Interest Rates:
Current conforming rates for mortgages are within ½% of a percent of historical lows. Last summer, rates rose to 6.75%, but by the end of the year they had fallen into a range of 5.75% and today, they are 5.35%.
With the benchmark 10-Year Treasury trading well below the 4% range, interest rates for home mortgages should remain low. Buyers can not afford to sit on the fence too much longer with rates this low. Jumbo loans will soon follow suit and begin dropping from their present 6.25% to 6.50%.
Forecast: Expect the Federal Reserve to continue to cut the discount rate a couple more times
before summer. These cuts, and the need for banks to get back into lending (big profit
source), will continue to put downward pressure on interest rates for mortgages.
Lending:
The financial markets have been in turmoil since summer. This was largely due to an over reaction in the sub-prime market, whereby financial institutions had bundled all types of loans into mortgage-backed securities. With investors not knowing exactly how much of their portfolio was sub-prime, they panicked and pulled the plug on additional funds being available for mortgages. As the investors either put on hold or adjusted their lending criteria, the whole landscape of lending changed.
Forecast: This is not the first time there has been a crisis in the banking world. The good news is
that it usually takes about 6 months for financial institutions to straighten out their mess.
In the very near future, money will begin to flow once again into home loans.
Why do I say there was on over-reaction to the sub-prime mess? Here is an analysis of what is
really happening in the mortgage market.
Source: Federal Reserve, U.S. Treasury, U.S. Bureau of Labor, IRS, Mortgage Bankers Association
The Sub-Prime and Prime Loan Market
Today’s various media outlets play up bad economic news more than ever, which leads to misconceptions about economic realty. In dealing with the news about sub-prime loans, they have greatly over-exaggerated the true situation. David Wyss, chief economist at Standard & Poor’s in New York said on January 4, 2008: “You look at the magnitude of the sub-prime problem, and it’s just not that big relative to the size of the economy or the financial market.” These 3rd quarter numbers also register the full combined effects (including jumbo loans) of the financial crisis.
It may surprise you to know that including Alt-A loans (less than prime but better than sub-prime) with sub-prime loans only makes up 13.1% of mortgage market.
Market Share of Loans: Sub-Prime: Prime Loans FHA/VA
Fixed ARMs Fixed ARMs
U.S. 6.3% 6.8% 63.1% 14.5% 9.3%
C.A. 15% 83% 2.0%
Delinquencies – 3rd Quarter Findings:
A delinquency in a mortgage payment occurs when just one monthly payment has been missed. In California, 21% of the loans that are delinquent are non-owner occupied home loans. The U.S. average is 13%.
Sub-prime: Fixed & ARMs Prime: Fixed & ARMs FHA VA Combined
U.S. 16.31% 3.12% 12.92% 6.58% 5.59%
CA. 12.6% 14.20% 1.00% 3.25% (2Q)
Notice that the combined rate of delinquencies for all loans in the U.S. is 5.59%. The media never asks, “What was the all-time low delinquency rate?” The answer is 4.0%, which occurred in the 4th Qtr. of 2005! Also notice that 84% of sub-prime buyers have never missed a payment!
Notices of Default – 3rd Quarter Findings:
Notices of Default are filed when lenders’ loans have been delinquent for a specific period of time. This begins the foreclosure process. Most of the rise in this process is due to Florida, Ohio, Michigan, and California loans.
Sub-prime: Fixed & ARMs Prime: Fixed & ARMs FHA VA Combined
U.S. 1.38% 4.72% 0.22% 1.02% 2.22% 1.03% 1.69%
CA. Figures for California could not be found
Although the four states of California, Florida, Nevada and Arizona currently have the largest amount of loans in foreclosure, in the 1st Qtr., 24 states saw a decline in foreclosure starts. By the 2nd Qtr., 36 states saw a decline. California and Florida hold 28.1% of all sub-prime ARMs, yet 33.7% are in the foreclosure process.
The media will report that 81,550 notices of default were filed in the 4th quarter - a new record for California, surpassing the 1st quarter of 1996 with 61,541 filings. Nowhere do they say that since that time, California has built 2 million more homes and condos. Today, California has 7.9 million homes and condos.
Source: Mortgage Bankers Association and DataQuick Information Systems
Foreclosures – 3rd Quarter Findings:
Foreclosures occur when the buyer has been unsuccessful in curing the debt, and either a lender or an investor has acquired the property.
Sub-prime: Prime Combined vs. 2006
1. U.S. 3.12% 0.79% 1.45% 1.09%
2. CA n/a n/a 2.08% 1.17% (2Q)
Sub-prime adjustable loans represent only 6.8% of the market, yet they create 43% of all foreclosures. Over the past 20 years, the average foreclosure rate in the U.S. has been 1.09%. The lowest foreclosure rate ever was 0.86%. In California, 54.6% of homeowners emerge from the foreclosure process by bringing their payments current, refinancing, restructuring their loan or successfully selling their home and paying off what they owe.
Last year, 43 states had fewer foreclosures in 2007 than in 2006. Only 7 states have a foreclosure problem. One third of all foreclosures come from just two states - California and Florida. The other two thirds come from Nevada, Arizona, Indiana, Michigan, and Ohio.
Reasons for Foreclosure:
The #1 reason: Fraud and/or Speculation! As of Dec.1, 2007, the FBI reported 46,717 cases of mortgage fraud. As of Aug 30th, California investors (those not living in the home) represented 21% of the loans in default. In Nevada, the number is 33%, Arizona is showing 26%, and Florida has 25%.
The # 2 reason: Unethical Lending! The government has enacted new standards for lenders including more education and licensing. New truth in lending guidelines are being put in place and so far 21 states have enacted new rules and regulations, including California.
The #3 reason: Loss of a Job, Medical Problems or a Change in Marital Status
Financial Support for Housing:
Since housing is so important to the overall economy, it will always receive help when things go wrong. Today, lenders are modifying existing loans to prevent foreclosure. Other lenders are not adjusting the interest rates upwards when the rollover period comes due. Congress has passed legislation allowing Freddie Mac and Fannie Mae to buy more sub-prime loans. FHA may raise their loan limits and cut in half, the down payment. The Federal Reserve has reduced the discount rate, and is pumping money into the credit markets. The European banks put $400 billion dollars into the credit markets in December. The Bush Proposal is to inject a $100 billion dollar stimulus package into the economy (supported by the Fed Chairman) plus there is a bill in the Senate to raise the conforming loan amounts for California. Investment firms, private equity companies, giant bond companies, and hedge funds are all planning on buying up delinquent mortgages. The big money houses have pretty much written off their bad loans, getting ready to institute new underwriting standards, and will once again enter the home lending business.
Source: Mortgage Bankers Association, Federal Reserve, FBI, Inside Mortgage Finance, U.S. Congress
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