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

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.