About Government Refinance and Home Purchase Programs

If you are holding your breath to see interest rates around or below you are probably turning blue. There is growing consensus that that particular ship has sailed and is not coming back. However, rates in the mid to upper 5’s are currently available so if you have an interest rate in the 6’s or higher now is still a good time to look at a refinance. It probably won’t be too long before these rates go away as well.

See a video of an interesting 4 minute article in this subject here.

Now is also a great time to purchase a home. Contact us for info on that as well.

There had been some hope over the last month or so that the Fed would act to compress mortgage interest rates back to the levels we saw in the first part of 2009. Based on the announcement by the Fed today that is probably not going to happen. As a result the rates at 5% or better may very well be gone for good. The hope is that we can at least hang on to rates at 5.5% or better for a while.

Here are some excerpts from a LA Times article on the subject:

The Federal Reserve signaled that it won’t try to do more than it previously planned to pull down mortgage rates and other long-term interest rates.
…

For homeowners hoping to refinance at a lower interest rate, the Fed didn’t offer any fresh encouragement.

…

Nobody expected the Fed to make a change in its short-term rate. But some on Wall Street had hoped that the central bank would boost the $1.75 trillion it plans to spend to buy mortgage-backed bonds and Treasury securities for its own portfolio this year.

The Fed’s purchases, which began earlier this year, were aimed at keeping a lid on long-term bond yields and mortgage rates. But those rates have risen anyway, in part because of the Treasury’s unprecedented borrowing to fund rescue programs for the economy and the financial system.

The Obama refinance program — the Home Affordable Refinance Program — has gotten off to a slow start. Not only have banks had a hard time implementing the program, rates have deteriorated significantly since mid May so refinancing is no longer as enticing for consumers. Additionally, Freddie Mac was very slow to allow anyone but the existing lender to participate in the program so that created problems for some borrowers. On top of that, while the program officially allowed for refinances of up to 105% of the value of the home, most lenders were only willing to fund up to 95% of the value of the home. (This on top of the restrictions for people with second mortgages and the high credit score requirements.)

Well news is coming out this weekend that the Obama administration is not ready to throw in the towel on the program. Here are some quotes from a recent Bloomberg article on the topic:

We’re actively considering how to structure a program that makes sense over 105 percent, Federal Housing Finance Agency Director James Lockhart said yesterday. He said a ratio of 125 percent is a number that’s on the table, though not necessarily the number we’re going to end up with.

…

While this will help some borrowers with higher interest rate loans, you really need to get mortgage rates down below 5 percent to have a huge impact on refinancing, Scott Buchta, a strategist at Guggenheim Capital Markets LLC in Chicago, said.

The yield on the 10 year treasury bond bounced up again today after easing since last Friday. It is looking more and more like the sub 5% interest rates from the the spring of ’09 are gone for good. For now we are holding out hope that 5.5% rates will still be a viable option for a while.

See a WSJ article on the reasons behind today’s bad bond bounce here.

After a brutal 3 weeks where mortgage interest rates shot up nearly three quarters of a percent there has been a little break over the last few days. This could possibly be the last hurrah for the low interest rates we have enjoyed for most of 2009. If you have an FHA loan with a rate above 6% now is the time to contact us to see about streamlining that loan to the mid 5’s. Likewise, anyone who needs a cash out loan or who has expensive mortgage insurance along with a rate in the 6’s or higher ought to contact us now. As the last three weeks have shown, low interest rates won’t last forever.

Are the historically low mortgage interest rates gone for good? It is starting to look like the answer might be yes. This recent Bloomberg article suggests that the markets reacted to the Fed’s rate compressing efforts in the first half of this year but inflation fears are beginning to make the market more and more immune to Fed purchases now. If that is the case, we may soon be at a point where a rate at or below 6% will be considered excellent…

Here are some excerpts from the article:

The Federal Reserve’s mortgage- buying program to bolster housing demand by lowering fixed interest rates is losing effectiveness at a time of the year when sales of U.S. real estate traditionally peak. …

“The government played chicken with the bond market and it lost,” said Randy Johnson, president of Newport Beach, California-based Independence Mortgage Co. “If they were able to keep it up long enough, the housing market would heal and the rest on the economy could start its recovery. What has happened, however, is that the bond market called their bluff.”

The bond market continues to take a beating as it has over the last few weeks. As a result mortgage rates are up nearly a full percentage point. There is no telling when or if the Fed will intervene again to compress rates but in the meantime people looking for mortgages are faced with significantly higher rates than they would have seen a month ago.

Here are some excerpts from an interesting Newsweek article on the details:

Here’s a feedback loop that nobody expected: It looks like investors’ expectations for an economic recovery could end up delaying that very scenario.

Fear of inflation and concerns over the long-term impact of ballooning government debt have been driving up yields on 10-year U.S. Treasury notes, which reached 3.91% on June 8 before easing back to 3.84% the next day.

But hasn’t the Federal Reserve been working overtime to keep rates down? The prime reason for the Fed’s commitment to buying Treasury debt was to lower mortgage rates to revive the moribund housing market. That was starting to work, but economists are now warning that rising mortgage rates will stop any rebound in the housing market in its tracks and derail the broader economic recovery. …

Things are going from bad to worse in the mortgage market right now as the Fed sits on the sidelines still. Rates today are moving above 5.5% and inching back toward 6%. The markets seem to me goading the Fed to do something. We’ll see how the Fed reacts shortly.

Until recently people who had loans backed by Freddie Mac could only participate in the Obama refinance program through their existing lender. Fannie Mae did not have the same restrictions. Word came out Friday that Freddie is following Fannie’s lead and will allow any qualified lender refinance via the Obama Home Affordable Refinance program. Here is an excerpt from a WSJ article on the subject:

Freddie Mac (FRE) loosened rules for its it Relief Refinance Mortgage program, allowing borrowers who are current on their mortgage payments to refinance their mortgages with any lender affiliated with Freddie Mac. …

Freddie Mac, which had required mortgages refinanced under the program to be refinanced with the original lender, also increased the amount of closing costs, financing costs and escrows that borrowers can roll into refinanced mortgages to the lesser of 4% of the refinanced amount or $5,000.

The 10 year treasury note yield shot up again on Friday. The yield was all the way up to 3.86% at close. That is very bad news for mortgage rates, with par rates higher than 5.5% at the end of the week. The question now is if the Fed will intervene again to compress mortgage rates, and if so when. This WSJ article mentions that the time for Fed intervention may be very soon.

Treasury traders now await further news on purchases from the Fed. So far, it hasn’t shown its hand either way, with Fed Chairman Ben Bernanke making no comments on the issue in testimony to Congress on Wednesday, noting only that the rise in yields reflects both economic optimism and concerns about rising deficits. At the April Fed meeting, policy makers had left the door open for a possible expansion of the program.

Bond bears are betting the Fed won’t be able to halt the rise in yields as any purchases are overwhelmed by mounting debt supply and continued worries over the U.S.’s fiscal outlook. Mortgage-related selling, they say, will drive yields up further.

Bond bulls, however, expect the Fed to take action should the 10-year yield head for 4%, as that would push mortgage rates beyond 5.5%, resulting in more housing woes and undercutting the tenuous recovery currently under way. The 10-year yield was at 3.70% Thursday.

There was a good article over in the Christian Science Monitor that outlines some of the reasons mortgage rates have been rising in recent weeks and why that trend might very well continue. Here are some excerpts:

Surging interest rates are making it harder for Americans to get mortgage deals, and set the stage for taxpayers to pay higher fees on a soaring federal debt.

What’s happening is a full-fledged bear market in Treasury bonds, as investors become more optimistic about the economy. They’re buying more stocks and less government debt, a trend that pushes up government borrowing rates.

The interest rate on a 10-year Treasury note has gone from 2.93 percent in April to 3.68 percent Monday. That’s an extraordinary surge in just a few weeks.

Mortgage rates, which are often tied directly to the direction of US Treasury bonds, are also heading upward, at a time when many households would like to refinance their loans to save money.

“I would suspect that the move up in bond yields will continue into next year,” says Michael Cosgrove, a Dallas economist who publishes the EconoClast, a market newsletter. “In particular, the home mortgage market is the one that will be impacted.”

The short version — this plan turned out to be a disappointment.

First time home buyers get an $8000 tax credit if they purchase a home this year. The hope was that the new plan would allow some or all of that $8000 to be used to cover the 3.5% downpayment requirement for FHA loans. The reality didn’t turn out that way. That will surely be a disappointment to many in the real estate business and many prospective homebuyers.

Here are some quotes from a recent WSJ article on the subject:

Under the guidelines, most borrowers won’t be able to use the funds from the tax credit to meet the minimum 3.5% down payment required for an FHA loan. Rather, they can apply the money toward closing costs, other upfront charges or increasing the size of their down payment above 3.5%.

“One of the primary hindrances for a lot of would-be buyers, especially if they’re entry-level buyers that are looking to be home owners, is coming up with a down payment. It doesn’t erase that,” Brent Anderson, vice president of investor relations for home builder Meritage Homes Corp. (MTH), said.

Anderson pointed out that closing costs can often be paid by the seller. “The down payment is a bigger assistance,” he said.