Mortgage Rates Rise After Jobs Data
Stronger than expected Employment data and the end of the Fed's MBS purchase program were negative for mortgage markets. Mortgage rates ended the week at the highest levels since January.
Investors viewed Friday's Employment report as positive for the economy, which means it was bad news for mortgage markets, and mortgage rates climbed after its release. Against a consensus forecast of 200K, the economy added 162K jobs in March, the highest level since March 2007. The Unemployment Rate remained at 9.7%. While the headline number fell a little short, other aspects of the data displayed a larger degree of unexpected strength. Hiring of census workers, a temporary boost, added just 48K jobs, which was far less than expected. Revisions to data from prior months added 62K jobs. The separate employment survey used to calculate the unemployment rate, which includes smaller companies, showed a higher level of job gains in March.
To support the economy, the Fed has purchased almost $1.25 trillion of MBS since the start of 2009, but the MBS purchase program ended on March 31. Forecasts for the impact on mortgage rates of reduced demand for MBS varied from slight to as much as a one percent rise. While mortgage rates rose this week, yields in other bond markets posted comparable increases, meaning that the effect of the end of the MBS purchase program was close to the lower end of the estimated range this week.
Federally Sponsored Refinance Options
It has been a while since I wrote about the options available to those who need assistance with refinancing their existing loan, but feel they can’t, due to either income or value issues.
It has been 13 months since the President announced the government’s first effort to help homeowners. Many refer to it as the Obama Plan. It is actually two very different programs. The first helps homeowners with equity issues, while the second attempts to help those with income issues. A third program was announced last week that will try and help those with equity issues through a new FHA loan.
New FHA Refinance Program
This program was announced last week by the President. As with the other government programs announced to help homeowners, it sounds great, but most likely will not work. This latest program is again strictly voluntary for lenders to participate in. It will allow those homeowners with 1st and 2nd mortgages to refinance into a new FHA loan. This program is only for owner-occupants. If you are current on your existing mortgages, have decent credit, and sufficient verifiable income, this loan program could work for you. In order for you get a new FHA loan, the government is giving lenders financial incentives to write down a portion of your current mortgages. The new FHA 1st mortgage can not exceed 97.75% of your home’s value. Adding your 2nd mortgage, you can not owe more than 115% of your home’s value. To qualify, the combined payment on your new FHA mortgage and your reduced principal 2nd mortgage can not exceed 31% of your gross income. All other debts can not exceed 50% of your gross income.
Since this program was only announced last week, it is hard to gauge how many home owners will qualify, or how lenders will respond to this program. If it is anything like the modification program reviewed below, it will again be a big waste of time.
Making Home Affordable
This is the program for those wishing to refinance to a lower rate, but are unable to due to a large drop in the value of their property. This program is available to all three types of home ownership: Owner Occupants, 2nd Homes, and Investment Properties. The concept is simple. If you have decent credit and have sufficient income to qualify, by lowering your interest rate, you are less of a risk of foreclosure. This program allows those people to refinance their existing mortgage even if the balance is as high as 125% of the value of the home.
The problems most people encounter with this program are if you have a 2nd mortgage or are already paying mortgage insurance. The program does not allow for you to combine your 1st and 2nd mortgages into one new loan. If you fall into this category, you still might be able to refinance the 1st mortgage at a lower rate, but you will still have the 2nd mortgage. A huge sticking point is that the holder of the 2nd mortgage must agree to the refinance. If they say no, you are stuck. For those with one loan, but have mortgage insurance, the program does allow for those currently with MI to be able to transfer that MI certificate from the old loan to the new one. Borrowers trying to refinance these loans are finding that most lenders either will not do it, or do not have the systems in place to do so. 95% of all those with current MI are stuck.
To qualify for this program you must have decent credit, sufficient verifiable income, an existing 1st mortgage that is owned by either Fannie Mae or Freddie Mac, and the existing mortgage can not be one where you originally qualified with “credit enhancements” such as stated income. To obtain one of these loans, call me, as this program does not require the home owner to work with their current mortgage servicer.
Home Affordable Modification Program
This program is for those in imminent risk of foreclosure. This voluntary program allows those that are close to losing their home to apply with their existing servicer for a 5 year modification of their current loan to a lower interest rate. The lender is in no way compelled to grant you a modification. There are specific formulas to calculate if you qualify, and to what rate your loan can be lowered to. The government involvement in this program is that they help offset the lenders loss, by compensating them for a portion of their reduced income from your loan. The lender does have the right to tack on any losses not covered by the government to the end of your loan, or even require you to agree to a separate loan for the income they are giving up.
This is the program most scam artists have used to prey upon the desperate. Never pay a company for their services in helping you get a modification. There are several non-profit organizations that will assist you for free.
If you want a modification because you want to lower your rate, yet you have sufficient income and good credit, you will not get one! Here is how the lenders look at your request and deciding if they should grant you a modification. For a moment, look at your situation through the eyes of the lender: “Will we the lender, lose more money by granting a modification, or by going to foreclosure?” If the lender feels that they will lose more income by granting a modification over foreclosure, you will not get one. They will let the property go into foreclosure and take the smaller loss.
When this program was announced in February of 2009, it was touted as the government’s best effort to stop the flood of foreclosures. One year later, thousands of homeowners have been scammed by bogus modification companies who charged as much as $5,000 up front to desperate homeowners. Then there’s the other group of people that had great credit that were advised to stop paying their mortgage to show need. They never got a modification and had their credit ruined in the process
The most sobering statistic released this week by the government is that of all those homeowners trying to use this program to lower their mortgage payment, slightly less than 10% have been successful.
Also Notable:
The 4-week average of Jobless Claims dropped to the lowest level since September 2008
The Treasury will auction $74 billion in 3-yr, 10-yr, and 30-yr securities next week
Oil prices rose to $85 per barrel, the highest level of the year
The Fed purchased $6.0 billion in agency MBS during the final week of the program
Average 30 yr fixed rate:
Last week:
+0.15%
This week:
+0.10%
Stocks (weekly):
Dow:
10,925
+25
NASDAQ:
2,400
0
Week Ahead
It will be a light week for economic data next week. Pending Home Sales, a leading indicator for the housing market, will come out on Monday. ISM Services will also be released on Monday. The FOMC Minutes from the March 16 Fed meeting will be released on Tuesday. These detailed meeting notes often provide additional insight into the Fed's decisions. In addition, there will be Treasury auctions on Tuesday, Wednesday, and Thursday.
HUD changes definitions
The U.S. Department of Housing & Urban Development (HUD) has announced changes to its Neighborhood Stabilization Program (NSP). HUD will change how it defines foreclosed and abandoned to include properties in mortgage default and uninhabitable homes with lingering code violations. These expanded definitions, effective immediately, will increase the reach of NSP by allowing more properties to qualify, remove existing barriers caused by market conditions, and help state and local grantees to meet a Congressional requirement that they obligate all of their NSP1 funding by September of this year. HUD previously defined the term foreclosed to apply only to properties where the foreclosure process was completed. Local communities suggested this narrow definition was not a good fit for market conditions since many properties were lingering in the foreclosure process and beyond the reach of NSP.
The original definition limited a grantee’s ability to intervene strategically when a lender initiates but does not complete foreclosure, or where a default is allowed to linger. In addition, many lenders are transferring properties to aggregators or loan servicers, which then arrange for final disposition. In some of these cases, the previous policy did not consider the properties to retain their foreclosed status after title is transferred to the aggregator or servicer. Properties will now be eligible for NSP assistance if any of the following conditions apply: The property is at least 60 days delinquent on its mortgage and the owner has been notified; or the property owner is 90 days or more delinquent on tax payments; or under state or local law, foreclosure proceedings have been initiated or completed; or foreclosure proceedings have been completed and title has been transferred to an intermediary aggregator or servicer that is not an NSP grantee, subrecipient, developer, or end user.
Dollar down
The dollar fell 0.1% against the yen to ¥94.475 and 0.4% versus the British pound to $1.527. But it rose 0.1% to $1.348 against the euro. “The March employment report confirmed that the trend in the U.S. job market and indeed the economy remains upward and onward,” said analysts at Forex.com in a report. Still analysts said that much of the dollar’s strength against the euro is attributed to persistent worries over Greece’s stability. “Credit default swaps for Greece, Portugal and Spain surged to recent highs this past week, just after the EU accord on Greece, which should serve as a reminder that EU credit concerns are still an issue,” analysts for Forex.com said. The British pound continued to enjoy a boost because of better-than-expected economic reports announced by the U.K. government last week.
But Forex.com said any major appreciation in the currency will be stifled ahead of the May general election. Investors will be keeping a watch on China’s currency policy, which many economists believe has been artificially held down to boost Chinese exports and bolster its economy. Revaluation of the Chinese yuan would be seen as supporting the global recovery by improving the export competitiveness of developed economies such as Japan or Germany, Forex.com analysts said. Several economic reports are due out this week, including consumer credit and chain-store sales.
Here come taxes
The new Medicare tax on investment income and a rise in capital gains and dividend taxes means investors will soon face higher costs. By 2013, investment taxes for wealthy Americans will rise to roughly 24% from the current level of 15%. The tax applies to roughly 1 million individuals who earn over $200,000 and 4 million couples who rake in more than $250,000. While this group makes up just 2% of the population, it’s a far bigger driver of market activity than the other 98%. In addition, the higher rates aren’t tied to inflation, meaning middle-class Americans will eventually price into the group. The psychological impact may be profound in the market. With the U.S. economy still reeling in the aftermath of the worst recession since the 1930s, investors have more reason to show caution in the near term. “You’ll probably see more of a sideways pattern in the stock market over the next few years, but it’s a little muddy as to how the higher taxes might factor in,” said Linda Duessel, equity market strategist at Federated Investors.
With some of the 2003 tax cuts expiring at the end of this year, wealthy Americans will likely see a boost in long-term capital gains taxes to 20% from 15%. Starting in 2013, they’ll also pay additional Medicare taxes – an extra 0.9% of their wage income and an extra 3.8% on investment income. For many investors, the rally over the last 12 months only served to cut or erase the losses they racked up in 2008’s bloodletting. Having only just recovered some or all of their holdings, investors may see the threat of higher taxes as a catalyst to bail, said Ken Grant, partner at Waterstone Private Wealth Management. “If you’re thinking of selling and you know you’re going to see a tax of 20% in 2011 and 15% in 2010, you’re going to sell ahead of the higher rate that’s coming,” Grant said.
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