Monday, August 29, 2011

Refi Out of Reach

Recently there have been some headlines suggesting that the Obama Administration is working on a program to help underwater homeowners refinance to lower rates. These news stories have made the phones of thousands of mortgage loan originators ring. Unfortunately most of the calls end with, "I'm sorry there is nothing I can do to help you right now."

In 2009 the federal government rolled out the Home Affordable Refinance Program (HARP) which is designed to do what the current headlines propose. A homeowner can be as much as 25% underwater on their current loan and still be eligible for a refinance, but only if their current mortgage is owned by Fannie Mae or Freddie Mac. There are some discussion of a new program that expands the HARP guidelines, but there doesn't seem to be anything of substance at this time.

Something that needs to be addressed are adjustable rate mortgages or ARMs. There are a lot of homeowners that can only afford their home because they have an ARM today, and that rate has adjusted so low (sometimes below 3%). However, their interest rate will begin to adjust up in future years. No one knows exactly when, but Fed Chairman Ben Bernanke states that rates will remain low through 2013.
For discussion sake, let's say that rates drive up several points by 2014. Those ARM homeowners will see their payments shoot up, and they better have increased their income by then in order to keep up with their payments. Also, many of these ARM loans are not owned by Fannie Mae or Freddie Mac, so a program that allows them to refinace can help to avoid future defaults down the road. If the government wants to avoid more foreclosures, then this is something they should implement.

Saturday, August 6, 2011

U.S. Debt Downgrade & Mortgage Rates

As the stock market tumbled this past week, mortgage rates rallied. Rates for home loans fell to the lowest level of the year on Thursday. On Friday, rates gave back some of their gains, but after trading hours the really big news hit the wire. Standard and Poor's (one of the big three rating agencies) believes that U.S. Treasury debt is no longer safe enough to deserve the top credit rating.

How does this news impact mortgage rates? We won't know for sure until the market opens on Monday, but logic tells us that rates must rise. If Treasury securities are now more risky, then investors will demand a higher yield. Treasure rates which are the benchmark for other bonds will rise. Investors that buy debt should also demand higher yields on corporate bonds and mortgage backed securities.

We'll be anxiously awaiting investors' reaction on Monday morning when the market opens.