Bond Yield Plunge is a Boon for Mortgage Borrowers

Post-Brexit uncertainty has meant that global investors are pouring money into so-called safe haven investments, like US government bonds. As prices rise, benchmark 10-year Treasury yields touched an all-time low of 1.344 percent – think about that…if you lend the US government money for ten years, you will only receive just over 1.3 percent interest—and if you lend for 30 years, you will only get about 2.1 percent! That’s terrible news for savers, especially risk-averse ones -- as well as pension funds, which try to provide stable income for retirees. But it's great news for mortgage borrowers. The average contract interest rate for 30-year fixed-rate mortgages for conforming loans ($417,000 or less) has dropped to near all-time lows for those with good credit. There are some lenders going as low as 3.25 percent, the lowest level since May 2013. 15-year loan rates are running at about 2.75 percent. Adding to the good news is that at the same time, home prices have mostly increased and credit scores have improved, which means many people who couldn’t refinance a few years ago, can do so now.

According to Mike Raimi of Luxury Mortgage Corp, “Closing a loan is still labor intensive. Borrowers need patience and perseverance” according to Mike. Mortgages for new home purchases can take about three weeks to close, while refinancing can take longer – “anywhere from 30 to 45 days.”

If you are looking for a 30-year conventional mortgage with 20 percent down, the best rates are available for those with credit scores above 740. For every 20-point drop in score, the mortgage rate jumps by a quarter of a percent. If your credit score is below 620, it’s tough to get a loan closed. (Credit scores do not have nearly as much impact on loans of 15 years and shorter.)

If you are preparing for the mortgage process, here’s what you will need:

• W-2 (2 years)
• Tax Returns (2 years)
• Pay Stubs (2 months)
• Bank statements – all pages (2 months): You may also need to provide the lender with an explanation for any large deposits that have been made into bank accounts. This has more to do with beefed up anti-money laundering efforts than the mortgage process itself.
• 6 months of mortgage payments in cash reserves (sometimes less, but this is a good rule of thumb)
• Investment accounts: If bank accounts do not show adequate assets, lenders may ask for investment account statements.
• Donor letter: If a family member or friend is helping you with your down payment or providing cash for the re-fi, he or she may be required to provide a letter and may also have to present his or her account statements.
• Self-employed applicants: Must have 2 years of proof of self-employment and 2 years of tax returns. Gone are the days when self-employed borrowers can “add-back” tax preference items. While you may have used the tax code to your advantage, the bank will not cut you any slack – the numbers on the return are set in stone.

Déjà vu for Fannie, Freddie and Housing

A whiff of the surreal wafted across the wires last week, when recently installed FHFA Director Melvin Watt presented the 2014 Strategic Plan for the Conservatorships of Fannie Mae and Freddie Mac. (In his role at FHFA, Watt is the overseer of government-owned mortgage finance giants Fannie Mae and Freddie Mac, which required a government bailout of $188 billion in 2008.) Watt did a u-turn from previously announced plans to reduce the maximum loan amounts that are eligible for purchase by Fannie and Freddie and to require larger down payments on mortgages in certain types of Fannie and Freddie-backed mortgage securities. Those measures would have made it harder for many borrowers to qualify for the low rates offered by government-insured loans. Watt cited concerns that the changes could hurt the fragile housing recovery.

In just six months, the pendulum has swung from a desire to make Fannie and Freddie smaller—and to eventually phase them out—to focusing on reducing taxpayer risk without necessarily shrinking the companies’ size. Watt’s plan came amid the Senate Banking Committee’s vote on the Johnson-Crapo Fannie, Freddie reform bill, which would overhaul and eventually eliminate Fannie and Freddie by constructing a new market system in which private investors would take initial losses on mortgage securities that would carry government reinsurance.

The final vote was 13 to 9, which is a smaller margin than supporters wanted and dim its prospects for a vote by the full Senate, at least for this year. Even if the bill were to make it to a Senate floor vote and pass, both of which are in question, it would not likely pass the House. While Watt noted that the government’s control of Fannie and Freddie “should never be viewed as permanent or as a desirable end-state,” for the time being, they are here to stay.

Watt’s comments come on the heels of Janet Yellen’s recent Congressional testimony, where she warned lawmakers that the nation’s housing recovery may have stalled. There may be further information about the Fed’s analysis of the housing slowdown when the minutes from the last policy meeting are released this week.

What’s got Yellen and Watts worried? Here’s where things stand versus a year ago (through March):

• Existing Home Sales: -7.5%
• New Home Sales: -13%
• Mortgage rates: +1%

There will be fresh data on existing and new home sales at the end of this week, but even if those results show weakness, the comparison is to last year, when the market was sizzling. For those fretting over housing, there was some good news on housing starts last week, which jumped 13.2 percent in April to a seasonally adjusted annual rate of 1.07 million, the highest level since November 2013. Multi-family homes, which have become increasingly popular in the wake of the real estate crash, were behind most of the increase.

Despite the bumps along the way, the housing recovery was always expected to lag the general economic and stock market rebound because of the depth of the melt down and the inability to unload a physical asset like a home. That said, part of the decline in existing home sales is related to fewer distressed sales, which is good news; the ratio of house prices to disposable incomes is still well below its long-run average; and buying a home is more affordable than renting across much of the nation.

Additionally, economists believe that the impact from rising mortgage rates is mostly behind us, as 30-year rates have steadied at a range of 4.2 to 4.5 percent. While that rate is higher than last May’s 3.6 percent, it is still a historically low level. And it has gotten a little bit easier to qualify for a home loan. Recent data from Ellie Mae show that the average FICO credit score on newly approved mortgages for home purchase was 725 in March, down from 750 a year ago, though still above the average American’s score of 690.

Even if the housing slowdown were to persist, its impact on the overall economy is much less than it used to be. Despite an uptick in the last two years, housing activity remains a smaller share of GDP since WWII. Residential investment accounted for 3.1 percent of GDP in March 2013, nearly half the level at the height of the housing bubble in 2006 and well below the 5 percent seen during much of the past few decades.

Of course both Yellen and Watt know all of this, which is why it was curious that both seemed to put the housing recovery on watch. A slowdown is not a meltdown and chances are, housing should continue to heal from the boom and bust.

MARKETS: On Tuesday, the Dow and the S&P 500 closed at new all-time highs. In the subsequent two sessions, investors took profits and the Dow and S&P 500 turned lower on the week. On Thursday, the Russell 2000 index of small stocks fell into correction territory, down more than 10 percent from its March 4th record closing high. The Dow and S&P 500 haven’t suffered a correction since the second half of 2011. The NASDAQ’s last 10 percent drop occurred in November 2012, although the tech-heavy index fell as much as 9.2 percent from early March through mid-April this year before bouncing back.

• DJIA: 16,491, down 0.6% on week, down 0.5% YTD
• S&P 500: 1877, down 1 point on week, up 1.6% YTD
• NASDAQ: 4,090, up 0.5% on week, down 2% YTD
• 10-Year Treasury yield: 2.52% (from 2.59% a week ago)
• June Crude Oil: $102.02, up 2% on week
• June Gold: $1293.40, down 1.2% on week
• AAA Nat'l average price for gallon of regular Gas: $3.65 (from $3.60 a year ago)

THE WEEK AHEAD:

Mon 5/19:

Campbell Soup, Urban Outfitters

Tues 5/20:

Salesforce.com, Home Depot, Staples

Weds 5/21:

Target, Tiffany

2:00 FOMC Minutes

Janet Yellen delivers commencement speech at NYU

Thurs 5/22:

Hewlett-Packard, Gap, Dollar Tree

8:30 Weekly Jobless Claims

10:00 Existing Home Sales

10:00 Leading Indicators

Fri 5/23:

10:00 New Home Sales