Home equity loan delinquencies reach new record levels

The American Bankers Association reported yesterday that job losses contributed to new record levels of home equity loan delinquencies. With more than 6 million jobs lost since the current recession began, people are falling behind in paying their bills.

The ABA considers a home equity loan payment to be late if it is made more than 30 days after its due date.

This is one of the contributing factors which make it very difficult to obtain or refinance home equity loans or home equity lines of credit in today's market. If you have a HELOC or a 2nd mortgage in place and you're not "upside down" in your financing (that is, if your home is worth more than the sum of your mortgage balances), your best bet may be to refinance both loans into a single new FHA mortgage. FHA rates less than 6.000% are still easy to get, and that rate will cover not just your first mortgage, but also the portion of your financing which has been covered by your second.

FHA loans do come with FHA mortgage insurance, but FHA monthly premiums are lower than private mortgage insurance, and chances are you'll be saving money on the portion of your financing currently held in your second mortgage.

Denver real estate losses are relatively good

Hard to put a headline to this data; on Wednesday, May 27th, the Denver Post said "Metro home slide not off cliff".

Here's the essence of what they're saying -- the latest real estate market data released (for March) shows a 5.5% decline in the Case-Shiller home price index, the least bad result for 20 major cities.

We beat out Dallas, which had a 5.6% decline. Not too shabby, compared to Phoenix (36.0%) or Detroit (25.7%). And although their Lakers seem on their way to another NBA championship after beating our noble Denver Nuggets, our decline was less bad than theirs (22.3%).

Maybe we should all move to Phoenix, where it's cheap.

A realtor might tell you that this shows that Denver is the most stable market among the top 20.

Call me if you want to buy a home (go to http://www.jordangraham.com/).

Sub-5% mortgage rates are going...going...gone?

Here's the picture worth a thousand words, and more than a thousand dollars for the typical mortgage borrower -- it's a graph of the yield for the 10-year US Treasury note (from Yahoo), which is the foundation on which fixed rate mortgages are built. When the yield on the 10-year goes down, so do fixed mortgage rates for new loans.

That dip you see toward the left of the graph took place on March 17th - a couple of days after China's premier Hu Jintao voiced his concern at how much the United States is borrowing in order to stimulate our economy. The US Federal Reserve responded by announcing a plan to buy $1 trillion worth of government debt and mortgage-backed securities -- prices for Treasuries shot up (which means that yields plummeted), and I spent all day the next day on the phone locking refinances for people I knew who were waiting for the right time to lock.

That day I locked 30 year fixed rate refinance loans at 4.375% with no origination or discount points. That's a "novelty" interest rate -- unbelieveable from a historical perspective.

But a look at the 10-year yield graph since then shows movement steadily upward, and the past week and a half have seen particularly steep climbing. All good things must come to an end, as I'm learning in my personal life right now, and it seems as though reality is catching up with the US mortgage market.

Fundamentally, US government bonds are trading at unsustainably high prices. China cannot afford to continue buying our bonds (read: lending us money) as much as they have in the recent past; they desperately need their cash for domestic spending projects to stimulate their own economy. We've seen interest rates at historic low levels for a long, long time.

My take is that rates will be back in the 6.000% range for 30 year fixed rate loans before too long. That's a great interest rate, by the way, if you look at historic averages. The days of novelty sub-5% interest rates look like they're going. . . going. . . gone.

How long are sub-5.000% interest rates going to last?

I read a piece today by my well-published friend Vitaliy Katsenelson about the pickle in which China finds itself these days. What struck me as the understated punch line is that mortgage interest rates are as low as they are right now (I quoted someone 4.375% for a 30 year fixed rate loan this morning with 1.500% in discount points) largely because China is continuing to buy US Treasuries at unsustainable levels.

In the old days it worked like this: China bought US Treasuries, driving down their yields -- and since fixed rate mortgages are built on the yields of US Treasuries, this drove down our mortgage interest rates. Americans refinanced their homes and spent money, fueling demand for China's exports. This gave China more money to buy US Treasuries. . . and so the circle went.

In this financial crisis, though, Americans have pulled way back on spending. China is responding with a stimulus of its own, forcing banks to lend and going on its own spending spree, hoping that the global financial crisis will ease before it runs out of money to spend propping up its own economy. For this it needs cash, and it's eyeballing its huge portfolio of US Treasuries, wishing it could use some of those funds.

To quote Vitaliy, here's the pickle China's in:

Now China needs to stimulate its economy. It’s facing a very delicate situation indeed - which is a nice way of saying that China’s screwed. China needs the money internally to finance its continued growth. However, if it were to sell dollar-denominated treasuries, several bad things would happen. Two come immediately to mind:

1. Its currency would skyrocket - not good for China, because it would lose its (relatively) competitive low-cost producer edge.

2. US interest rates would go up dramatically - not good for the US (its biggest customer), and therefore, not good for China.

This is why China is desperately trying to figure out how to withdraw its funds from the US dollar without driving the dollar down. Good luck with that.

And the US government isn’t helping: It’s printing money and/or issuing Treasuries at a fast clip, and needs somebody to keep buying them. If China reduces or halts its buying, we may be looking at high interest rates, with or without inflation.

The latter scenario worries me most.

Me too. On Saturday, March 14th, China's premier Wen Jiabao expressed concern about China's investment in the United States, saying "We have lent a huge amount of money to the U.S. Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried.”

Three days later, the Fed announced that it would begin buying US Treasuries (to reassure global financial markets?); the next day, long term mortgage interest rates hit the lowest I've ever seen them. I spent all day on the telephone, only calling people who were ready to lock interest rates on refinances -- I got 4.375% 30 year fixed rate loans with no points at all that day (the best I've ever seen; I doubt rates will be that low again).

Of course, the market reaction was brief, and by the late afternoon rates were rising again.

I've been harping on sustainability for years. China is buying Treasuries at unsustainable levels. The Fed cannot step in and take China's place. Soon -- and I don't know when -- demand on Treasuries will begin to drop, and long term mortgage interest rates will return to 6.000% and higher.

Shared equity down payment assistance

Douglas County (Colorado) has a new down payment assistance program called the Shared Equity program. They provide up to 20% for qualified first time home buyers to use as the down payment on their new home -- but unlike traditional down payment assistance, no interest ever accrues on their piece, and no payments are ever required.

Instead, the home buyers pay the county back when they sell or refinance their home, paying the same percentage of the home's then-present value as the percentage given as down payment assistance.

For more details, click here: Shared equity down payment assistance program

3.99% 30-year fixed rate mortgage

The Wall Street Journal reported yesterday that home builder Toll Brothers (based in Horsham, Pennsylvania) is offering 30-year fixed rate financing at 3.99% for buyers of their homes.

The rate requires no "points" (origination or discount fees), and is for loans:

1. Under the conforming loan limit ($417,000 or less)
2. Made to borrowers with credit scores of 720 or higher
3. For purchases in which buyers have 20% or more for down payment

This following last week's record-setting low mortgage interest rates.

Rates rose Friday and Monday of this week, and although they are higher than last week's best, borrowers can still get 30 year fixed rate loans in the 5.000% range.

For more information or to find out what interest rate you can get, contact me.

Treasury Department considering 4.5% mortgage loans

The US Treasury Department is thinking about making 4.5% fixed rate mortgage loans available to home buyers through Fannie Mae and Freddie Mac in its latest effort to stabilize the real estate market. Rates this low haven't been around since the early 1960's; the theory is that home buyers who have been waiting on the sidelines would flock to the closing table, buying homes, reducing home inventories and stabilizing the real estate market.

As recently as September, Fannie Mae and Freddie Mac fixed-rate mortgages had interest rates as high as 6.375%. With that interest rate, a home buyer's monthly payment of $1,350 could buy a home worth only $179,000. With a 4.500% interest rate, that same monthly payment could buy a home worth $214,000.

Sounds pretty good so far. The New York Times' headline reads "Washington’s New Tack: Helping Homeowners" - but far from helping homeowners, the new plan would rescue banks by placing the risk of falling real estate values squarely on the shoulders of American families. Inventories would be reduced (that's the piece that helps banks; the country is littered with foreclosed properties which banks have had to repossess - they sit empty, costing the banks more money every day) - but what effect would this have on real estate values?

In the short term, buyers would quickly pick up on the logic of being able to afford more home. Americans love MORE MORE MORE; a few years ago we rushed to take out subprime mortgage loans because we could buy bigger homes. We save almost no money for our future; we open financing accounts with Best Buy so that we can bring home larger televisions with flatter screens; we buy bigger homes.

But what are homes really worth? These below-market mortgage interest rates would only artificially prop up home values. If you bought that $214,000 home today and went to sell it years from now when the 4.5% mortgage plan was no longer being offered, who would pay you $214,000 for it? The home which cost you $1,350 a month to live in would cost someone wanting to buy your home $1,552 a month. The "hangover" after this plan tanks will depress real estate values years from now.

The subprime market collapsed largely because the assets in the mortgage-backed securities involved weren't worth what the financial whizzes thought they were worth. Sure, if a buyer is willing to pay you $214,000 for your home, in one sense your home is worth $214,000 -- but economists point out that the ratio of home prices to household incomes is still very high.

As long as Americans sign up for living that life - paying more and saving less because we're buying the illusion that that will make us happier - this house of cards that is our economy will sputter along as it has for the last couple of decades. Our parents and grandparents probably shake their heads in disbelief, and I think they're right to do so.

1.0% Fed Rate; GDP shrinks by 0.3%

The good news is that the Government is still spending money, and that America is exporting for the moment -- the New York Times reports today that consumer spending is down for the first time since 1991, when President George Bush Sr. went to war in Iraq.

Even after 9/11, American consumers were spending. It was the patriotic thing to do, after all.

Now we're having the economic hangover from all of that spending -- and the borrowing that fueled it.

The Federal Reserve Board met yesterday and did what was expected of them -- they dropped the key benchmark Federal Funds Rate to 1.0%, the lowest rate since our emergency response to the attacks of 9/11.

Bloomberg reported this morning that the Fed may not stop there:

Bernanke is drawing on an academic career studying the failed efforts to prevent the Great Depression, and yesterday's shift indicates he's prepared to revisit his 2003 commitment as a governor to lower rates to zero percent if necessary. Should lending fail to revive by December, the central bank will probably cut by another half point, said former Fed Governor Lyle Gramley.

The Fed most recently lowered the Fed Rate three weeks earlier, on October 7th, 2008; long-term mortgage interest rates responded by climbing steadily higher. With its many rate cuts over the last couple of years, that's what has happened -- long term mortgage interest rates rose after the Fed lowered its rate. Sometimes rates were higher only for a few days; other times they were higher for several weeks.

Interest rates on mortgages opened higher today.