HR 5830- Short Refinances: Saving the US Mortgage Industry?

by: Brian.Brady on May 06, 2008 07:08:40     5 comments »

Ive been writing about the merits of H.R. 5830, The FHA ‘short refi’ program that will allow home owners to refinance their mortgage to 90% of the outstanding loan balance.  While my tenuous support is being criticized by liberatians, Jamie Geiger, a real estate agent from Tempe, AZ asks me this, on Twitter:

 

Are you seeing any lenders doing ‘short’ refis?

 

Great question, Jamie.  The answer is¦not really.  Lets look at the lenders options:

 

1- Foreclose on a 2-year old, poorly collateralized loan, lose 20% to principal, and reinvest at 6%, on a well-collateralized loan.  Over five years, they will recover their loss and eke out a net 2.5% annual return for the 7-year period. Foreclosing and reinvesting in a low LTV loan protects the principal.

 

eg- $100,000 loan made in 2006 at 7% interest.  Foreclose, collect $80,000 and reinvest at 6%, for five years.  Total interest collected is $14,000 (first two years) plus $24,000 (reinvested loan) for a total of $38,000.  $80,000 principal balance paid back in five years.  The lender invested $100,000 in 2006 and will receive a sum of $118,000, over 7 years; about 2.5% return.

 

2- ‘Short refi’ the original loan and take a 10% nick to principal.  Collect 6% interest, on a still poorly collateralized loan, and net out a 4% return for the same 7-year period.

 

eg- $100,000 loan made in 2006 at 7% interest.  ‘Short refi’ to a $90,000 loan and collect 6%, for five years.  Total interest collected  is $14,000 (first two years) plus $27,000 (short refi loan) for a total of $41,000.  $90,000 principal paid back at the end of five years.  The lender invested $100,000 in 2006 and will receive a sum of $131,000, over 7 years; about a 4.4% return.

 

Its a no brainer, right?  A short refi is the answer!  UNLESS¦

 

¦they think the new loan is still risky.  Lenders can reinvest the money, from the first example, against a $100,000 home.  In the second example, they will have a $90,000 lien against an $80,000 home.   That tells me that the lenders dont believe the real estate market can recover at a 4% appreciation rate, over the next five years.  It also tells me that lenders dont think were out of the woods, yet.

 

Wanna try and guess the bottom?  Watch the lenders.  When short refis are offered, en masse, they think a turnaround is near.




Mortgage Rates Report- April 14, 2008

by: Brian.Brady on April 13, 2008 23:36:52     2 comments »

I'm still floating mortgage rates, unless my clients are closing within 14 days.  I"m cautiously floating because of the volatility in the market.  Fundamentally, mortgage rates shouldn't have a whole lot more room to come down; the Fed cuts are probably coming to an end.  Something much more drastic than the Fed open market activities will be needed to pull us out of the recession. 

 

Yep.  I said the R word and have been since last fall.  I'm not scared of the recession; I welcome it.  Here's the trick for mortgage rates.  The weak dollar has world investors believing that the Fed's easy money policy is inflationary...

 

UNTIL...

 

the recession hits them.  Make no mistake about it, the economic slowdown is a global phenomenon.  Canada and the UK are following suit by cutting rates.  I think the world wide recession will lower oil prices and provide some much needed relief to the American consumer.

 

Nothing says it like pictures.   I'll show you some charts, to see how I'm thinking.

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Mortgage Rates Report: March 18, 2008

by: Brian.Brady on March 18, 2008 12:02:20     3 comments »

The Federal Reserve Bank Cut both the discount rate and federal funds rate .75% today in an effort to stimulate this slowing economy.  While commodities' prices accelerate, the housing market and subsequent liquidity crisis is dragging the economy into a recession.

 

We call this phenomenon stagflation and it's REALLY  bad for the economy.  The Fed has been aggressively cutting interest rates and the declining housing market is closing down mortgage companies, investment banking firms, and real estate brokerages.  What more can the Fed do to help?

 

The Fed can (and will) buy mortgage-backed securities. 

 

Rather than to buy treasury notes in the open market, the Fed will be buying mortgage-backed securities.  They will want to get those assets off investment banking firms' balance sheets and provide stability to the MBS market.  Remember when I said that only the uneducated pay attention to the treasury note to determine the direction of mortgage rates?  Today is proof.

 

The spread between treasury notes and mortgage-backed securities has been widening these past six weeks. Why?  America was considered to be a sub-prime nation;  everybody was expected to default on their home loans.  Expect the Fed to prop up the MBS market in the next 4-6 weeks.  That will be bad for treasury notes and good for MBS.

 

Remember when I compared this to the junk bond crisis of the early 90's and advised you not to panic?   Now is the time to take action.  There will be some great opportunities to lock into a low mortgage rates during the rest of this month.  If you're closing a loan in less than 14 days, lock your rate.  Otherwise, float and see mortgage rates decline a bit.

 

I am always available for your question at (858)-777-9751.  March has been a very busy month for us so I may not be able to answer your questions immediately.




Mortgage Rates Report: January 17, 2008

by: Brian.Brady on January 17, 2008 12:21:59     Leave a comment »

Mortgage Rates Report:  Nationally syndicated from Long Beach to Palm Beach

 

Fed Chairman Bernanke testified before Congress today noting his "increased concerns for slow economic growth".   While he was careful to say that The Fed doesn't forecast negative growth (READ: recession), he did believe that the risks of a recession have increased.

 

I think the Fed Chairman is either (a) clueless or (b) practicing the art of circumspect rhetoric.  I'm inclined to believe the latter.  I think Bernanke is delivering bad news.  He offered support for radical fiscal policy (permanent tax cuts) to Congress.  When a Fed Chairman signals to Congress that the ball is in their court, to stave off a recession, he believes that monetary policy (rate cuts) have become useless.

 

Bernanke is saying that he has done all that he can do to stop a recession.I think a 1/2 of 1% rate cut is built into the pricing; now the Wall Street traders believe that more cuts are on their way (after January 30).  I'm splitting my recommendation to the following:

 

1- Purchases closing in less than 15 days:  Lock the mortgage rate immediately

2- Purchases closing in 15-45 days:  Cautiously float the mortgage rate

3- Refinance applications- lock at application

 

Current 30 Year fixed rate mortgage: 5.5% rate, 5.79% apr

 

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Surviving Stagflation

by: Brian.Brady on January 16, 2008 17:15:30     1 comment »

Stagflation is a period of economic contraction amidst commodity-push inflation.  It is a term from the 1970's to describe the economic phenomenon of rising unemployment and inflation.



disco I kind of dug the 70's.  I remember driving with my mother to the roller skating rink, listening to The Trammps on the 8-track, and praying that we had enough gas in the tank to make it to the even day.  The 70's were that time where a gallon of gas broke a dollar, mortgage rates were at 14.75%, and President Carter introduced us to the word malaise.  It wasn't a pretty time for the American economy.  How did my father respond to the malaise of the late 70's?



He bought a vacation house at the Jersey Shore.



Why?  It was cheap.  You see, Jersey Shore real estate had gone through a period of price decline in the late 70's and my father had a plan.  He always wanted to have a home "Downashore" and he had figured out a way to deal with the stagflation of the 70's.  He understood the difference between Core CPI and inflation and he had a solution.



Stop eating and driving.



I'm not kidding, he really laid down that law.  His thoughts were:

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