Loans Learning Center

Fed Moves Spark Refi Madness!

by Mike Larson 03-20-09

The Federal Reserve has done it now. In poker terms, it’s gone “all in.”

Specifically, the Fed said this week that it will ramp up its purchases of Fannie Mae and Freddie Mac Mortgage Backed Securities (MBS) from $500 billion to a whopping $1.25 TRILLION in the coming months. The Fed is also going to double its purchases of Fannie Mae, Freddie Mac, and Federal Home Loan Bank bonds to $200 billion from $100 billion.

And for the icing on the cake …

The Fed will buy as much as $300 billion in longer-term U.S. Treasury securities. It’s going to focus on Treasuries with maturities between two and ten years, and make purchases two or three times a week.

Printing money and using it to buy our own debt is Banana Republic-type stuff.

I’m going to call it like I see it here:

This is Banana Republic-type stuff! And I’m not talking about the clothing store. Printing money out of thin air at the central bank, only to turn around and buy debt securities issued by your Treasury, is the kind of practice you typically see in emerging market regimes.

We’re essentially monetizing our country’s debt and deliberately devaluing our country’s currency. We’re also screwing over our foreign creditors — a dangerous path to tread considering we’re a net debtor nation that’s trying to borrow tens of billions of dollars a month to fund our massive deficits.

But what’s done is done …

We’ve gone off the edges of the map now, and in a way that I think will ultimately end badly. Indeed, the Fed’s actions sparked the biggest one-day plunge in the U.S. dollar in several years. Gold also surged, a vote of no confidence in central bankers’ willingness to preserve our purchasing power.

The Impact on Treasury
And Mortgage Rates …

The currency and metals markets weren’t the only ones rocked by the Fed’s moves. Long bond futures rocketed more than eight points in price soon after the Fed announcement hit, before pulling back a bit. The yield on the 10-year Treasury Note, which had been flirting with the 3 percent level, plunged roughly 50 basis points in the blink of an eye.

After the Fed’s announcement, the yield on the 10-year Treasury Note plunged roughly 50 basis points in the blink of an eye.

These are unheard-of moves in the Treasury market! Indeed, a rise or fall of two points in price — or, say, 15 basis points in yield — is considered a big deal. We also saw a big move in the home loan market, with MBS prices rising and mortgage rates falling.

The last weekly survey from the Mortgage Bankers Association pegged the average 30-year mortgage rate at 4.89 percent. That tied the record low set in January. I expect we’ll head down to the 4.5 percent level as the impact of the Fed’s latest move settles in.

How does 4.89 percent compare to previous lows?

Consider that the lowest annual average mortgage rate seen in the 20th and 21st centuries was 4.7 percent, set right after World War II. In other words, this is just about the cheapest that mortgage money has ever been.

Whether you agree with what the Fed is doing or not, one thing is crystal clear: It’s having a major impact on interest rates.

But enough about the big-picture macroeconomic stuff. Let’s talk about what the latest round of largesse from the federal government and the Federal Reserve means for rates and your PERSONAL finances.

Specifically …

Is This the Right Time to Refi Your Mortgage
Or Buy a New House?

If you have a mortgage, now is the time to get in touch with your lender and see what he or she can do for you. A typical rule of thumb is that if you can save one percentage point on your interest rate, you may want to go ahead and refinance.

But keep in mind that refinancing isn’t free …

You’ll have to pay upfront fees for everything from a title search to an appraisal to prepaid interest. Those costs can run several thousand dollars, depending on the size of your loan and where you live. So before you decide to refi, make sure you’re going to keep that new mortgage with those lower payments long enough to recoup your upfront costs.

There is one alternative: You can have your lender cover most of your closing costs. But if you do so, you’ll have to accept a higher mortgage rate in exchange.

Also be prepared for a long line at the lender’s office, or a long wait time on the telephone. Because of this latest Fed action and the recent roll out of the Obama mortgage plan, lenders will be swamped with calls.

It’s a buyers’ market right now. And prices are likely to decline further. So even though interest rates have dropped, you don’t need to rush into anything.

So what if you were considering buying a house? Is now the time to jump in? Will the Fed’s move have as big an impact on home buying as it’s having on the refinance market? In one word … NO.

Look, refinancing to grab a lower rate and payment is a no brainer when rates plunge. But the decision to buy a house or not depends on a lot more than financing costs …

You have to think about whether your job is secure. And you have to take the likely direction of home prices — lower — into consideration. Does it really make sense to jump in and buy now when the employment outlook is so uncertain? Or when home prices will likely continue to fall for the next year to 18 months?

Personally, I’d encourage you to tread carefully. Take your time. There’s no need to rush in and buy now with so many homes to choose from and prices likely to decline further. You, as a buyer, have the upper hand now and will likely continue to have it for some time.

Until next time,

Mike

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Last week, I went to settlement on our mortgage refinance. Refinancing was our first step toward converting our residential property to a rental.

Our new interest rate is 5%, which is 0.75% lower than our previous rate and ended up lowering our mortgage payment by $350/mo.

A lower mortgage payment will allow us to set a more competitive monthly rate when we put the property on the market for rent while also netting a profit on the rent after management and maintenance fees.

For the most part, our refinance was a pretty smooth ride for the nearly 90 days it took to complete all of the paperwork and underwriting for the loan. But, there were a few things I needed to set in place and one hurdle that I had to jump in order to complete the transaction.

Loan Restriction

Many finance loans for primary residence properties require the owner to occupy the home for a certain period of time following a refinance transaction such as ours. Our loan documents indicated a 60-day period following this transaction during which we are required to occupy the property as a primary residence. This is consistent with our planning since I intend to occupy the premise until the move to Mississippi in July.

If you are refinancing with intent on converting the property to a rental, therefore, please ensure that you plan to occupy the home in accordance with your loan’s occupancy requirements.

Power of Attorney for Absent Party

Whenever there are two or more persons on the title of a piece of real estate, all parties may be required to participate in such things as the transfer or finance of the property. For all intents and purposes, refinancing a property is like transferring the property back to yourself under different finance terms. In my case, since I was adding my husband to the title of the home, it was like transferring the property back to myself and also to my husband.

Since he was going to be on the title and since his financial credibility, including income and credit health, would be considered for the loan, he would also be responsible for cosigning all of the paperwork at settlement. But he would be away at deployment on the settlement date, so I needed to have him sign a Power of Attorney giving me the power to sign on his behalf.

Through a Power of Attorney, one party can appoint another party to handle the affairs of the first party in that party’s absence. Powers of Attorney can be general or specific, but are meant to give the appointee the right to sign documents and make decisions on the absent party’s behalf.

The title company had instructed me to produce a Power of Attorney that was specific to this transaction. The form can look something like this. It must be signed by the appointer and sometimes by the appointee agent. A notary public for the state must also notarize the document.

As an attorney, I felt comfortable doing a simple search on Google for a Power of Attorney document specific to real estate transactions. Although you don’t have to be an attorney to execute and produce a Power of Attorney, please bear in mind that different states may have different requirements for the Power of Attorney and it may be advisable for you to speak with an attorney about conforming any Power of Attorney to your state’s requirements. Any person appointing another to be an attorney-in-fact through this document should also keep in mind that your appointment gives that person the power to make potentially important decisions on your behalf and possibly about assets belonging to you.

Escrow

During the 90 day rate lock-in period, I submitted the requested documents to the title company, including the Power of Attorney. The documents were approved by the title company, and our loan had gone through underwriting successfully. We were ready for closing. They assigned the date and we were ready to go. Once you make it all the way to closing day, you assume that the mortgage lender and the title company have done their due diligence and that everything should be smooth for the taking. Wrong.

On the day of closing, Wells Fargo told us that a state tax lien had appeared on my husband’s credit report and had been there since November 2008. I’m thinking, “if I requested this loan at the beginning of this year, why have they only found this now???” Anyway, they were requiring me to pay the amount of the lien and they would hold it in escrow.

What is escrow? Escrow is an account for holding funds until the consummation or termination of a transaction or until some condition is met.

The lien assessed against my husband was assessed in error. It was actually something that we thought had been taken care of as the state tax lien office acknowledged the error, but it had not been released. Although I was able to have the state lien office fax a letter to our mortgage lender indicating that the lien was in error and would be released, since the lien had not already been released, they insisted I pay the amount of the lien and they would hold it in escrow until the lien is released. The state tax office indicated it would take approximately 5-7 days to release the lien. At that time, I expect the money to be returned to me. At any rate, I made the title company give me something in writing indicating that fact.

Due Diligence

If my husband and I had done our own due diligence, we might have discovered the lien on his credit report beforehand and could have resolved it before I applied for the loan. What puzzles me is that this didn’t hurt us at all when getting the terms for the loan and, although it had been there since November 2008, the mortgage lender only found it on closing day. One possibility is that there are three credit reporting agencies and things don’t always hit each one at the same time. So, it may not have been on the credit report reviewed by the mortgage lender when we first requested the loan. I would imagine that if it were on there, they would not have accepted our application.

Fortunately for us, the lien was erroneous. But, these types of blemishes on your credit report can really hurt your credit worthiness. It will be up to my husband now, once the lien is released, to ensure that it has also been removed from all of his credit reports. We now have learned that one should never assume something has been resolved. Always do a follow-up.

Have you refinanced a mortgage? Did you have any hiccups in the process?

MAKE MONEY MONDAYS is a forum to discuss ways in which you can create additional sources of income. I try to focus on particular ideas and steps you can take to create alternative income and passive income sources. I have also begun a series of posts called “Rental Property Conversion.” This series follows my husband and I as we turn our property into a rental property. I will also research and post other useful information in this category. If you like what you see here, please use the orange icon at the top right to receive my content updates by email or RSS reader.

Home owners who have lots of equity in their house, might be looking for ways to get access to that equity without having to re-finance their house every time a need arises for some additional money.

A mortgage with a line of credit portion is a great product for some. Here are some typical reasons why you might want to get access to your home equity: buy investments, stocks, bonds, RRSPs, renovate your home, pay for education costs, or other reasons.

The diagram below shows a total home value of $380,000 divided into three sections: the top portion means that 20% of your home value must remain as equity and cannot be financed. The middle portion represents the line of credit portion. The line of credit portion can go up to 80% of the value of the home. The bottom portion is your actual mortgage loan portion today, that you decide to convert over, when you move into this product.

Using the example of a home owner who has a home valued at $380,000……This client has a mortgage balance right now, with a lender, at $210,000. By moving into the mortgage + line of credit product, the current mortgage amount of $210,000 is set up as either a FIXED mortgage, or a VARIABLE rate mortgage.

The borrower can then use anything over this set mortgage amount, all the way up to 80% of the home value.

The home Value for this illustration is $380,000
——————————————————-
20% cannot be financed
——————————————————-
$ 94,000
the MAX Line of Credit portion

Variable rate calculated at
**Prime + 1%

**2.25% + 1% = 3.25%

Line of credit can be increased
up to 80% of the value of the home
——————————————————-
current Mortgage balance today
$ 210,000

Variable rate / 5 year term
Or
Fixed Rate at a 2, 3, 4, 5, 7, 9, or 10 year term
5 yr fixed = 3.69%
or
variable =
**Prime 2.25% + 0.80% = 3.05%
——————————————————-

It is important to mention……. this kind of mortgage product requires a very disciplined borrower as reckless spending or improper investing strategies, with the line of credit portion, could have a very negative outcome: a higher debt and possibly the inability to re-pay the debt.

NOTE: Mortgage rates are effective as of May 17, 2009. **The variable rate amount can go up or down depending on current posted Prime Rate. Mortgage rates are subject to change without notice.

This blog was written by Elizabeth Blair, a Licensed Mortgage Agent with Mortgage Edge in Richmond Hill, Ontario.

Elizabeth services mortgage clients in Mississauga and all over the Greater Toronto area.

You can contact Elizabeth directly by phone at (905) 510-5785

by email at eblair@mortgageedge.ca

or you visit her website at: www.missmortgage.ca

Elizabeth is licensed with the Financial Services Commission of Ontario and is also a Member of IMBA (the Independent Mortgage Brokers Association of Ontario) www.imba.ca
Lic # M08005880 / Brokerage Lic # 10680

I’ve received a tremendous amount of calls lately, with regards to the Homeowner Affordability and Stability Plan, which is in the works as part of a broad plan to get the economy and housing industry back on track through President Barack Obama, The U.S. Department of the Treasury and Housing and Urban Development’s broad plan. The details of the plan are still being worked out, but the plan will help “up to 7-9 million families restructure or refinance their mortgage to avoid foreclosure”, according to the United States Department of Treasury’s website. An Executive Summary of the Homeowner Affordability and Stability Plan can be found on our website at:

Read the rest of this entry »

Here’s the latest news on mortgage rates:

According to bankrate.com, the benchmark 30-year, fixed-rate mortgage rose 7 basis points, to 5.41 percent. Our rates at Home Loan Specialists continue to rank better than the national averages . One year ago, the mortgage index was 6.41 percent, so even though rates have inched up, we are still seeing extremely low rates due to the economic environment.

The benchmark 15-year, fixed-rate mortgage was unchanged at 4.93 percent. The benchmark 5/1 adjustable-rate mortgage rose 3 basis points, to 5.4 percent.

As I mentioned in a previous post, we have uncovered a great new lending source for jumbo loans; that is loans in excess of the FNMA & FHLMC maximums of $417k. These loans have been very tough to find as lenders have tightened credit becuase they cannot easily be packaged and purchased by the government. Previously, we were limited to only offering ARMs on these products or offering much higher than market fixed rates. If you are looking to refinance to reduce your rate or your term, give me a shout.