Sounds scary doesn’t it?  For me, the words ‘Government Takeover’ quickly conjur up images of dictators and loss of liberties.  Let’s shed some light on this topic.

The mortgage business is a rapidly-changing landscape these days.  A couple of years ago, I stayed pretty tuned in to what lender programs were out there, and what the requirements were for those programs.

Well, let me tell you, those days are gone.  In today’s climate, I couldn’t possibly keep up with it all myself, and if I did, I wouldn’t have any time left to market your home.  I really enjoy what I do, and don’t want to be on the mortgage side of things, so I rely even more heavily on my trusted advisers today than I used to.

On that note, Kenneth Wohl of SpiritBank Mortgage sent me some information yesterday to pass along to you, our local clients, in regard to the US Government’s overtaking of Fannie & Freddie, and what he sees as the benefits and the risks of this move:

Good morning.

Today history is being made.  Unless you live in a cave or under a rock, you will have by now heard that over the weekend Fannie and Freddie were taken over by the Federal Government.  This historic undertaking is not without it’s benefits and/or risks.

Benefits:
 
1.  The immediate benefit is rate/price related in that the 30 Year Fannie 6.0% Bond is up a full 1 Point in Price– that’s 32/32 in other words.  That price increase and rate decrease has been reflected in this mornings rate sheets with conventional mortgages around 6.00%!
 
2.  The money keeps flowing– by doing this the Fed. Gov’t prevented a “locking up” of the housing finance system– or at least for roughly 50% of the capacity as the GSE’s fund roughly half of all mortgages made in the US.
 
Risks:
 
1.  Long term rates go up?  What??? Didn’t I just say they’d go down?  Yes, but, remember, the US Taxpayer has just had $5 TRILLION in Debt/Obligations shifted onto it’s balance sheet– that in essence dilutes and devalues the price of a US Treasury Security– a T-Bill, T-Note and/or T-Bond are the primary debt instruments issued by the US Govt.  Now, that the US Govt has essentially stepped in and guaranteed the GSE’s we’ll have to deal with the potential that US Treasury yields will increase because the Taxpayer is now “more leveraged” than he/she was on Friday thus the Gov’t will have to pay a higher rate to attract buyers of its debt.  This could push long term mortgage rates up.
 
2.  The GSE’s continue to see their portfolio’s deteriorate–  according to one market source of mine there is roughly $1.2 Trillion of ALT-A and Subprime out of the $5 Trillion outstanding.  That’s over 20% of their outstanding portfolio.  Can the US Gov’t step in make whole those investors who’ve purchased the GSE MBS on those loans?

Summary:
 
I expect to see the short term rally in the Fannie/Freddie Bond last only through mid Wed at best– eventually profit takers will come in and trade off the news and rates will stabilize.
 
In the long term, time will tell– however I think the potential for Treasuries to be hammered is very, very real and that could lead to higher rates 6 mos to a year from now.

Kenneth Wohl of SpiritBank recently put together this explanation, and I thought it’d be useful to you, my clients, so with his permission, here it is.  Hopefully it’ll help us all understand things a little better.

Spotlight– How Interest Rates are Set
 
One of the most commonly misunderstood facets of Mortgage lending is how rates are arrived at daily.  While many think that a lender simply sets a rate arbitrarily, the exact opposite is true.  In fact, mortgage rates are simply a function of the free market– Good Old Supply & Demand are at work setting prices and rates.
 
Every day Billions of dollars worth of Mortgage Backed Securities (MBS) are traded back and forth in the Capital Markets.  As these are Bond/Credit instruments their rate or yield moves the opposite direction of their price.  When a bond price goes up, the rate or yield goes down.  When a bond price moves down then the rate/yield increases because a higher rate should attract a buyer to purchase that bond.
 
Every morning and through the day, we receive rate updates on each of our programs from our secondary market investors who purchase our loans after closing.  Their rates are set based on the activity in the Bond/Credit markets for that day.  Typically, when economic news and outlook is gloomy, like higher unemployment; that is actually good for rates because bonds are seen as safer than stocks.  Good economic news tends to push rates higher as Stocks become more attractive to investors and bonds are not as attractive in terms of investment return.  Bonds are somewhat safer than stocks since they have a claim on the issuer’s assets.  As such, they benefit from when money flows out of stocks looking for a safe haven to set while they await their next investment move.
 
As investors want more and more of a particular mortgage bond, like those backed by FHA loans, we have seen the FHA rates fall faster than that of conventional loans.  There are many different factors that can move the markets from the price of Oil to political events like terrorist attacks and elections, to natural disasters and economic supply shocks.  However one thing remains true, in the good ol’ USA the market still reigns supreme in setting the price of money– Interest Rates
 
Call your Mortgage Banker for more information on our exciting mortgage programs!

“Going, Going, Gone” is the tune to new regulations set forth by the mortgage industry.

As of the end of March 2008, mortgage insurance companies have changed their standards for insuring conventional loans.  They will no longer insure loans over 97% Loan To Value and many are making changes to their acceptable Debt Ratio requirements.

For the past few years you could get mortgage insurance up to 100% with Debt Ratios at 65% of gross income. Look at this example:

• Joe and Amy just graduated college
• They both have car payments of $350, credit card minimum payment of $100, and student loan min payments of $300, while their combined income is $60,000 

With the old guidelines this couple could take their Debt Ratio up to $3250 per month in debt payments (65% of gross $30,000).  That means their home payment could be $2,150 which would buy a $280,000 home!

Same couple today is now limited to borrowing just 97% with debt ratios of 41% (aprox $2,050 per month total).  Therefore combining their other debt obligations will lower their housing ratio payment to only around $950 (not $2150) which would buy a $135,000 home.

With this said, it looks like the days of people buying homes they can actually afford are back!

-Author, Kenneth Wohl of Spiritbank Mortgage

I recently asked Kenneth Wohl, of SpiritBank Mortgage fame, to give me a basic rundown on what’s going on in the world of home mortgages right now, and how it relates to you, our readers, and other Edmond home buyers. 

I had heard quite a bit about some changes coming in the way of FHA requirements and limits, and it looks like some of these changes are going to open the door for many buyers who otherwise may have had some difficulties.

Here’s what Kenneth had to say:

With the volatility of the mortgage industry, conventional interest rates are creeping up! FHA (Federal Housing Administration) backed loans are a great alternative. These loans are federally insured and usually carry a fixed interest rate of .5% lower than conventional loans. With recent changes in the mortgage industry, FHA has increased loan limits around the country. Oklahoma areas have changed from $200,160 to $271,050 allowing Oklahomans located in the more affluent growing communities to afford the homes in slightly higher-priced subdivisions.
There are no income requirements, and underwriting guidelines allow for those with lower or no credit scores. There is a down payment requirement of 3% of which can be gifted by friends, family, and non-profit organizations.

So, as you can see, while things have tightened up in some areas, there are other avenues which seem to be opening up.  If you have questions related to this or any other real estate topics, feel free to email Kenneth or myself.