Danny Salas

Archive for October, 2008

Chico, CA Interest Rates Market Report – Economic Influences – Oct 28th, 2008

FHA Is KING!

I thought I’d take some time to reflect on just what exactly is currently available to home buyers.  I often get asked, “Is anybody doing loans right now?”  The answer is unequivocally, “YES!”  Basically, we’re back to the old days of two’s!  Two paystubs to give us a month’s gross income, two months bank statements to be certain that a client’s down payment and closing costs are “seasoned,” two years’ W-2’s and two year’s 1040 Tax Returns.  Whereby in the past eight years my office’s FHA applications ran from about one to two percent, we’re now funding over sixty seven percent FHA loans.  I’d like to go over a few things that you should know about FHA and some other recent changes that the housing market is going through.

New Underwriting Guidelines

FHA stands for Federal Housing Administration.  They are a division of Housing and Urban Development and their goal is to help administer the funding of loans for home buyers.  They have changed their guidelines, recently, and most of the guidelines will go into effect in January of 2009.  One of the biggest is their requirement will go from three percent to three and one-half percent, of the sales price, as a down payment.  The other major change will be the mortgage insurance premium that is financed into the loan amount AND the monthly mortgage insurance payment.  These will vary with a clients credit risk score.  FHA finances an upfront mortgage insurance premium.  It will vary from 1.25% to 2.75% of the loan amount depending on credit risk scores.  Basically, if you have great credit, your up-front mortgage insurance premium will be 1.25% of you loan amount.  Let’s take a $200,000 purchase.  In January, you will be required to put three and one-half percent down, so your base loan amount will be $193,000.  Now, what’s great is that that down payment can be a gift from a family member.  So we know that the financed up-front mortgage insurance premium will vary from $2,412.50 to $5,307.50.  This amount is added to your base loan amount of $193,000 for a total loan amount of $195,412.00 to 198,307.00.  So, obviously, if you have a good credit risk score, your payment will be based on the lower total loan amount.

Qualifying Is Quite Easy

Qualifying for FHA is still pretty easy.  Your application is put through an automated underwriting engine that determines your eligibility.  With higher credit risk scores, more of your income can be used to qualify you for a house payment.  There are still opportunities to qualify with approximately fifty percent of your gross income going toward all of your monthly liabilities, however, some good factors to use would be thirty-five percent of your gross income going toward your housing costs and about 45% going toward all of your monthly obligations.  These are tighter qualifications that we’ve seen in the past, however, still pretty flexible.

Freddie Mac Changing Too

FreddieMac announced this week that they are only allowing 45% of a borrower’s income to go toward ALL of their monthly obligations.  This is a major change from their automated underwriting engines approval loans with 80% and more of someone’s income qualifying them.  Freddie used to have an “accept +” status that didn’t care what the qualifying ratios were, as long as a client had extremely high credit risk scores.  Expect to see more changes, but we’re in a market that needs to correct itself and these are responsible ways to do so.  It will take some time but it’s a step in the right direction.  If you have the supporting documentation to qualify, it’s just an excellent time to buy.  Values and rates are still low.  See you next week…

Chico, CA Interest Rates Market Report – Economic Influences – Oct 21st, 2008

What Information Do We Rely On For Rates?

Last week’s doom and gloom article reported that we should have seen lowering interest rates but, unfortunately, did not.  This week’s article is going to be a little more uplifting.  But with good news, it seems even more apparent in recent days, there is bad news to accompany it.  It’s truly amazing how quickly things can change.  In years past there was more weight given to changes in interest rates due to speculation in the marketplace rather than from the actual economic reports that the government released.  Nowadays, not only does the speculation not have too much of an effect on the markets themselves, but the actual reports are being somewhat ignored due to the unprecedented change in the world of high finance and economic dynamics that we’ve never really seen before.  It’s all new and it’s difficult to interpret until markets have an opportunity to absorb the information being provided to them and then determine how that affects them.  One example is how, generally, stocks and bonds move in opposite directions.  Investors will take money out of one and put it into the other.  What’s been happening recently is that banks have been required to deleverage.  The ratio of capital compared to loan balances has gotten completely skewed, and forced banks to sell not only stock, but bonds too.  Anything to raise more funds, however, when you can’t raise enough capital by selling stocks and invest that money in bonds for a more favorable outlook, you’re stuck selling both with no way to invest in anything else.  Hedge Funds have been hurt by this too, as investors demand their principal investments back.  They’re selling holdings at enormous loses, just to raise some capital.  Stuff like this has never been seen in the market before, and it’s an example of interest rates ignoring economic data and relying on the next Federal Reserve announcement or bailout or stimulus package.

Lower Oil Prices

We are finally getting some cooler reading on inflation, as oil prices diminish.  The Consumer Price Index and Core Consumer Price Index were lower than expectations.  Weakness in the labor market continues and Capacity Utilization, which suggests where businesses are operating within a certain capacity, is far below the number that suggests full capacity.  Housing Sales were reported lower than we’ve seen since 1991.

Some investors feel as though we’re starting to see recent government activities and new policies have an influence on markets.  On Monday, Good ‘Ole Ben Bernanke spoke to the House Budget Committee and low and behold, mentioned a few things that really moved the market and set interest rates back at very desirable levels.  One was the feeling mentioned above regarding investors and the global market sensing that the maneuvers by the government are starting to have an effect on markets and another indication that he felt that another economic stimulus package would help boost the economy.  Last time President Bush signed the first package, many felt as though Bernanke was a key player in influencing the president.

PIMCO Continues To Buy

One of the biggest movers of rates was the news that PIMCO, the nation’s largest purchases or bonds, announced that they will be increasing their investment in Mortgage-Backed Securities to 79%.  This is their highest investment in Mortgage-Backed Securities in over seven years!  They also mentioned that they would take money out of Treasuries and move funds into MBS which tells the Global Market that they think it’s worth the risk.  That could continue to be huge for lower interest rates…and with lower home values…what a time to buy!!!  Until next week…

Chico, CA Interest Rates Market Report – Economic Influences – Oct 14th, 2008

Unchartered Territory…Again

Last week I indicated that… “some experts think that the Fed might have a surprise lowering of our (overnight) rate by 50 basis points before the October 29th meeting.”  Also, I indicated that generally, that would be inflationary, however, with a coordinated effort of banks all over the world, lowering their benchmark rates too, “the value of the dollar would not be affected and rates might benefit from this.”  Well…rates haven’t benefited.  I did say also that, “we’re in unchartered territory.”  So, that’s my out!

So, the European Central Bank, Canada, the United Kingdom, Switzerland, and Sweden all lowered their Benchmark Overnight Rate.  This should have kept rates lower and should have not had an inflationary reaction since the value of the dollar would be in check.  Also, since the value of the dollar was increasing, and oil is traded in dollars, the price of oil came down…this should have helped interest rates too.  So I was right about the actions of the banks, just wrong about what the affect of those actions would be.  Unfortunately…there was no lowering of interest rates.

A Catch-22 for Interest Rates

The next day, Central Banks in Asia, followed suit.  What ended up happening here was a flight of investors, back into the stock market, which was at the expense of bonds, mortgage-backed securities, and therefore, interest rates.  We’re stuck in somewhat of a catch-22 scenario and interest rates are bearing the brunt.

The four-week average of Initial Jobless Claims moved to a seven year high.  But, as mentioned before, here’s some good news…oil is trading at about $82 per barrel.  Remember when I was writing about $100 dollars, then $147 in July?  So…at least we’re spending less at the pump!  Other good news was that two weeks ago I reported on the sharpest decline in the Dow Jones History…well…this last week we had the highest gain in the Dow Jones History…a 936 point increase.  That’s cool, but this volatility can be frightening.  We’ll just have to buckle down and try to be optimistic about the future.

Follow The Right Index

Once again we were experiencing opposite directions regarding the 10-Year Treasury and the yield on mortgage-backed securities.  I have spoken more often of this in the past year than any other year in history.  It’s important to note that many of my colleagues use the 10-Year Treasury Yield to follow interest rates and that is a dangerous path to follow.  For example, last week Treasuries were getting pummeled as people took money out of them and put them into the stock market.  However, Mortgage Bonds (or mortgage-backed securities) started to look a little more favorable to investors, as they tried to gain some momentum on the recent declining values of these bonds.  So again, some in the industry may have locked in an interest rate on the wrong day, by following the wrong index.

So, $250 Billion of the $700 Billion rescue plan (or whatever the final number ended up being) went to invest directly in our banking system.  So, the government will start buying stock in the biggest American Banks.  This will stabilize the marketplace, and it’s truly needed right now, but will be interesting to see how the government will get out of this habit in the future.  Banks just had too many loans compared to what capital they held.  The only way to offset this is to sell the loans at a discount or raise capital.  Hard to raise capital when nobody’s interested…so the government will step in.  There are incredible buying opportunities out there…get out and work with your favorite real estate agent and mortgage professional to see the safe haven real estate holds for the future.  It’s an excellent time to buy.  Until next week…

Chico, CA Interest Rates Market Report – Economic Influences – Oct 7th, 2008

FDIC Insured to…$250,000?

Where do I start?  First of all, let’s mention the Financial Rescue Bill that was passed last week.  Some last minute Senate changes enabled some tax cuts to squeak by and continue over the next two years, but all-in-all, it was relatively rushed through the second time around.  One major change that I’m sure a lot of you have been reading about was the increase in FDIC insured protection, from $100,000 to $250,000.  I’m sure a lot of support was received after the first time the bill was submitted – it failed to pass.  After the failed attempt, we had the sharpest one-day decline in the stock market history.

Wow!

I think many Americans woke up and saw their 401(k)’s and retirement accounts depleted so significantly that people that completely opposed the rescue plan, quickly changed their minds in support of the plan after that shake up.  Some reports indicated that many Senators’ offices were being infiltrated with calls and e-mails of which over seventy percent favored passage of the plan.   What needs to be understood is that without the plan, the economy would probably have spiraled out of control and required many businesses to “hold on and hope” that they could survive without getting any credit extended to them whatsoever.  Business needs credit in order to survive.  It keeps the economy moving forward.

Economic Prowess:  Essentially Healthy?

Throughout this report I’ll mention some economic data, however, with so much uncertainty before the passage of the bill, coupled with new plans and strategies being put forth almost on a daily basis, many of the economic reports are having no effect on where interest rates go.  Makes my job here…interesting, to say the least.  Take for example that the initial Jobless Claims number was 497,000, the greatest number in seven years.  Remember when I was talking about 362,000 being recessionary?  Even at that time people were saying that our economy was, “essentially healthy.”  Funny!  The United States lost more jobs in September than in the past five and one half years.  Interestingly enough, though, the unemployment rate stayed at 6.1%.  Generally, interest rates would spiral down on this news, but with all of the uncertainty…they didn’t move at all.

Worldy Overnight Rate Changes

The Federal Reserve and other Central Banks around the world  are all considering lowering each of their over-night rates.  Generally, the lowering of our Fed Funds would be inflationary, however, again…we’re in unchartered territory and if other central banks around the world lower their rates, the value of the dollar would not be affected and rates might benefit from this.  This, too, will be interesting to watch over the course of the year.

$900 Billion Term Auction Facility

So, after the $700 Billion rescue plan was passed by the House and Senate, you’d expect markets to feel more secure and things to move back to a somewhat normal status.  Unfortunately, the opposite occurred.  Global Stock markets plunged as the world felt that bail out wasn’t the fix that they thought it would be.  Germany, Ireland, and Greece immediately started to ease concerns by guaranteeing bank deposits to avoid a world-wide run on deposits.  Then the Fed announced another Term-Auction Facility of $900 Billion and started paying interest on reserves that banks are required to have.  Australia lowered their benchmark overnight rate by a full percentage point and some expert’s think that the Fed might have a surprise lowering of our rate by 50 basis points before the October 29^th meeting.

Is Iceland Ca-Poot?

Iceland was seeking help from Russia for an emergency bailout, and a new Commercial Paper Funding Facility (CPFF) was started by the Fed in order to give businesses uncollateralized loans to be able to continue operating.  Will this be enough to put some confidence back into the market?  I hope I’m here to give that answer next week.  Hey…home values are down and rates are low…go buy, buy, buy!!!  Until next week…