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

Get ready for even tougher documentation on loans ?

In 2009, Freddie and Fannie spent a lot of time idenfying bad loans. They are digging in and forcing banks to buy back bad loans that had some type of incorrect or incomplete documentation. As defaults on sub-prime loans have begun to improve, defaults on conventional loans has risen. Since most conventional loans are resold to Freddie and Fannie, they are seeing the biggest problem. As these loans get pushed back to banks, there will be repercussions into the documentation from borrowers. Fortunately, the bad loans tend to be from 2007 and 2008, before most documentation standards were raised. So, there probably will be additional increases in documentation required, but we may have seen most of the requirements already.

Fed to stay the course in mortgage buyback plans

Yesterday the Federal Reserve Board, reiterated its plans to discontinue its program to purchase huge quantities of mortgage backed securities. For the past several months the Fed has kept mortgage rates artifically low by buying large quanities of these instruments. At the end of March, they will discontinue the program. This will allow mortgage rates to be set by normal market processes.

What does this mean? Well, that is the big question. It may not mean a whole lot given that they have already begun to ramp down the purchases, very slowly over the past several weeks. But when the purchases stop, we will see the real impact that they have had. It is a given that rates will go up, but with overall interest rates so low, mortgage rates may not climb much until the economy picks up - and that may be several months away. Time will tell..........

Where is the FHA headed?

The FHA has a dilema on it's hands. Recently the FHA has been a huge player in insuring loans - as many as 20% of loans in the last few months. This is much different than in the early 2000's when they only insured 2%. Then, most borrowers bypassed the FHA and pursued sub-prime loans. Now that these have dried up, people are returning to the FHA loans for the financing they need. The problem is that default rates are climbing for FHA loans.

Now, the dilema, is that the FHA needs to tighten the qualifying rules to control defaults, at the same time they need to encourage lending to help the still unstable housing market. We'll have to wait to see how this unfolds.

you can visit us on the web at http://www.neighborlyfinancial.com/ or http://www.neighborlyfinancialmortgage.com/