"RATE WATCH"

No news on the sub-prime fiasco today – although the fallout is still a daily story. Instead, I would like to focus on a new service I have developed.

Over the past several months many borrowers have contacted me regarding refinancing of their current mortgages. Their desire to refinance was based upon multiple reasons - the turbulence in the mortgage market, the tightening of credit, the public awareness of fluctuating rates, Adjustable Rate Mortgages coming due, and just the basic economics of “if I have a lower rate, I will save money”.

I am happy to announce that after several weeks of work, I have now automated the process of keeping track of all the variables that contribute to determining the interest rates that are available to a particular borrower. I am formally launching my “rate watch” program. The timing is excellent, as conforming (<$417,000), rates are at there lowest in 2 years.

Although the program is fairly complex, what it does is simple. It monitors for me (and you) interest rates on a daily basis, including all the important factors that contribute to an individual clients’ rate and closing costs. It then generates a daily report of those customers who are in a favorable position to refinance. I can then contact you by either phone, or email and let you know that market conditions are favorable for refinancing. You no longer have to watch rates and crunch the numbers yourself. I (or the program) will do that for you. Information you will receive include rate, payment, mortgage program (fixed, adjustable, interest only, etc.), and estimated closing costs. It will also include the rate and payment with no closing costs, as well as a break-even analysis to determine if it is beneficial to pay closing costs or not.

If you have an Adjustable Rate Mortgage approaching its adjustment date within the next few years, I can also provides you an analysis showing you the risk reward of refinancing now –even if it is at a rate higher than you currently have, verses waiting until the termination date and risking a higher rate at that time. Last, if you currently have a first and second mortgage, I can perform an analysis to determine if it is worth combining the two mortgages into one lower rate mortgage.

If you would like me to put you on my “rate watch”, please provide me as much of the following information as possible.

Estimated value of your current home;
Property type (condo, single family etc);
Occupancy type (owner occupied, second home, rental, etc.);
Location of property;
Are you in a mortgage tax state?;
Balance on your current mortgage(s);
Rates on your current mortgage(s);
Rate and Term or cash-out refinance. If you have a first and second mortgage and you would like to consolidate them, it is considered a cash-out refinance unless you acquired the mortgages at the same time, or you have not drawn down against the second mortgage in the last 12 months.
Estimated credit score.
Any other factor that you think is important that I know.

All of the above are critical to an accurate quote. Rates have fallen fairly dramatically in the last week – despite the risk premium attached to mortgage backed securities. I look forward to hearing from you.

The Sub-Prime Mortgage Fiasco and What it Means to You - Part V

5 months and still in the news. The only positive aspect of the Sub-prime mortgage fiasco is that it gives me continued relevant mortgage and housing material to provide to you. Once again sub-prime related issues are dominating the financial news market. In recent weeks we have seen huge mortgage related write-offs by both Merrill Lynch and Citi (costing both CEO’s their jobs – nice severance packages though), as well as continuous problems with Countrywide and Washington Mutual, and losses by both Wells Fargo and Indy Mac. Yesterday two financial stalwarts, AIG and Morgan Stanley also announced mortgage related write downs – even though they are not direct lenders.

By comparison, Chase’s mortgage related write-offs were less than most analyst estimates, and we showed a solid profit for the most recent quarter. Relatively speaking, we are doing quite well.

So again, what does the renewed sub-prime mortgage facts and fears mean to you, and the mortgage and housing markets? Following, please find this months opinion.

Mortgage Related:
Conforming Loans (<$417,000). Thank goodness for Fannie Mae and Freddie Mac and their quasi government guarantee on these loans. Rates fluctuate almost daily, but in a limited range. For the last 60 days they have stayed between 6.125% and 6.375%. There is a constant battle between a slowing economy and potential Fed rate cuts which favor lower rates; and inflationary fears that lead to increased rates. The periods leading up to each of the last two rate cuts resulted in declining rates as the Fed meeting approached, followed by rising rates within days after the meeting.

Jumbo Loans (>$417,000). As stated previously, there is no secondary market for jumbo loans. The need for banks to keep these loans on their books forced an initial run up in jumbo rates. The across the board increase in jumbo rates that borrows pay combined with the total 75 basis points Fed reduction in the rate that banks have to pay for the money they borrower means one thing – big profits. Banks want these loans on their books. The key is to have a strong balance sheet to be able to underwrite and retain these loans. Fortunately (here comes my first plug) Chase has a very strong balance sheet. We are also starting to see the yield curve on mortgages steepen, meaning a wider spread in rates between shorter term Adjustable Rate Mortgages (ARM’s) and 30 year fixed mortgages. Our rates (this is the last plug – I still thing our rates are the best on the street) for 30 year fixed mortgages are in the mid-upper 6%, and our 5 and 7 year ARM’s are well under 6%.

Home Equity Loans – The recent rate reduction has reduced interest rates on Home Equity Lines of Credit by .25%. However, underwriting standards are getting tougher, and the total loan to value maximum is lower.

Mortgage Rate outlook. Call me a pessimist, but I am fearful that longer term, rates will begin to rise. Not terribly high, but higher than the current market. I think inflation will win out over a slowing economy if oil prices remain at their current levels. Although oil and wholesale food prices are not considered in calculating core inflation, I do not know how the ripple effect of higher prices of each can not ultimately filter through the economy. It would take a very large increase in our productivity to offset these price increases. I also have a secondary fear that you do not hear much about. With the weakening of the dollar and the gaining stability of emerging markets, $US backed debt securities will be less attractive to foreign purchasers of mortgage backed securities. Interest rates may have to be higher to attract these buyers.
Underwriting. Lenders are tightening their underwriting standards. Loans on the peripheral may be rejected, where previously they have been accepted. First time home buyers may have fewer options. Appraisals and appraised values will be more thoroughly scrutinized. It is important that you have a good loan officer who can prepare a solid credit write up for underwriters review.

Lenders – Aside from the continued number of direct lenders and brokers that are closing their doors, as mentioned earlier, many banks are getting pummeled as they deal with unprecedented mortgage write downs. Countywide can’t escape the news as even their CEO’s huge compensation is being bashed. Andrew Cuomo, the Attorney General of New York has started an investigation of Washington Mutual for colluding with appraisers to force appraisers to inflate home values. He has recommended that Fannie Mae and Freddie Mac not purchase Wamu loans unless they get separate 3rd party verification of home values.

Continued Credit Market Woes – The market is cautious of other shoes to drop. In addition to the expectation of more sub-prime write-offs, there are other debt related securities to worry about. The first is a mortgage product called an option ARM – a product I spoke about in my September message. As a reminder, option ARM’s allow the borrower 4 different option payments – including an introductory rate as low as 1%. The difference between the introductory rate payment and the effective or market interest rate (which is currently over 8%) is added to the mortgage balance each month. This is known as negative amortization. The Wall Street Journal ran a lengthy article at the end of October about option ARM’s in general, and Countrywide specifically, and their exposure to rising delinquency rates. Many, if not the majority of option ARM mortgages were low documentation mortgages. In addition, they often had loan to values approaching 90%. The perfect storm may be brewing. Falling home values, increasing mortgage balances, and payments that will reset (increase) to market rate over the next several years. It is estimated that between 2009 and 2011, $229 billion of option ARMS are scheduled to adjust. While the amount of option ARM’s originated were less than half the amount of sub-prime loans, and the delinquency rate has not approached those of sub-prime mortgages, these loans bear keeping an eye on, as the payment shock when the rates adjust to market rate is huge, and borrowers may not be in a position to sell their homes. Countywide has been the leading provider of Option ARM’s and Washington Mutual is also a big player in these loans.

Housing – The Market remains week October Existing home sales were off more than 36% from record sales in October 2005, and down 27% from last year. Toll Brothers reported this morning that for the first time in company history they will be taking a loss for the quarter for the first time in company history. In addition, for the first time in company history, cancelled contracts were greater than new contracts signed. The Biggest weakness was high end homes in the South and West. Tightening credit standards and the reduction in the availability of reduced documentation loans is affecting the market, as there are less available buyers. State legislation of mortgage brokers has the potential to make the pool of qualified home buyers even smaller. Today, Massachusetts is set to approve a law that severely restricts the ability of mortgage brokers to operate in Massachusetts. While they are my competitors, they fill in the nooks and crannies for borrowers that do not fit the profile of traditional banks like Chase. Without brokers filling these needs, it will further erode the number of home buyers, and further depress the home market. While the intention of Massachusetts may be good, this law will prevent the consumers that Massachusetts is trying to protect from even securing a mortgage, and will hurt home sales.

So what does this mean to you? Expect fluctuating rates over the next several months. Much like the stock market has fluctuated with varying economic data, mortgage rates will as well. If you have a variable rate mortgage, or are interested in consolidating a first and second mortgage, consider doing so now.

Work with a bank, not a broker. As evidenced by the anticipated Massachusetts law, brokerage firms may begin to be forced out of business. In addition, due to larger default rates with loans originated from brokers than by bank loan officers, many banks are reducing or ending their relationship with brokers.

If you are buying a house as a primary residence or second home, do not worry too much about deteriorating prices. You are buying a home, not an investment. Over time, real estate has always appreciated. One of the best pieces of advise I have ever received was not to count my house as an asset as part of my wealth. The reason for this is that you will always need a place to live. The value of the house should only be counted for your estate – or as part of your kids’ wealth.

As always, I always welcome your comments. If you or any of your friends, family, or co-workers is in the process of purchasing a home or refinancing, I would welcome the opportunity to speak with them.

Disclosure: The opinions expressed are my own and do not represent the positions, strategies or opinions of JPMorgan Chase.