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For everyone who is panicked right now over where mortgage rates are or are going, I thought it would be good to post a chart of the historical mortgage rates since Freddie Mac began recording them in 1971. Looking at the chart below, you can see that historically, rates are still excellent and that we are still well positioned for a good recovery from the current real estate downturn.
Many Atlanta homeowners may be wondering whether now is a good time to be fixing their Atlanta mortgage rates - especially given that fixed rate Atlanta mortgage rates still appear to still falling, while adjustable rate Atlanta mortgage rates are on the rise. The short answer here is that nobody really knows. Many in the industry have not seen events like these in over a decade, if at all. As such, nobody really knows what to expect in the next thirty to ninety days. While sub-prime mortgage rates should not really affect prime mortgage rates - given that there is a difference in the credit risk, if nothing else - it is also true that the fall effect of the woes in the sub-prime market may not still be fully know. However, if you keep to the fundamentals, namely that if you are not looking to sell or refinance your property in the short to medium term, then fixing your Atlanta mortgage rate now is certainly an option you should be considering. Alternatively, if you think you may be on the move soon, then sticking with an adjustable rate Atlanta mortgage rate while the market works through the present turmoil is certainly an option you should be keeping in mind.
Although fears surrounding the mess the sub-prime mortgage sector is currently in have been bounding about for some months now, announcements by several funds that they were to freeze withdrawals has had markets around the world running for cover in the fear that a credit crunch is on the way. It comes as a somewhat pleasant surprise, therefore, to find that according to Bankrate.com's national survey of large lenders, fixed rate mortgage rates saw a fall for the third week in a row. Both 30-year fixed rate mortgages and 15-year fixed rate mortgages fell five basis points over the course of the last seven days. 30-year fixed rate mortgage rates ended this week at 6.66 per cent. 15-year fixed rate mortgage rates ended the week at 6.33 per cent. Unfortunately, however, 5-year adjustable rate mortgage rates didn't fair so well, climbing nineteen basis points over the course of the week to end the week at 6.55 per cent. Unfortunately, this has more than clawed-back the recent falls seen in 5-year adjustable rate mortgage rates. A reduction or increase of one basis point is equivalent to a reduction or increase of one-hundredth of one percentage point.
A couple of months ago we posted information regarding the state of the sub prime mortgage market. Unfortunately, as this situation has continued to play out, things have started to spill over into the prime side of the market. I wanted to bring everyone up to speed on where things are and where we may be headed.
The Background - Sub prime issues
Starting around November of last year, sub-prime lenders (those lending to people with credit scores under 620) began to fail. The problem was that their underwriting guidelines were dependent on appreciating home values. Meaning that as long as prices continued their march upward, folks who would otherwise be forced into foreclosure were able to do a cash out refinance and delay that foreclosure. When home prices stalled 12 to 24 months ago, these borrowers were no longer able to make their mortgage payments and the foreclosure rates skyrocketed. This started a domino effect.
Sub prime lenders typically sell their loans to investors by packaging a number of loans together. This is done usually within a month or two of closing the loan. When they sell these packaged loans, there is typically language in the contract that when the foreclosure rate on these bundled loans exceeds a certain percent, it triggers a buyback clause whereby the originating lender must begin buying back the loans. These buyback clauses began kicking in late last year and caused a liquidity crunch in the sub prime market. The lenders only have a minimal amount of liquid assets available at any given time. When they are asked to buy back too many loans, they run out of cash and then they lose access to money for new loans. At this point they are no longer able to fund the loans that are in their pipelines and they quickly fold up shop. This has happened to dozens of sub prime lenders over the past 9 months.
Problem expands to the "Prime" side of the business
What is happening now is that this problem is beginning to spill over into what is known as the "Prime" side of the business — Lenders who lend to borrowers with credit scores above 620. Specifically, it is currently affecting "portfolio products". These are products which for one reason or another do not meet the guidelines set forth by Fannie Mae or Freddie Mac, and that makes them "non conforming" loans. Examples would be jumbo loans (loan amounts above $417,000), stated income or stated asset loans, certain investor loans, no doc loans, etc.
Monday of this week a company called American Home Mortgage was caught in this liquidity crunch and was unable to fund $300 Million in mortgages that day, probably affecting 1,000 or so borrowers. The problem got worse on Tuesday. They have not funded a single loan this week and last night they announced that they were permanently closing their doors. Now, you may be saying to yourself, I've never heard of this company, who cares? They were the #8 mortgage lender in the US by mortgage volume in 2005 as ranked by the Mortgage Bankers Association. Ranking ahead of companies you have heard of such as Wachovia, Citigroup, First Horizon, Homebanc and many others.
The good news is that the sky is most certainly not falling. The vast majority of mortgages are conforming or government loans which to this point are basically unaffected. I expect there will be some changes to underwriting guidelines on conforming mortgages in the months to come, but the bottom line is that the entire US economy is very dependent on the real estate market, and the powers that be are not going to let this get too far out of hand.
What you need to do
That said, you need to take a close look at your clients who have been pre-approved and who are still looking for a house. Specifically look for these three things: 1) Are they going to need a Jumbo loan? 2) Are they planning to use stated income loans or no doc loans to qualify? 3) Are they planning to borrow 100% of the purchase price of the house? If you have pre-approved clients who are in those situations, let them know that their pre-approved status is at risk. That if they are ready to move, now is the time. It is possible that this will blow over and they will remain unaffected, but present evidence suggests otherwise. In the last 24 hours I have one lender who raised rates on their portfolio products by 2 points across the board in a single day and another who simply will no longer accept new loans on a large percentage of their portfolio products. Obviously, you may also have potential clients who have no idea this is occurring - they have great credit, so they thing how could they possibly be impacted? You'll want to get these clients in touch with a reputable mortgage lender - and by making them aware of this issue, you'll solidify your standing as an expert in the real estate world.
How does Primacy Mortgage fit into all of this? We are a mortgage broker, so we cannot be caught up in this liquidity crunch - only the lenders we work with can be. As a precaution, we have ceased doing business with a number of lenders who we think may be in trouble. At this time, we're working with several of the largest banks pretty much exclusively. These are very strong financial companies who have a well diversified portfolio of business who are highly unlikely to end up in a situation where they cannot fund a loan. If any loan officer you are working with on current business is not aware of what is going on with this liquidity crunch and is still funding loans with smaller companies, be very careful. This situation will continue to play itself out over the next several months. Until things stabilize, proceed with caution.
Arm chair Atlanta mortgage rate watchers may be a little confused with what really amounts to a minor reduction in home mortgage rates over the past week. With the somewhat more dramatic fall in 10-year Treasury yields over the same period of time, many would have been hoping to see a rather bigger reduction in Atlanta mortgage rates this week. This did not materialize. However, as most of us know, historically there has been a correlation between 10-year Treasury yields and Atlanta mortgage rates. So why such a small reduction in Atlanta mortgage rates this past week when compared to the reduction in 10-year Treasury yields? The simple answer to this question is the problems being encountered in the sub prime mortgage rate sector. While it could well be argues that the sub prime mortgage rate sector should not have any bearing on the home mortgage rates tracked by Bankrate.com, who only tracks the prime mortgage sector, noises being made this week clearly indicate that all is not well and everything is not under control in the sub prime sector, as had at first been believed. Indeed, problems in the sub prime sector in the US are having far reaching consequences: from Australia to the United Kingdom. It should come as no real surprise then that any gains made in the reduction of the 10-year Treasury yield have been partially offset with concerns within the sub prime sector. Even with a further reduction in 10-year Treasury yields in the coming weeks and months, American homeowners should anticipate fairly flat movements in Atlanta home mortgage rates over the remainder of this year.
American homeowners will no doubt be glad to see a further fall in Atlanta mortgage rates over the past week. According to Bankrate.com's national survey of large lenders, 30-year fixed rate mortgage fell by four basis points this week to end the week at 6.71 per cent. 15-year fixed rate mortgage rates had a similar reduction of four basis points ending the week at 6.38 per cent. Once again, however, 5-year adjustable rate mortgage rates had the best results this week, with a five basis point reduction week-on-week to see out this week at 6.36 per cent. A one basis point reduction is equivalent to a reduction of one hundredth of one percentage point.