortgage rates are based on mortgage-backed securities (MBS), which are essentially bonds.  Conventional wisdom holds that stocks and bonds supplement one another, and that as “money moves in” to one side of the market, it will move out of the other.  Conventional wisdom can be wrong.


If conventional wisdom held true today, we would have seen a very big move lower in rates.  The massive sell-off in stocks means there was a huge amount of cash looking for a new home.  While it’s true that some of this cash did find its way into the bond market, the amount doesn’t even begin to compare.  By the end of the day, the bonds most closely tied to mortgage rates had barely reentered positive territory. 


Due to the timing of the afternoon market volatility, many mortgage lenders were still showing higher rates compared to yesterday.  Others ended up releasing new rate sheets at the end of the day.  Unfortunately for those on the east coast, many of these reprices happened.


If this move in stocks behaves anything like February’s example, today may have been a mere warm-up for what’s to come.   If stocks continue to drop tomorrow, rates would likely see more benefit.  As far as today goes, the takeaway is that bonds/rates did everything they could to resist improving.  The bigger picture remains challenging.  


Mortgage Credit Tightens, Government Programs Drive Change

The availability of mortgage credit at least as measured by the Mortgage Bankers Association’s (MBA’s) Mortgage Credit Availability Index (MCAI) pulled back in September, with the government component of the index falling to the lowest level in four years.  The MCAI registered 182.1 at month’s end, an 0.8 percent decline.  An increase in the index indicates a loosening of credit, a lower number indicates standards have tightened.


The components, representing different loan programs, largely offset each other, making substantial moves in both directions.  The Conventional MCAI rose 1.2 percent and one of its components, the Jumbo Index increased by 2.7 percent.   The Conforming MCAI, the second part of the Conventional Index, decreased by 0.7 percent and the Government MCAI lost 2.5 percent.


 “Credit availability moved lower in September, as tightening in the government index offset an increase in conventional credit availability. The decline in government credit was driven by fewer streamline offerings as well as a decline in loan programs with lower credit requirements. The government index is at its lowest level since July 2015.

The jumbo sub index increased for the fifth time in six months and reached its highest level since we started tracking jumbo credit,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting.


The MCAI is calculated using several factors related to borrower eligibility (credit score, loan type, loan-to-value ratio, etc.) and data collecting from 95 lenders and investors.  The base period for the main and component indices is March 31, 2012. The base values vary; the component is 100, the Conventional is 73.5 and the Government is 183.5.

Mortgage Rates Improved!

October 8, 2018


Inflation is critical to the Fed’s decision-making process–especially because we’re currently at an important crossroads.  For the first time since before the financial crisis, core inflation stands a chance to make a sustained move up and over the 2% barrier.  2% is generally the line in the sand, above which the Fed is more apt to think about tightening monetary policy (i.e. doing things that push interest rates higher).  This time around, they began tightening well in advance of 2% inflation because they were highly confident in the inflation outlook (and they were right).


If the Fed doesn’t see inflation running hotter than expected, and if today’s interest rates do what they can to price-in future expectations, the only risk remaining is that inflation progresses slower than expected.  That would be good for rates and that’s essentially why rates recaptured some recently-lost territory today.


Loan Originator Perspective


Bond markets caught a small reprieve today, as the FOMC statement and press conference by Chairman Powell played to prior expectations.  The “rally” was welcome, but may be fleeting.  It’s certainly way too early to pronounce the rising rate trend over.  I’m floating a couple of applications overnight in hopes of small improvement on tomorrow’s pricing (since few lenders repriced better this PM), but I’ll need to see several days of gains before my “lock early” sentiment changes. -Ted Rood, Senior Originator

Ongoing Lock/Float Considerations 

  • Rates moved higher in a serious way due to several big-picture headwinds, including: the Fed’s rate hike outlook (and general policy tightening), the increased amount of Treasury issuance to pay for the tax bill (higher bond issuance = higher rates), and the possibility that fiscal stimulus results in higher growth/inflation.
  • Rates cooled off heading in the summer months, but that proved to be the eye of an ongoing storm.  As long as economic data remains strong, rates can continue to move higher in general, even though there may be brief periods of correction.
  • It makes sense to remain defensive (i.e. generally more lock-biased) because the headwinds mentioned above won’t die down quickly.  It will take a big change in economic fundamentals or geopolitical risk for the big picture to change.  

Yes! More Mortgage Applications!

Jann Swanson reports that the Mortgage Bankers Association (MBA) says its Market Composite Index, a measure of mortgage application volume, moved higher during the week ending September 21 as did all of its seasonally adjusted and unadjusted components.  It was the second straight week that all of the MBA indices gained ground, the first such double play since early 2016.


The Component index was up 2.9 percent on a seasonally adjusted basis compared to the week ending September 14 and 2.0 percent on an unadjusted basis. 


The volume of applications for purchase mortgages increased 3 percent on an adjusted basis, the fourth week in a row that measure has gained ground.  It was up 2 percent before adjustment.  The unadjusted version was 4 percent higher than during the same week in 2017.


The Refinancing Index rose 3 percent from its prior level and the refinancing share of total applications increased to 39.4 percent from 39.0 percent the previous week.


**All reports from Mortgage Daily News

Highest Rates in Last 5-7 Years

October 1, 2018


According to Matthew Graham late September 2018, mortgage rates are in bad shape.  At some point in the past 3 days (depends on the lender), top tier 30yr fixed rate offerings hit their highest level in 5 years, then 7 years.  For the first time since 2011, the most prevalent top tier rate is 4.875% (meaning a handful of lenders are at 4.75% or 5.0%).  If this trajectory holds, the average lender would be at 5% next week.


In order to make the past few days relevant for anyone who reads this, let’s focus on the CHANGE between today’s average rates and those seen less than a week ago.  From mid-month, the average 30yr fixed quote is an eighth of a percentage point higher (.125%).  While we’ve seen moves that big in the past, with only 1 or 2 exceptions, we haven’t seen anything like it in 2018.  And when we consider that it takes rates to their highest levels in 7 years, it’s even more troubling.


Jann Swanson says that existing home sales, which were expected to increase in August after four straight months of declines instead remained unchanged from July. In fact, almost the entire report on August’s existing home sales can be summarized by the word, “flat.”


Said sales of single-family homes, townhouses, condos, and cooperative apartments were at the seasonally adjusted rate of 5.34 million, identical to the July rate.  Sales in July had fallen 1.5 percent below those from a year earlier, and that too was unchanged in the August to August comparisons.  Existing home sales were selling at an annual rate of 5.42 million in August of last year.


Econoday said the analysts it polls were expecting at least a modest increase after months of lagging sales analysts.  They forecasted results in the range of 5.290 million to 5.460 million with a consensus of 5.360 million.


Sales of both single-family homes and condos didn’t sparkle either.  Single-family sales were at the same 4.75 million annual rate as in July and condo sales remained at 590,000 units.  Single family sales remain below sales a year earlier, by 1.0 percent and condo sales are down 4.8 percent.


Homebuilder stocks are tanking after J.P. Morgan said it is “more cautious” about the sector’s prospects.

“We expect the housing recovery to remain fairly tepid in 2019,” the firm’s analyst Michael Rehaut says. Homebuilder stocks fell Friday after J.P. Morgan said it is “more cautious” about the sector’s prospects.





Weekly mortgage applications rise 1.6% as interest rates hit a 7-year high

Total mortgage application volume increased 1.6 percent last week compared with the previous week.


Rising interest rates for home loans may be what’s getting borrowers back to their brokers.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances rose to its highest level in more than seven years.


Interest rates for home loans appear to be climbing again, and that may in fact be what’s getting borrowers back to their brokers — fear that rates could move significantly higher in the coming months.


Total mortgage application volume increased 1.6 percent last week compared with the previous week, according to the Mortgage Bankers Association’s seasonally adjusted report.


Refinance volume led the charge, rising 4 percent for the week, although it was 39 percent lower compared with the same week one year ago. A year ago last week, rates were nearly a full percentage point lower.


The refinance shares of mortgage activity increased to 39 percent of total applications from 37.8 percent the previous week.


Shares of M.D.C., Beazer , Century Communities and Meritage all fell by more than 3 percent, while PulteGroup’s stock dropped about 2 percent Friday after the report.


The analyst said rising inventories of new homes and declining affordability will hurt home prices over the next year. He cited J.P. Morgan’s growth estimates of 150,000 jobs per month on average for 2019 vs. the 207,000 monthly job growth average so far this year.


“We expect builder fundamentals to moderate over the next two years, which include a continued softer order growth rate in 2018 and gross margins peaking over the next 12 months,” he said.

Home Equity Line of Credit (HELOC) – What do you need to know?

September 26, 2018


A home equity line of credit allows homeowners to take out credit on the value of their home. Taking out a HELOC is a way to gain funds for large purchases, or even help pay off an initial home loan, using “piggybacking” to pay off the balance of the home loan at a lower interest rate without mortgage insurance.


The following are a few pertinent details about taking out a HELOC. Everyone’s financial situation is different, and homeowners or prospective buyers should speak with financial professionals before they make a decision about whether to take out a line of credit using the equity in a home.

What does a HELOC entail?

In a HELOC, the value of a house provides the collateral for a line of credit. The lines of credit generally have fixed terms, and derive their value from a formulation of a specified percentage of a home’s appraised value minus the balance still outstanding on the mortgage. Every lender and particular HELOC offering is different, so the Consumer Financial Protection Bureau recommends shopping around and looking for a loan that fits a particular borrower’s needs.


The government agency noted that when setting up a HELOC, homeowners typically have to pay an appraisal fee, application fee and potentially a percentage point of the credit limit up front. As with normal mortgages, there are closing costs associated with paying the attorneys and other professionals handling the case. There are also fees such as membership or maintenance charges, as well as potential transactional fees.


In some HELOCs, borrowers can make payments that only count toward interest, rather than the principal borrowed. In those cases, the principal will be due at the end of the payment plan. In other cases, the repayment plan does anticipate paying off the balance of the loan. Some HELOCs have variable interest rates, which can fluctuate from month to month.


Selling a home tends to mean paying off any HELOCs drawn on equity in that property right away. Homeowners who are planning to move on from a current home therefore have less incentive to take out a line of credit than those who are settling down for a long time to come.

What is HELOC piggybacking?

One use of a HELOC involves taking out another loan during the homebuying or refinancing process to make a high-value home more affordable. The second loan, using a high percentage of the home’s value as collateral, offsets the costs of the house, and may represent a way to manage lower payments overall, removing the need for extra mortgage insurance.


Homebuyers who “piggyback” their primary home loans and HELOCs with us can take out HELOCs up to $500,000 in value, drawing on up to 95 percent of the equity in the home and making low down payments. Flexible monthly repayment schedules enable them to pay off the loan in a way that makes sense for their unique circumstances. Extra principal payments can go to paying the HELOC balance and lowering overall payments. This is an option for people with credit scores 680 and over, in states excluding Alaska, Hawaii, Louisiana, Tennessee and Texas.



Real Estate Investor Loan News




Sales of Existing Homes Unchanged, Trailing Projections

September 24, 2018


Sales of previously owned U.S. homes were unchanged in August, indicating buyers are balking at higher prices and leaving more inventory on the market for the first time in three years, a National Association of Realtors report showed.


Contract closings were unchanged from the prior month at a 5.34 million annual rate (before the report, it was estimated it would be at a 5.37 million pace). This follows four straight declines. The median sales price increased 4.6% year-over-year to $264,800. The inventory of available properties rose 2.7% year-over-year to 1.92 million, which was the first increase in more than three years.


Borrowing costs have risen this year and property price gains — while moderating — continue to outpace wages amid a persistent shortage of available listings. Those affordability hurdles are especially burdensome for younger prospective buyers looking for their first homes.


Buyers are getting help from a steady job market and healthier finances. While overall consumer confidence remains elevated, the latest University of Michigan report showed Americans see home buying conditions as less favorable than a few years ago.


Homebuilding also is struggling to pick up steam, government data showed on Sept. 19. While housing starts rose, permits — a proxy for future construction — fell to the slowest pace since May 2017, with single-family authorizations dropping the most in seven years.


“There are buyers on the sidelines” ready to re-enter the market, Lawrence Yun, NAR’s chief economist, said at a press briefing accompanying the report. “The housing market can turn for the better” as long as inventory continues to rise, he said.


Purchases rose in two of four regions, led by a 7.6% gain in the northeast; sales also rose in Midwest while declining in the south and west. At the current pace, it would take 4.3 months to sell the homes on the market, compared with 4.1 months a year earlier; the Realtors group considers less than five months’ supply consistent with a tight market.


Single-family home sales were unchanged at an annual rate of 4.75 million. Purchases of condominium and co-op units unchanged at 590,000 pace.


Homes stayed on the market for an average of 29 days, compared with 30 days a year earlier.


Existing home sales account for about 90% of the market and are calculated when a contract closes. The remainder of the market is made up by new home sales, which are considered a timelier indicator and are tabulated when contracts get signed.


Sources: Bloomberg News



As Loan Volumes Fall, Homebuyers are Making Big Down Payments


Even as homebuyers acquiring loans deposit more money into the transactions, mortgage origination volume is continuing to fall.


According to Attom Data Solutions, the median down payment on Condos and single-family homes purchased with financing reached its peak since 2000’s first quarter when the data was first recorded. At a median of $19,900, the 2018 second quarter was up 18 percent year-on-year from $16,925 and up 19 percent from the previous quarter’s $16,750.


Daren Blomquist, a senior vice president at Attom Data Solutions in a press release said, “Buyers are upping the ante when it comes to down payments, evidenced by the record-high median down payment for homes purchased in the quarter, and an increasing number of buyers are getting help from co-buyers.”


At 7.6 percent of the median sales price, the second-quarter down payment figure marked the highest percentage in nearly 15 years. It’s a move up from 6.6 percent of the median sales price for both year-on-year and quarter-on-quarter.


Larger down payments imply that homebuyers are financially sound, hence lenders can expect better repayment. However, it also means that lenders take on less risk, which translates into smaller loan amounts that drive interest earnings and loan officer commissions.


In the meantime, mortgage originations decreased for the third quarter consecutively as growth in purchase and home equity line of credit lending was overshadowed by a fall in refinance activity.


In the second quarter, more than 1.5 million loans secured by residential property were originated, reducing 27 percent year-on-year and 16 percent from the previous quarter.


Of all residential loans originated, purchase loans accounted for 926,516, a 1 percent year-on-year increase and a 39 percent rise from the earlier quarter. There was a decrease in refinance loan originations at 799,093- a four-year low, down 2 percent from one year ago and less than 1 percent from the previous quarter. 


 Source: National Mortgage News

A Tale of Two Opinions

July 16, 2018

Will interest rates rise or fall? The answer is “it depends.” It depends on whom you ask. Opinions are divided. 


The speculators are of one opinion. Grant’s Interest Rate Observer reports that net-short positions in 10-year U.S. Treasury note futures reached a record of more than 500,000 contracts in the first week of July. These traders are betting, with conviction, that the price of the 10-year note will fall and its yield will rise. 


Recent news on consumer-price Inflation appears to support the speculators’ bet. The Consumer Price Index rose 2.9% year-over-year in June. That’s the largest annual increase in six years. Meanwhile, the New York Federal Reserve’s Underlying Inflation Gauge suggests inflation runs even hotter than CPI estimates. The UIG rose 3.27% in May. The UIG is at its highest level since 2006. 


Consumer-price inflation influences long-term interest rates more than most influencing variables. Given the latest news on consumer-price inflation, we should expect more speculators to bet that interest rates will rise. 


To bet that interest rates will rise appears the smart bet these days, but is it? Some market-participants apparently see it otherwise. 


Interest rates on the long-end haven’t been rising. The yield on the 10-year note continues to hover around 2.85%, as it has for the past three weeks. Mortgage rates, which take their cue from the 10-year note, also continue to hover within a tight range. Mortgage New Daily reports that the note rate – the rate quote that determines the payment – has held for the past two weeks (at the national level). 


Perhaps the contra-rising-rate opinion is more influenced by the shape of the yield curve than consumer-price inflation. The yield curve has flattened over 2018. It continues to flatten as we write. The spread between the two-year U.S. Treasury note and 10-year U.S. Treasury note has tightened to 27 basis points. (The 10-year note yields only 27 basis points more than the two-year note.) 


Flattening is one thing, inversion is another. We’ve noted with great frequency in recent months the implications of an inverting yield curve. When short-term yields have risen above long-term yields, a recession has followed.


An inverted yield curve has correctly predicted the past seven recessions. The last two times the yield curve inverted was 2000 and 2006. A recession followed 12-to-18 months later.  


So we have two leading opinions balanced on the opposite end of the fulcrum. This suggests to us that market-rate volatility will remain muted. We don’t see much variability in mortgage-rate quotes for the immediate future.


We also don’t see a reward commensurate with the risk of floating at origination. The conservative course is likely the prudent course. After all, low variability can give way only to higher variability. 


Another Reason to Worry?


It’s always different. No two economic eras are alike. An inverted yield has accurately predicted recent recessions. It doesn’t guarantee a future recession. Unfortunately, another influencing variable appears to support the recession narrative. 


Data mined by Calculated Risk Blog show that private fixed investment has fallen during every recession since the 1940s. Residential fixed investment is a huge component of private fixed investment. Calculated Risk Blog’s mined data show that residential investment leads nonresidential investment. As residential fixed investment goes, so usually goes other private fixed investment.  


Residential fixed investment has broken away from the uptrend in private fixed investment. Though residential fixed investment has grown monthly for most of 2018, it has grown at a gradually lower rate each successive month. Its growth rate has trended down to a point where it’s not growing at all month over month. If past is prologue (and it isn’t always prologue), the trend does not bode well for private fixed investment and for the overall economy. 


But let’s keep our perspective, let’s not exaggerate the fear. We’re not there yet. The yield curve remains positive, as does residential fixed investment.


That said, the trend in residential fixed investment is yet another reason we are so down on tariffs and trade wars. Rising building costs related to tariffs on imported lumber and steel will only hinder investment-spending growth.   

Mortgage Rates Fall, Recession Fears Rise

July 12, 2018

The trade imbroglio between the political powers that be in Washington and the political powers that be in the rest of the world continues to weigh on market sentiment. Market participants remain cautious. Heightened uncertainty has kept many of them bottled up in haven investments. 


U.S. Treasury securities (long-term securities in particular) remain the favored haven. Yields on the longer-end of the curve have eased. The yield on the 10-year U.S. Treasury note has drifted closer to 2.8%. The yield is down 15 basis points over the past two weeks. 


Mortgage rates have also drifted lower, though the drift has been less pronounced than the drift on the 10-year note. The range still holds at 4.625%-to-4.75% for the prime 30-year conventional loan. Rate quotes hold near the lower end of the range these days. 


Given the unlikely scenario of any participants in the trade imbroglio retreating, many market participants will remain bottled up in their haven. This suggests to us that mortgage rates are unlikely to burst out of their range to move higher. Floating to save a few basis points appears a reasonable risk to accept in this market. 


The story is different on the short-end of the yield curve. There, yields continue to rise. 


This shouldn’t be unexpected. The Federal Reserve exerts most of its influence on the short-end of the yield curve when it raises its federal funds rate (the overnight lending rate among commercial banks). The prospect of additional increases in the fed funds rate has kept yields on the short-end of the curve on an upward trajectory. 


Yields on the short-end of the curve rising while yields on the long-end of the curve fall have induced another worry — an impending recession. Market participants are worried that the yield curve could invert. Short-term yields could rise above long-term yields. 


The worry isn’t unfounded. The yield curve has been a reliable recession predictor. Nine of the past 10 recessions have been preceded by an inverted yield curve. When the yield curve has inverted, the subsequent recession occurred 12-to-18 months later. 


The spread between the yield on the two-year U.S. Treasury note and the 10-year U.S. Treasury note is scrutinized most. The spread between the two securities has contracted to 30 basis points.  The spread was 50 basis points at the start of the year. The spread was 90 basis points a year ago. 


So what’s the cause?


Market participants will buy long-term debt if they anticipate a recession. They buy the long-term debt because they anticipate the Fed will change course: It will lower the fed funds rates to counter the recession. The price of long-term debt rises more than short-term debt when interest rates are cut. Market participants anticipate booking a capital gain.


That said, it’s still mostly good for now. But if the economic costs associated with the trade imbroglio accumulate, it might not be less good a year from now. 



This Trend Is No Longer Our Friend


We are 10 years removed from the bursting of the housing bubble. Prices have recovered, and then some. Home prices at the national level are at an all-time high. They continue to gain altitude. 


CoreLogic reports that prices in its home price index were up 7.1% year over year in May. The year-over-year gains have ranged between 5% and 7% each month over the past five years. That the latest price increase is at the high-end of the range this late into the recovery is somewhat extraordinary. 


Supply remains the issue. We have a dearth of it. Unfortunately, the dearth will continue into the foreseeable future. The soaring costs of principal building materials will hinder housing supply growth. 


Random-length lumber prices are up 44% from a year ago. CME futures contracts are up about 52% for the same period. Lumber prices tend to peak this time of year and then bottom in the autumn months. This time could be different. This year, lumber is saddled with a 20.8% tariff applied to imported Canadian lumber. Canada has historically been a key supplier of lumber to the U.S. housing market. 


Housing costs will likely rise further because of the 25% tariff applied to imported steel and the 10% tariff applied to imported aluminum. Higher costs will impede new-home construction, which is unfortunate. If housing needs anything, it needs more new-home construction. It needs slower home-price appreciation.