Friday, August 29, 2014

New Credit Score Model Would be Great for Housing! Too Bad it Won't be Used

FICO, the company that develops proprietary scoring models for credit bureaus and lenders, announced August 7 that anew model (FICO Score 9) would be released this fall.  FICO's press release caught buyers', Realtors', and lenders' attention, as the new model was touted as significantly more “borrower friendly”. Paid collections would no longer impact credit scores.  Medical debts (paid or not) would hurt scores less as well.  FICO predicted some consumers' scores could rise by 25 points, an amount that would significantly reduce their loan costs or interest rates.

The pending changes (which followed a CFPB study on the fairness of FICO's scoring models) ignited a frenzy of optimism from Steve Brown, president of the National Assn of Realtors who gushed they would “make a real difference in the lives of millions of American who have been shut out of the mortgage market or forced to pay higher mortgage interest rates because of flawed credit scores.”

Fanfare aside, the reality is that the changes are unlikely to impact credit scores for the foreseeable future.  Fannie Mae, Freddie Mac (the GSE's), and lenders currently use three scoring models, and have shown no interest in switching to FICO Score 9.  Those models (Equifax Beacon 5.0, Experian FICO V2, and Transunion FICO Classic 4) have been the norm since 2009.   That same year FICO unveiled another “improved” product touted as “consumer friendly” (FICO 08), but neither the GSE's nor lenders opted to adopt it.  In other words, all of this has already happened before and it did nothing to help the housing market!

FICO says their new model more accurately evaluates consumers' credit (just as with FICO 08), but until it's put into national use by the GSE's (and, by default, lenders), FICO Score 9 is essentially a curiosity.  There are large costs to rewrite automated underwriting programs for new score models, and (more significantly), higher default risks if FICO's conclusion of more “accurate credit evaluation” proved to be inaccurate.
While loan officers, home buyers, and Realtors would love more accessible, affordable loans, FICO Score 9 won't be boosting housing sales anytime soon.  Our recent mortgage meltdown leaves little industry appetite foradditional credit risk.  While FICO Score 9 could well be hugely popular with consumers, it's irrelevant unless the GSE's embrace it.  Until then, buyers should keep paying those medical bills and avoid collections to ensure their loan approvals!

Wednesday, August 20, 2014

Mortgage Rates Move Higher After Fed Minutes

Mortgage rates were higher for a third straight day as financial markets continue a measured correction from last Friday's volatility. At that time, headlines concerning Ukraine destroying a Russian armored convoy caused rates to move to their lowest levels in more than 2 months. Since then, it's been a steady march back in the other direction.

Of the week's limited scheduled events, most haven't had any objection to a moderate move higher in rates. Today's release of the Minutes from the most recent Fed Meeting was no exception. In general, most analysts felt the details from the Fed meeting were slightly more upbeat than suggested by the Fed's official policy announcement on July 30th.

A more optimistic Fed is bad for rates as it implies an earlier potential rate hike and removal of other forms of accommodation. While the Fed seems to be in favor of leaving their portfolio of Mortgage-Backed-Securities (MBS) intact, they do plan on reducing their Treasury holdings after the first rate hike. This suggests upward pressure on Treasury yields, and MBS, which dictate mortgage rates, are heavily influenced by Treasuries.

The initial reaction to the Fed Minutes at 2pm prompted several lenders to revise rate sheets higher though not all lenders repriced. It wasn't enough of an increase to unseat 4.125% as the most prevalently-quoted conforming 30yr fixed rate for top tier scenarios. Many borrowers will still see the same rates today vs yesterday with the movement coming in the form of increased closing costs.

Sunday, August 17, 2014

Mortgage Rates Drop Quickly to 2-Month Lows on Ukraine Turmoil

There were numerous headlines swirling mid-morning concerning military violence between Ukraine and Russia. Financial markets responded in a big way with stocks losing quit a bit of ground by noon and US Treasuries falling to their lowest levels since June 2013. MBS, however (the mortgage-backed securities that dictate mortgage rates), were not able to experience quite as much benefit, essentially meaning that Mortgage rates didn't improve nearly as much as other sectors of the bond market.

Part of this underperformance in the mortgage market is a simple fact of life when the rest of the financial world is responding to unexpected geopolitical headlines. Treasuries will always glean the most benefit when investors are seeking safe-haven demand amid risks of war, and other serious events around the globe. And while lenders clearly weren't able to pass on as much of the improvements as they otherwise might, we still saw enough of an improvement to bring rates to their best levels since late May.

Today's improvements further solidify 4.125% as the most prevalently quoted conforming 30yr fixed rate for flawless scenarios. 4.25% is starting to fade from view at this point, and 4.0% wouldn't be out of the question if we see just a bit more improvement (though it has a ways to go before challenging 4.125% in terms of prevalence.

So with all the improvements over the past week now adding up to what are effectively the best rates of the year, what should you do if you're considering locking/floating? First of all, it's much better to regret a bad float decision vs a bad lock decision. Beyond that, it's all about setting rules for yourself. There's no question that we have some pervasive momentum toward lower rates at the moment, but there is a question as to how far it will run before turning course. It's not a horrible decision to see if you can keep riding this wave of improvement as long as you commit to locking at a loss if the market moves against you by a certain amount. For instance, if your rate quote rose by .125%, all other things being equal, that might be your limit. Others might have more risk tolerance.

The major word of caution is that all the recent improvements have been extremely hard-fought. We're seeing mortgage rates have a very hard time moving lower at any sort of reassuring pace. The only reason we can say rates are the best in over two months is the combination of an excessively narrow range, and slow, steady improvements that finally crossed their last line in the sand with Today's rally. Bottom line: the trends that have taken rates lower are still intact, but it's never a bad idea to lock when rates are near their lowest levels in over a year.

Thursday, August 14, 2014

Average US 30-Year Mortgage Rate at 4.12 Percent

Average long-term U.S. mortgage rates declined this week, approaching their lows for the year.
Mortgage company Freddie Mac said Thursday the nationwide average for a 30-year loan slipped to 4.12 percent from 4.14 percent last week. The average for a 15-year mortgage, a popular choice for people who are refinancing, fell to 3.24 percent from 3.27 percent last week.
Mortgage rates are below the levels of a year ago. They have fallen in recent weeks after climbing last summer when the Federal Reserve began talking about reducing the monthly bond purchases it was making to keep long-term borrowing rates low.
Mortgage rates often follow the yield on the 10-year Treasury note. The 10-year note traded at 2.42 percent Wednesday, brushing its low for the year of 2.41 percent and down from 2.47 percent a week earlier. It fell to 2.38 percent in trading Thursday morning.
At 4.12 percent, the rate on a 30-year mortgage is down from 4.53 percent at the start of the year. Rates have fallen even though the Fed has been trimming its monthly bond purchases, which are intended to keep long-term borrowing rates low. The purchases are set to end in October.
To calculate average mortgage rates, Freddie Mac surveys lenders across the country between Monday and Wednesday each week. The average doesn't include extra fees, known as points, which most borrowers must pay to get the lowest rates. One point equals 1 percent of the loan amount.
The average fee for a 30-year mortgage was 0.6 point, down from 0.7 point last week. The fee for a 15-year mortgage was unchanged at 0.6 point.
The average rate on a five-year adjustable-rate mortgage edged down to 2.97 percent from 2.98 percent. The fee remained at 0.5 point.
For a one-year ARM, the average rate rose to 2.36 percent from 2.35 percent. The fee was stable at 0.5 point.

Monday, August 11, 2014

Another Down Week...

Another down week for the stock market after international instability continues to dominate the world headlines.  Not only dominates, but appears to be getting worse.

There is so much turmoil between Iraq, Israel and Hamas, and Russia, that investors are becoming increasingly worried about the economy.  Add on top of that the world economic indicators showing that more and more countries are experiencing an economic slowdown.  The Dow as of Friday morning is down 130 points for the week.  The pre-market indicators show that the indices will likely fall even further at the opening bell on Friday.

Part of the uncertainty in the market on Friday morning is related to President Obama's announcement that the U.S. may use military action in the Mideast against ISIS if they attempt to interfere with the humanitarian aid the United States is going to provide to the region.  Unfortunately based upon ISIS's track record of disregarding any authority except for their own, many expect that in fact they will attempt to disrupt the aid and once again the United States will be drawn into another military conflict.

If that isn't enough, it appears that relations between the U.S. and Russia are further deteriorating.  Although none of it has to do with anything military, (thankfully) it appears that President Vladimir Putin is not showing any signs of backing down from the sanctions instituted by the U.S. and Europe.

On the home front in the economy, there has been little happening in the past week that played any major role in the U.S. stock markets.  One piece of good news is that factory orders surged in the month of June following a weak May report.  The increase of 1.1% was much higher than analysts were anticipating.  In addition, the durable goods orders were revised significantly higher to an increase of 1.7%.

Additional good economic news was the stronger than expected report on the ISM Non-Manufacturing Index.  This index measures many different areas of economic productivity such as construction, mining, agriculture, forestry, fishing and hunting.  This index rose 2.7 points which was higher than expected.

The only report related to the real estate market released this week was the Mortgage Bankers Association report on mortgage applications.  The MBA reported that purchase applications declined 1.0 percent while refinance apps jumped 4.0 percent.  The report is not surprising as typically purchase activity declines in the month of August.  Additionally, the economic instability I mentioned earlier has been placing downward pressure on mortgage rates which would easily explain more homeowners jumping in to take advantage of refinancing.

Next week will be quiet on the economic date side of things.  Add to it that August is the biggest vacation month of the summer.  The only wild card is what may happen internationally which no one knows.

  • Wednesday August 13th - MBA Applications and Retail Sales
  • Thursday August 14th - First Time Jobless Claims
  • Friday August 15th ? Producer Price Index, Industrial Production and Consumer Sentiment

As your mortgage professional, I am happy to assist you with any information you may need regarding mortgage or real estate trends.  I welcome the opportunity to serve you in any way I possibly can.  Please feel free to reach me at (707) 455-7070.

Thursday, August 7, 2014

Bi-Weekly Mortgage Payment Programs : Will You Pay Your Mortgage Faster?


The typical mortgage asks for one payment per month, which equals 12 payments per year. With a 30-year fixed rate mortgage, therefore, 360 payments are required to pay the loan in full.
Each mortgage payment is split into two parts -- a principal portion and an interest portion. The principal portion is applied to the amount that you owe the bank. This diminishes your remaining loan balance. The interest portion is your cost for borrowing from the bank.
As your loan moves toward maturity, the balance between your mortgage payments' principal-and-interest shifts. In the early years, a significant portion of your payment is comprised of interest and just a small part goes to paying down your balance. It's not until later in your loan's lifecycle does the principal portion of the payment start to grow.
This repayment schedule is the reason why after 5 years or so, your loan's balance has been barely paid down. The technical term for this repayment schedule is amortization 


A bi-weekly mortgage payment program is meant to short-circuit your loan's amortization schedule. Instead of taking 12 payments per year, the bi-weekly payment plan asks for one payment every two weeks, which adds up to 13 payments per year.
Except that you can't make 13 payments per year on your mortgage -- that's not how a mortgage works.
With a mortgage, you pay a certain amount of interest on an annual basis and that amount is covered in your first twelve payments. The 13th payment has to go somewhere, though, so it gets applied to your principal balance; the amount that you still owe to the bank.
And, this is how a bi-weekly payment plan works. With each "13th payment", your loan balance is reduced by the entire amount of the payment. You reach your loan's payoff date sooner.
At today's mortgage rates, bi-weekly payments shorten your loan term by 4 years.


Bi-weekly payments plans work; there's no doubt about that. It's just basic math. However, there are several reasons why homeowners may want to avoid enrolling in a bi-weekly mortgage payment plan.
The first -- and most obvious -- reason to avoid bi-weekly mortgage payment programs is that homeowners choosing to self-manage their bi-weekly payments get better results than via a bank-managed bi-weekly payment program.
Here's how to self-manage : Rather than sending payments to the bank every other week, achieve the same result by making your regular mortgage payment once monthly, and adding 1/12 of your regular mortgage payment to your check.
For every $1,200 in your mortgage payment, in other words, add $100 to your monthly payment. By sending $1,300 to your lender monthly, you will "overpay" your mortgage by $1,200 annually, which is a 13th payment.
Assuming a $300,000 mortgage at 4.000%, look at how the math works :
  • Bank-managed bi-weekly mortgage payments pays off in 26 years, 0 months
  • Self-managed bi-weekly mortgage payments pays off in 25 years, 11 months
This math works because banks don't apply that 13th payment until the year is complete. By contrast, your self-managed system applies 12 times per year.
Another reason to skip the bi-weekly mortgage program is that bi-weekly payments are a contract and once that contracts starts, as a homeowner, you're obligated to make those 13 payments per year no matter what.
By contrast, with a self-managed payment plan, you never have that obligation. You can choose to skip a month during the holidays, for example, then double-up on payments later on, or not at all. It's all in your control -- not the bank's.
And, lastly, if you find your bank is charging for its bi-weekly mortgage payment program, make sure to say "no" no matter what. That's just wasted money.


Putting bi-weekly mathematics aside, the thing is, with mortgage rates low, your best alternative to the bi-weekly mortgage plan may be to get a new mortgage altogether.
Extra payments can speed up your payoff, but not as well as taking a zero-closing cost refinance, then putting your monthly savings back to your loan balance. Your payment stays the same, but your loan payoff date accelerates.
Assuming a 1 percent drop in your mortgage rate, the Refinance-and-Reinvest plan can shorten your loan's term 63% more than a bi-weekly mortgage payment program ever could. Plus, with lower interest rates comes larger long-term savings.
Take a look at today's live mortgage rates and compare your mortgage options. Rates are available online at no cost and with no obligation whatsoever.

Sunday, August 3, 2014

Just When You Thought It Was Safe....

Just when you thought it was safe to play the markets, BOOM the market erases all the gains for 2014 in one day of trading.  After weeks of slow but steady increases in the DOW, NASDAQ, and the S&P 500, Thursday took it virtually all back with the DOW plunging 317 points.  The drugging of the markets had only a little bit to do with domestic issues.  The market drudging was most impacted by international concerns.

The U.S, portion of the market decline was led by Exxon Mobil Corp. and Micron Technology Inc.  Both companies reported significantly weaker corporate profits for the 2nd quarter of 2014.  Additionally the outlook for the next quarter was not any better fueling fears that the global slowdown that some economists have been fearing may be taking shape. 

One quarter of less than stellar results does not mean that we are heading in the wrong direction.  However investors always try to stay ahead of the movement of the markets and many of them are just playing it safe by selling off some of their holdings in companies that they think may in line for lower profits in the coming months.

The big driver in the market decline was on the international front related to Portugal and Argentina.  Argentina defaulted on a debt payment and a large Portuguese bank indicated they are having financial issues.  This was enough to stimulate fears in the world monetary system bringing us back to last year when countries and banks needed to be bailed out.  This sent investors around the world scurrying to sell stocks and buy bonds.

The DOW as of Fridays opening bell was down 40 points on account of the latest labor department report.  The employment report came in lower than expected with 206,000 jobs added.  The analysts were anticipating the addition of approximately 230,000.  The unemployment rate rose by.1% to 6.2%

On the housing front, the market seems to be divided.  Sales of new homes have been weak whereas sales of existing homes are still considered respectable.  The pending homes sales index came in a healthy 102.7.  This is down from 103.8 in the prior month however the number is still considered reasonably strong.

Home price appreciation seems to be slowing down more than most experts predicted.  The Case-Shiller Home Price Index shows that in May home prices declined .3 percent.  This is the first negative reading since January of 2012.  The positive news in the report is that home prices are still 9.3 percent higher than the same time last year.

After a very busy week of economic data, next week seems to be a little more relaxed with only a few market moving reports due out:

  • Tuesday August 5th - Factory Orders
  • Wednesday August 6th - MBA Applications
  • Thursday August 7th - First Time Jobless Claims

As your mortgage professional, I am happy to assist you with any information you may need regarding mortgage or real estate trends.  I welcome the opportunity to serve you in any way I possibly can.  Please feel free to reach me at (707) 455-7070.