Posts from — November 2007

Its said that most of the general public believe what they read. I was taking a look at The Wall Street Journal’s Real Estate portal called Real Estate Journal and noticed and article on “What Moves Mortgage Rates” written by Teri Cullen. It always gets my curiosity when I see articles like that because 50% of the time they get it wrong, although its predominately fellow peer loan officers are the ones that really get it wrong I did not think the Wall Street Journal, “The King of Finance Media” would.

I will let you read the article but basically Teri Cullen answers the question from a reader named Victor. “Victor, mortgage rates actually follow the bond market, not the Fed-funds rate. The interest rate on a 30-year fixed-rate mortgage tracks the yield on the 10-year Treasury note (at Tuesday’s close 4.383%.).”

This is just not accurate. First, the 10 year treasury is a government backed instrument and has no direct effect on the direction of mortgage rates. Second, mortgage rates follow mortgage backed securities or MBS’s which are issued by Fannie Mae and Freddie Mac. While sometimes interest rates and the 10 yr tsy may move in the same direction, one does not affect the other. Very often they trade in completely opposite directions. You will notice by this quote that 6.0% mortgage bonds where up 6bp’s points and the 10-Year was down 72bp’s.

This brings me to another point. When I talk to prospective borrowers one of my handouts lists “questions to ask your loan officer” and one of the questions on the sheet to ask “What are mortgage rates based on?” Its the very basic of knowledge. This is the largest transaction of your life and far too important not to be handled by a competent, quality professional that’s trained to advise you properly. If they do not answer correctly run…do not walk to a loan officer that does know the correct answer. It always amazes me when talking to borrowers how indifferent some seem at the quality of professionals advising them on such a large transaction. Its like using a stock broker giving you quotes out of yesterdays Wall Street Journal.

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Fixed Rate Mortgage Backed Securities                            November 26th, 2007

Mortgage rates headed south yesterday to a 2 1/2 year low. News that HSBC, the largest bank in the U.K., was bailing out two of its Structured Investments or SIV’s sent investors to a flight to quality buying bonds. HSBC will be moving $45 billion worth of these SIV’s to its own balance sheet in a move that undermines the $100 billion Super Fund that was in the making with the largest banks of the U.S. HSBC has over $2 Trillion in assets to accommodate a move such as this and is unmatched by the larger U.S. banks.

With mortgage bonds trading at a 2 1/2 year high, those looking to lock in, have to at these levels. Even though there may be more room to move, in the nearer term profits will be taken causing rates to possibly tick up.

The only question is the 10 year treasury bond has moved a lot higher, a lot quicker than mortgage backed securities and at some point the 2% point spread between the two would have to narrow. With the U.S. being in a decreasing interest rate environment, I would take a educated guess that the spread will be narrowed by mortgage backed securities trading higher therefore reducing the yield on long term fixed rate mortgages. An excellent mortgage product to take advantage of the longer term view of reduced rates would be the HOA.

(Images Courtesy of Mortgage Market Guide)

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It’s not a surprise to investors out there that properties are staying on the market for what seems like a lifetime, if they sell at all. The Census Bureau estimated that there are approximately 2.1 million vacant homes for sale nationwide, up over 7% from a year ago. The total number of vacant properties not for sale or rent is estimated an astounding 17.9 million units.

For many the one option may be to wait out the market downturn and rent out the properties until the inventory glut clears out. For those that have no history of renting properties be prepared for a whole new world. Mike Mulligan of Property Managers of Virginia states that “investing in real estate is serious business and a big investment. Knowing and keeping up with regulations, legal issues and liabilities in the State of Virginia can seem overwhelming.”

Its is true, there is a whole new world out there of fair housing requirements, landlord tenant laws that may vary from county to county, tenant screening, property maintenance and expense and pricing your property for rental. For those that are not prepared with professional help and professional advice can be set up for disaster.

Of course just by hiring a property manager does not mean that you will be trouble free. But it does mean that you can have a life outside of managing your properties.

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One of my first cars was a yellow 1966 Ford Mustang coupe. When I first got it it looked like a 25 year old car. I can remember when I got home from Marine boot camp at Paris Island my mother, as a present for my return, had totally renovated it and it was a beauty. Painted a glowing yellow, brand new carpet on the inside with beige leather seats. Everything was replaced, the dashboard, all the chrome inside and out. Everything was as original, even the radio. She did a tremendous job.

This car ran on regular gas, I do not think there is a station now that even sells regular gas, but even then, I had to hunt for the few that did. Gas then ranged .95 to .99 per gallon. Those were the days.When I look at gas prices today being at around $2.65 although it sounds like a lot the incremental increase over 20 years, yes I am showing my old age, from that time is not. I am guessing less than 5% a year. Now this is taking a picture of a specific time period and maybe the year before that was .65 or $1.50. I can only remember that Mustang!

So even if it is actually 5% price increases that is just a tad above normal and I do not think its reason to sound the alarm bell. What alarmed me was paying $5.65 for a gallon of milk last week. Now that is high. I have to say, I think its the only gallon of milk I have ever bought as I do not shop unless its for a 1/2 pound Hershey Bar, but how outrageous is that? Almost $6 bucks! For a gallon of milk? I think the fed should keep an eye on those milk prices, forget the gas.

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