Fed's interest-rate cuts will benefit ARM, HELOC borrowers

Effect on long-term rates remains to be seen
By: Matt Carter: Inman News
The unscheduled and dramatic cut in short-term interest rates announced today by the Federal Reserve will provide immediate relief for borrowers with home-equity loans or facing interest-rate resets, mortgage market experts say.

But long-term rates - which were at 2 1/2-year lows before today's 75-basis-point reduction in the discount rate and the target for the federal funds overnight rate - could move in the other direction if bond market investors get nervous about inflation.

For now, the Fed seems to have decided that the threat of a recession far outweighs the risk of inflation, making in a single day cuts in short-term rates some observers had expected would be stretched out over months.

"Just a few weeks ago, the consensus was that the Fed would cut no more than 75 basis points, and 3.25 percent would be trough," said Freddie Mac's chief economist Frank Nothaft. "We're there already. So are we at the low point? It's really hard to say."

Nothaft said the Federal Reserve's Open Market Committee could cut rates again when it holds its scheduled meeting Jan. 29-30. Or its members may want to wait and see how to today's dramatic move affects economic indicators.

The rate cuts are "certainly good news for people who have mortgages, or are shopping for a mortgage," Nothaft said. For those with adjustable-rate mortgages (ARMs) indexed to the prime rate or home-equity lines of credit (HELOC) loans, "this shows up right away in terms of lower interest rates," as banks follow suit and lower the prime rate to 6.5 percent. For ARM borrowers facing interest-rate resets, Nothaft said, that translates into a smaller increase in payments, and "maybe even a decline."

According to Freddie Mac's most recent weekly survey of mortgage rates (see Inman News story), the 5.69 percent rate on a 30-year fixed-rate loan was the best in 2 1/2 years. While it remains to be seen what effect the cut in short-term rates will have in the long run, rates on 10-year Treasurys fell today as stocks bounced back from earlier losses, Nothaft said.

Although rates on 10-year Treasurys are not linked directly to mortgage rates, they tend to move in the same direction, as they play a similar role in investor's portfolios.

"It helps more than it hurts," said Doug Duncan, the chief economist for the Mortgage Bankers Association. "It's probably not going to bring long rates down much further, but it certainly brings short rates down, and has some positives for the whole economy and housing."

Duncan said what happens with long-term rates depends largely on whether market participants think the Fed has gone far enough with short-term cuts.

If today's cuts are seen as adequate, "that increases expectations of future economic growth, and may establish a sort of bottom where the 10-year Treasury yield is going to go," Duncan said. "I don't expect the 10-year Treasury yield to go much (lower), unless there were a whole bunch more difficult financial announcements made in the next couple of months."

What the rate cuts probably won't do is restore investor confidence in the secondary market for mortgage loans not guaranteed by Freddie Mac and Fannie Mae. That means borrowers seeking subprime and so-called jumbo loans will continue to pay much higher rates than offered during the housing boom.

Although the secondary market for loans within the $417,000 conforming loan limit "is working just fine," Nothaft said, rates on jumbo loans are about a full percentage point higher than those for conforming loans.

The National Association of Realtors and some Democrats in Congress are pushing for a 50 percent increase in the conforming loan limit to allow Fannie and Freddie to buy or guarantee loans that are now considered "jumbo."

The Bush administration wants stricter oversight of Fannie and Freddie in place before it will go along with an increase in the conforming loan limit, saying the bigger loans may involve more risk, and reduce the number of smaller loans the government-sponsored enterprises can back.
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What the Fed Cut Means For Your Mortgage

Learn what the Federal Reserve's rate cut means to your mortgage and your home’s financial future.
CNBC
On days like this, I think it’s important to go back to the ol’ mortgage primer and figure out exactly what all this news means to you, to your mortgage, to your home equity line and to your home’s financial future. I’ve said it before, and I’ll say it again: the 30-year fixed is not tied to short-term treasuries.

Fixed mortgage rates are tied to long-term bond yields that move based on the outlook for the economy and inflation. And guess what? The long-term outlook for the economy isn’t exactly rosy right now.

Today’s rate cut does affect short-term adjustable rate mortgages, but not really as much as you might think. Why? Because this rate cut was already priced into the market, maybe not three quarter's point, but definitely a half-point. So if you are facing a reset on your ARM, you’re in much better shape today than you were just six months ago.

For example, if your rate adjusts Feb. 1st, and your ARM is pegged to the 1-year treasury, than your reset is going to be to 5.25 percent as opposed to the 7.5 percent that it would have been in August. That’s going to make the payment much more manageable.

So does this cut stem the foreclosure crisis? Maybe a bit on the margins, but not really, and here’s why: the bulk of the folks facing foreclosure because they can't make their monthly payments have no equity in their homes and no money to put down on a refinance.

While rates might be lower, this is a market where lenders and investors are much more aware of risk and will gravitate toward borrowers that represent less risk. So many folks will still find themselves in trouble. For people who are having trouble paying the initial rate on the loan, forget it. No help there.

As for those looking to buy a home, that is, get a new mortgage, while ARM rates may be lower, the mortgage landscape is still a far far different tundra than it was just a year ago. You can’t do a stated income loan anymore, and you can’t do 100 percent financing. Tighter standards don’t change with a rate cut.

And I want to add my two cents here about a home equity line of credit. Yes, the rates are lower now, but I really don’t think that means we should all start using our homes as ATM’s again, which is what got us all in trouble in the first place. This is a time to pay off debt, not to gather more. The housing market is still in trouble.

The statement from the Federal Reserve this morning: “incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.” We all know the price correction in housing is still underway with home prices across the nation (yes, I know, some markets worse than others) expected to fall further, so this is no time to put your home in more hoc. Just my two cents, which I’m putting in the bank as we speak.
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Mortgage Markets Get a Hand from BoFA

The giants are taking hold of the mortgage industry. Bank of America's purchase of Countrywide is a vote of confidence in the revival of the housing industry.
By: James R. Hagerty: The Wall Street Journal Online
The giants are taking control of the home-mortgage market.

Friday's agreement for Bank of America Corp. to buy Countrywide Financial Corp. for $4 billion shows how size and financial solidity are trumping everything else in mortgage lending. With the heft to withstand rising defaults and falling home prices, these big companies are helping prevent a total shutdown of mortgage lending.

"Bank of America stepping in right now is a very good thing for the market" because it signals confidence in an eventual revival of the housing and mortgage markets from what appears to be the worst slump since the Great Depression, said Susan M. Wachter, a finance and real-estate professor at the University of Pennsylvania's Wharton School.

There is a price to pay: Their greater role means less competition and higher costs for consumers, at least in the short run.

But giant banks like Bank of America have the ability to finance their lending relatively cheaply through deposits and to keep on their books loans that are hard to sell to investors. That insulates them from the market fears that, in the past year, have knocked thousands of small and midsized lenders and brokers out of business because they could no longer find takers for loans they generate or borrow money at reasonable rates.

Those fears may drive other big mortgage lenders into deals. Washington Mutual Inc., which had 5.9% of the mortgage market in the first nine months of 2007, has been struggling with heavy loan losses and is considered a potential takeover candidate, as is IndyMac Bancorp Inc., whose share was 3.3%. Both Washington Mutual and IndyMac operate thrifts and are heavily focused on home mortgages.

One potential buyer for Washington Mutual is J.P. Morgan Chase & Co., which has expressed interest in expanding its retail-banking franchise in places like California and the Southeast. Executives at J.P. Morgan also have expressed interest in other regional banks.

The Bank of America purchase is "the first step on a new way of life" for the mortgage industry, said Paul J. Miller Jr., an analyst at Friedman, Billings, Ramsey & Co. To survive, major lenders will have to hold more capital and charge higher interest rates, in relation to their cost of funds, to compensate for the risks of home loans. Those risks have increased because house prices are falling, lowering the value of collateral, and it is no longer easy to sell loans other than those that match the criteria for sale to government-sponsored mortgage investors Freddie Mac and Fannie Mae.

Having a well-known name like Bank of America or J.P. Morgan Chase also is important in this period of turmoil because home buyers, and the real-estate agents who advise them, don't want to risk finding out at the closing table that their lender has just shut down. "Right now people are afraid, and they're looking for certainty," said Tom LaMalfa, a managing director of Wholesale Access, a mortgage-research firm in Columbia, Md. He said many are willing to pay a bit more in fees or interest rate to get a loan from a lender they view as solid.

The shakeout follows an unprecedented boom. During the first half of the decade, when falling interest rates encouraged millions of Americans to refinance, big lenders couldn't keep up with demand. That left plenty of room for small lenders and mortgage brokers, which originate loans for sale to bigger lenders.

Now, defaults are forcing lenders to tighten their standards, and mortgage volume has been plunging, along with home sales. The Mortgage Bankers Association has projected home mortgage originations of about $1.86 trillion this year, down from a peak of $3.95 trillion in 2003.

With much less business, big lenders are much less inclined to accept loans generated by brokers, especially as those loans in the past often have been more prone to default. The number of mortgage-brokerage firms - mostly tiny operations with a handful of employees - has dropped to 40,000 from 53,000 a year ago, estimates Mr. LaMalfa of Wholesale Access. He thinks the number is likely to fall to 30,000 by the end of this year.

Mr. LaMalfa thinks brokers will remain a significant part of the mortgage business because they tend to have low costs, a willingness to work in the evenings or on weekends and an ability to reach borrowers in neighborhoods with few or no bank branches.

For now, lenders are being forced to concentrate on loans that either can be sold to Fannie or Freddie or those considered safe enough to retain as long-term investments.

For Bank of America, buying Countrywide will gain it a commanding position in mortgages. Bank of America and Countrywide had a combined market share of about 25% in the first nine months of 2007, according to Inside Mortgage Finance, a trade publication. That puts them far ahead of the No. 2 mortgage lender, Wells Fargo & Co., with a market share of about 11%. The other top contenders in terms of loan volume are Citigroup Inc. and J.P. Morgan Chase, which both had about 8% of the market in last year's first nine months.
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Housing Scams More Than Double

The FBI expects even more this year, particularly with foreclosure scams that prey on home owners desperate to save their homes.
By: Donna Leinwand: REALTOR® Magazine
According to the FBI, the agency took on 1,210 new cases of mortgage fraud during the last fiscal year — nearly three times the caseload for 2003.

The agency saw its conviction rate more than double to 260 in 2007, from 123 in fiscal 2006. Financial crimes section chief Sharon Ormsby predicts the number will likely rise even further this year.

That is, in part, because the FBI expects more foreclosure scams to emerge as an increasing number of home owners caught up in the subprime loan fiasco resort to desperate measures to try and save their homes.

Ormsby also says more new fraud cases may be tied to reverse mortgages, which allow senior home owners to borrow against their equity.
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Pending Sales Activity Expected to Rise Later this Year

Over the next few months, existing-home sales are expected to hold fairly steady as indicated by pending sales activity, then rise later in the year and continue to improve in 2009, according to the latest forecast by the National Association of Realtors®.
RISMEDIA
Lawrence Yun, NAR chief economist, said there is a pull and tug exerting itself on the market. “On the one hand, we have a pent-up demand from the four million jobs added to our economy over the past two years of sales decline,” he said. “On the other, consumers continue to wait for additional signs of market stabilization. There are more people with financial capacity now than in 2005, but many are trying to market-time their purchase. As a result, the exact timing and the strength of a home sales recovery is a bit uncertain. A meaningful recovery in existing-home sales could occur as early as this spring, or it may be further delayed toward late 2008.”

According to NAR, the Pending Home Sales Index, a forward-looking indicator based on contracts signed in November, fell 2.6% to a reading of 87.6 from a strong upward revision of 89.9 in October, but remains above the August and September readings and indicates a broad stabilization. The index was 19.2% below the November 2006 level of 108.4.

“Although there could be some minor slippage in the first quarter, existing-home sales should hold in a narrow range before trending up,” Yun said.

The PHSI in the South rose 2.3% in November to 100.7 but is 19.8% below a year ago. In the West, the index slipped 2.1% to 86.6 but is 18.5% lower than November 2006. The index in the Midwest fell 4.1% in November to 82.1 and is 18.6% below a year ago. In the Northeast, the index dropped 13.0% in November to 70.1 from a spike in October, and is 19.1% below November 2006.

Existing-home sales for 2007 will probably total 5.66 million, the fifth highest on record, then edge up to 5.70 million this year and 5.91 million in 2009, compared with 6.48 million in 2006. Existing-home prices for 2007 are likely to be down 1.9% to a median of $217,600, hold even this year and then rise 3.1% in 2009 to $224,400.

“Rising home prices in the affordable midsection of the country are likely to offset declines in some of the previously hot markets,” Yun said.

There are wide variations in housing market conditions around the country, with nearly two-thirds of the metropolitan areas showing price gains. Healthy increases in metro prices are occurring in places such as Pittsburgh; Beaumont-Port Arthur, Texas; San Jose, Calif.; and Bismarck, N.D.

“Our consumer survey shows buyers today are in it for the long-haul, planning to stay in their home for a median of 10 years. This is a wise approach to housing because the data shows the longer you own, the better your investment,” Yun said.

New-home sales are projected at 773,000 for 2007, and declining to 669,000 this year before rising to 730,000 in 2009, but well below the 1.05 million 2006. With an appropriate slowdown in production, housing starts, including multifamily units, are forecast at 1.36 million for 2007 and 1.09 million this year before edging up to 1.10 million in 2009; starts totaled 1.80 million in 2006. The median new-home price should drop 2.1% to $241,400 for 2007, and then rise 0.4% to $242,200 this year and gain another 5.9% in 2009.

“Some policy changes, such as raising the loan limit on conventional mortgages, would provide a significant boost to home sales, increase liquidity, strengthen home prices and lessen foreclosures, but it is unclear as to if and when the measure will be implemented,” Yun said. NAR strongly supports raising the Government-Sponsored Enterprise loan limit to at least $625,000 from the current $417,000 so that more consumers will have access to lower interest rates on safe conforming mortgages. “NAR estimates that raising the GSE loan limit will result in interest rates savings for an additional 330,000 homeowners,” he said.

NAR also encourages the Fed to make a single lump-sum cut in the Fed funds rate to 3.5% at the January Federal Open Market Committee meeting, rather than a series of modest cuts throughout the year. “Consumers are also looking to market-time interest rates, and the expectations of further rate cuts are pushing some home buyers to delay. Monetary policy will be much more effective with a one-time large cut, rather than a series of small cuts,” Yun added.

The 30-year fixed-rate mortgage is expected to rise slowly to the 6.3% range by the end of this year, but an additional cut in the Fed funds rate would lower short-term interest rates.

Growth in the U.S. gross domestic product (GDP) is seen at 2.1% in 2007, below the 2.9% growth rate in 2006; GDP growth will probably be 2.0% this year.

After averaging 4.6% for both 2006 and 2007, the unemployment rate is estimated to rise to 5.3% in the second half of 2008. Inflation, as measured by the Consumer Price Index, is projected at 2.9% for 2007 and 3.1% this year; it was 3.2% in 2006. Inflation-adjusted disposable personal income is forecast to grow 3.1% for 2007, the same as in 2006, and then grow 1.6% this year.
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Spotting Market Bottoms in 2008, Strategies for Home Sellers

In this week's survey of news from across the Web, Open House looks at why you may want to buy in 2008, smart strategies for home sellers and buyers, a plan to put seniors to work to pay off property taxes and a real-estate niche that's benefiting from foreclosures.
By: Lauren Baier Kim: RealEstateJournal.com
Here's a look at what's new in real-estate markets across the U.S. from around the Web.

Resolve to buy in 2008

Demand for U.S. residential real estate isn't dead, it's just stalled, writes Thomas Kostigen of Marketwatch. He notes that sales of luxury homes have been strong and that "with the value of the U.S. dollar low and real estate prices dropping, it isn't hard to imagine foreigners taking bigger positions in properties here as part of their overall portfolios." Prices and sale volumes are already down 25% in some areas of South Florida, and when overseas buyers see values dropping 50%, they are likely to buy, he says.

"At the first blush of renewed energy, the real estate market will bounce back," he says.

Real-estate strategies for the new year

Steve McLinden of Bankrate.com agrees that home values will "stabilize again," but it will be a rocky ride until they do - especially for home sellers, he says. He advises that they stay put and "ride this out," he suggests. For sellers whose circumstances demand that they sell in today's soft market, he offers several tips, including:

• Realize that your house is worth only "what someone is willing to pay" and price accordingly. Throw in incentives like a free flat-screen TV, or offer financial assistance like helping the buyer secure financing or covering closing costs.
• Spruce up your house - don't try to sell "as-is" unless you're willing to sell for a bargain-basement price.
• Look for a seasoned real-estate agent with a high percentage of sold homes.
• Know your local market well.
• Get your listing online.
• Try renting out your house instead of selling or offering a lease-to-own option to renters.

For buyers, he recommends not waiting to pounce on good deals, as the housing market may be "at or near bottom," and using the glut of homes on the market and sellers' anxiousness to sell to bargain more effectively. Make your purchase contract contingent on the home passing inspection, obtaining buyer financing, etc., he says. Do your research on the local market, noting asking and selling prices, and don't overlook "diamonds in the rough" - residences that aren't cosmetically attractive, but have good bones, he says. He also suggests factoring in a house's potential resale value before making a purchase.

Seniors sent to work to pay taxes

Greenburgh, N.Y., located in the state's Westchester County, is considering a program that will allow seniors to literally work off their property taxes, according to an Associated Press article published in the New York state government's Legislative Gazette. Through the program, the town would employ 25 seniors for $7 an hour in a variety of jobs, and allow them to work off about $500 a year from any outstanding property-tax debt.

The plan has its supporters, but the relief may not go far enough - Greenburgh has the third-highest property taxes in the U.S., the AP says. For instance, one senior interviewed in the article who has already taken out a reverse mortgage to help cover her expenses, says that she pays $12,000 in property taxes a year.

Similar programs are already in place in areas like Colorado, Massachusetts and South Carolina, the article says, with seniors in Boulder County, Colo., doing landscaping work and staffing the courthouse's information booth to help pay their bills.

New real-estate niche heats up

In the midst of the housing slump, one segment of residential real estate is hot - "real estate owned" homes, known as "REOs," says the Washington Post. These are foreclosed homes that banks failed to auction off at the courthouse.

Real-estate agents, title lawyers, cleaning specialists and information technology firms looking to profit from the surge in foreclosures are all getting into the field, the Post says. While some REO agents - who earn a commission for each home they sell - are having luck, the niche isn't for everyone. The Post notes that such agents have high operating costs, having to pay for homes' heating, electrical, cleaning and maintenance costs. For instance, one husband and wife team in Maryland who specialize in REOs typically pays $5,500 a month for homes' gas and electric bills, the Post says.


Ms. Kim is a senior editor at RealEstateJournal.com.
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Fed minutes: credit woes may force more rate cuts

Members of the Federal Reserve's interest rate setting committee worried last month that a credit crunch could sharply brake economic growth and require big interest rate cuts, minutes of the U.S. central bank's December meeting released on Wednesday show.
By: Mark Felsenthal: Reuters
"Some members noted the risk of an unfavorable feedback loop in which credit market conditions restrained economic growth further, leading to additional tightening of credit; such an adverse development could require a substantial further easing of policy," the minutes said.

At the same time, members of the Fed's rate-setting Federal Open Market Committee realized that financial market conditions might improve more rapidly than they expected, which would make it appropriate to raise borrowing costs, reversing earlier cuts.

The Fed cut rates by a quarter-percentage point to 4.25 percent at the meeting.

Risks to growth had risen since their last meeting in large part due to deteriorating credit markets, the Fed said.

Even so, the policy-makers weighed the lagged impact of cumulative interest rate cuts, and a strong labor market, which suggested the economy retained some forward momentum. Overnight, interbank borrowing costs stood at 5.25 percent when the Fed began trimming borrowing costs in September.

"Members also recognized that financial market conditions might improve more rapidly than members expected, in which case a reversal of some of the rate cuts might become appropriate," the minutes said.

(With additional reporting by David Lawder; Editing by Neil Stempleman)
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