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The most-asked questions by home mortgage borrowers so far in 2010 are about where rates will go, how to lock rates in a volatile trading environment, and how home appraisals affect the lending process. Each question is addressed below.

Where Will Rates Go By Summer?
Rates on loans up to $417,000 are about 5% as of mid-February, and rates could rise as much as .5% by summer for three macro reasons: (1) The Fed will end it’s $1.25t mortgage bond buying program March 31, and then we’ll likely see profit taking on mortgage bonds as private investors sell, which pushes prices down and yields—or rates—up; (2) An improving economy and resulting inflationary fear will cause mortgage bonds to sell off because inflation eats up bond returns, so this would also push bond prices down and rates up; and (3) Inflation will cause the Fed to start hiking short rates from current near-zero levels. Global investors currently borrow on these short-term rates to buy long-term securities with higher returns. When short rates rise, it will erode the benefit of this interest rate trade and force selling of long-term securities—including mortgage bonds—to repay short-term loans. That selling will also push rates higher.

How Do You Decide When To Lock A Mortgage Rate?
We can expect continued rate volatility as markets struggle to interpret the impact daily economic indicators have on the aforementioned macro rate factors. For now, rates are holding close to record lows, but intraday rate swings can be .25% to .5% as mortgage bonds trade on different interpretations of daily economic data. So how do you decide when to lock a rate? You need to set a rate target with your mortgage advisor based on current trading ranges and estimated results of upcoming economic data, and you need to be ready decide on a rate lock based on those rate expectations. If it looks like rates will trade above that target, it’s time to lock your rate—this includes locking ahead of economic releases that might have surprise results: better to lock at your target than having rates trade the wrong way on surprise data. It’s a very simple strategy, and making the lock decision process more complicated than this adds unnecessary stress. more…

For the past three weeks, rates have closed market trading days within .25% of record lows. But the intraday rate swings have been dramatic as mortgage bond traders sort through economic data releases.

Case in point: how rate markets reacted to today’s Jobs Report. Stocks rallied and mortgage bonds (that rates are tied to) sold off on the initial reaction to unemployment decreasing from 10% in December to 9.7% in January. But the report also said that actual January job losses of -20k were greater than the 15k new jobs estimates called for, and December’s previously reported -85k job losses was revised up to -150k. Markets seemed to realize this as the trading day continued because stocks went negative and bonds rallied.

All told, mortgage bonds traded in a 68 basis point range today, which caused rates to trade in a .25% to .375% range as lenders issued new rate sheets throughout the day (Sidebar: can we still say “rate sheets” in this online era). more…

A common question among mortgage shoppers is: what if rates get better after I lock a rate for my loan? The answer is that locking a rate is much like buying a stock.

When you choose to buy a stock at a specified price, you’re executing a Limit Order. This means you set the price at which the trade will be executed rather than being subject to the market price at a trade interval.

So if you execute a limit order to buy a stock at $55.00, you own it at $55.00. If the market price declines to $52.50 after you own that stock, you can’t go back to the securities firm and re-purchase those shares at the lower price. You could elect to use some kind of hedging strategy to offset the loss but even then, you’d be incurring more cost to buy more securities to create a hedge. more…

WeeklyBasis is normally published Fridays, but this Monday report is an exception so I can do an outlook on this first business day of 2010. To summarize, my outlook is for waning Fed support to push rates to about 1% higher, and choppy economic recovery marked by modest GDP growth and minimal employment improvement. Rationale for these positions is below.

Please note that conforming rates are assumed when discussing rates because these are the broadest proxies for how all rate tiers behave. Current conforming, super conforming and jumbo rates are also included at the bottom along with loan amounts designated by each of these categories. more…

Repeat after me: Fed Funds are set by the Federal Open Market Committee, don’t vary daily, and have no direct bearing on 30-yr mortgage rates. 30-yr mortgage rates are set by supply and demand through the bond markets, vary every day, and prices are adjusted by what investors & servicers want to see flowing into their portfolios.

According to Fed Chairman Bernanke, the Fed still expects the labor market to improve very slowly, so they are reluctant to remove monetary stimulus by raising rates. Fed officials believe that inflation will remain low for the next couple of years, meaning that there is little short-term pressure to raise rates. But mortgage rates are not set by the Fed, or their thoughts on inflation – they’re set by “the market”. more…

RELEVANCE OF FHA LOANS

Q: Are FHA loans even relevant for the San Francisco Bay Area?
A: Yes. In the 9 county San Francisco Bay Area, FHA loan limits are $729,750. With a 3.5% down payment, this translates into a $756,217 home purchase price. So on a condo with $350 HOA dues, all-inclusive pretax monthly costs are $5632 and all-inclusive cash-to-close is $46,172. With a 10% down payment, this translates into a $810,833 home purchase price. So on a single family home, all-inclusive pretax monthly costs are $5405 and all-inclusive cash-to-close is $103,252. Cash-to-close figures include 8mo prepaid taxes and 1yr prepaid insurance. About $145,000 gross annual household is needed to qualify for these scenarios.

OVERVIEW OF FHA LOANS more…

Do prices for the same item vary in the same area? Of course they do. A gallon of milk, or a paint brush, costs more or less in some stores than in others. Consumers, like you and me, know this but still often buy goods for more money than they have to. Convenience, loyalty, and perceived quality all come into play in purchases, and in mortgage origination. The price of labor is no different. An underwriter’s salary at one mortgage shop, for the same skills, could be +/- 20 or 30% of what it is at another shop less than 10 miles away. Why is that? Is the labor market that inefficient? Are the working conditions that different? Probably not. Workers are much less likely to leave a high paying job than a low paying job. And during a recession, and unemployment is high, fewer people will quit their jobs, since they almost think that they are lucky to have a job. Perhaps their employer has convinced them of that! And a sense of duty and fairness obviously factor into it.

IRS Help For Commercial Refis
Yesterday the IRS issued new rules which impact the refinance of commercial loans. Most believe that it will be easier to refinance some commercial real estate loans. The new IRS rules would allow commercial loans that are part of REMIC’s (Real Estate Mortgage Investment Conduits), to be refinanced without triggering tax penalties for investors. Those in the commercial side of mortgage banking are seeing a potential tsunami of delinquencies and foreclosures, and hopefully this will help but probably not enough to cover the lack of available financing seen in the industry. At this time the changes will not affect commercial mortgage loans held by investment trusts. more…

As of July 31, the process of mortgage loan disclosure got a lot more complicated with revised provisions of the Truth In Lending Act (TILA) being implemented as of this date. Since today’s date is when the first of these loans are getting to the closing phase, lenders and borrowers are beginning to realize just how complicated it is. Normally you shop for a mortgage, get some competing Good Faith Estimates, choose your lender and go forward. Estimates should have always been accurate but since the lender’s Good Faith Estimate is disclosing line item fees that come from third parties like title and insurance companies, there was always fine tuning in the end of a transaction as those third-party fees were finalized during a transaction. And speaking of fine-tuning, maybe you’re in a sales transaction and the seller offers a credit mid-escrow or changes the closing date. These items change the final terms.

And the new TILA rules say final fees cannot change by more than $100 as compared to the disclosures you signed when you began: you will sign a Good Faith Estimate which is the line-item breakdown of cash to close (also includes monthly obligations and rate) and the Truth In Lending form which shows what your rate would be if you financed closing costs (called Annual Percentage Rate (APR) and Amount Financed) and what the total cost of the loan would be over the life of the loan (called Finance Charge). If they change by more than $100 up or down, you have to sign new disclosures, put the transaction on hold for three days while you wait out the ‘rescission period’, then resume. Even the three days will most likely change the cash-to-close by more than $100 because of the change to prorated interest. The best thing to avoid problems is to choose a lender you trust and stick with them—if you expect to close on time or at all, you should be done shopping for a lender before you enter into escrow. More on this topic to come. For now, the link above is to the full TILA rules, and below are the excerpts highlighting APR, Amount Financed, and Finance Charge. More to come on this topic. more…

“Holy Good Faith Estimate, Bat Man!” Here are HUD’s answers to all your questions about the new Good Faith Estimates & RESPA.

In the old days, hurricanes were named after women. Why? Because when they arrive, they’re wet and wild, but when they go, they take your house and car. We now have Hurricane Bill in the Atlantic, which reminds the markets that it is the time of year when every major storm that comes and goes tends to move the price of oil. Fortunately for anyone who drives a car, however, the price of oil is sinking, given continued slow economic news around the world.

Aside from that, there is no economic news today, aside from whatever the equities markets might be up to. Yesterday rates worsened slightly in spite of the Fed buying their usual allotment of securities – this time mostly 5% and 5.5% securities (5.25%-6.125% mortgage rates). In spite of little news, the bond market is on a tear this morning! The price on the 10-yr is better by almost a point, and the yield is down to 3.41%; 30-yr mortgage prices are better by between .250-.375 more…

RATE/MARKET UPDATE
Rates on conforming loans up to $417k and super-conforming loans up to $729k continue to trade up and down as much as .5% per week but as of today we’re about .125% lower than last week. Rates on Jumbos from $729k to $3.5m are competitive for borrowers with strong down payments, income and credit profiles, but borrower scrutiny—even for the most stable borrowers—is intense so borrowers should expect to provide full financial documentation to obtain financing.

This week S&P Case Shiller home prices for May showed a -17.1% decline, but the fourth straight month where declines shrank. GDP for 2Q2009 was -1% vs. -6.4% for 1Q2009, making this the fourth straight quarter of declines, something that hasn’t happened in 62 years. The decrease in GDP loss from 1Q to 2Q is due mostly to a +5.6% increase in government spending, rather than the consumer who typically accounts for two-thirds of spending. Also this week we had about $100b in Treasury auctions (this is how the government raises money to spend). Some attribute better rates to well-received Treasury auctions that benefit Treasury and mortgage bonds, but it’s the negative economic news that is the more likely factor behind a move toward bonds this week. more…