Danny Salas

Chico, CA Interest Rates Market Report – Economic Influences – March 4th, 2008

Hitting a Recession?

Jobless Claims Continue To Show Signs of Recession

Last Wednesday the Wall Street Journal reported this headline:  Inflation could be a bigger problem than many think!  As Homer Simpson might say, “Doh!”

Last week I mentioned the nice layer of support that the 200-day moving average was giving us.  It has continued to be our best friend in this extremely volatile market. 

I keep commenting on the Initial Jobless Claims numbers for the week.  Remember that the last two recessions that the United States went through, the four-week average of these claims reached 362,000.  This last week we hit 373,000 and brought the average to 360,500.  We’re getting closer folks!

A recession is two Gross Domestic Product quarters in a negative number.  The Fourth Quarter 2007 GDP was 0.6%.  It shows the economy is significantly slowing.  Good ‘ole Ben Bernanke spoke to congress this past week.  His comments caused interest rates to lower a bit.  But the big news of this past week was OFHEO’s (The Office of Federal Housing Oversight Committee) announcement that they rescinded the Capital Requirment Penalties to GSE’s.  What does this mean?  Remember when FreddieMac and FannieMae’s accounting was off approximately $3 Billion each?  OFHEO (the government entity that governs conforming loan limits) penalized these Government Sponsored Entities (FannieMae and FreddieMac) by requiring that they have penalty reserves of 30% more than the usual reserve requirement for each loan funded.  Well, Wednesday, OFHEO removed this penalty reserve requirement, freeing up more money for Fannie/Freddie to purchase loans in the secondary market.  So, this announcement was completely separate from HR 5140 and the economic stimulus package that the president signed into effect on February 13th.  This may also have an effect on removing the limits on Jumbo loans.  We’ll learn more about this in the future, however, this could be huge for high priced areas like California, in general.  I’ll report more on this latter as I learn more. 

FHA Loan Limits Increasing?

So, the announcement of HUD’s new median priced home limits will be announced on March 7th.  Here’s what’s expected.  Conforming loan limits will remain at $417,000.  However, if our median prices stay the same as they are now, $304,000.  Than FHA loan limits should increase by 125% or $380,000.00.  FHA is very flexible, with 3% down, no termite report clearances are required, the seller doesn’t have to pay any of the buyer’s fees anymore (excluding a tax service fee which is about $77.00), the appraisals are just as flexible as FannieMae and FreddieMac appraisals, and with the Nehemiah Funding Program, a participating seller can fund 6% (3% for the down and 3% towards buyer’s closing costs) of the sales price through their non-profit and basically put nothing down in this market.  Believe me, there are a lot of sellers out there that wouldn’t mind crediting 6% just to sell their home right now. 

The Core PCE, by the way, was reduced to 2.2%.  Better than expected, but still outside of the Fed’s desire to have inflation readings between 1% and 2%!  Until next week…

Chico, CA Interest Rates Market Report – Economic Influences – November 19th, 2007

Rates Moving Down, But Exceptions Costing More

Stock or Bonds?

So, last week we were waiting for Retail Sales numbers to come in and we expected numbers to be a little higher than we’ve seen lately because WalMart reported some strong earnings.  They came in at expectations, but the Producer Price Index (PPI) rose 0.1% for October.  But the Core PPI came in below expectations, which was good for interest rates.  The Consumer Price Index rose to 2.2% from 2.1%, which is inflationary and generally bad for interest rates, however, what kept rates down was the understanding that this inflationary information would mean that the Fed would NOT raise the overnight rate at their December meeting.  So, money poured out of Stocks and into Bonds on that news. 

CitiGroup Downgraded

This week, Goldman Sachs downgraded Citigroup to a “Sell” from a “Hold”.  Citi may have to write off $4Billion dollars, additionally to what they have forecasted in the past, due to sub-prime related losses. 

Federal Reserve Chairman Ben Bernanke indicated last week that the Fed is changing the manner in which reports, minutes, and other general information will be reported to the general public and markets.  This is really cool because it will enable us to follow, more closely, why the Fed makes certain monetary policies on the information that they’re being provided with.  This “transparency,” “will provide a more-timely insight into the Fed’s outlook, will help households and businesses better understand and anticipate how our policy decisions respond to incoming information, and will enhance our accountability.”  What they plan to do is provide information on economic growth, unemployment, and inflation twice as often as they do now, and estimate figures for three years out, as opposed to the two year estimates currently being produced.  This will be helpful to guys like me because it’s just more information that could have a result on the markets.  But, it also means that I could be writing myself right out of an columnist position with the News & Review (editor…don’t read this).

Mortgage Insurance Changes

I thought I’d take some time and go over some major changes regarding mortgage insurance (MI) that will go into effect in January, 2008.  Generally speaking, mortgage insurance is required whenever you put less than 20% down on the purchase of real property, one to four units.  There are ways around this…but for the sake of simplicity…The calculations have been pretty standard for years, but first, HUD came out and said that they were changing the Up front MI factors based on loan to value, credit risk score, and/or source of down payment funds.  Let’s give an example:  Richard N. Diedert buys a home.  Funds are a gift from pops.  His credit score is bummin’ at about 595.  In the past, regardless, his up front MI factor would be 1.5% of the loan amount.  Now, we would have to go to a matrix and look up what that factor would be.  With this scenario the factor would move to 2.0% of the loan amount. 

Fannie Mae & Freddie Mac Pricing Changes

Not to be outdone, Freddie Mac came out with their new model for pricing loans.  For example, let’s say the Richard is now buying an investment property.  He wants to put 20% down.  In the past, he could either pay 1.375% in points (this varies from lender to lender) OR absorb that cost in his interest rate (about 0.5% in rate).  Now, that add on will also be determined by credit risk score.  So, many changes keep popping up in this new environment and we’ll keep you posted.  Gobble, Gobble…Danny

Chico, CA Interest Rates Market Report – Economic Influences – May 29th, 2007

Rates Still Higher

The Fannie Mae Foundation is the largest purchaser of real estate loans  in the  United States. 

If you meet their guidelines, than you qualify for the lowest interested rates and more flexible products than other loans because lending institutions can sell these loans to the foundation, freeing up more money for them to lend to more home owners and buyers.  The foundation has recently pledged $20 Billion toward loosening these guidelines to assist homeowners in refinancing that currently may be in a tight financial hardship in an effort to help prevent foreclosure and bankruptcy. 

As you may have been reading in the media, many homebuyers in the past few years, purchased mortgages that could not be sold to Fannie Mae and therefore, were put into sub-prime loans that enabled them to buy for reasons like bad credit, high monthly expenses compared to monthly income (debt ratios), extremely flexible underwriting requirements, almost no documentation to support claims on an application, and high loans values compared to the purchase price.  These types of loans are generally fixed for a very short period of time, and then start adjusting with a high profit margin to the bank over an index that can make payments difficult for a client. Generally refinancing or selling to get out of that financial hardship are the homeowner’s only options.   If they are unable to refinance or the home doesn’t’ sell, their sub-prime loan will adjust to higher interest rates with their payments adjusting dramatically, as a result. 

While values in our area have remained relatively stable, values throughout the nation have steadily declined, causing many homeowners to not have the equity to refinance out of these high interest loans.  Banks generally want to finance a percentage of the value of the home.  Some of these loan balances have surpassed the value of the home itself and many people unfortunately have been forced into such a financial hardship, that they have had to either walk away from their home, causing a foreclosure, or simply file for bankruptcy protection on their other personal financial responsibilities. 

What’s Fannie Mae doing to help with this situation? 

The $20 Billion has been set aside to aide the refinance of borrowers in this undesirable situation.  By encouraging full documentation; Fannie Mae has determined that allowing higher debt ratios, not requiring an appraisal on the subject property, allowing minimal amounts of liquid assets (cash) in saving institutions, and increasing the term or time in which a borrower has to pay the loan off (40 year terms), will help homeowners stay in their homes and help alleviate the financial hardship.  This will save lending institutions, homeowners, tax payers, and consumers billions of more dollars on foreclosures and bankruptcies alone.  Fannie Mae will be choosing four lending institutions to handle these requests.  Access Real Estate Lending, of course, has access to these options now! 

For those of you not in the sub-prime market, the stock market is still doing quite well.  Not helping matters was Tuesday’s Consumer Confidence Report coming in hotter than expect at 108.  We just can’t get through this negative downtrend that we’ve been experiencing.  This Friday, we have two big reports coming out; the Jobs Report and the Core Personal Consumption Expenditure (PCE) Index.  These two reports would have to really be tame to turn this current market around.  But, how quickly the market can change…Until next week…