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Bruce McCoy
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As expected the Federal Reserve Board left short term interest rates at a 45 year low today. This action, along with the earnings growth we have seen reported, as well as many of the economic reports showing the sluggish economy sllooowwlly turning, would normally give us an "up" stock market and a "down" bond market. Well we got an "up" on both today.
What caused this was the policy statement that accompanied the Fed's decision to leave rates unchanged. In the policy statement the Fed said that "rates should remain unchanged for the forseeable future". This tells the long term bond investors that they (the bond investors) can continue their investments without fear of inflation.
If inflation increases, the adjusted value of bonds decrease. This would cause a sell off in bonds. Since the Fed said to not worry today, bond traders took it to heart and drove up the price of bonds to a yield under 4.2% for the 10 year Treasury. Mortgages rates followed suit and it is rather common to see lenders offerring 30 year fixed mortgages for 5.75% at no points, and a couple at 5.625%.
If you missed last summer's rates get your application in now. I still don't think we will see them in the low 5% range, but I could easily see another quarter point lower soon!
Housing prices have been appreciating steadily over the past few years. Granted the rate of appreciation has remained low, not enough to suddenly price prospective buyers out of the market, but enough for current homeowners to keep up with inflation. Add in the unbelievably low mortgage rates and resulting refinance boom of the past year and current homeowners are well ahead of the game.
Ah, the refinance boom! Therein lies the rub, or at least part of it. Because of the huge refinancing of mortgages over the past few years, there are a huge number of current homeowners that have no plans on selling for years. As one of my clients put it “I’ll leave this house feet first”. And now, with fresh mortgages at low rates that may not appear again for years, it is even less likely that these homes will reenter the market anytime soon. At Mountain Coast Mortgage we always take time to learn about our clients’ goals in a refinance; how long they plan to stay in the house, whether they plan to sell or turn the home into a rental after moving, and a number of other factors that affect financing strategy. Often we tell our clients that it makes no sense to refinance because the “numbers” just don’t work out.
If we combine these observations with the fact that Santa Cruz County is renowned for a low growth policy in housing, we see lower supply of housing available to purchase, whether used or new. Given a steadily increasing demand through a rising population, the result over time must surely be higher prices. Why haven’t we seen this already? The answer is in the sluggish economy (no reference to the UCSC mascot here!). When the Bay Area economy turns around, which it eventually will, I foresee a tremendous increase in local housing prices.
Mortgage Rates for conforming loans (those under $322,700) as of 10/20/03 (a.m.) are:
(quoted are 2 point loans, add ˝ percent to the rate for a 0 point loan)
30 year fixed: 5.5% (APR 5.78%) payments are $1,832.26/mo
15 year fixed: 4.875% (APR 5.34%) payments are $2,530.93/mo
On October 1st another phase of the Patriot Act kicked in. Now, in addition to all the information that must be provided for an initial loan application, you the borrower are required to provide your birth date (previously it was your age) and, for some lenders, a copy of your driver's license, passport or one of a number of other documents. This identification process is supposed to ensure that banks and lending institutions "know their client" and help stop the laundering of terrorist funds.
I'm not certain how many terrorists buy houses. With mortgages. And now, with California allowing illegal aliens to obtain driver's licenses I am at a loss to see how this is going to prove anything else that we haven't already proved in the loan file. My paranoia about personal information being used for other than stated purposes is working overtime. So far the lenders are telling me that this is just another layer of paperwork, but this is what smarter minds than mine dreamed up so...
Rates are still headed up. It looks like the yield on the 10 year T-Bill is going to test the highs of 4.5% in the next week or so, especially with the good earnings reports coming off of Wall Street.
Fixed mortgage rates shot up today (like a rocket!) on the unemployment report. Although the overall unemployment numbers stayed flat, job creation rose by 53,000 new jobs. The forecasters had predicted that instead of more new jobs, there would be an overall job loss. Woops. And they pay these guys big dollars for their advice. Here you can get wrong advice for nothing!
My personal forecast remains the same, though- we will see interest rates creeping down. Yesterday a member of the Federal Reserve stated that he expected interest rates to remain at historically low levels "for the foreseeable future." I think that this jobs report was merely an excuse for the bond traders to take some of the big profits off of the table. If you look back over the last 2-3 weeks, the 10 year bond yields have dropped from 4.5% down to 3.94% on October 1st. Since yields move inverse to price this means that the price, or cost, of these bonds have risen dramatically during the same time. There was ALOT of profit on the table to be taken, and they did so today.
As always, though, this advice isn't guaranteed. Mr Truman is still looking for the one handed economist!
Since yesterday we have had two separate refinance clients who went into closing to find that their previous lenders- the lender who was being paid off from the new refinance- had added "force placed insurance" to both loans.
Because mortgage lenders require property insurance on any home that they lend on, when a homeowner fails to pay their home insurance, gets cancelled, or dropped for any reason, the lender will have their own insurance company write a policy to cover the house. This is called "force placed". It is ALWAYS hugely more expensive than any insurance readily available to the homeowner. It is usually meant to be in effect only for a short term and is only sufficient to assure the lender that there is enough insurance on the property to protect the lender's interests in case of a fire, etc.
The problem with these lenders- Wells Fargo and Prudential- is that the borrowers had never let their own insurance lapse and the lenders had mistakenly put the "force placed" on the homes, in one case to the tune of three years worth of premiums! Only because Richard- the Mtn Coast loan officer- was at the sign-off and spotted the demand from the lender for the "past-due" premiums was it able to be quickly deleted. This saved our borrower over $3,000 that the lender was trying to charge!
We thought this was just an isolated case until we received a call from another borrower whose lender was trying to do the same thing!
I don't know if this is a new trend in lenders trying to boost their bottom line by ripping off customers who are closing their mortgages, but your bottom line should always be CHECK YOUR CLOSING STATEMENT!