Maryland Mortgage Rates 7/19/08 - 9/28/08

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9/28/08

3:37 pm. Rates are moving up and the Fed has stepped in to try and get the credit markets on a corrective course. Make no doubt about it this credit crunch is not over. Really no matter how much the Fed pumps into these firms to buy up bad debt, the firms will still be concerned about lending. It is probably a good bet to finally expect the lenders to stop giving loans to bad credit borrowers for homes, credit cards, car loans, students loans and more. The moderate credit borrower will likely also see a limited offer on credit lines. The fear of lenders to take any risk is very high. The "bailout" will only relieve bad debt already on the books and not really do much for new lending. Foreign banks have also run for cover and are less willing to lend to Americans. We have used up our credit line and created to much debt.

It is not all bad news. This market correction was a long time coming. The mortgage markets have been spending like a drunken pirate. It has all snowballed and finally came to a head. But it did not happen after a catastrophic failure. If the markets kept going as they had been the bailout probably would have been a couple of trillion in the next few years. So as crazy as it sounds, we may have gotten off cheap if this bailout helps motivate investors back into the markets, restrains lending to poor credit borrowers, removes the bad lenders and sure's up confidence by adding some REAL market regulations and ratings.

We have to wait to see the implementation of the programs for defaulted and foreclosed properties but maybe a new financial vehicle could be offered to those borrowers to help get them on a corrective course and keep their home. Of course with many bad loans the borrowers have just upped and left but the ones that stayed in may have given themselves a chance if the Fed creates a longer termed loan at a reduced rate for payback set on a shorter term (this is just a guess and no program has been offered yet).

We will have to see how this plays out over the next few weeks but expect rates to more upwards as banks and mortgage lenders pull back lending.

9/15/08

2:50 pm. So Lehman Brothers and Merrill Lynch appeared to have collapsed and AIG maybe on its way. The common question we have gotten is the basic.. What is going on and how will this effect me?

Lets try to explain what has happened in basic terms. (Of course things are always more complex but it does boil down to the home mortgage foreclosure disaster.) Companies like Merrill Lynnch and Lehman Brothers are investment firms and are not actually mortgage lenders. What these firms do is take peoples money, directly or from Retirement/IRA funds ect and make long term investments and try to get high returns. They do this by using the money invested in them and also "borrowing" cash based on, in essence, a promise. So they will invest in mortgage notes using some of it's own (investors) cash and also large amounts of "borrowed" cash (largely borrowed from AIG). If the return works out it usually results in profits for the investor, the firm and the borrowed cash is paid back. But when the housing market slowed, the foreclosures increased and the credit crunched occurred, the investments started dropping below the original purchase price. The Firms, in turn, had to come up with cash, not just its investors money but also the money "borrowed" to buy the investments. Of course there was no money there. The money borrowed was basically lent on good faith and not on actual assets. These companies have been playing the system like this for a very long time. Most of the time these dips, in the market, end and the investment recovers and the firms stay strong. However, due to the long and increasing issues in the credit market these investment firms could not keep taking these loses. The creditors who lent them money basically get a report on the probability of them getting repaid. Over the past few weeks the reports show that it is likely the lenders will not get paid. As fears rose the investment firms looked to sure up these loans by getting capital to back up what they borrowed. The Federal Government refused to lend them money (although, legally they could) and so they turned to private equity.

In Merrill Lynch's case, Bank of America stepped in and purchased them using Bank of America stock. This seems like a very good move. The reality is that the economy will recover, the housing market will get better. BofA has so much assets from its banking customers that they can take a short term hit in order to buy a firm at 2/3 its street price. Lehman Brothers is another story. Currently, as far as the news stories go, no one is interested in buying them out to sure up their capital base.  Since, no big organization stepped in they went into Bankruptcy to protect assets. It can be a good guess that it is likely that while in Bankruptcy they will shed some investments to third party to free up capital and will likely have some investment groups step in to buy the debt at a reduce price and take over the firm.

What will happen. Rest assured on the basics. Your cash in Banks insured by the FDIC is protected up to 100k. Although some banks are listed as in danger of failing most banks are very secure and have been careful about their assets and largely protected against failure. The home market needs to shed excess inventory and then home prices will begin to recover. As prices recover the economy will bounce back. History shows that when these large failures occur they are usually the "bottom" of the market and are signs of the "market correction". The good news is mortgage rates will remain low, the Fed will not likely risk any additional economic slow down by raising rates. The main issue will be if people can actually find a institutiontaht will lend a mortgage. Most will not lend to any credit risk as long as the market is this scared of defaults.

9/10/08

12:59 am. So many things have been going on in the mortgage rate markets over the past few days it is hard to decide which has had the largest effect on the markets.

Most likely it was the Fed taking over FANNIE and FREDDIE which may have been a long time in coming but investors rallied the markets on the news. This bail out caused mortgage rates to drop. The tax payers securing Fannie and Freddie helped to stabilize liquidity in the mortgage lending market. This liquidity can loosen up cash to lend and rates have dropped.

Further, the decrease in oil prices and the lack of major signs of inflation has held the Fed to not hint at raising rates. This all helps to boost the home markets and the sentiment that within the second quarter of 2009 a economic recovery in the housing market could happen!

As for now, take advantage of the dropping rates as they will likely not last as oil prices will increase on the decrease in production and increase in demand over the winter. This increase may stall the economy again and cause liquidity to be pulled back again.

9/4/08

2:10 am. The good news has been that rates have dropped. But no one is really sure as to why. It likely is a reaction to many things going on in the economy.

Housing prices are improving but not rapidly. This steady increase in home purchases and indicators that in some locations housing prices are increasing may have added hope to the traders. Keep in mind, that overall, most places still have dropping home prices.

Also, recent data and information shows that the Feds are looking out to protect Fannie and Freddie as much as possible. This is very reassuring to mortgage traders. These companies help keep lending institutions liquid. So when they have cash, they lend.

It may be a good idea to also look at the decreasing oil prices and the fact that inflation has not roared ahead. This has lead to speculation that the Fed will not jump at the first chance to raise rates. Either way, the markets have seen a steady decreasing in rates over the past several week. So keep and eagle out if you are refinancing and want to lock in on a prime rate.

8/6/08

1:59 am. Well the FED did the expected and left rates unchanged for the time being. This appears to be a very good move by the Fed.

Analysis : Mortgage Rates are pretty much at the lowest point they can reach even if the Fed reduced rates more. The markets are not really concerned over a .25 either way since the current 2% Feds fund rates. The fear of inflation (which is not just a fear it is currently a reality) would call for rates to increase. A rate increase could stimulate the value of the dollar and make it stronger to help hold off inflation. But a raise may cause more harm to an already hurting economy. Besides. the increase in gas/energy cost have basically acted like a rate increase.

Did that explanation confuse you? Well the best thing to do is just look at the Markets to see how rates will act. Basically for the foreseeable future the FED's hands are tide. In  all likelihood they will take little action on rates, the markets will determine how rates move.

The good news for rate shoppers is that rates have dropped slightly over the past few weeks. However, recently commodities, like oil, have been selling off as demand by US consumers has been lower than expected. As the sell off continues, initially investors will likely invest in stocks and then take profits as the market surges and then likely turn to bonds. If that happens expect the market factors to push mortgage rates upwards. Most likely not to high or to fast but still higher. It is probably best to take advantage of the soft market now. Call your LO to get pricing.

8/4/08

12:01 am. Well mortgage rate dipped a little at the end of July. Why is that? Well some speculators believe that "major" mortgage lenders and banks may have already "stated" the worst in loses. Or maybe because oil prices have dipped slightly. The markets have been jumping on virtually any and all data rolling in. It looks it would be hard to guess really what caused the minor movement.

The reality is that most mortgage lenders and banks have probably not shown the total cost of the loses to date. Also, many lenders are probably still in deep trouble. You should not expect the rates to keep going down. In all likely hood the jobless claims and the GDP reports will cause more concerns within the markets. These will spill over as high energy costs over the summer cause more economic stress. While congress took a break with no real energy solution expect the markets to look at all little data trickling in to determine how rates will move. You can bet the data will not be great and will affect the rates.

7/27/08

8:09 pm. Congress has passed a bill that is intended to help save the mortgage industry. Well, at least help prevent a complete meltdown of the industry which could then will result in a meltdown of the economy. There is a lot to digest in the bill but more important than the new law is how will banks and investors react to it. So how will it impact you?

We have to take a look into the crystal ball and guess. Why? Well it is because the industry is so complex with so many issues. What jumps out first to us is that in the bill the Federal Reserve / Treasury will have the ability to secure/lend Fannie and Freddie Mac as much needed cash as required. More interesting is, the Federal Government can now BUY stock in these publicly traded companies. That last part is huge. Sure the Government lending money is important but that is only if the companies need the cash and they probably need a little. However, the knowledge in the stock market that  the Federal Government will buy up stock in this company if needed (...consulting the crystal ball....wait... ) will likely result in a run on the stock. Meaning large investment firms, 401ks etc. will now feel confident in buying stock in Fannie and Freddie. They can't lose. Even if the company's tank. The Fed's will step in with cash and if necessary buy up stocks. This run should result in a cash influx into both companies. Which means more cash to lend.  

(Why is Fannie and Freddie so important - OK the basic explanation-  These two companies basically set out lending guidelines and say to banks, "If you have a borrower that means these requirements, - i.e. credit score, income, LTV, debt to income ratio, then we will buy that loan at any time." So banks and lending institutions rely on Fannie and Freddie to buy loans when the bank has lent all it can. Fannie and Freddie buy up the loans that meet the guidelines and the banks' get fresh money to lend. If no company like Fannie and Freddie are around then banks would rarely lend to people. They would only issue loans to the best credit risks, and at that, only use a limited amount of the deposited money to lend because they need cash on hand.)

Another interesting item is the possibility that refinancing a mortgage will be allowed and the borrower may use a homes value plus 15% more to get the loan. This will be a Federal backed mortgage. WOW.... This should allow those with no equity in poor interest rated loans or ARM's to refi into a better product. This is what appears to be in the bill and how the crystal ball is interpreting it. But we will have to wait and see after the bill is signed in and the banks and mortgage lenders have a chance to set guidelines. Or maybe now that the Feds have control over Fannie and Freddie they will set up strict guidelines.

Also, note that there are special allowances for low income loans and a buyout plan for people in foreclosure. Currently the program appears to be limited and will likely not cover the majority of people in foreclosure but it is good odds that if the program is successful it will be expanded.

In the meantime, while everyone sorts out these changes, expect interest rates to creep upwards. More liquidity in the markets and rapid inflation will lead the rates upwards.

We wish we could be more definitive in our predictions of how this bill will affect the markets but lets face it.... It is the first major overhaul of the lending guidelines since they had been established. It is a wait and see to really figure out how these changes affected the markets.

7/19/08

12:01 am. So recently we have been getting asked the question "What is going on here with the mortgage industry?" Well I guess it is time to take a shot at answering it, or trying to at least. The issue is complex but first lets start with a simple version. For about the past 6 years, or so, many mortgage lenders have been giving loans to people that really should not have been able to qualify for the loans. Things worked out ok as long as the economy was strong. However, as the consumer spending slowed, due to gas prices, loss of jobs, inflation, fears of recession etc. many of these borrowers whom could barely afford their homes in the first place got placed in even a worse position as their income decreased and the rates on their ARM mortgages adjusted upwards. This left many people with no option but to skip making payments. As the economy weighed in and rates adjusted upwards a snow ball effect occurred and many loans went into foreclosure. As the foreclosure rate mounted Banks began taking loses and investors worried about the banks. So did the banks customers. Recently as the Banks take loses the people whom has asset in the bank begin to worry about the banks failing to have enough cash on hand and they begin to withdrawal savings. This causes a "run on the bank". Banks' loss the capital they have to lend and mortgages become really hard to get.

Their are many more issues involved but those are just some of the things going on.

SNW - So Now What?

Well look for rates to keep moving upwards. The Banks that have failed or are failing need to be protected. So what tends to happen is that rates go up so that the "good" borrowers have to pay for the failing borrowers. As both a consumer and a person involved in the mortgage industry, I have seen this occur in the past. In the 70's inflation was a major issue along with high oil prices. Rates shot up. In the late 90's mortgage guidelines allowed for many bad credit borrowers to over borrow and cause a high foreclosure rate. Right now is a mix of both. If you are in the market for a loan the best step is to protect yourself. Make sure your credit score is as high as can be, clean up old collections, judgments and liens. Make sure to pay all your revolving credit  lines on time. Also have several months of reserves saved up. For example, if you have $2300  a month in total payments have at least $9600 in savings before you buy. Also, take all your mortgage offers and compare them to local banks and credit unions. Sometimes these places can offer better deals to solid borrowers. Most of all know what loan you are getting into. Lean about mortgage origination fees, lender fees, points, processing fees, document prep fees, and what type of term and rate you are getting. Never be afraid to ask and do not be afraid to question. It is your biggest investment and you should never have a question you are afraid to ask to the lender.

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