LIBOR Update: Interbank Lending Thaw May Bring Relief to Adjustable Rate Mortgage Holders

Graphic via Econompic Data.

The worldwide shock and awe campaign against seized up interbank lending is having the desired effect, at least as it relates to LIBOR, according to the Wall Street Journal. 

"Money market tensions are easing," said Lena Komileva, head of G7 market economics at Tullett Prebon...three-month U.S. dollar Libor dropped to 3.83375%, the lowest since September 26, from Monday's fixing of 4.05875%. The rate has shed nearly 100 basis points since peaking at 4.81875% on October 10.

As we mentioned last week, this is good news for those with a LIBOR indexed Adjustable Rate Mortgage, especially those facing an adjustment in the next 45 days or so.

LIBOR still has some ground to cover before it's back to "normal." The comparable 1YR Constant Maturity Treasury Index is roughly 1.5% lower than the 1 YR LIBOR. Normal difference is .25%, give or take.

Still this qualifies as meaningful progress.  Things are coming back down to earth, which means your impending adjustment just got smaller.
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If you aren't sure what index your ARM carries, much less how to calculate the adjustment, fear not.  Follow us after the jump (as in, click on the link below, wherein we help you sort out just what you may be up against)

1. Pull out the documents entitled "Mortgage", "Note", and "Adjustable Rate Rider" from the dusty folder you probably have not cracked open since your loan closed.  Read them.  Right now.

2. If after doing that you are still lost, reach out to me and I'll walk you through it.  Assuming you can lay your hands on the documents above, it will take less than 5 minutes, or a couple of emails.

10/21/08 at 01:44 PM Permalink | Comments (0) | TrackBack (0)
Filed Under: Financing Options, Interest Rates

Leaping LIBOR: Keep your eye on the Ball if you have an ARM

For those of you that need a reminder of just what exactly LIBOR is, and how it can impact everything from your mortgage rate (if you have an Adjustable Rate Mortgage) to your credit card rates, Bloomberg has provided this tidy little graphic:

Notice how LIBOR has historically tracked the Federal Funds rate, and that the correlation has broken down completely as LIBOR has spiked?  Whether or not you understand, or seek to understand the nature of the credit crisis, this fact alone will tell you that something extraordinary is afoot.

Our more narrow point is this:

If you have an adjustable rate mortgage indexed to LIBOR, you may be in for a larger upward adjustment than anticipated.  Granted, LIBOR may come back down to earth, and you likely have a cap structure that will prevent an increase of more than a point or two, but this bears watching, because:

1.  Many Prime ARM's of a vintage (originated between 2002-2005) set to adjust in the next 12-18 months have a cap structure that allows an adjustment all the way to the lifetime cap (typically 5-6% above your initial rate) at the first adjustment.
2.  Many homeowners with Prime ARMS have exactly this cap structure, but don't know it, or have forgotten.
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Quick PSA: If you aren't sure whether your adjustable rate mortgage is even indexed to LIBOR, much less what your cap structure or margin is, here's what you do:

1. Pull out the documents entitled "Mortgage", "Note", and "Adjustable Rate Rider" from the dusty folder you probably have not cracked open since your loan closed.  Read them.  Right now.

2. If after doing that you are still lost, reach out to me and I'll walk you through it.  Assuming you can lay your hands on the documents above, it will take less than 5 minutes, or a couple of emails.

10/09/08 at 12:59 PM Permalink | Comments (0) | TrackBack (0)
Filed Under: Credit Crunch, Financing Options, Interest Rates

Existing Home Sales: (Earth to NAR) Tighter Lending Standards are Not the Problem

Another ugly print from the National Association of Realtors, who've today released the August existing home sales numbers:

• August sales declined 10.7% Year-Over-Year.
• August median prices declined 9.5%, YOY.
• Inventory remains elevated at 10.4 months supply

Despite the ugliness, the contraction does seem to be decelerating a bit, so there is a sliver of good news here.

Predictably, tighter lending standards are held out as the culprit (emphasis ours):

The difficulty in obtaining a mortgage increased over past couple months, making it more challenging for creditworthy borrowers to find financing,” he said. “Our hope is that overly tight lending criteria can be loosened with reasonable standards and credit so that sales activity can catch up with demand.

This is, IMHO, utter bunk.

The idea that "obtaining a mortgage right now is all but impossible" seems to be seeping into the national consciousness, aided and abetted by mainstream media and press releases like this, so let's push back on this notion a little.

We'd argue that mortgage lending standards remain very reasonable, and that the problem is not "overly tight" standards, but that we are reaping the whirlwind caused by lending standards that were far too loose for far too long.

Stay with us on this.

The loose lending era stimulated a lot of artificial, unsustainable demand, which drove prices way out of line with any reasonable market fundamentals.

It is the aftermath of this era - too much supply and not enough legitimate demand - that's driving prices down and putting many homeowners ass over tea kettle on their mortgage, not tighter lending.

No amount of yearning for the ridiculous-redefined-as-reasonable lending standards of three years ago will fix that. Those days are thankfully gone, they aren't coming back, and we'll be lucky if we escape the whole mess with an intact financial system.

[quick aside: It is also amusing that an organization so quick to blame the Media for "talking down" the real estate market is essentially trying to convince the public that mortgages are so hard to get you shouldn't even bother to try, when that really is not the case.  We'd argue this hurts demand, and does not help their cause.]

Now, lending standards have tightened, for sure, and the cost of borrowing for some (still creditworthy) borrowers has increased, but just as a for instance:

Here's a snapshot of what a typical (average credit, has a job, with a non-excessive amount of consumer debt) owner occupant borrower can do to finance a home in the Twin Cities:

1. She can purchase a home, using conventional 30 year fixed rate financing, for 5% down.
2. She purchase a home, with 3% - 3.5% down, with an FHA 30 year fixed rate mortgage.
3. She can purchase a home, using "Jumbo" (loan amount > $417K) financing with 10% down.
4. She can split a Jumbo loan in two, using a conforming (<=$417k) first mortgage, and a second mortgage, to avoid egregiously high "Jumbo" fixed rates.
5. She can qualify for a monthly mortgage payment that takes up more than 50% of her gross monthly income.
6. If she happens to be a first time buyer, she can get a reduced interest rate and up to $15,000 in targeted down payment/closing cost assistance.

With the exception of Jumbo financing, in any of the above cases, even assuming the very worst (but still acceptable) credit profile, our borrower would be hard pressed to pay more than 6.75% for a 30 year fixed rate, and if she had good to very good credit, a rate of 6% or less is in play.  Hell, with an FHA, the down payment does not even need to be hers - it can be a gift from a relative.

Now we ask you, in reading the above, does this strike you as an "overly tight" lending environment?

And to the Realtors in the audience: Don't be afraid to let your clients know that getting a mortgage is not as tough as they may have been led to believe.  Come on in, the water is fine.

09/24/08 at 11:58 AM Permalink | Comments (4) | TrackBack (0)
Filed Under: Financing Options, First Time Buyer, Market Stats

Lehman Brothers Bankruptcy Driving Mortgage Rates Lower

So it goes.  There is no Treasury/Federal Govt backstop this time.

The ripple effect from this will have all sorts of consequences downstream, but the immediate impact on main street will be lower mortgage rates, as money runs to the safe haven of (now Govt guaranteed!) mortgage bonds and other securities (treasuries also are rallying today) to wait out the storm. 

For real time updates to the mortgage market, don't forget to pull our Twitter Feed (on the sidebar to the right.)

It might interest you to know that back in the heyday of the Mortgage/Real Estate boom, Lehman Brothers was one of, if not the biggest buyers of "Alt-A" mortgages through an outfit called Aurora Loan Services, or ALS.  I am sure few thought then that their foray into mortgage securitization would eventually cause their demise.

More on Lehman worth reading:

· Paul Kedrosky: "Take a very deep breath. It looks almost certain that this week will be the one where we see the financial implosion in U.S. banking and brokerage that many have been expecting for some time."
· Barry Ritholtz: An awesome roundup of all the Lehman and related links.
· Floyd Norris at the NYT will be liveblogging the day's Lehman related developments.

09/15/08 at 09:01 AM Permalink | Comments (0) | TrackBack (0)
Filed Under: Credit Crunch, Financing Options, Interest Rates, Mortgage Economics

In Which Mortgage Standards Continue to Tighten

Somewhat lost in the hubub over this past weekend's GSE takeover, and the subsequent drop in rates (did you know most mortgage rates improved by .5% after the takeover?  More on this here, or you could simply subscribe to our twitter feed for real time updates to rates) is that fact that mortgage guidelines continue to tighten.

For instance, this announcement [PDF!], from last Friday, released to little fanfare, tells us that:

• The minimum down payment for investment properties is going up, to 15%, from 10%.
• The price adjustment for the above mentioned scenario is 3.75% of the loan amount up front, (or 1% higher in rate, give or take) in additon to other adjustments based on credit score, and/or property type.

These changes, among others, don't go into effect until Dec 1st, but most lenders will implement them much sooner than that. So for aspiring property investors and landlords being lured back into the market by lower prices, it is time to get a move on.

Bottom line - though the takeover of Fannie and Freddie has helped baseline rates dramatically, availability of mortgage money continues to contract for many types of loans.

09/11/08 at 09:00 AM Permalink | Comments (0) | TrackBack (0)
Filed Under: Credit Crunch, Fannie Mae, Financing Options, GSE's, Interest Rates

As Home Prices Fall, Costs of Financing Continue to Rise

Can we talk about risk based pricing?

In the simplest of terms, risk based pricing is a system where the interest rate and/or fees paid for a mortgage vary based on the characteristics of both the borrower and the loan itself.

Some borrowers are more likely to default.  Some loan types, such as those with lower down payments, cost the lender more when they go bad. It really is a straightforward system designed to equitably align the costs and rewards for banks and borrowers by assigning a rate that, as accurately as possible, reflects the risk of default.

It's a nearly universal practice in mortgage lending, and whether you know it or not, the rate you are carrying right now probably included at least one adjustment to the rate or fees you were charged.

There are, quite literally, dozens of variables that can impact the price, or rate on a given mortgage, but the two most important are loan-to-value (equity in the home), and credit score.

Generally speaking, the higher the credit score, and the lower the loan-to-value, the better your rate.

We bring all this up because with defaults and losses on the rise (Freddie Mac lost $821 Million dollars last quarter) Fannie Mae is changing their risk based pricing fees, or "hits."  At Fannie, these are known as LLPA's or Loan Level Price Adjustments, and this is actually the third such adjustment since November of last year.

Take a look at this graphic (click to biggify), straight from a document called Updated Adverse Market Delivery Charge and Flow Business Pricing Requirements, which was released on Monday, right here.  We can think of no better way to illustrate how down payment and credit score interplay to drive the rate you actually get.

We've marked this up to illustrate what has changed since the last adjustment by Fannie.  Some are for the worse (in red.)  Some were for the better (green).  The negative negative numbers are credits, positive numbers are fees.

It's important to understand that the items in the chart are not adjustments to the rate, but to the price of a loan at any given rate. 

Adjustments can be paid (OR credited) in a lump sum, up front, as part of your closing costs, or as a slightly higher (or lower) rate. 

Here's a prime example of how the specific characteristics of the loan, AND the borrower can impact the cost of financing.

For example, if someone with a credit score of 685 puts 15% down on a purchase, there is a .5% price adjustment.  This means you can pay .5% of your loan amount up front, or take a rate that is .125% higher.  If that same person had a credit score of 675, the adjustment balloons to 1.5% of the loan amount, or .375% higher in rate.

On a $200,000 loan, that's a difference of $2000 up front, or $38.00 per month over a 30 year term.

The moral of the story: Even as home prices fall, the cost of financing those homes will steadily rise, especially if you have imperfect credit and lack a big down payment.

08/07/08 at 01:18 PM Permalink | Comments (1) | TrackBack (0)
Filed Under: Credit, Financing Options, Freddie Mac, Interest Rates, Risk Based Pricing

Housing Bill Passed, Awaits Senate Vote, Presidential Signature

As expected, the omnibus housing bill was passed by the house yesterday.  There's all sorts of housing related fine print in this bill, but here are what we see as the key provisions:

07/24/08 at 10:58 AM Permalink | Comments (1) | TrackBack (0)
Filed Under: Financing Options, Housing Market Politics, National & Abroad

Pulling the Plug on FHA Down Payment Assistance

FHA seller-funded downpayment assistance programs (wherein the seller of a property makes a donation to a non-profit, and then this same non-profit gives this money to the buyer for their down payment) have been on Death Watch for years.  HUD and FHA have tried to eliminate them at various points, only to be stopped by legal challenges from the assistance providers themselves.

Looks like these programs will finally be killed, as reported by the Washington Post:

The fate of these seller-funded down-payment-assistance programs has been in limbo for weeks. The Senate version of the housing bill would have banned them. The House version would not. Negotiators crafting a compromise bill have agreed to the Senate's position, which also is supported by the Bush administration.

"We're going to yield to the Senate on that," said Rep. Barney Frank (D-Mass.)

The root of the problem with these programs is, and has always been simple: 

• They default at a higher rate.
• They have, at face value, been a legal end-run on FHA guidelines which requires borrowers to bring 3% of their own funds to the table. 
• Also, in practice, the sellers aren't really paying anything, the sales price was simply inflated to cover the cost, and the buyers wind up with a larger loan.

Now, the use of these programs was perfectly OK, and many very good homebuyers used them to great advantage, so none of this should be taken as an indictment of a homeowner that used seller funded assistance to buy a home. (full disclosure, a handful of our personal clients used such programs over the years.  Mortgage bankers are not to judge, only approve or deny a loan based on the allowable programs and guidelines.)

BUT as is often the case, a program that may be good for an individual family, may be a disaster when writ large across the entire spectrum of FHA borrowers (who skew toward lower credit quality in the first place.) And speaking of disasters writ large:

...seller-funded down payments present the single biggest challenge to its solvency. Borrowers who take part in these arrangements go to foreclosure at nearly three times the rate of borrowers who put their own money down, according to the [FHA]

The FHA's solvency is at risk, and for them to execute their new role as the backstop for the home lending universe (a mission they did not ask for, but are going to get out of this credit crunch, sure as the world) these programs need to go away, and should have a long time ago. The taxpayers are the ultimate bagholders here.

No word yet on when the ban will take effect, but in all likelihood they will still be available for the balance of 2008.  More on this as it develops.

In the meantime, if you are an aspiring homeowner, start saving, because the last true Zero Down option is having it's epitaph chiseled. 

07/23/08 at 04:33 PM Permalink | Comments (1) | TrackBack (0)
Filed Under: FHA, Financing Options, First Time Buyer

Dumped, Mortgage Style

That letter you get from your home equity lender breaking up with you:

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Dear Homeowner,

The time has come to reconsider the nature of our relationship.  This is really hard, so please don't start crying or anything until you get to the end.  We know the timing is really bad, what with the trip we planned and all.

This has been building for while, and we can't hold it in any longer.  Maybe it's you, or maybe it's us, but we just aren't attracted to you anymore, and these feelings get stronger every month.  It's all very hard to explain, but it's like something has come between us, and we just feel EXPOSED. This is no way to have a healthy relationship. We have to make a change. We have to end things.

Not that we don't love you - we've gotten a lot out of this relationship, and grown together over the years.  And don't for a minute think we haven't appreciated your timely payments, often scented with the sweet perfume of extra principal reduction.  It has really been a great ride - cars, boats, the little things to tide you over when the going was tough - and we certainly wouldn't be who we are today without you.

No no no, it's nothing you've done - it's just, you see, a lot has changed since those glorious, heady days when we first got together.  Remember those? 

Anyway. We are doing this for you as much as for us, but if it does offer some small bit of comfort, if our feelings change in the future, we'll definitely take you back.

Formerly Yours,

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Or it might read substantially like this letter received by thousands of Citibank customers who recently had their Home Equity Loans unceremoniously suspended, via Caveat Emptor (click to biggify):

04/08/08 at 03:13 PM Permalink | Comments (4) | TrackBack (0)
Filed Under: Credit Crunch, Financing Options, Home Equity Lending

Pain for Prime Borrowers: Fannie Mae, Freddie Mac to Hike Fees; or How a Three-Point Difference in Your Credit Score Could Cost You Thousands.

Back in November of 2007, Fannie and Freddie (the two GSE's, or "Agencies" under whose guidelines some 70% of mortgages are underwritten) announced additional fees which would be tacked onto mortgages for borrowers with credit scores below 680 as of March 1st.  We reported on this here.

Since then, credit markets have deteriorated further, so the 'Agencies' are hiking these fees, or pricing "hits," across the board. By June 1st (though many lenders will implement these fees well in advance of that date) even borrowers with FICO scores over 700 - once considered rarefied air - will start feeling the pain.  See the chart below from Fannie Mae. See the Announcement from Fannie here [PDF!]

Click to Biggify

The graphic above may be Greek to many of the civilians reading this blog, so lets use the chart to illustrate the impact with a few examples:

Assumptions: You are buying a 250,000 home, with 20% down, so your loan amount will be $200,000, and the prevailing 30 year fixed mortgage rate is 6%.  Goes without saying you can document income and the down payment is yours.

Scenario 1:
Suppose you have a credit score of 721.

Loan Amount:   $200,000
Payment (P&I): $1199.10

Scenario 2:
Now suppose your credit score is a still very good 718 - just three points lower than the previous example. here's where it gets a little tricky - now you have a choice.

1.  You can either pay an additional .5% of the $200,000 loan amount ($1,000) to obtain a 6% rate.
2.  Or, you can accept a rate that is .125% or so higher, in lieu of the up-front fee.

Loan Amount: $200,000
Payment:        $1199.10 (+ $1,000 up-front)
                      $1215.22  (6.125% rate)

So at the end of the day, those three points in credit score will cost you $1,000 bucks up front, or an additional $16.00/mo (or $1920.00 over the next ten years)

Scenario 3:
Suppose your credit score is 679. Again you have a choice between an up front fee, or a higher rate, but the up front fee is now 1.25%, due to your credit score:

Loan Amount: $200,000
Payment:        $1199.10 (+ $2500 up-front)
                      $1247.74 (6.375%)

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As you can see, even what were once considered safe, rock-solid credit scores are starting to feel the pinch of the credit crunch; and though rates seem to be on a (very choppy) downward trajectory for 2008, you'll need to have a darn good credit score and a healthy down payment to take advantage of them.

This should also be food for thought for those trying to time the real estate market  - in particular the "fringe" borrowers with less than 10% down payment, or those with less than 10% equity who are holding out for "better rates" to refinance.

Though fundamentals suggest property values will  continue to fall, there is no guarantee that cheap money (or any money, for that matter) will be available to finance them.

03/17/08 at 01:44 PM Permalink | Comments (4) | TrackBack (0)
Filed Under: Credit, Credit Crunch, Financing Options, Interest Rates