Monthly Archives: January 2014
Mortgage rates moved forcefully lower today, bringing them well past previous 2014 lows and back in line with levels not seen since November 19th. Overnight weakness in equities and foreign markets continues to promote strength in US bond markets, including the mortgage-backed-securities (MBS) that most directly influence mortgage rates. This further solidifies 4.375% as the most prevalently quoted conforming 30yr fixed rate for ideal borrowers (best-execution). For some lenders, that rate remains 4.5%, but for the most aggressive lenders 4.25% is a close contender for utterly flawless scenarios. When adjusted for day to day changes in closing costs, rates fell an equivalent of 0.07% today.
Once the sharp move higher in mortgage rates during 2013 topped out in the first week of September, bond markets have been cycling between those highs and corrective lows roughly half a point away. If you look at that phenomenon in terms of 10yr US Treasuries, that’s been taking place between 3.0% and 2.5% in general. The analogous range for mortgage rates has been roughly 4.75% to 4.25%.
The first day of 2014 marked the high point in one of these cycles and we’ve been in the corrective pattern ever since. The question remains: will this instance of correction prove to be just as pronounced as the one ending in late October? Thankfully, if you don’t want to try to predict the future, we’ve already covered so much ground that it wouldn’t be a bad idea to take the improvements that are on the table and lock in your rate.
What is QM ruling (Qualified Mortgage)?
The rule took effect on January 10, 2014. It is intended to create a class of “safer” mortgages. It does this by (A) restricting certain loan features, (B) capping mortgage points and fees, and (C) imposing certain underwriting requirements for loans. In exchange for generating QM loans, lenders will be given some degree of legal protection from consumer lawsuits, either in the form of a safe harbor or a rebuttable presumption.
Mortgage rates continued a strong move lower today, benefiting from a global sell-off in risk-related assets. What’s a risk-related asset? In this case, it’s a catch-all term for investments that carry greater risk and greater reward, such as stocks and emerging market currencies. When risk-assets get trounced, bond markets are often one of the safe-haven beneficiaries, and stronger bond markets mean lower mortgage rates.
In the current case, and indeed in most cases where there is a large tidal exchange across the risk spectrum, mortgage rates aren’t able to fall as quickly as more direct beneficiaries like Treasuries. Still, they’re falling. Most of the improvement has been in the form of lower closing costs for the same interest rates quoted yesterday, but some borrowers may be an eighth of a point lower today. 4.5% remains the most prevalently quoted conforming 30yr fixed rate for ideal scenarios (best-execution), but 4.375% is VERY close at several lenders. When adjusted for day to day changes in closing costs, rates fell an equivalent of 0.03-0.04% today.
While unexpected, the improvement in rates is certainly welcome. The question is whether or not it will carry over into next week. The other question is how much markets will even be concerned with what had been shaping up to be a big FOMC Announcement on Wednesday. If global markets continue in this same vein next week, the momentum could easily overshadow the Fed. The counterpoint and the risk is that such episodes of global risk-aversion and emerging market panic are not uncommon. They happen a few times a year. Sometimes the Eurozone crisis happens and sometimes things blow over. On the occasions where things blow over, rates tend to snap back higher fairly quickly.
If today’s session results in more losses, it will make for an increasingly slippery slope in that regard. In other words, if 10yr yields were to rise above the 21-day moving average at 2.88 for instance, the shape of the past few weeks would begin to look less level and more like a bounce. Such a move would also add confirmation to a potentially negative shift in technicals that reemerged yesterday.
The technical concern is mitigated by the fundamental understanding that markets tend to hesitate ahead of events like next week’s FOMC. Granted, the consensus is for the Fed to stay the course, but recent reactions to Fed speeches suggest a few dissenters in the crowd who may not be fully on board with the “full steam ahead” mentality regarding the reduction of Fed bond buying.
Today’s data (the relevant reports anyway), hit at 8:30am and 10am with Jobless Claims and Existing Home Sales respectively. The Claims data is still trying to earn its spot back at the big kid table after several late 2013 reports that were so far off the mark that markets disregarded the subsequent reports. That’s only just begun to change with the last few, and today provides another chance.
Existing Home Sales is coming off its worst print in a year, and not expected to gain much ground. This opens the door for a bit more of a reaction than normal as a miss would likely be another 1-Year+ low.
Mortgage rates edged modestly higher for a second straight day, though they’re still in a lower range than most of December and early January. The movement was small enough as to only effect the closing costs associated with yesterday’s rates. 4.5% remains the most prevalently quoted conforming 30yr fixed rate for ideal scenarios (best-execution). When adjusted for day to day changes in closing costs, rates rose an equivalent of 0.02% today.
Although rates have managed to stay in this newer, lower range for the past two weeks, they’ll soon come to a crossroads, if they’re not there already. The decision to move higher or lower from here is most likely to be informed by next week’s FOMC Announcement. That will be the Fed’s chance to either stay on the same path with respect to reducing it’s bond buying (which benefits rates), or to pay some mind to the last jobs report, either by slowing down the pace of tapering or holding off altogether for one cycle.
If they don’t take one of those softer approaches, this low range of rates may well end up being a floor indefinitely. The fact that we haven’t been able to move any lower than Friday’s levels on 2 occasions now, suggests that the very welcome move lower in mid January has run its course and will now rely on the next big event if it’s going to make any further progress.
While the fact that the ‘big event’ doesn’t happen until next Wednesday should serve to limit bigger swings, it’s not uncommon for rates to start sliding in one direction or the other even before the event. With the longer-term trend still pointing toward higher rates, this recent rebellion has the burden of proof. Because of that and because of the resistance we’ve seen at Friday’s lows, the decision to lock or float ahead of next Wednesday’s FOMC may as well be made now.
Wealthy home buyers signed up for these loans in droves last year because of their low rates and flexible repayment options. The total dollar amount of originated private jumbo mortgages—which exceed $417,000 in most parts of the country and $625,500 in pricey housing markets such as New York and San Francisco—was on track to be the highest since 2007.
Here are five changes to expect in 2014:
Fewer types of jumbos
Several jumbo-mortgage repayment options are tougher to find. That includes the interest-only jumbo mortgage, which doesn’t require principal payments during the first few years, and many mortgages with balloon payments that require small monthly payments and a lump-sum payment to pay off the remaining balance after five or seven years.
Mortgages that are originated with these features fall outside of the definition of a “qualified mortgage,” which was first established by the Dodd-Frank financial reform bill of 2010 and whose terms were announced by the CFPB. Lenders can still originate these loans if they believe the applicant has the ability to repay, but they stand to incur more risk going forward. Should borrowers default, they could challenge foreclosure proceedings by arguing the lender didn’t properly vet them to confirm that they can afford the loan.
Some lenders are requiring borrowers to make large down payments. National lender EverBank, for instance, says it requires at least a 35% down payment for interest-only jumbo loans, compared with 20% for other jumbos. Some lenders have been scaling back. By the third quarter of 2013, interest-only mortgages accounted for roughly 3.2% of jumbo mortgages that were being securitized, down from 8.5% the prior quarter, says Guy Cecala, publisher of Inside Mortgage Finance.
Lower down payments
Lenders started lowering down-payment requirements last year. Most notably, Wells Fargo began accepting 15% down payments for jumbos, down from 20%, and Bank of America made the same change for loans of up to $1 million. Experts say more lenders will likely follow and that some will begin accepting 10% down payments.
Low down payments allow affluent borrowers to lock less cash into a home and to invest it elsewhere. For lenders, lower down payments help attract more applicants and are a sign lenders are becoming more comfortable loosening underwriting guidelines.
So far, most jumbo lenders aren’t requiring private mortgage insurance—an added expense that was widely employed during the housing boom to lessen losses from borrowers who went into foreclosure. But that is expected to change this year. Private insurers say lenders have been contacting them about reintroducing this cost.
Higher hurdles for “nonqualifed” mortgages
Lenders that originate “nonqualified” jumbos are raising requirements for borrowers.
For instance, in most cases qualified mortgages don’t permit borrowers to end up with a debt-to-income ratio—the percentage of their monthly gross income that goes toward paying debt—that exceeds 43%. Zions Bank, which is based in Salt Lake City, is originating jumbos for borrowers with a DTI as high as 50%. But those borrowers need to meet stricter guidelines, including a higher FICO credit score and provide documentation proving they have six to 18 months of mortgage payments (including taxes and insurance) in cash reserves, says Kim Casaday, president of the bank’s home-financing division.
Separately, fewer lenders will make exceptions for borrowers who don’t supply full income documentation. Affluent jumbo borrowers have been able to provide partial documentation with some lenders and still get approved—a setup that helped those who are self-employed or have complex income structures.
But the CFPB’s new mortgage rules prohibit low- and no-documentation mortgages. These loans “may be much harder to come by,” says Keith Gumbinger, vice president at mortgage-info website HSH.com.
Bigger push to ARMs
Banks will likely ramp up their pitches for adjustable-rate jumbos—in indirect ways. Tom Wind, executive vice president of home lending at EverBank, says lenders will slowly raise rates on 30-year fixed-rates jumbos, which will result in more borrowers turning to ARMs.
Banks hold most private jumbos on their books and prefer ARMs because once their rates reset, they stand to receive larger interest payments from borrowers. While the CFPB’s new mortgage rules have made qualifying for these loans tougher—lenders can no longer approve borrowers based on the loan’s introductory rate—that is unlikely to affect wealthy home buyers who have the income or assets to qualify at a higher rate.
Mortgage experts say jumbo rates are likely to remain low this year in comparison with non-jumbos. Lenders are still courting affluent borrowers and want to add more of these loans to their books. The lowest rates will continue to be on the adjustable-rate jumbos while fixed-rate jumbos are expected to get pricier later in the year.
Further rate increases could come by next year as well. A rule proposed under the Dodd-Frank law will require the small number of securitization firms—which sell mortgages to investors—to retain 5% of the loan amount on their books.
The Treasury Department is coordinating the rule, which will be completed by six federal agencies. This rule will likely result in the companies asking investors for a higher price for those loans, which will trickle down to higher rates for borrowers
Mortgage rates were sharply unchanged today with the few better-priced lenders offset by a few others in worse shape compared to yesterday. The balancing act was only perfectly achieved in the afternoon when several lenders released better rate sheets after trading levels improved. In other words, rates were slightly worse this morning, on average, but afternoon reprices brought them in line with yesterday’s levels. As such, 4.625% remains the most prevalently-quoted rate for ideal, conforming 30yr Fixed loans (best-execution).
Tomorrow brings the month’s most important piece of economic data: the Employment Situation Report. In fact, this is the first major dose of market-moving information since the Fed announced the reduction in asset purchases on December 18th. As always, it has more potential than any other economic report to cause movement for mortgage rates.
When considered in conjunction with the fact that the rate environment has been exceptionally flat for the past several weeks, a big reaction to this data may well kick off the next wave of momentum. A weak number could usher in a more developed pocket of recovery while a stronger number could make for a run at a 4.75% ‘best-execution’ level.
The U.S. apartment vacancy rate eased to its lowest level in more than a decade, but stagnant income growth moderated rent increases, according to an industry report released on Monday.
The national apartment vacancy rate fell 0.1 percentage point to 4.1 percent in the fourth quarter from the third quarter, according to a preliminary report by real estate research firm Reis Inc. It was the lowest vacancy rate since the third quarter of 2001, when it was 3.9 percent
A sluggish job market and weak wage growth help keep rent growth at just 0.8 percent, however, well below the level usually associated with such low vacancy rates.
(Read more: Manhattan apartment sales hit a high)
“While national rent growth remains low relative to vacancy, there are a number of markets where rents continue to boom such as Seattle, San Francisco, San Jose and Oakland-East Bay,” the report said.
New Haven ranked as the city with the tightest vacancy rate at 2.2 percent. San Diego, San Jose and New York came in at numbers two, three and four, respectively.
With more housing supply coming online, Reis expects vacancies to increase slightly in 2014 while rents rise by roughly 3.3 percent.
Rep. Mel Watt won’t be sworn in as the director of the Federal Housing Finance Agency until Monday, but he has already sent a clear signal of the coming shift in direction from his predecessor Edward DeMarco, the agency’s acting director for the past four years.
Last month, Mr. Watt announced that he would immediately delay a series of loan-fee hikes, announced in December by the FHFA, once he was sworn in as the agency’s director on Jan. 6. The FHFA had announced those fee hikes on the eve of Mr. Watt’s confirmation by the U.S. Senate, and the increases provoked strong industry blowback after more details were released by Fannie MaeFNMA -1.01% and Freddie MacFMCC -1.74% one week later.
Mr. Watt’s announcement signals that access to mortgage credit is likely to ride shotgun ahead of other competing policy goals, such as reducing the firms’ footprint in housing markets, a top priority of the FHFA in recent years. Mr. DeMarco has often been called the most powerful man in housing through his role overseeing Fannie Mae and Freddie Mac, the government-supported mortgage companies that backstop around half of all U.S. home loans. Consequently, Mr. Watt’s confirmation as the FHFA’s director could presage the largest potential shift in housing policy since the companies were taken over by the government in 2008.