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Here’s an NYT op-ed with some useful history of the 30yr mortgage. It also discusses some ideas about flexible mortgages, where for example, a borrower can have a 30yr fixed that could have interim periods of interest-only when a borrower needs it. These ideas are not new. Robert Shiller, of Case Shiller home price index fame, has been talking about these concepts for years. But Shiller and the author of this post, a UCLA law professor, never discuss the fact that any ‘flexible’ mortgage would also have flexible pricing—meaning that rates will be higher on mortgages with more options. And let’s not forget the current regulatory wave is precisely to limit flexibility in mortgage products and pricing. So theory about a newer, better mortgage to replace the 30yr fixed is one thing. Market and regulatory reality is another.

Back in January, here’s what we said about rates and the economy:

“As we move through 2010, our outlook is for waning Fed support to push rates approximately 1% higher, and for a choppy economic recovery marked by modest GDP growth and minimal employment improvement.”

Conforming 30-year fixed rates were at 5% at the time. At this July 14 writing, rates are much lower at 4.57%. Clearly our rate view was conservative but at least our economic outlook is still accurate, and at least rates are lower. more…

Rate Snapshot
Conforming, Jumbo, and FHA rates ended last week at record lows again (see rates below), which makes a two-month streak of record lows. A significant rate spike is not expected in the near future, but it’s also not likely rates will stay this low. Here’s why rates could tick up next week.

How Bond Markets Affect Mortgage Rates
We will see June Retail Sales figures Wednesday, June business inflation figures Thursday, and June consumer inflation Friday. These reports are important, but will likely show continued tame inflation and tentative consumers, which won’t surprise rate markets. more…

Every Thursday, Freddie Mac releases its Primary Mortgage Market Survey (PMMS). This is the official record on mortgage rates and source material for the overwhelming majority of rate reports in the media—reports that very often exclude critical details rate shoppers need to know. Since the one-day market crash May 6, mortgage bonds have rallied to insane levels and mortgage rates have dropped to new record lows several times. So news stories about record low rates hit at the end of each week, but they are for rates that were available the previous week. And only if you have a single family home, and a loan of $417,000 or less, and lots more fine print. Below is a checklist of characteristics used in the Freddie Mac PMMS survey, so you know if these rates apply to you or not.

PMMS rates reported in the press each Thursday are for the week leading up to (and not including) Thursday. Mortgage rates are tied to mortgage bond trading, and as such, rates change all day everyday. The Thursday PMMS report on rates is for rates that are long expired, so it’s critical to get market-relevant quotes from a mortgage lender, not a news source. Also below are some other useful links for understanding rate quotes and rate locks. more…

Rate shoppers and watchers should note that the lowest rates on official record are here now. The chart below shows rates from June 2010 back to April 1971, when Freddie Mac started officially tracking 30 year mortgage rates. The high was in October 1981, when then Fed chairman Paul Volcker was hiking rates to battle inflation (more on this below). At that time, borrowers paid an average of 2.3 points to buy a rate down to 18.45%. The low was May 27, 2010 when borrowers averaged 0.7 points to buy a rate down to 4.78%—note that 4.78% with 0.7 points was also achieved three times in 2009: April 2, April 30, and November 25. These are national average rates on loans up to $417,000 for single family homes with 20% or more equity in the property. Rates change daily as mortgage bonds trade.

FULL SIZE CHART

Which Bonds Are Mortgage Rates Tied To?
Rates on mortgage loans up to $417k and up to $729k are tied to trading in “agency” mortgage-backed bonds—meaning bonds issued by Fannie Mae, Freddie Mac, and Ginnie Mae. So while many look to the 10yr Treasury Note for clues on mortgage rates, they should be looking at mortgage bonds. And specifically, there are different duration mortgage bonds to watch during different times in the market to predict what rates might do, and how to properly lock a rate at the best time.

Prices on agency mortgage bonds have been slightly abnormal lately, so we have to look at the security price difference between a 4% and a 4.5% security to see what’s going on. Historically, on average, price differences between .125% for a 30-yr mortgage is about .5 in price, or 2 points for .5%. This relationship, however, has gotten out of whack with the latest volatility and prepayment fears in the mortgage-backed security sector. Currently the price difference between a 4.0% security and a 4.5% security is now 2.75 in price (instead of 2.00), so therefore the difference in price between a 4.75% loan, which would typically be slotted into a 4.50% security, and a 4.625% loan, which would go into a 4.00% security, same impounds, same LTV, same credit score, is now much greater. more…

Zero-point rates on 30yr fixed Conforming loans (up to $729k) ended last week at their lowest levels since official records began in 1971, and Jumbo 30yr fixed loans (above $729k) touched the low-5% range. By the time last week’s rate levels are officially announced by Freddie Mac on May 27, rates are likely to be higher. Below is a recap of how rates got here and rationale for why rates may rise next week.

Why Rates & Stocks Have Dropped
The Dow dropped 1000 points before closing down 348 points on May 6. The press has dubbed it a “Flash Crash,” but let’s go beyond the clever label to understand what happened that day, why the Dow is down 675 points since that day, and why mortgage rates are down .25% since then. more…

How Lenders Create Rate Sheets
Zero-point rates on loans up to $729k held at record lows for the second week last week even though mortgage bond levels might suggest rates would have dropped further. Jumbos also held steady at very attractive levels. Mortgage bonds benefitted as the EU/IMF’s $140b Greece bailout caused investors to sell European debt and buy more conservative U.S. mortgage and Treasury bonds. When bond prices rise on these buying rallies, rates drop.

But it’s not actual mortgage rates that drop when mortgage bond prices rally, it’s mortgage bond yields (the rate of return on those bonds) that drop. Then lenders re-price mortgage rate sheets based on those lower yields. This lowering of mortgage rates didn’t happen to quite the extent that lower mortgage bond yields might suggest because last week was wildly volatile. Mortgage bond prices swung more than 100 basis points Thursday and Friday—in the bond world, this is similar to the massive swings we saw in the Dow Thursday (when it was down 1000 at one point). more…

In the past week, we’ve seen promising economic and home price data, but many homeowners are still strained to the point where foreclosure is inevitable—or perhaps “viable” for those deeply underwater homeowners considering strategic defaults. So the often repeated question is: what do late mortgage payments, foreclosures and bankruptcies do to your credit score? A couple weeks ago, Les Christie at CNNMoney did a great job of answering this question, and since the story got a bit lost in the SEC/Goldman Sachs lawsuit hysteria, we just wanted to highlight it again.

Excerpted below are some estimated credit score hits a borrower would take by being late on their mortgage, and eventually going into foreclosure and/or bankruptcy. These are based on models from Fair Isaac, one of the three major credit bureaus … in other words, these aren’t real consumer scores. But it’s still a useful ballpark for debt-strained consumers who need scenarios of what might happen to their credit score. Every profile will be different based on overall credit profile, and the recovery time to get back to a favorable score vary based on credit history prior to the derogatory filings. Derogatory reports remain on the credit scores for 7 years (and in the case of bankruptcy, it’s 7 years from the time of discharge), but if an otherwise top-tier credit score consumer is hit by default, foreclosure or bankruptcy, their score can rebound in less than half that time if they resume a well-maintained credit profile immediately. more…

This picture on ‘How To Complete The New Good Faith Estimate’ was making the email rounds this week. Laugh-out-loud funny for most mortgage professionals, but also any borrowers who’ve seen this new form effective January 1, 2010 will see the humor.