So what's going on with rates ?????

Right now, rates are incredibily low. We thought at this time last year, we were seeing the bottom. Everyone was in a mad scramble to refi to historically low rates. Now, a year later we are seeing rates at even lower levels. And this, at a time when we thought rates would begin to rise, following the government subsidies of the last year.

Well, it all goes back to the recession that we are supposedly coming out of. We seem to go from euphoria to fear and panic, then back again, from week to week. The stock market is going thru a funk now and the same in happening with interest rates on mortgages.

So the real question is what is triggering the fear? Well, it's pretty simple. As some of the smaller European countries like Greece, Spain, Portugal, and Italy have racked up huge government debts, there is growing fear about their ability to repay. In Greece, the government workers are having to make huge concessions to the government in order to keep the government out of bankruptcy. Even with these concessions, other European countries are having to bail out these smaller countries. This extra tax load on the citizens of Europe could trigger a second wave of recession. It's too early to tell, but some folks are nervous. But, in any case, big debts, racked up by governments are not good. (Oh and did I mention that the US debt has more than doubled in the last year........)

But, in any case, if you need a refi, now is a great time to get one. Give us a call at Neighborly Financial (www.NeighborlyFinancialMortgage.com)

What's next?

During the past year, the Fed purchased over $1 trillion worth of mortgages in the form of mortgage backed securities. This had the effect of driving interest rates down about 1/2 % point. During FY'09 rates were running about 5% or a little less for a 30 year fixed mortgage. Had the Fed not purchased these, rates would have been running about 5.5%. The net effect was that many homeowners were able to refi their homes and increase their cash flow, which translated into increased consumer spending and a stimulus to the economy.

But, now that the Fed purchased these mortgages and is holding a huge amount of these, at some point they have to unload them. As they do, this will have the negative effect on interest rates - pushing them higher. At this time the Fed it contemplating how to unload them. They have several options, but the most important question is when and how quickly. Since the Fed has said they have no intentions of raising any interest rates soon, they will probably hold these mortgages for several months.

In any case, once they begin to unload them, interest rates will be pushed artificially higher than they would be at that time.

Rates rise when Fed buyback ends

On March 31, the Fed ended its yearlong program of buying mortgage backed securities - a program aimed at keeping mortgage interest rates low. When they stopped, the impact was immedidate. Rates have risen over a quarter point in the last couple of days.

Interest rates rise in spite of the Fed

It's interesting that this week the Fed stated that they see no need to raise interest rates because the US economy is still fairly weak. In spite of that, mortgage rates took a small step up. Why? Because some of the members of the European Union have overextended their credit. Greece has been in trouble for several weeks and now it is becoming more clear that Portugal has some problems. What has happened is that these countries have borrowed too much and now are at risk of not paying back the loans. This has resulted in Greece having to cut government services and this is causing riots in the streets. As lenders see increased risk, they raise rates on everyone to cover the losses from the default of a few borrowers.

What does this mean to us? First, it means that in spite the Fed wanting to keep interest rates low, they are going to rise anyway. This, in turn, means that our weak economy has another burden to bear in the form of higher interest rates. The hopes for a quick recovery and getting people back to work quickly is not very good.

Second, the problems that Greece has only foreshadow the issues we have in the US. We are piling on huge deficits in the US and record levels. This puts us at increased risks as well. It will take huge tax increases in the coming years to pay back the debt and many years to do it. As this debt gets repaid, it will mean every taxpayer will be funneling money into paying off the debt and paying interest on the debt - money that could be spent on something beneficial...........

underwater??

For those of you that are underwater, don't feel alone. Last week Zillow reported that in the 4th quarter of '09, 21% of all homeowners are underwater with their mortgages.

John
www.NeighborlyFinancialMortgage.com

underwater??

I thought it would be fun to see where 30 year mortgages have been lately. This shows where they have been for the last 5 years. Interesting, but they peaked at 6.35% about 3 times, with lows near 5%.

If you taken out a $300k mortgage at the high and the low, your mortgage payments would have been $1870 and $1610 respectively. That's about $260 per month, or 16% higher.

It will be interesting to watch the impact that inflation has on interest rates in the next year or two and the subsequent impact on home demand and prices............

you can find us on the web at www.NeighborlyFinancialMortgage.com