Average interest on 30-year fixed loans slipped a notch to 4.98 percent from 4.99 percent and was down from 5.10 percent a year ago.

Here’s how other rates fared for the week:

• 15-year fixed loans dropped down to 4.39 percent from 4.40 percent.
• Five-year adjustable-rate mortgages dipped to 4.25 percent from 4.27 percent.
• One-year ARMs came down to 4.29 percent from 4.32 percent.

While still higher than the historic lower of 4.71 percent established in early December, long-term mortgage rates have hovered around a very favorable 5 percent thanks to the Federal Reserve’s mortgage-backed securities program meant to keep rates low and make home buying more affordable.

The central bank’s policymaking committee confirmed on Jan. 27 that it will keep rates near those record lows in order to prop up the economy; but it still plans to terminate the program at the end of March.

Low rates also trigger more refinancing activity, according to Freddie Mac. In the 2009 fourth quarter, it said, about a third of borrowers who refinanced a home loan — the highest share since at least 1985 — opted to slash their principal balance rather than tap into their equity.

As a result, only around $11 billion in home equity — the smallest quarterly volume in about nine years — was tapped by consumers who refinanced a conventional, prime mortgage.

Payment Shock Concerns Grow as Billions in Interest Only Loans Face Recast Date

by Jann Swanson on

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Fitch Ratings warned today that billions of prime and Alt-A mortgages that were written as interest-only (IO) loans are due to recast over the next two years. $47 billion of these loans convert to fully amortizing loans in the next 12 months and a total of $80 billion in Prime and Alt-A loans and another $50 billion Subprime loans will recast by the end of 2011. These conversions will result in substantially higher monthly payments.

While IO options were written into both fixed rate (FRM) and adjustable rate mortgages (ARM), over 90 percent of the loans in each category, prime, Alt-A, and subprime, are ARMs because those offered borrowers the lowest payments and many borrowers qualified only because of these artificially low payments.  In addition, 63% of Prime and Alt-A loans qualified based on less than a full documentation of income.

As MND reported, in September Fitch warned that $134 billion in Option ARMs would recast by the end of 2010. Option ARMs are mortgages that allow the borrower to choose each month among making a fully amortizing payment, an interest only payment, or a smaller payment that does not cover all of the interest. In the last case the remaining interest is added to the mortgage balance.  Fitch estimated that 94 percent of Option borrowers had exercised the lowest payment option, allowing the loan to negatively amortize.  These loans will recast both as fully amortizing loans and at a higher balance than the borrower qualified for.

Because interest rates have remained low, many of the IO loans due to recast will have payment increases only to the extent necessary to begin amortizing and some may actually have the payment shock mitigated by a lower interest rate.  However, many Subprime loans have an interest rate floor that does not allow the rate to drop below the initial one and, in subsequent years, all borrowers will probably suffer additional payment shock as their loans go through periodic rate adjustments. Just considering the amortization component or the recast, current average payment shocks are estimated at 15%, and each 1% rise in the benchmark rates corresponds to an approximate 10% increase in payment shock.

While historically only 3.3 percent of Prime loans have been seriously delinquent prior to recast, the 60 day delinquent rate rose to 9.3 percent within a year.  Alt-A loan delinquencies have increased from 12 percent to 29 percent and Subprime loans from 20 percent to 58 percent. In the current climate borrowers also have less incentive to continue payments as their equity has significantly eroded or disappeared.

IO loans account for only 8 percent of the non-agency RMBS market so the impact of expected defaults on these loans will be relatively small. However, in certain securitizations the concentration of IOs can be greater than 50 percent. These securitizations could be at risk, particularly if large numbers of IOs recast at the same time. Fitch pointed out that performance on these pools will be particularly hard-hit by recasts. If observed IO performance results in higher than expected loss estimates for Fitch-rated RMBS, this may result in further negative pressure on long-term ratings and/or Recovery Ratings (RRs).

Fitch Ratings Managing Director Roelof Slump said “60-day delinquency rates have risen over 250% in the 12 months following previous recasts for prime and Alt-A loans,’ said Slump. Even though Fitch’s current ratings consider the risks of upcoming IO recasts, ‘mortgage pools with significant interest-only loan concentrations may be downgraded if performance is worse than anticipated.”



U.S. mortgage applications driven up by refinancing – Yahoo! Finance.

This article is self explanatory, however, I will throw in my two cents worth of opinions.

Rates, as I have noted for the past week, have been trending lower for around six weeks now.  They are now reaching levels close to the lowest numbers early this year.  People are really taking advantage of this….if they can.

Expanding on that “if”, appraisals seem to be the issues that face potential buyers.  Some markets do not have that problem, but in major markets, Foreclosures are being forced to show up on appraisals due to the fact that appraisers have to use the homes with the most recent activity.

Due to this, the lowered prices for homes sold due to foreclosure push the prices down for a generalized area, as everyone knows.  The majority of potential refinance applications, and the borrowers associated with them, are either trying to get out of the ARM’s (Adjustable Rate Mortgages) that were so attractive over the past 4 – 5 years.  Now that they are close to adjusting, the borrowers face another problem.   NO EQUITY and NO VALUE. 

Programs have been created, such as FHA’s Streamline Refinance, that allows borrowers some flexibility and lesser documentation based on their payment history.  There are many others, but the lack of equity remains the issue. 

Normally closing costs are rolled into the loan amounts, but that is not possible as most Rate and Term refinances have a loan-to-value cap of 90% (except FHA).  The only option then is pay the closing costs out-of-pocket, which, is becoming even more difficult in today’s economic culture. 

It’s true.  Now is the time to refinance for the low rates, but know going in that so many things depend on the outcome, and the appraisal reigns supreme.  Most (if not all lenders) will charge you for the appraisal upfront, and it’s unrefundable, even if the loan cannot close. 

Call you mortgage consultant for details, and they should guide you, or at least give you enough information to prevent you from paying for an appraisal that will ultimately be less than needed.  Also, due to the many possibilities for refinancing, your mortgage consultant can give you the information needed about all programs available to you.

I was perusing the latest real estate industry news over at CNN Money today and came across an alarming topic that needs to be addressed by the real estate industry and by the general public as soon as possible, before any damage is done.

Though the above link is to a CNN Money blog, I also found this article on Philly.com, illustrating more of the facts and aspects to this new proposal, which aims to reign in the amount of loans granted by the FHA.

Essentially the FHA is getting a bad rap for the quantity of loans it is issuing, as the number of FHA loans as a percentage of all home loans has risen dramatically since the housing crisis began, from a mere 3 percent of all loans in 2006 to a stunning 30 percent of all loans in 2009.  And the most important number here?  75 percent of FHA loans are to first-time homebuyers – those up-and-coming individuals and couples who are currently among the only buyers gobbling up short sales, foreclosures and bank owned/REO properties, which in turn keeps inventory in check and helps maintain home values for everyone else who is either thinking about selling or simply hoping their home’s don’t depreciate any further than they already have.

Supporters of this legislation feel that the FHA is being too risky in loaning so much money to first-time homebuyers, who are only required to make a very low 3.5 percent downpayment in order to secure the loan.  They say the homeowners need to have “more skin in the game” before they should be awarded these loans, because individuals purchasing homes beyond what they can afford is what got us into this mess in the first place.

However, this is a seriously flawed argument.  The housing market’s ailments come from only a few main problems – home buyers getting into adjustable-rate mortgages (ARMs) without reading the fine print and banks making loans without analyzing buyers’ incomes closely enough.  For example, going by stated income instead of actual income, allowing unrealistic ratios, etc.  The issue is not whether you can put down $2,000 or $200,000 as a downpayment, the issue is whether or not you can pay off the loan within its terms.  After all, an individual or couple with low debt, a decent education, a good credit score and a proven work history, regardless of how much money they have in the bank, is always a safer bet for a fixed-rate loan than a person with a lot of liquid assets but an unreliable work history and a habit for taking big financial risks. With the right ratios and a modest home, the reliable, hard-working individual or couple will rarely fail to make their modest payments, where a high-risk/high-reward candidate may make a financial mistake that will cost them six months of mortgage payments and thus cost them the house.

On top of everything is the issue of the tax credit extension and expansion for first-time homebuyers. When these individuals are buying up the bulk of FHA mortgages (and accounting for roughly half of all home purchases in the country), why would we think it wise to push them out of the game by requiring more money from them at the closing table?  If a hard-working home buyer wants to get into the game and send 25-30 percent of their hard-earned monthly income to a bank so they can own a home, how is this a bad thing?  From what I know about the housing collapse, the amount of equity one had in a home had very little to do with whether they kept the home or not. it ultimately came down to ballooning rates and falling income, resulting in the complete inability to make the monthly mortgage payments that at the end of the day, are the only thing that really matter.

Passing any restrictions on FHA loans before the tax credit expires June 30 would be hugely counterproductive and would essentially resemble the federal government shooting itself, and the housing market, in the foot.

My one exception here is the raising of the minimum credit score for loan qualification.  Credit scores reflect a person’s ability to make payments on time, at any expense, and should be the most important aspect when considering an applicant for an FHA loan.  But if the individual(s) show a solid history of income and a good credit score, what is the value in forcing them to waste thousands of dollars on rent over several years just so they can save up a larger chunk of cash to put down on a home?  It is my opinion that the value of years of mortgage payments will do more for the banks, the housing market and the economy as a whole than that extra downpayment cash could ever do.

So I say leave the FHA requirements alone, for now.  If any tampering needs to be done, the government should at least wait until the tax credit deadline passes, but in the event that the deadline passes and we see a precipitous drop in loan applications thereafter, further tightening the requirements will only exacerbate the problem.  I just can’t see a situation where this legislation is needed in today’s very fragile real estate industry.

Sometimes, We need to check our facts and perspective from time to time.

I always thought that people would finance with the shortest and lowest interest rate possible.