The Sub-Prime Mortgage Fiasco - Part IX

Half way through the year and it’s déjà vu all over again! Wall Street still fears another round of financial institution write downs as the result of further deteriorating mortgage backed securities; oil prices continue to climb to record levels; inflation raises its ugly head; and the economy is lack luster. Ouch!

So what does the continuing bad news mean for the mortgage and housing markets? Unsettled is the word that most frequently comes to mind. As I have mentioned numerous times before, there is pull on rates in each direction between a weak economy, which generally leads to lower rates, and inflation fears, which leads to higher rates.

The economy pull towards lower rates is fairly weak. Even if the economy worsens, the Fed can not go much, if any lower in cutting rates. In addition, due to the continuing mortgage write down’s on Wall Street, the unknown value of underlying assets, and continued declining housing values in some markets, there is still no secondary market for mortgages, which keeps rates higher. The recent plunge in stock prices has been somewhat helpful to rates, as it modifies the risk of mortgage backed securities compared to alternative equity investments.

On the flip side of the equation is the inflationary pull towards higher interest rates. A few weeks ago, when the Fed mentioned inflationary fears that may lead to an increase in their overnight rates, mortgage rates jumped considerably. Even when the Fed backed off these statements, rates did not return to their previous levels. Rates are easing a bit now only because of the horrific stock market. A recent Economist article stated that worldwide, interest rates were actually net negative, meaning that interest rates were below worldwide inflation. A venture capitalist friend of mine just returned from a two week trip to Europe, the Middle East, and Greece, and his one sure takeaway was that there is severe inflation, and interest rates were going to go up. He referred his partner to me to refinance his adjustable rate mortgage, even though the rate does not adjust for eighteen more months.

Other prognosticators believe that the world wide economy will become so bad that the demand for goods and services will deteriorate to such a degree that inflation pressures will fall. I am not sure I like that scenario any better.

Not to be all doom and gloom, there are some positive events that have taken place in the mortgage markets. The FHA by increasing its loan limits to the same amounts as the new conforming loan limits has expanded their reach to borrowers in need of low down payment financing, and allow up to 97% financing. If it is a purchase transaction, 100% financing can be structured. The new conforming loan limits, which vary by county, have allowed many borrowers to stay below the more expensive jumbo loan amounts. While FHA loans also take into consideration recent credit history, they are not Fico score driven, which aids weak credit borrowers.

The “declining market” guidelines, which were a blanket reduction of loan to value limits in certain states have also been eased. They no longer exist for conforming loans, and Jumbo loans are restricted on a county by county and product basis, rather than per state.

Also, there is still a market for no income, no asset verification mortgages, poor credit, and or foreign nationals. The key is loan to value, which requires a significant owner’s contribution if you are purchasing, or solid equity in your home if you are refinancing.

The housing market continues to show expected declines on a year over year basis in both units sold and values, but it varies within states, within counties, and even within towns. There are very good buying opportunities for informed, patient buyers. Do your research.

If you have an adjustable rate mortgage coming due within the next year or two, I would strongly suggest considering refinancing now. I say this for two reasons. One is the aforementioned inflation possibilities that could lead to higher interest rates. The second is the London Interbank Offered Rate (LIBOR) which is the index that most ARM’s are tied to. Although it did not get too much press, this rate was kept artificially low due to incorrect reporting by member banks. Since the time of the discovery in late spring, the LIBOR rate jumped over .5%. I would be happy to put together an analysis for you if you have an adjustable rate mortgage that compares and contrast the cost of refinancing before your mortgage adjusts relative to various incremental rate increases, and provide you the break-even in number of months. I have already designed the template.

Last, if you have not already done so, I again urge you to join my automated “rate watch” program so that I can notify you when it makes economic sense to refinance. This takes the burden off of you monitoring rates and crunching the numbers, and puts it on me and my system. It is particularly important in this volatile market when a rate drop may last only a day or two – if not less. You can go to my past posts for more details. Or just shoot me an email letting me know that you want to be included, and I will provide you the information I will need about your current mortgage. It should take you less than a minute to provide.

Again, please feel free to contact me with any questions or scenario, and if you are already working with a different Chase Loan Officer, please continue to give him or her your support.

Regards, and Happy 4th!

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