Lender Intelligence

New Mortgage Menu Isn't All Easy to Digest

2005-08-01T10:46:00.000-07:00

August 1, 2005

Pamela Yip

Not long ago, financing a home was like ordering from a menu with only one item: You got what was available, which was the plain-vanilla, 30-year fixed-rate mortgage.

But today, lenders are offering hundreds of mortgage products with creative terms. You can pay the interest only for a few years, choose your monthly payment or even close on your loan with little documentation of your income.

The trick, experts say, is that these hot products can be time bombs for consumers who don't consider the long-term consequences of such easy credit.

"Mortgage programs now are not just one-size-fits-all," says Anthony Hsieh, president of www.LendingTree.com, an online lender. "Some people are stretching today because of the runaway housing prices."

You can thank technology for the smorgasbord of mortgages out in the market.

"Software has made it possible to maintain consumer protections and to instantaneously recalculate loan payments," says Doug Duncan, chief economist of the Mortgage Bankers Association. "It's allowed companies to make what used to be a paper-and-manual process an electronic process and dramatically lower the cost."

More sophisticated credit analysis plays a role, too, because lenders can more accurately judge their risks while still enticing borrowers with lower rates.

"There are so many more programs these days, it could be confusing to the consumer," Hsieh says. "The lower the monthly payment, you're giving up something else."

Mortgage lenders loosen standards despite risks

2005-07-26T10:24:00.000-07:00

By Ruth Simon, The Wall Street Journal

Mortgage lenders are continuing to loosen their standards, despite growing fears that relaxed lending practices could increase risks for borrowers and lenders in overheated housing markets.

Novel loan products have helped fuel much of the run-up, which continues to defy expectations, as reflected in home-sales data released Monday. Existing-home sales hit another record in June, up 2.7 percent from May's heated levels, according to the National Association of Realtors. Median home prices rose 14.7 percent from June 2004.

But lenders are making it still easier for borrowers to qualify for a loan. They are lowering the credit scores needed to qualify for certain loans, increasing the debt loads borrowers can carry and easing the way for borrowers to get loans while providing little documentation. In some cases, lenders are easing standards not only for homeowners, but also for the growing number of people buying residential real estate as an investment.

In one recent move, Chase Home Finance, a unit of J.P. Morgan Chase & Co., this spring began allowing some of its customers to take out home-equity loans and lines of credit without having their incomes verified. Under the new program, income verification isn't required for home-equity loans of up to $200,000, provided that the borrower's total mortgage debt doesn't exceed 90 percent of the property's value or $1.5 million. The change "is not for all customers -- it's only for customers with the very highest credit rating," a company spokeswoman says. Loans with little or no documentation have grown in popularity industry-wide.

Last month, Wells Fargo & Co. began allowing buyers of investment properties in some parts of the country to take out interest-only mortgages, which let borrowers pay interest and no principal in the loan's early years. Another recent change in some markets boosts the standard for how much total debt and housing expenses certain borrowers can carry to 45 percent of their income from 38 percent.

A Wells Fargo spokesman says the company doesn't discuss specific changes, but that it consistently monitors economic conditions in its major markets and will at times "modify our lending guidelines in a specific market." He added, "On a national basis, we have made no substantive changes to our lending policies and practices."

Banking regulators, meanwhile, are paying closer attention to mortgage lending practices. "Lending standards are continuing to ease," says Barbara Grunkemeyer, deputy comptroller for credit risk at the Office of the Comptroller of the Currency, which is putting the finishing touches on its annual survey of bank underwriting standards. Federal Reserve surveys of bank loan officers show that lenders have tended to loosen standards since early 2004, following a period of relative tightening.

In some cases, lenders have tweaked their offerings by reducing the minimum credit scores needed to qualify for certain loans. Countrywide Financial Corp., for instance, recently cut by 20 points the minimum credit score borrowers with bigger loan amounts need to qualify for one of its popular loan programs. A Countrywide spokeswoman says the change was designed to make the terms of this loan consistent with its other offers.

The continuing loosening of lending standards has helped push the homeownership rate to a record 69 percent of U.S. households. Mortgage delinquencies, meanwhile, have remained low, with just 1.08 percent of residential mortgages in foreclosure proceedings at the end of the first quarter, down from 1.17 percent five years earlier, according to the Mortgage Bankers Association. Low interest rates and rising home prices have helped keep delinquencies down by keeping monthly payments in check and making it easy for borrowers who run into trouble to refinance or sell their homes at a profit.

But the lowering of standards has also raised concerns that some borrowers may run into trouble making their payments, and that defaults could rise. In May, in response to concerns about looser underwriting standards, bank regulators issued their first-ever guidelines for credit-risk management for home-equity lending. Regulators are working on new guidelines for mortgage lenders.

In addition, bank examiners "are looking more at how banks originate first mortgages today than they were a year ago," says Ms. Grunkemeyer of the Office of the Comptroller of the Currency. "The reason they are doing it is because the mortgage products (lenders) are originating are higher risk."

Washington Mutual Inc. says it's loosening its guidelines on some products while tightening them on others. In June, it began offering home-equity lines of credit to borrowers who buy condominium units as an investment or as a second home. Another recent change lets borrowers who buy a second home or investment property finance as much as 90 percent of the home's value, up from 75 percent. Sales of investment properties have surged recently, adding fuel to the heated housing market.

The Seattle-based lender says it has also moved to toughen some standards. Earlier this year, Washington Mutual began setting stricter limits on the size and loan-to-value ratios for loans above $7 million. It is also reassessing its credit standards for investment properties and second homes, says Jim Vanasek, the company's chief enterprise risk-management officer.

"There's been a growing awareness over the past six to nine months that the risks are starting to increase with the very, very rapid price escalation we have seen," Mr. Vanasek says. "I would be surprised if mortgage lenders don't do some degree of reining in or tightening over the next several months."

So far, evidence of tightening has been hard to detect. "The trend toward relaxing standards is still relatively strong," says Gibran Nicholas, a mortgage broker in Ann Arbor, Mich. Mr. Nicholas expects this pattern to continue as long as foreclosure rates remain low and demand remains high from investors who buy bonds backed by pools of mortgages.

Some lenders say they are being forced to relax their standards to remain competitive. U.S. Bank Home Mortgage, a unit of U.S. Bancorp, says interest-only mortgages and loans with less-than-full documentation now account for about 10 percent of its business, up from just 4 percent a year ago.

"We're just offering the product that a lot of our competitors have offered," says U.S. Bank President Dan Arrigoni. "If anything, we have to think about loosening them if we want to compete." But, he says, U.S. Bank has resisted pressures to offer increasingly popular option adjustable-rate mortgages -- which carry starting rates as low as 1 percent and give borrowers multiple payment choices -- because the bank considers them too risky.

Lenders also say that advances in technology and data analysis enable them to do a better job of determining who is a good credit risk. "One of the things that is often missed is that we've become much better predictors of loan performance with automated underwriting systems and appraisal practices," says Jerry Baker, president and chief executive of First Horizon Home Loan Corp., a unit of First Horizon National Corp.

First Horizon recently reduced the credit scores and boosted the loan-to-value ratio allowed on limited and no-documentation loans that it sells to investors through Wall Street. The bank says such loans represent a tiny portion of First Horizon's volume.

The loosening of standards also shows up as products that were initially geared toward the most sophisticated borrowers -- such as option ARMs and interest-only loans -- have become more mainstream. A recent analysis by UBS AG shows that the average credit scores for borrowers with option ARMs has declined over the past three years. In addition, more than 22 percent of the borrowers who took out option ARMs this year financed more than 80 percent of the purchase price, up from 12 percent of borrowers in 2004 and less than 2 percent in 2002, according to the UBS analysis, which looked at loans sold to investors.

Similarly, interest-only mortgages, which were first aimed at wealthy borrowers, are increasingly being offered to people with poor credit. Interest-only mortgages accounted for 30 percent of the subprime loans originated in April, according to UBS, up from 14 percent in all of 2004. Average credit scores and other measures of credit quality have also been declining, according to UBS.

Easing Up

Here's how mortgage lenders are loosening their standards:

Reducing the minimum credit score borrowers need to qualify for certain loans.
Allowing borrowers to finance more of a home's value or carry a higher debt load.
Introducing new products designed to lower borrowers' monthly payments for an initial period.
Letting borrowers take out loans with little, if any, documentation of income and assets.

A Field Guide to Innovative Mortgages

Here are some of the novel loan products that have been gaining popularity and helping fuel the housing boom:

LOAN PRODUCT: Interest-only mortgages
COMMENT: These allow borrowers to pay interest and no principal in the loan's early years, which keeps payments low for a time.

LOAN PRODUCT: Option adjustable-mortgages
COMMENT: These loans carry introductory rates of as low as 1 percent and give borrowers multiple payment choices. But borrowers who elect the minimum payment can see their loan balance rise.

LOAN PRODUCT: Piggyback loans
COMMENT: These combine a mortgage with a home-equity loan or line of credit, allowing borrowers to finance more than 80 percent of the home's value without paying for private mortgage insurance.

LOAN PRODUCT: No-documentation and low-documentation loans
COMMENT: Under these programs, borrowers can take out a loan while providing little if any documentation of their income or assets.

Source: WSJ research

Rate Probability: Sideways to Slightly Higher

2005-07-25T14:04:00.000-07:00

The Bond Rate Monitor

So what does China have to do with mortgage rates in the US? Enough to stall an upward trend in the mortgage backed securities market, which is exactly what happened last week. But will rates continue to rise, or is the worse part over?

Rates were improving last week until China announced that they were going to let their currency float against a myriad of other foreign currencies last week. Before this announcement their currency, the Yuan was fixed to the US dollar. This announcement caused a panic in the bond market which feared the heavy Chinese investment in US bonds might be discontinued in the near future. However after digesting the Chinese surprise announcement bonds rallied on Friday and ended at a support ceiling.

This of course means the big question is - Will bonds rally enough to break through the ceiling or reverse course again and head down, thereby pushing rates higher? Unfortunately, if this weeks full schedule of economic indicators is on target, the economy will continue to do better which generally is bad for rates. However, for rates to move noticeably higher the economy will have to post higher improvements than the market expects, which we view unlikely. Therefore, it seems rates will continue to bounce around between the support ceiling and floor this week and maintain their overall downward trend, which means rates will continue to slightly worsen.

Mortgage interest rates rise

2005-07-22T10:00:00.000-07:00

Rates on 30-year, fixed-rate mortgages rose to 5.73 percent this week from 5.66 percent last week, Freddie Mac reported in its nationwide survey.

Rates on 15-year, fixed-rate mortgages, a popular choice for refinancing, rose to 5.32 percent from 5.25 percent. For one-year adjustable rate mortgages, rates increased to 4.42 percent from 4.39 percent. Rates on five-year hybrid adjustable rate mortgages rose to 5.26 percent from 5.15 percent.

The average rates do not include add-on fees known as points. Thirty-year mortgages and 15-year mortgages each carried an average fee of 0.4 point. One-year ARMS had an average fee of 0.6 point, and five-year ARMS carried a fee of 0.5 point.

Associated Press

Fed releases meeting minutes

The Federal Reserve won't use monetary policy to deflate what some economists say is a "bubble" in the U.S. housing market, the minutes of the Fed's June 29-30 meeting showed. Federal Reserve staff made a special presentation on housing valuations to the interest-rate setting Federal Open Market Committee during the two-day meeting, according to the minutes.

"A strategy of responding more directly to possible mispricing" of assets such as housing "was seen as very unlikely to contribute, on balance, to the achievement of the committee's objectives over time," the minutes of the FOMC meeting showed. The Fed document cited "the unavoidable uncertainties associated with judgments regarding the appropriate level of and likely future movements in asset prices."

Bloomberg News

Greenspan expresses mortgage concerns

2005-07-21T10:56:00.000-07:00

Issuing an otherwise cheery outlook for the U.S. economy, Federal Reserve Chairman Alan Greenspan warned homeowners about risky mortgages.

BY NELL HENDERSON
Washington Post Service

WASHINGTON - Federal Reserve Chairman Alan Greenspan said Wednesday that certain types of increasingly popular, risky home mortgages could prove "disastrous" for some borrowers betting on ever-rising house prices.

"There's potential for individual disaster there," Greenspan said on Capitol Hill, issuing his strongest warnings yet about the potential pitfalls for consumers and lenders in the nation's red-hot housing market.

Historically, the kind of rapid price appreciation seen recently "does not go on" forever, Greenspan said during a hearing of the House Financial Services Committee.

RISKY MORTGAGES

However, some borrowers are assuming such continued gains will enable them to pay back various mortgages that initially involve very low costs, he said.

Those mortgages have surged in popularity over the last year, enabling individuals and families to buy houses they could not otherwise afford, and helping to further pump up prices, he said. But some borrowers could find it difficult to make the required loan payments if interest rates rise sharply or their incomes fall.

If prices flatten or decline, a borrower might be unable to sell a house for enough to pay off such a loan.

Greenspan said such loans account for only a small fraction of all the mortgages outstanding, and therefore do not pose a threat to the overall economy.

But, he added, these mortgages in "individual cases, could prove disastrous."

The Fed chairman went on to warn lenders to "fully appreciate the risk that some households may have trouble meeting monthly payments as interest rates and the macroeconomic climate change."

Greenspan discussed the risks in the housing market while delivering an upbeat assessment of the overall economy in his semi-annual report to Congress on behalf of the Fed.

'FIRM FOOTING'

"The U.S. economy has remained on a firm footing, and inflation continues to be well contained. Moreover, the prospects are favorable for a continuation of those trends," he said.

Stock prices rose after he spoke, with many investors cheered as well by his comments reaffirming the Fed's belief that it can probably continue raising short-term interest rates at a gradual, or "measured," pace.

The value of all U.S. residential real estate rose 15 percent in the first three months of the year from a year earlier -- faster than the growth in after-tax income, according to the latest Fed data.

Greenspan said it is difficult to know whether homes are overvalued on average nationally.

But he repeated that "there do appear to be, at a minimum, signs of froth in some local markets where home prices seem to have risen to unsustainable levels."

The National Association of Realtors estimates that 23 percent of U.S. homes purchased last year were for investment. Another 13 percent were second homes.

When one size fits all, none are fit well

2005-07-20T14:21:00.000-07:00

By Chuck Jaffe, MarketWatch

BOSTON (MarketWatch) -- When one size fits everyone, you can bet that most people are improperly covered.

That's because proper fit is different from something that provides coverage in a fashion that is too baggy or too tight, too long or too short, or simply odd.

The same goes for generic financial advice that is thought to apply for everyone.

While consumers and investors desperately want rules and guidelines that can take them directly to the promised land of smart personal finance, the reality is some of the most common one-sized advice actually fits few people well.

Last week, this column focused on some common savings and investing rules that people tend to follow blindly, thinking that they are sound formulas.

This week, we'll look at five more financial rules of thumb, pointing the fingers at the flaws in these common misconceptions about insurance, spending and savings. If you follow these rules, you should review your situation to see if you are the rare person these suggestions actually fit.

To retire comfortably, your investments must generate 70 percent of the income you earned while working:

This is one of the most dangerous -- and most widespread -- financial rules of thumb, because it ignores virtually all critical factors and influences.

In short, it's no better than a guess.

Your retirement income needs are a function of life expectancy, inflation, and spending, not previous salary. If your idea of retirement is foraging for nuts and berries while camping in national parks, you'll need a lot less money than if you want to cruise the world on a luxury liner.

This formula forecasts a cut in key living expenses when you are in retirement, assuming you'll have paid off the mortgage and won't have other costs associated with working.

But most people don't want to live out their remaining days with a 30 percent reduction in available spending money. For anyone who wants to avoid that kind of cut, aiming at this 70 percent target leaves them short of the standard of living they hope at achieve.

Life insurance benefits should equal five times current income:

A long-time insurance industry marketing ploy, this formula is another feel-good guess.

Buying coverage valued at five times income may be appropriate for the sole breadwinner in a family with two kids -- although the family's lifestyle determines if it's correct -- but it's completely inadequate for larger families, and it's a money-waster for anyone without children.

Anyone looking at life insurance and trying to buy sufficient protection without overspending on coverage they don't need should go through a detailed needs analysis, based on individual circumstances and the level of support necessary for the family.

Always use borrowed money to pay for your home:

With interest rates at historic lows over the last few years, this rule has become that much more ingrained in many consumers, but that still doesn't make it right for everyone.

The logic here is that you want to capture the mortgage-interest tax deduction.

While the deduction is a big help on April 15, it's not always the way to go.

Paying ahead on your mortgage -- which cuts both the amount owed and the total potential deduction -- gives you a guaranteed rate of return (equal to the mortgage rate, since you will never pay interest on money that is prepaid) for your dollars. Owning your home free and clear creates peace of mind, erasing the burden of a big monthly payment and the thought that some bank is lurking, waiting to take over in the event of a financial disaster.

In addition, with a growing number of forecasts predicting a cool-off in real estate prices in the near future, leveraging your home to the max could increase the family's vulnerability during a rough economic cycle.

Getting the tax deduction and using credit to increase your purchasing power is fine, but not at the cost of peace of mind.

Homeowner's insurance should match your purchase price or cover the cost of your mortgage:

The wicked hurricane season of South Florida last year showed just how many people fall for this outrageously dumb idea.

If you worry about the purchase price, you may be paying for excessive coverage - a fire or storm typically doesn't destroy the land on which the home sits, although the price included that property -- or leaving yourself vastly under-protected, if the mortgage is a fraction of the home's replacement cost.

The only standard that matters in these situations is that your coverage provides enough money to rebuild your home. When the policy pays replacement cost, it means that you'll get your money's worth in the event of a disaster, and that's what you have insurance for.

Keep three to six months of salary in an emergency fund:

For many people, gathering an amount equal to six months' worth of take-home pay could take a few years.

That's why determining an appropriate emergency reserve is an individual decision that takes into account everything from an individual's disability insurance coverage, available sources of credit, and ability to borrow against retirement plans, to the income level of a spouse or partner.

To set an appropriate reserve, consider the chance for a personal disaster and the potential costs you'd have in that worst-case scenario. Emergencies run the full gamut, from health problems or job loss down to car wrecks or the immediate need to replace a big-ticket household appliance.

If you are debt free, credit cards and lines of credit may suffice as emergency protection, and shorten the kind of reserves you need to build. If you have debt or fear a protracted period of unemployment, the full six-month cushion might provide peace of mind.

Most importantly, whenever your personal or financial circumstances change -- from the birth of children to being part of a corporate takeover to getting remarried, to retiring -- the way you calculate your appropriate emergency reserve changes too.

Evaluating Ways to Nix Mortgage Insurance

2005-07-18T12:39:00.000-07:00

The Associated Press

NEW YORK -- If you're tired of making monthly payments toward private mortgage insurance, you may have an out.

While these payments are irksome for many borrowers _ they aren't tax-deductible _ they do help people buy homes they couldn't otherwise afford by allowing them to put less money down upfront. Indeed, lenders have traditionally required borrowers to pay mortgage insurance if they borrow more than 80 percent of the home's price to protect against default.

However, house prices have kept rising in many parts of the country. The median U.S. home price has risen 25 percent over the past four years; prices in some urban areas have gained even more. So now's the best time to evaluate whether that appreciation might present an opportunity to cancel your policy.

Borrowers can ask to have their private mortgage insurance canceled once they effectively own 20 percent of the house.

"Through a combination of paying (off your mortgage) and home price appreciation, you might be able to cancel the insurance within as little as two years," says Keith Gumbinger, a vice president at HSH Associates, financial publishers in Pompton Plains, N.J.

Many consumers _ notably first-time homebuyers in today's hot real-estate markets _ simply can't manage to come up with the traditional down payment of 20 percent. In fact, the median down payment for a first-time homebuyer is 3 percent, according to a survey conducted by the National Association of Realtors.

The insurance can be quite expensive. For instance, putting $30,000 down on a $350,000 home (at a fixed rate for a term of more than 25 years) translates into a loan-to-value ratio of 91.43 percent. This would require a monthly private mortgage insurance payment of $208, according to the PMI Calculator on HSH's Web site.

There are a few factors that need to be considered before ordering up a home appraisal for $350 or so.

Greg McBride, a senior financial analyst at Bankrate.com, notes that lenders often require you to keep the insurance for a certain period, typically between one and five years.

"It's important to involve the lender in this process so that borrowers don't pay for an appraisal unnecessarily," McBride says.

Naturally, borrowers must have a respectable payment history in order to qualify for a cancellation, nor can there be a second mortgage out on the home.

There are very few loans that require insurance for the entire loan term, but there are some exceptions, according to the Mortgage Insurance Companies of America, a mortgage insurance industry trade group. Some loans, such as certain low-down-payment loans through Fannie Mae, Freddie Mac and the Veterans Administration, are exempt from cancellation laws, according to MICA. And "lender paid" mortgage insurance, or when the insurance is paid by your lender, translating into a slight higher interest rate on the loan, can't be canceled during the loan's lifetime.

Meanwhile, the Homeowners Protection Act of 1998 requires servicers to automatically terminate coverage on most loans originated after July 29, 1999, when the loan is paid down to 78 percent of the house's original value, MICA says on its Web site. MICA also has a calculator that estimates how long it will take to get your PMI automatically canceled.

Getting to that point can take quite a while _ often a decade or more _ which is why borrowers should factor in any home appreciation, as well as equity built up in their home, and see if they are eligible sooner rather than later.

A Hands-Off Policy on Mortgage Loans

2005-07-15T10:47:00.000-07:00

By EDMUND L. ANDREWS - NYTimes.com

WASHINGTON - For two months now, federal banking regulators have signaled their discomfort about the explosive rise in risky mortgage loans.

First they issued new "guidance" to banks about home-equity loans, warning against letting homeowners borrow too much against their houses. Then they expressed worry about the surge in no-money-down mortgages, interest-only loans and "liar's loans" that require no proof of a borrower's income.

The impact so far? Almost nil.

"It's as easy to get these loans now as it was two months ago," said Michael Menatian, president of Sanborn Mortgage, a mortgage broker in West Hartford, Conn. "If anything, people are offering them even more than before."

The reason is that federal banking regulators, from the Federal Reserve to the Office of the Comptroller of the Currency, have been reluctant to back up their words with specific actions. For even as they urge caution, officials here are loath to stand in the way of new methods of extending credit.

"We don't want to stifle financial innovation," said Steve Fritts, associate director for risk management policy at the Federal Deposit Insurance Corporation. "We have the most vibrant housing and housing-finance market in the world, and there is a lot of innovation. Normally, we think that if consumers have a lot of choice, that's a good thing."

At the Federal Reserve, officials face issues similar to those posed by the stock market bubble of the late 1990's. Alan Greenspan, the chairman of the Federal Reserve, warned about "irrational exuberance" in the stock market but did not try to pop the bubble.

Today, Mr. Greenspan acknowledges that housing prices in some areas are "frothy," but he and other top regulators do not think it is their job to push them back down.

The main issue for regulators is whether banks and other lenders are properly managing their own risk, and the lenders are looking good.

They have hedged their risks by bundling mortgages into securities that are then sold to investors around the world. And if interest rates go higher, they have shifted much of the risk onto consumers because a growing share of home buyers have taken on adjustable-rate mortgages. At the same time, they have built sturdier financial institutions through mergers and the breakdown of barriers to interstate banking.

Bert Ely, an independent banking analyst who was among the first to recognize the crisis at savings and loan institutions in the 1980's, said the banks are far sounder today. "It's a night-and-day difference," Mr. Ely said. "No comparison."

But consumers - and perhaps the broader economy - are taking on more risk. About 60 percent of mortgages last year had adjustable interest rates, many with artificially low teaser rates that expire after the first few years. If a mortgage rate jumps from 4 percent to 6 percent, just slightly above current levels, the monthly payment can jump by roughly 30 percent when the teaser rates come to an end.

The jolt can be higher for people with interest-only loans. In addition to facing higher rates, borrowers also have to start paying down the amount they owe after about five years. People who put no money down face a different risk: if housing prices decline, even slightly, owners who need to sell their homes may have to come up with thousands of dollars beyond the sale price to pay off their loans.

Indeed, because the main risks are to consumers rather than to financial institutions, some critics say regulators have been too timid. "The prevailing attitude is that if you're taking on a risky mortgage, you're an adult and you're taking on the risk yourself," said Representative Barney Frank, Democrat of Massachusetts and a co-sponsor of a bill that would impose tougher rules against so-called predatory lending practices.

"If you are the comptroller of the currency or the Federal Reserve, you're looking out for the system of the world," Mr. Frank added. "You're making macroeconomic policy. It's much more fun than looking out for consumers."

Even as federal regulators try to reinforce what they say are standard practices for proper underwriting, a growing number of state banking regulators worry that more may be necessary.

"The issue is suitability," said Joseph A. Smith Jr., the state banking commissioner of North Carolina. "If you are a stockbroker, you don't put grandma into a hot tech stock. In the mortgage market, you may have a product that is perfectly O.K. for a thoracic surgeon or a professional basketball player, but is not appropriate for a nurse at Baptist Hospital in Winston-Salem."

Betting on RatesUnconventional mortgages have soared in popularity in recent years. About a third of home buyers in the last 18 months did not put any money down, according to a recent survey of home purchasers by the National Association of Realtors.

Over 25 percent of all new mortgages in the last year have been interest-only loans, which allow buyers to postpone principal payments for three to five years but which become much more expensive afterward.

Perhaps the hottest new loan is the so-called option adjustable-rate mortgage, or option ARM, which gives borrowers the choice of paying interest and principal, interest only, or even less than the normal interest. If the home buyer picks the lowest possible payment, the mortgage debt goes up rather than down.

Despite their hands-off approach, some regulators are worried that banks and other mortgage lenders may not have properly judged the risks to themselves. They warn that speculative buying has increased, with many people hoping to quickly resell houses and condominiums before the construction is even finished.

"There is a lot of pressure on banks to build market share, and consumers are looking for a quick response," said Barbara J. Grunkemeyer, deputy comptroller for credit risk at the Office of the Comptroller of the Currency. "With respect to these new mortgage products, they are new and have taken off rapidly. We are still in the process of understanding the risk-management systems that surround them."

Led by the comptroller's office, which oversees nationally chartered banks, federal banking regulators published guidance in May that gave lenders more detailed instructions on how to evaluate the risks in home-equity loans.

The move was a warning shot to lenders. The value of home-equity loans shot up 40 percent in 2004, to $398 billion. Almost all of those loans are at adjustable interest rates, which could rise sharply, and many were extended to people who had just borrowed money to buy a house.

Regulators say they plan to raise many of the same concerns this fall that they have already raised about home-equity loans. The areas they find worrisome include granting loans equal to 100 percent of the value of the homes; granting large loans without due attention to the likelihood of higher monthly payments in the future; and granting "no-doc" (no documentation) or "low-doc" loans that require little or no proof of income or assets.

Such "guidance" is part of a joint effort by the federal regulators involved with banks and savings and loans: the Office of the Comptroller, the Federal Reserve, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision and the National Credit Union Administration.

Ms. Grunkemeyer said she would push for better assessment of a potential buyer's capacity to repay a loan. Even if the applicant qualifies for a loan based on a teaser rate of 4.25 percent, for example, banks will be asked to judge whether that borrower will be able to make payments if the rate jumped to 6 percent.

Regulators also want to take a tougher stance toward no-documentation loans. "You have to ask yourself, why would he be willing to pay a quarter-percent more when he could have gotten a lower rate by giving a copy of his pay stub and a W-2 form," Ms. Grunkemeyer said. "There's a reason they've been called 'liar's loans.' "

The guidance is tougher than it sounds, because bank examiners use it when they scrutinize an institution's loan portfolio and underwriting practices.

But even advocates of stricter scrutiny, like Susan Bies, a governor of the Federal Reserve, say regulators are merely telling banks what most of them already know.

"We're not trying to set off alarms that we see broad issues," Ms. Bies said in a recent interview. "We are seeing examples of practices that need to be tightened down a bit."

Most regulators, including Mr. Smith in North Carolina, are against issuing edicts against particular kinds of loans, even relatively risky ones, if both home buyers and lenders are eager to have them.

But many state regulators want to go further than the federal government. State banking regulators are locked in a long-running power struggle with Washington over so-called predatory lending: deceptive mortgage loans that have extremely high fees and are usually offered to people with poor credit.

Complaints about predatory lending are heavily concentrated among subprime borrowers, or people with spotty credit records and erratic incomes who probably could not have obtained a mortgage 10 years ago.

The volume of subprime mortgages has soared from about $35 billion in 1994 to about $530 billion in 2004 - more than 20 percent of all new mortgages last year. That growth helped propel the homeownership rate to a record 69 percent in 2004. The foreclosure rate on subprime mortgages remains modest, only 3.5 percent in the first quarter of 2005, but that is nine times the rate for prime borrowers.

The Bush administration and Republican lawmakers in Congress are seeking to pre-empt state laws on predatory lending, saying that consumers and lenders need a coherent set of national rules.

But many states, including New York and North Carolina, contend that the federal guidelines are weaker than their own and that federal agencies are not equipped to handle consumer complaints from 50 states.

"When I started out, the biggest complaints were about denial of credit," Mr. Smith of North Carolina said. "Today, none of our complaints are about denial of credit. They are all about what happened after the credit was given."

Mortgage rates edge upward

2005-07-14T13:17:00.000-07:00

By Holden Lewis • Bankrate.com

Mortgage rates rose modestly this week as investors shifted money from bonds to stocks.

The benchmark 30-year fixed-rate mortgage rose 6 basis points to 5.76 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 39 discount and origination points. One year ago, the mortgage index was 6.11 percent.

The benchmark 15-year fixed-rate mortgage rose 7 basis points to 5.36 percent. The benchmark 5/1 hybrid adjustable-rate mortgage rose 8 basis points to 5.35 percent.

Bankrate conducts its weekly mortgage rate survey every Wednesday, and the economic calendar was relatively light during the week. The lack of important economic reports left Treasury yields and mortgage rates at a relative standstill. They dropped a bit on the morning of the London train bombings, then returned to their previous levels by the end of the day.

What sent yields up, finally, was the prospect of a happy week in the stock market. Rising corporate earnings encouraged investors to move money out of bonds and into stocks. That caused bond prices to fall and yields to rise -- and mortgage rates follow.

The economic calendar promised to get more crowded later in the week, with today's release of the Consumer Price Index for June, and Friday's release of last month's Producer Price Index. Both of those can influence mortgage rates; unexpectedly high inflation can send rates upward. Today's report on June's retail sales and Friday's report on industrial production in June also could affect mortgage rates.

But as of deadline time, all those reports are in the future. For an expert's glimpse into the near-term future, we have Doug Duncan, chief economist for the Mortgage Bankers Association. On Wednesday he issued the latest update of his three-year economic forecast.

Duncan predicts that 30-year, fixed-rate mortgages will be about 20 basis points lower in the third quarter (July through September) than they were in the second quarter (April through June). In Bankrate's weekly survey, the 30-year averaged 5.78 percent in the second quarter.

Duncan expects long-term mortgage rates to rebound in the fourth quarter, ending up at about where they are now. He predicts that they'll gradually rise another half a percentage point through 2006, "finally reaching about 6.25 percent for a 30-year, fixed-rate mortgage in 2007."

That's still low by historical standards, Duncan points out, and he's certainly correct. Mortgage rates have been exceptionally low for three years, averaging less than 6 percent in 2003, 2004 and so far this year. The 30-year averaged 6.55 percent in 2002, 7.01 percent in 2001, 8.08 percent in 2000 and 7.46 percent in 1999.

You have to regard rate forecasts skeptically, even when they're the product of Duncan, who has a good track record compared to his peers. Two years ago he predicted that the 30-year would be averaging 7 percent now, and one year ago he predicted that the 30-year would be averaging 7.3 percent now.

Duncan's forecast two years ago was founded on his belief that job creation would run strong, putting pressure on prices and forcing interest rates up. In fact, he underestimated the strength of the job market. But interest rates are lower now than when he made that prediction. That's not what anyone would have expected.

Bank profits may benefit from home loans

2005-07-13T11:53:00.000-07:00

By Aleksandrs Rozens
Reuters

NEW YORK (Reuters) - Low interest rates have extended America's appetite for housing, likely boosting earnings for banks and other lenders this year, according to company and industry analysts.

The Mortgage Bankers Association on Tuesday revised its outlook for 2005 lending and predicted that U.S. home sales will hit new highs for the fifth consecutive year.

Expectations that demand for home loans will be sustained prompted Richard Bove, bank analyst at Punk, Ziegel & Co., to raise investment ratings for three U.S. banks -- Atlanta, Georgia-based SunTrust Banks Inc. ; First Horizon National Corp. of Memphis, Tennessee; and Birmingham, Alabama-based Regions Financial Corp. .

"We haven't seen sustained low interest rates for such a long period of time," said Buchi Ramagopal, director of financial research at Freddie Mac , a leading source of mortgage finance in the U.S. He added: "This has allowed people opportunity to trade up and be first-time home buyers."

Bove's ratings for SunTrust and First Horizon were upgraded to "buy" from "market perform," while Regions was upgraded to "market perform" from "sell."

He expects First Horizon shares to rise to $51, up from $44.46 on Tuesday and $42.58 at the beginning of 2005. Bove also sees SunTrust shares hitting $87, up from $74.99 on Tuesday and $71.06 at the start of the year.

Other lenders that could benefit from the mini-boom in mortgage lending include Wells Fargo & Co. and Washington Mutual Inc. , Bove said.

"Low rates probably have had a significant impact on volume, but what is uncertain is what this means for margins," said Michael Cohen, analyst at Susquehanna Financial LLP.

The margins Cohen referred to include measures like the net interest margin -- the difference between the interest rate at which a bank lends and the interest rate it pays on deposits.

The heightened mortgage lending is not just tied to home buying, according to industry participants.

Some of the stepped-up mortgage lending business comes as consumers refinance home mortgages to pay down home equity loans (HELs) and home equity lines of credit (HELOCs) that have seen their interest rates spike higher.

The U.S. Federal Reserve has raised interest rates nine times since last June, prompting banks to increase prime rates. As a result, borrowing costs on home equity loans and lines of credit, which are linked to prime rates, have risen.

Most fixed-rate home loans -- usually with terms of 15 or 30 years -- are linked to U.S. Treasury 10-year note rates. Ten-year note rates have dropped in recent weeks amid expectations that higher oil prices could slow the U.S. economy and that the Fed could hold off from further rate hikes. "Month after month, people have been seeing higher payments on their home equity loans because the Fed keeps raising rates," said Bove. "They are up 2.25 percent over the last year."

According to Bove, the benefits of the stepped-up activity within mortgage finance likely will show up later this year.

"Banks will still make pretty good profits on this in the third and fourth quarters," said Bove.

Shares of Regions Financial rose 0.6 percent, to $35.08 each, while SunTrust's stock was up 0.4 percent to $74.99 in trading on the New York Stock Exchange. Shares of First Horizon were up 2.2 percent, at $44.46, also on the NYSE.

Know the rules, your rights before your mortgage closing

2005-07-12T10:31:00.000-07:00

Just about anyone who has purchased or refinanced a home has a mortgage-closing horror story. Unexpected fees. Last-minute surprises. A settlement document that contains more pages than The Brothers Karamazov.

The Department of Housing and Urban Development has embarked on a renewed effort to make the closing process simpler and less costly. An earlier effort to update the rules generated such a buzz saw of opposition that HUD withdrew the changes last year.

This time around, HUD Secretary Alphonso Jackson plans to confer with as many industry and consumer groups as possible, starting with a round table in Washington Thursday. While it won't be possible to satisfy all the constituencies, "We're looking for consensus," Jackson said in an interview. Last time around, he said, "I couldn't find anyone who was with us."

There's already a consensus on one point: The Real Estate Settlement Procedures Act, which governs mortgage closings, is overly complicated and outdated. But there's widespread disagreement on how to fix the problem because so many players have a financial interest in the outcome.

Jackson said he hasn't set a timetable for releasing proposed changes to the rules. "We're going to move very judiciously," he said.

That may improve the chance for reform, but it also means the change could be a long time coming. So if you're planning to buy or refinance a home in the next few months, you'll have to go into the market with the rules that you have, not the rules that you want.

Protecting your interests

To protect your interests, make it clear upfront that you're an informed borrower, says Allen Fishbein, director of housing and credit policy for the Consumer Federation of America. Some closing costs may be negotiable with the seller, lender or closing agent, he says. The box on this page shows price ranges for closing-related costs. While closing costs vary depending on where you live, raise questions if an item is significantly higher than average, Fishbein says.

Other tips for borrowers:

Shop around. When you apply for a home loan, the lender or mortgage broker is required by law to give you a good-faith estimate of your settlement costs. Trouble is, there's no penalty for low-balling. Many borrowers say their actual costs have no earthly connection to the good-faith estimate.
Some lenders have tackled the problem by offering flat-rate packages or guaranteeing their estimates of closing costs.
Ditech.com, a subsidiary of General Motors Acceptance Corp., has offered a $395 flat fee for its mortgage refinancings for several years; last week, it extended the deal to home purchases.
Bank of America's Mortgage Rewards program waives most closing costs for Bank of America customers.
ING Direct's Orange Mortgage guarantees its closing costs, says Arkadi Kuhlmann, chief executive of ING Direct USA. If the estimate is too low, "We pick up the difference," he says.
ABN Amro Mortgage Group allows borrowers who obtain mortgages through its online channel, www.mortgage.com, to lock in closing fees at the same time they lock in the interest rate. The guarantee is also available through its LaSalle Bank and Standard Federal Bank subsidiaries.
"What customers say they want is simplicity and a guarantee," says Garth Graham, senior vice president of e-commerce.
Look for ways to save on title insurance. Title insurance protects the lender if there's a dispute over ownership of the property. If the house you're buying was owned by the seller for just a few years, ask the seller's title company for a re-issue rate. The premium will likely be lower. You may also qualify for a re-issue rate if you're refinancing.
If you're refinancing, go to your existing lender and ask for a streamlined refinancing. These typically require less paperwork, which translates into lower fees. Alternatively, ask your lender if you qualify for loan modification. With these deals, you keep your existing loan and pay your lender a fee in exchange for a reduction in your interest rate.
Ask to see the HUD-1. This is the official name of your settlement statement, which lists all your actual closing costs and charges. Borrowers have a right to review a draft of this document one day before closing, but hardly anyone ever asks for it. That's a mistake, because when it's time to close, it's usually too late to challenge inflated costs.

For more information, check out A Consumer's Guide to Mortgage Settlement Costs, published by the Federal Reserve Board. It's available at www.federalreserve.gov; click on "Consumer Information."

Mortgage rates edge up in latest survey

2005-07-08T11:26:00.000-07:00

From Staff and Wire Reports - Orlando Sentinel

Mortgage rates around the country rose this week but remain at a level that should continue to support the buoyant housing market. Mortgage giant Freddie Mac reported Thursday that for the week ending July 7, rates on 30-year, fixed-rate mortgages increased to 5.62 percent, up from last week's 5.53 percent, which had marked the lowest rate since early April 2004. Rates on 15-year, fixed-rate mortgages averaged 5.20 percent, up from 5.12 percent. For one-year adjustable-rate mortgages, rates rose to 4.33 percent, compared with 4.24 percent last week. Rates on five-year hybrid adjustable-rate mortgages averaged 5.19 percent, up from 5.06 percent.

Mortgage rates at lowest level in more than a year

2005-07-05T09:50:00.000-07:00

Rates on 30-year mortgages sank this week to their lowest level in more than a year, offering a dose of welcome news to prospective home buyers who still face soaring home prices in many markets.

Freddie Mac, in its weekly survey, reported that rates on 30-year, fixed rate mortgages dropped to 5.53 percent, down from 5.57 percent last week. This week's rate was the lowest since early April 2004, when rates on 30-year mortgages averaged 5.52 percent, a spokeswoman for the mortgage giant said.

Rates on 15-year, fixed-rate mortgages, a popular choice for refinancing a home mortgage, also declined to 5.12 percent, compared with 5.16 percent.

While long-term mortgage rates fell this week, short term rates edged up.

Rates on one-year adjustable rate mortgages rose to 4.24 percent, up slightly from 4.23 percent in the prior week. For five-year hybrid adjustable rate mortgages, rates increased to 5.06 percent, up from 5.05 percent. — Associated Press

Long-Term Mortgage Rates Sink to 5.53%

2005-07-01T09:43:00.000-07:00

From Associated Press

Rates on 30-year mortgages sank this week to their lowest level in more than a year.

Freddie Mac said its weekly nationwide survey showed that rates on 30-year, fixed-rate mortgages averaged 5.53%, down from 5.57% last week.

Rates on 15-year, fixed-rate mortgages fell this week to 5.12%, compared with 5.16% last week. Rates on one-year adjustable-rate mortgages rose to 4.24%, up from 4.23%. Rates on five-year hybrid adjustable mortgages increased to 5.06% from 5.05%.

Mortgage lending face-off

2005-06-30T13:37:00.000-07:00

Jenny Strasburg, San Francisco Chronicle Staff Writer
Thursday, June 30, 2005

Wells Fargo -- the largest Bay Area financial services firm and a leading U.S. mortgage lender -- has sent New York Attorney General Eliot Spitzer a message that, absent niceties, can be summed up in four words.

Mind your own business.

Spitzer, the crusading state official who took on mutual funds, Wall Street securities firms and the insurance industry, now has trained his spotlight on banks' mortgage practices.

He wants to know whether Hispanic, African American and other minorities are unfairly charged higher home-mortgage rates than white customers and has requested proprietary lending records from banks so that his office can investigate possible discrimination.

San Francisco's Wells Fargo and other large national banks, including Citibank, JPMorgan Chase and HSBC -- all of which are on Spitzer's inquiry list, according to court filings -- argue that federal bank regulators alone have jurisdiction over their business practices, including civil-rights matters. The U.S. Office of the Comptroller of the Currency, the lead agency regulating federally chartered banks, is weighing in on their side. For Wells and its chairman and chief executive officer, Richard Kovacevich, the coast-to- coast feud covers some familiar ground.

Wells and rival Bank of America used a similar argument in their successful fight against laws adopted by San Francisco and Santa Monica in 1999 that limited ATM fees charged to users who weren't customers of the banks.

In 2002, a federal appeals court in San Francisco tossed out the municipal bans, siding with the banks' view that federal regulations trump local law.

And in 2003, Wells Fargo's mortgage unit parried an attempt by the California Department of Corporations to limit interest charged on new loans.

The state, backed by state Attorney General Bill Lockyer, tried to shut down Wells' mortgage-lending operations in California, alleging that the bank's method of calculating interest rates broke state law. Wells argued that the state had no jurisdiction, and a federal judge agreed.

The latest dispute flared into public view on June 16 when the Clearing House Association, an industry group representing Wells and other major national banks, sued to stop Spitzer's probe. The same day, the comptroller's office filed its own lawsuit challenging Spitzer. Hearings are scheduled in July in U.S. District Court in Manhattan.

Kevin Stein, associate director of the California Reinvestment Coalition, a critic of banks' mortgage-lending practices, said Wells' prominence in the home-loan market and its big role in providing credit to the lower-income subprime market obligate it to share information more fully than it has.

"They're active in this lawsuit and were the main catalyst in the California dispute (over mortgage interest) a few years ago. It does seem that they're aggressive in trying to limit their obligations to the state of California," Stein said.

Wells, for its part, says its position is solid.

"We look forward to having the courts -- as they've done time and again -- uphold federal banking law, which gives the OCC exclusive enforcement responsibility over national bank consumer-lending practices," Wells said in a statement. The bank emphasized that it bases mortgage rates on risk factors such as credit scores and debt levels, not race.

The bank intends to "vigorously defend its reputation as a fair and responsible lender," said spokesman Chris Hammond, who cast the dispute with Spitzer as a matter of principle, not self-interest.

"We adamantly believe consumers and the industry are well served with a national standard," he said.

Wells' unwavering stance is in part a reflection of the forceful personality of Kovacevich, 61, who in leading one of the nation's largest and most profitable financial services firms has been a vocal defender of its lending practices.

He previously was chief executive officer of Norwest Bank of Minneapolis, keeping the top job in 1998 when Norwest took over the old Wells Fargo, adopted its name and moved its headquarters to San Francisco, creating the sprawling company that exists today.

"Talking to investors, the sense is that Kovacevich is a little more outspoken about these things" compared with top executives at other banks, RBC Capital Markets banking analyst Joe Morford said. "He's not willing to back down on some of these issues if he feels the bank is right."

Fair-lending activists chose different words.

"Kovacevich has said, mantra-like, 'We don't make predatory loans.' There's this sense of denial that starts at the top and works its way through the organization," said Scott Klinger, co-director of Responsible Wealth, a project of Boston nonprofit group United for a Fair Economy. "Wells is still at the point where they say, 'We're the leaders. We don't have a problem.' "

At issue, Spitzer and others say, is whether the comptroller's office is monitoring fair lending as effectively as it carries out its top priority -- regulating banks' financial soundness. Some critics of the comptroller's office argue that the agency's authority as the lead bank regulator should not prevent states from enforcing consumer and civil-rights laws.

"There's a big question whether they have enough resources. Are they big enough to do the whole job at all? They've put most of their resources into safety and soundness," said Gail Hillebrand, senior attorney for Consumers Union's West Coast region.

Spitzer argues that the comptroller's office is too cozy with the banks it regulates.

"My office is committed to enforcing laws that protect (New Yorkers) from racial discrimination in lending and will strongly resist attempts to limit our long-standing authority to do so," he said in response to the Office of the Comptroller of the Currency's lawsuit to bar his probe.

Banking experts note that the comptroller's office has repeatedly intervened in court cases to defend its turf.

"The OCC for a hundred years has very fiercely, jealously guarded its exclusive authority to be the regulator of national banks," said UC Berkeley banking expert James Wilcox, who was the agency's chief economist from 1999 to 2001. When challenged, he said, "the OCC's batting average has been high."

Meanwhile, Spitzer spokeswoman Juanita Scarlett said of the New York inquiry, "Our probe is moving forward."

The American Bankers Association, while not a party to the lawsuits, is prepared to defend the Office of the Comptroller of the Currency's exclusive authority to regulate federally chartered banks.

"You will not find an industry subject to more regulation and statutory requirements, bar none," said Dawn Causey, general counsel for the industry group.

"The OCC is expert in banks and banking transactions," unlike state attorneys general, who police a wide range of industries, Causey added. "Congress sets jurisdictions when Congress sees fit. And Congress has been very clear."

The high-profile battle between Spitzer and the banks is spurring legislation to curb the Office of the Comptroller of the Currency's powers to pre-empt state inquiries into banks.

"It's clear to me now that only Congress can sort this out," Rep. Barney Frank of Massachusetts, the ranking Democrat on the House Financial Services Committee, told The Chronicle on Wednesday. He said Democrats will introduce a bill next month aimed at limiting the Office of the Comptroller of the Currency's power to pre-empt state authority over certain banking practices. The current political climate could make support for a challenge to the comptroller's office difficult to muster.

Mortgage plans mirror hot housing markets

2005-06-29T13:59:00.000-07:00

By Amy Strahan
BLOOMBERG NEWS

Adjustable-rate mortgages are increasingly popular with first-time homebuyers in regions where home price appreciations outpace gains in personal income, regulators say.

The largest gaps between increases in personal incomes and home values were reported in Nevada, Hawaii, California, Washington, D.C., and Maryland, according to Bureau of Economic Statistics data compiled by bank regulators.

The percentage of adjustable-rate mortgages rose to 46 percent of home loans in 2004 from 18 percent the previous year in Nevada and doubled to 58 percent from 29 percent in California, according to the Federal Housing Finance Board.

"Affordability is becoming a major issue, and some of the innovations we're seeing in mortgage products are really homebuyers trying to qualify for mortgages in these very expensive markets," Rich Brown, the Federal Deposit Insurance Corp.'s chief economist, told reporters this week.

The FDIC calculates that booming housing markets envelop 25 percent of the U.S. population and account for 40 percent of home values.

The gap between home prices and incomes last year was widest in California and Nevada. In California, prices rose 22 percent and incomes 4.8 percent; in Nevada, home prices surged 28 percent while incomes rose 4.7 percent, the FDIC said. In states like New York, New Jersey and Pennsylvania, home prices last year rose at roughly twice the rate as incomes.

The FDIC and other banking regulators are studying the correlation between new adjustable-rate mortgage products, including interest-only loans, and higher home prices.

The studies are designed "to understand the extent to which these new credit factors may be contributing to home price growth," said Barbara Ryan, associate director of the FDIC's division of insurance and research.

Home appreciations rose faster than personal incomes in 39 out of the 50 states in the nation. The exceptions were Alabama, Mississippi, Tennessee, Indiana, Iowa, North Dakota, South Dakota, Colorado, Oklahoma, Texas and Utah.

HUD to start over on mortgage reform

2005-06-28T10:30:00.000-07:00

Better right than fast, secretary says

By MICHELE DERUS
journalsentinel.com

America needs stronger governance of home-mortgage transactions, but reform must be from the ground up, U.S. Housing and Urban Development Secretary Alphonso Jackson said Monday.

With that simple statement, Jackson completed his agency's March 2004 rejection of a sweeping mortgage-reform package introduced several years ago that would have required lenders to more fully disclose fees, charges and restrictions.

"HUD's job right now is to listen to you," Jackson said Monday of his commitment to gauge public opinion. "We begin today," he said in a teleconference with the media.

The now-defunct plan was on the brink of enactment last year when Jackson, then acting secretary, shelved it. At the time, he cited a need for further review and denied the move was meant to pacify Congressional critics who were stalling his nomination as HUD secretary.

HUD predicted its reform plan would save consumers $8 billion a year partly through industry efficiencies and by streamlining the loan application process.

"The plan is not dead," Jackson said then.

The plan is dead, Jackson spokesman Brian E. Sullivan said Monday.

"We're wiping the blackboard clean and starting fresh," Sullivan said.

Sullivan was left to field a barrage of new reporters' questions when Jackson disconnected from media lines right after his brief statement.

"Everybody understands that buying a house today is too complicated," Sullivan said. "When people are told at the closing that they owe hundreds and sometimes thousands of dollars more than they thought, that's a problem. Sometimes there are legitimate reasons for that. But there's also room for greater clarity."

With $55 billion a year in annual mortgage fees at stake, "the devil is in the details," Jackson said in a teleconference media call Monday. "I am more concerned with doing this right than doing it fast."

Starting July 14 in Washington, D.C., the HUD secretary said his agency will host at least six invitation-only discussions around the nation to gauge consumer and industry group opinion on mortgage reform.

The only Midwest session is Aug. 4 in Chicago. No time and site were immediately available.

HUD's authority to alter mortgage lending practices stems from the 1974 Real Estate Settlement and Procedures Act.

The Mortgage Bankers Association, a Washington trade group representing 2,900 real estate finance firms, issued a statement late Monday applauding Jackson's "collaborative approach" and agreeing with the HUD secretary that "any changes to RESPA should be done right, not fast."

No one at Consumer Federation of America or the Association of Community Organizations for Reform Now, two Washington-based public interest groups involved in the mortgage-reform issue, could be reached for comment Monday.

Because its potential fiscal impact exceeds $100 million, Sullivan said, Congress will be consulted on any new HUD rules, although they do not require Congressional approval.

Studies Confirm Risk Factors Drive Mortgage Loan Pricing

2005-06-27T10:00:00.000-07:00

Originator Times

DALLAS, TX - The interest rate a borrower pays on a mortgage loan is directly related to his or her credit risk profile, according to two new studies commissioned by the law firm of Sirote and Permutt P.C. of Birmingham, Alabama at the request of the National Home Equity Mortgage Association. The studies, authored by Professors Richard F. DeMong and James E. Burroughs of the University of Virginia's McIntire School of Commerce, are based on a detailed analysis of approximately 1 million mortgage loans made in all 50 states and the District of Columbia during 2004 by multiple lenders that specialize in nonprime mortgage lending.

"The question of how certain risk factors and the presence of prepayment fee clauses affect mortgage pricing came up when I testified at House of Representatives Financial Services Committee hearings last year," said Professor DeMong. "I had to admit I didn't know of any hard data on these issues that could help the Committee members. That's when I started moving forward on these studies. They directly address the vital questions -- is the mortgage market efficiently pricing loans based on risk? Are prepayment fee clauses on loans an option that really benefits consumers? Those questions go to the heart of informed consumer choice and effective policymaking."

To answer these questions, professors DeMong and Burroughs looked at a range of borrower characteristics on a huge number of loans, and found that the level of risk these characteristics represented, along with the presence of a prepayment fee clause, directly related to the price the borrower paid for the loan, as measured by annual percentage rate, or APR. Higher credit ratings and a borrower's willingness to accept a prepayment clause translated into lower interest rates.

Specifically, the analysis by Professors DeMong and Burroughs found that:

The higher the FICO score the lower the interest rate on the loan. FICO scores, which measure risk based on a consumer's financial history, have the largest influence on mortgage prices. On average, each 10-point increase in a borrower's FICO score reduces the APR on the loan by 10 basis points (or 0.10 percent).
Borrowers with more secure income pay less. Borrowers who can fully document their incomes pay lower APRs on their mortgages than borrowers who supply only "stated income" to lenders.
Buyers who live in their homes pay less than those purchasing property for rental or other investment. Prices are generally less for mortgages on homes the borrower plans to occupy than on non-owner- occupied homes -- the average APR for owner-occupied homes is 62 basis points (or 0.62 percent) less.
Borrowers who use less equity, that is have lower loan-to value generally pay less for their loans. On average, for every one- percentage-point increase in LTV, the APR increases by 0.6 basis points (or 0.006 percent).

Prepayment Fee Clauses Lower Loan Rates

Regarding prepayment fees, the studies found that borrowers pay less for mortgage loans that include prepayment fee clauses (in which they agree to pay a small fee if they pay off or refinance their loan before a certain amount of time has passed; usually two or three years). On average, a loan with a prepayment fee has an APR 38 basis points (or 0.38 percent) lower than a loan with no prepayment fee. Furthermore, the studies found that borrowers with higher FICO scores are actually more likely to opt for a prepayment fee than borrowers with lower FICO scores.

Bankers' Worries Mount About Mortgage Risks

2005-06-24T11:23:00.000-07:00

By RUTH SIMON
& THE WALL STREET JOURNAL

In the latest sign of how frothy the housing market has become, new data show the degree to which people are stretching to buy homes in a hot housing market.

The data, from the Mortgage Bankers Association, show that adjustable-rate and interest-only mortgages accounted for nearly two-thirds of mortgage originations in the second half of last year. Both types of loans have helped fuel the strong housing market since they carry lower initial monthly payments than do fixed-rate loans, enabling borrowers to purchase more-expensive homes.

With such loans accounting for an increasing portion of consumer borrowing, some mortgage analysts worry that the growth of these loans could cause problems for the housing market and broader economy. “The situation with interest-only ARMs is just one of several very scary things going on in the mortgage industry,” says Stu Feldstein, president of SMR Research Corp., a market-research firm in Hackettstown, N.J. The rise of interest-only loans, combined with other factors such as higher debt levels and changing bankruptcy laws, are likely to cause foreclosures to rise, he says, “possibly dramatically.”

Though it has been clear that borrowers in high-priced markets have been gravitating to products that make homes more affordable, the shift has been greater than expected. In California, where home-price growth has been sizzling, interest-only loans accounted for 61 percent of the mortgages taken out to buy homes in the first two months of this year, up from 47.1 percent in 2004 and less than 2 percent in 2002, according to an analysis prepared for The Wall Street Journal by San Francisco researchers LoanPerformance, a unit of First American Corp. Just 18 percent of California households can afford to buy a median-price house using a conventional 30-year fixed-rate mortgage, according to a report issued this month by the California Association of Realtors.

In another report issued this month, mortgage strategists at UBS AG called the shift to ARMs and nontraditional mortgage products such as interest-only loans “symptomatic of ...the end of the housing cycle. The thing that all of these loans have in common is that they allow homeowners to buy a more expensive home than they could have qualified for with a ‘traditional' loan.”

The Mortgage Bankers Association conducted the survey of the interest-only and ARM share of mortgage originations in an effort to provide more accurate information about the housing market. The group's survey found that interest-only mortgages accounted for 17 percent of loans originated in the second half of 2004. And 46 percent of loans were adjustable-rate loans that don't carry an interest-only feature. The data reflect dollars lent, not the number of mortgages.

This is the first time the group has measured the share of interest-only loans, in which borrowers lower their monthly outlay by paying interest and no principal in the loan's early years. It also is the first time it has looked at loans actually granted, not merely applications.

The findings are the latest evidence that borrowers have moved decisively away from traditional 30-year fixed-rate mortgages and have embraced ARMs and, in particular, interest-only loans, which used to be a niche product. Though borrowers take out these loans for many reasons, the shifts come at a time when both home prices and competition among mortgage lenders has climbed. The MBA's weekly surveys — which look only at application volume, not loans that are actually made — had put the share of ARMs, including interest-only loans, at roughly 40 percent to 50 percent this year. That is up from as little as 18 percent of application volume in early 2003.

The surge in ARMs and interest-only loans is particularly notable because rates on 30-year fixed-rate mortgages remain below 6 percent, still low by historical standards. Borrowers typically turn to ARMs as interest rates climb, but so far the increase in rates has been modest. Many economists see the current popularity of ARMs and interest-only loans as the latest sign of how borrowers are stretching to buy homes they couldn't otherwise afford — and of how lenders are more than willing to accommodate them.

Partly because of these products, mortgage originations are expected to total nearly $2.5 trillion this year, according to the MBA, down slightly from $2.6 trillion in 2004.

Products such as interest-only mortgages can be riskier than fixed-rate mortgages, particularly when interest rates are rising. If home prices fall as rates rise, some borrowers with interest-only loans could wind up owing more than the value of their home. Even if the growth in home prices simply flattens or slows, some borrowers could be squeezed by rising mortgage payments.

In another sign that worries about lending practices are increasing, federal banking regulators Monday issued new guidance for lenders making home-equity loans and lines of credit. The guidelines require banks to do a more in-depth analysis of borrowers' income and debt levels and their ability to repay the loan — instead of relying simply on credit scores.

Initially aimed at sophisticated borrowers who wanted to free up cash for other purposes, such as investing in the stock market, interest-only loans have come to dominate some segments of the mortgage market. A report issued in January by UBS found that the interest-only share of jumbo loans — currently, loans exceeding $359,650 — had tripled since the end of 2003.

Michael Menatian, a mortgage banker in West Hartford, Conn., says he is seeing some borrowers opt for interest-only loans over mortgages that carry a lower interest rate but result in a higher monthly payment.

If home prices continue to surge, affordability could this year reach its worst-ever levels in hot markets such as Los Angeles, Boston and Miami, according to recent report by Goldman Sachs Group Inc. senior economist Jan Hatzius.

The MBA survey highlights other changes in the mortgage market that may increase risks to borrowers and lenders. More than half of the adjustable-rate loans were “traditional” ARMs, meaning the initial interest rate is fixed for less than three years. Borrowers who opt for these loans typically get a lower initial interest rate in exchange for giving up protection from future rate increases.

Until recently, so-called hybrid ARMs had been a more popular choice. These loans typically carry a higher initial interest rate, but are considered a more-conservative option because the interest rate is fixed for the first three, five, seven or 10 years. That makes it more likely that the borrowers will move or see their incomes increase before they face higher payments.

The shift to short-term ARMs has occurred even as the difference between rates on ARMs and fixed-rate loans has narrowed, reducing the attractiveness of adjustables. “To have a lower initial monthly payment, people have gone for shorter-term ARMs,” says Fannie Mae Chief Economist David Berson.

As the use of more novel lending programs becomes commonplace, some mortgage analysts worry that borrowers are adding to the risks by combining a number of features _ using, for instance, 100 percent financing and an interest-only mortgage or a no- or low-documentation loan to buy a property for investment. “These things layer on each other,” says Mark Milner, senior vice president and chief risk officer of PMI Mortgage Insurance Co., a unit of PMI Group Inc. During the past year, PMI has increased its charges for insuring riskier loans, Mr. Milner says.

___

If you borrow $350,000 with an interest-only mortgage that carries a fixed rate of roughly 4.8 percent for the first five years, here's what you will pay:

The monthly payment on the loan would be $1,403 during the initial period.
Even if interest rates don't rise, the monthly payment would jump to $2,008 after five years.
If rates jump by two percentage points instead, the monthly payment would jump by 73 percent to nearly $2,500.

Source: Dominion Bond Rating Service

Mortgage rates fall further

2005-06-23T11:15:00.000-07:00

Average 30-year fixed-rate loan down to 5.57%, a level that should keep the housing market growing.
June 23, 2005: 1:12 PM EDT

NEW YORK (CNN/Money) - Mortgage rates fell across the board over the past week, mortgage finance firm Freddie Mac said Thursday, suggesting the housing market still has room to grow.

The rate on 30-year, fixed-rate loans averaged 5.57 percent for the week ending Thursday, with an average 0.6 point payable upfront, down from the prior week's average of 5.63 percent, according to the mortgage finance firm's survey.

A year ago, the 30-year fixed-rate loan averaged 6.25 percent.

Freddie Mac said the average for the 15-year mortgage fell to 5.16 percent this week from 5.22 percent the previous week, with an average 0.6 point payable upfront.

The 15-year loan averaged 5.64 percent this time last year.

"Existing home sales in May were at the second highest level ever recorded, suggesting the housing market still has a good head of steam," said Frank Nothaft, Freddie Mac vice president and chief economist. "As a matter of fact, mortgage rates, which are fueling the vibrant housing market, are even lower in June than they were in May.

"Given that mortgage rates aren't expected to move to much in either direction any time soon, we fully expect the housing market will continue to thrive well into the foreseeable future."

Five-year, adjustable-rate mortgages fell to an average 5.05 percent this week, with an average 0.6 point payable up front, down from last week's average of 5.10 percent.

There is no data available for year-over-year comparisons since Freddie Mac only began tracking these rates this year.

One-year, adjustable-rate mortgages also dipped to an average 4.23 percent this week, with an average 0.7 point payable up front, down from 4.25 percent.

At this time last year, the one-year adjustable-rate loan averaged 4.13 percent.

Mortgage bankers: home boom to continue

2005-06-22T12:23:00.000-07:00

The Mortgage Bankers Association predicts that the housing market will stay hot another two years.

June 22, 2005: 11:28 AM EDT
By Les Christie, CNN/Money staff writer

NEW YORK (CNN/Money) - The sharp rise in home prices will continue in 2006, according to an upcoming forecast by Douglas Duncan, chief economist for the Mortgage Bankers Association, the leading trade organization of the real estate lending industry.

"We're forecasting that 2006 will be a trend growth year for the economy with an increase of about 3.5 percent in the GDP," said Duncan. That will help keep what he calls the "Don Ho real estate market" ("Tiny Bubbles") percolating.

His one caveat is that the country has never experienced a housing market quite like this one. In the past, real estate prices have been closely tied to economic conditions, both national and local. But in recent years housing prices in many markets have far outgained other economic metrics.

Duncan predicts home ownership will further expand the next two years. He says the number of homes sold will set a record in 2005 for the fifth consecutive year. Helping drive this trend is the baby-boom generation, only 70 percent of whom currently owns homes.

"Typically, home-ownership peaks at about age 60," he says, " when 80 percent of Americans own their own homes." That means boomers should do a lot of homebuying in the near future.

Adding to that factor will be very modest upward movement in long-term interest rates over the next two years, he predicts, keeping monthly housing costs affordable for many. "That means another great year for housing in 2006," he says.

On the refinancing front, Duncan says most homeowners who wanted to refinance to lower their monthly payments have already done so.

Still, many homeowners may refinance – depending on rates trends – in order to take cash out. But Americans, he says, have become extremely rate sensitive.

"People react to small changes in rates," he says. Spikes in the number of Americans refinancing "may turn on 40 basis points or less."

US mortgage delinquencies, foreclosures down in Q1

2005-06-21T10:10:00.000-07:00

NEW YORK, June 21 (Reuters) - U.S. residential mortgage delinquencies and foreclosures edged down in the first quarter of 2005 from a year earlier, a mortgage industry group said on Tuesday.

The mortgage delinquency rate was 4.31 percent at the end of the first quarter, down from 4.46 percent at the end of the first quarter of 2004 and 4.38 percent at the end of the fourth quarter of last year, the Mortgage Bankers Association said.

The figures are seasonally adjusted and apply to one-to-four unit residential properties.

The new foreclosure rate on mortgages was 0.42 percent at the end of the first quarter, down from 0.47 percent in the year-ago quarter and 0.46 percent at the end of the fourth quarter.

The inventory of loans in the foreclosure process edged down to 1.08 percent at the end of the first quarter, from 1.29 percent in the year-ago period and 1.15 percent in the previous quarter.

Giving In to Bubble Pressure

2005-06-20T10:55:00.000-07:00

Michael Hiltzik - LAtimes.com

To paraphrase Mark Twain, everybody talks about the housing bubble, but nobody does anything about it.

Well, Mark A.R. Kleiman did something about it.

A professor of public policy at the UCLA School of Public Affairs, Kleiman, 54, announced on his weblog three weeks ago that he was, in a manner of speaking, shorting the Los Angeles housing market.

He had just accepted an offer for his 2,700-square-foot, four-bedroom Mulholland Drive home that would net him roughly a 62% gain over the price he paid in 1997 and the cost of a sizable remodeling in 2001. The deal closed last week, with the buyer acquiring a hilltop property with a picture-window view across the San Fernando Valley and a recently installed outdoor spa.

Kleiman acquired a lease on a two-bedroom apartment in Brentwood. "It doesn't have a hot tub or much of a view," he says, but in its favor it's within walking distance of a couple of very fine restaurants.

Kleiman was driven to sell by three considerations: One, he had already racked up an impressive, but unrealized, gain on the property. ("I had a good ride; why be a pig?") Two, he thought he had too much of his net worth tied up in one volatile asset. That thought alone was starting to keep him up at night, a classic manifestation of investor anxiety. Finally, the fundamentals of the housing market were telling him that the recent price rises in L.A. real estate couldn't continue.

"Someone hired into the UCLA economics department today couldn't afford to live in the neighborhoods where people in the same department moved 20 years ago," he observed recently as we took in the view from his living room. Quite reasonably, he questioned whether prices could stick at a level that placed housing so far out of the reach of its principal market.

Indeed, the way home prices have outraced growth in family incomes is one of the phenomena that make housing market analysts nervous. Harvard University's U.S. housing market study reported this year that the number of metropolitan areas nationwide where median home prices are four times the median household income or more has tripled over the last five years, with Southern California among the regions pacing the growth. Meanwhile, the percentage of home mortgages made to investors rather than owner-occupants has risen to 11% from 7%, a hint that speculation is starting to fuel home demand.

And now the Federal Reserve has begun nudging up short-term interest rates, which applies upward pressure to mortgage and other long-term rates. At a certain point, Kleiman reasons, higher rates will choke off the buyers' enthusiasm: The monthly payment on a 30-year, $1-million mortgage at 5.5% will only pay for an $860,000 mortgage at 7%. "What if mortgages go to 9%?" he says. "I thought, do I have the courage for this?"

To be absolutely accurate, Kleiman isn't shorting the market; with a true short position he would be risking a loss if the market kept rising — the analogous transaction to short selling a share of stock would be for him to sell a house he had borrowed, with the intention of buying it back at a lower price and returning it to the owner, pocketing the difference. What he's doing is more basic: moving to the sidelines.

It's worth noting that Kleiman has more flexibility to convert his home into liquid capital than many Southland families. He's unmarried and childless, so he didn't have to replace his Mulholland home with one of commensurate size in a suitable school district.

That said, he knows he's making a sacrifice. "I love this house. I went through a lot of heartache getting it redone." He'll miss the quiet, and his new apartment won't have the space for his extensive collection of African art and sculpture.

Before deciding to sell, he investigated a few conventional hedging possibilities, including HedgeStreet, a website that allows individuals to speculate on economic events, and another venture that has brought together Yale University economist Robert Shiller and the Chicago Mercantile Exchange to develop derivatives in housing and other asset classes. But the trading market at HedgeStreet is still thin, and the CME project hasn't yet gotten off the ground.

"If I could have found a Westside REIT, I could have shorted that," he says. Eventually, he concluded that the only way to adequately hedge against a downturn was to sell the physical asset.

Kleiman is aware that the housing market could confound his expectations.

"In my dreams, we get a crunch and I put the same money back into the market for 50% more house," he says. "The other side of the case is that it's true that they're not making any more land on the Westside. They're not building any more housing, either. Gas prices and freeways could really push up demand by forcing people to live closer to their work." He shrugs philosophically. "It will not surprise me if this house is worth 20% more in two years. I may end up with less housing than I could have afforded."

Then there's the contrarian factor: "The notion that this is a bubble is such conventional wisdom that I'm beginning to doubt that it is a bubble."

But the notion that he may have sold too early doesn't cause him as much anxiety as the idea that he might have held on until it was too late. When I called him last week on the day the sale closed, he sounded harried — but that was because of the consequences of the sale, not its rationale.

"I've discovered that there's a big disadvantage to shorting the market physically rather than financially," he told me. "You really do have to move, and it's moving day."

For Some Homeowners, Innovative Mortgage Plan Could Be Time Bomb

2005-06-17T10:11:00.000-07:00

By DAVID LEONHARDT
& MOTOKO RICH
& THE NEW YORK TIMES
Published on 6/17/2005

American homeowners have made a trillion-dollar bet that mortgage rates will remain near record lows for at least a few more years. But with some interest rates already rising, economists worry that the bet could turn bad.

The problem is that new types of mortgages that hold down monthly payments for families — helping many buy homes that they would not otherwise be able to afford — also require potentially far higher payments in future years.

The bill will soon start to come due in a serious way when the initial period of fixed payments, typically set at artificially low rates, expires for millions of homeowners with adjustable-rate mortgages.

This year, only $83 billion, or 1 percent, of mortgage debt will switch to an adjustable rate based largely on prevailing interest rates, according to an analysis by Deutsche Bank in New York.

Next year, some $300 billion of mortgage debt will be similarly adjusted.

But in 2007, a time bomb could go off when $1 trillion of the nation's mortgage debt — or about 12 percent of it — will switch to adjustable payments, according to the analysis.

The 2007 adjustments will almost certainly be the largest such turnover that has ever occurred.

The impact is not likely to derail the economy on its own, experts predict, but it will probably slow growth. For individual families, the problems could be significant.

Consider a typical $300,000 interest-only mortgage with fixed payments for the first three years, taken out last summer.

The homeowner would now be paying about $1,200 a month. If interest rates rose modestly over the next two years, as many forecasters expect, the payment would jump to more than $2,000 in 2007, according to Stephen Barrett, the owner of Redmond Financial, a mortgage business near Seattle.

“I'm not sure that people are being counseled on really how big of a risk they are taking,” said Amy Crews Cutts, deputy chief economist at Freddie Mac, the mortgage company.

With the help of new computer models, lenders have brought out newer and riskier mortgages to attract borrowers and boost their buying power during the long housing boom. The traditional 30-year mortgage with guaranteed payments is increasingly a loan of the past.

The hot loan of 2004 — the interest-only mortgage — allowed homebuyers to pay no principal for the first few years of the loan, substantially lowering their initial payments.

It has remained popular this year, accounting for at least 40 percent of purchase loans over $360,000 in areas with fast-rising home prices, like San Diego, Washington, D.C., Seattle, Reno, Atlanta and much of northern California, according to LoanPerformance, a mortgage data firm.

This year's new model, known as an “option ARM,” allows borrowers to make payments with monthly rates as low as 1.25 percent for the first five years of the loan; the average rate on a 30-year, fixed-rate loan is about 5.6 percent.

During the first quarter of 2005, 40 percent of mortgages over $360,000 issued to people with good credit were option ARMs, said David Liu, a mortgage strategy analyst with UBS in New York. Option ARMs barely existed in 2003.

Many borrowers stand to benefit from these creative loans. With the average homeowner moving every six years, loans with initially lower payments can substantially reduce housing costs. Buyers with variable incomes, like the self-employed, can also make smaller or larger payments depending on their take-home pay in a particular month, without incurring penalties.

But all of these loans come with the risk of a spike in payments at some point in the future. In particular, borrowers who have taken out an interest-only loan will see a jump in payments simply because they will then start to owe principal after the interest-only period lapses. If rates rise, the payments will go even higher.

Borrowers whose incomes have not risen sufficiently or who have not planned for the increase in payment could find themselves shocked.

Still, even some mortgage brokers are concerned by how much their clients are stretching their spending power using creative mortgages.

One possible warning sign is that a growing share of people taking out the aggressive loans are lower-income families who live in expensive areas, according to Economy.com, a research company. Another is that variable-rate mortgages have stayed popular even as rates on fixed-rate loans have gone down.

“There are people who are buying homes that they shouldn't buy,” said Eric Appelbaum, president of Apple Mortgage Corp. in Manhattan. “People are saying I can afford it on interest-only but I can't afford it” with a traditional mortgage, said Appelbaum. “It doesn't make any sense.”

Since borrowers with interest-only mortgages are not yet paying down their debt, they are hoping to build up equity through an increase in home values. If house prices fall, as they did during the early ‘90s in some cities, borrowers will be forced to bring money to the table when they sell.

Even if home prices go up a little, borrowers who have taken out option ARMs and made only minimum payments for five years could find themselves in a hole. Such loans, which are typically based on rates that adjust monthly, give home owners four payment options each month. In the first quarter of 2005, 70 percent of option ARM borrowers paid the minimum payment, according to UBS.

In doing so, those borrowers effectively added more debt to the back of their loans.

On a $400,000 loan, for example, a buyer who made only minimum payments over the first five years would add more than $27,000 to the back end of the loan, assuming short-term rates increase by 1 percentage point over the course of the loan, said Robert Binette, a mortgage broker with Hamilton Mortgage in Ridgefield, Conn. The monthly payment would jump from $1,718 in the final month of the fifth year to $2,580 after the loan reset, a difference of more than 50 percent.

Borrowers who expect to cover the larger debt by refinancing could be in trouble if rates have increased. Thirty-year fixed mortgage rates are near their lowest level in a generation.

Nationwide, the increase in monthly payments as more mortgage rates start to float will cost families about an extra $40 billion over the next two years, according to estimates by Credit Suisse First Boston. That is the rough equivalent of a 40-cent increase in gas prices over the same span, which would pinch incomes but not likely create a recession.

The biggest concern, many economists say, is that the new mortgages have come onto the market at a time when low interest rates and rapidly rising home prices are the only reality many people can imagine. Families might be making decisions assuming that combination will exist forever.

In a speech on Wednesday to bankers in New York, Donald L. Kohn, a Federal Reserve governor, said he expected a strong economy over the next few years.

“My message this morning, however, is that this is not a time for complacency,” he said. There is “significant uncertainty,” he added, because some recent financial innovations “have not yet been rigorously stress-tested.”

Mortgage applications increase is sharpest in almost a year

2005-06-16T10:55:00.000-07:00

Bloomberg News

WASHINGTON -- Mortgage applications in the U.S. rose last week by the most in almost a year, the Mortgage Bankers Association said Wednesday.

The group's index of mortgage applications jumped 17 percent, to 887. That's the largest increase since the week ended July 2, 2004, and the highest level since the week ended April 2, 2004.

Home sales "could be a record this year," said Tim Rogers, chief economist at Briefing.com in Boston. "I don't expect a real strong upturn in [interest] rates, and I expect that to keep the housing sector booming."

The group's gauge of applications to purchase homes rose 10 percent, to 529, the highest on record. The index of applications to refinance existing loans surged 26 percent, to 2,967, the highest since the week ended April 2, 2004. The index is twice as high as it was a year ago.

A separate report showed optimism among home builders rose this month to its highest level of the year. The National Association of Home Builders/Wells Fargo index of builder confidence increased to 71 from 70 in May.

"We've sold out into the second quarter of next year," said Joel Rassman, chief financial officer of Toll Brothers Inc., a luxury home builder based in Horsham, Pa.

Rassman said the company is seeing greater demand from consumers wanting to move up and from Baby Boomers looking for a second or third home.

Military personnel get mortgage break

2005-06-15T09:54:00.000-07:00

Freddie Mac's mortgage servicers must give more time to borrowers just released from active duty.
June 13, 2005: 1:13 PM EDT

NEW YORK (CNN/Money) - Freddie Mac said Monday it is requiring its 2,300 mortgage servicing companies to extend a break to borrowers recently back from active duty with the U.S. armed forces.

The company said the new policy was meant to help returning military personnel who face financial hardship avoid foreclosure.

"We're extending this forbearance to make sure that lenders do not initiate or resume foreclosure for at least 90 days from a borrower's release date," Ingrid Beckles, Freddie Mac's vice president of default asset management, said in a statement.

"This change gives lenders more time to work with servicemen and women and explore all relief options available," she said.

If a returning member of the military needs additional mortgage assistance, the new policy stipulates that a mortgage servicer will assess the borrower's individual circumstances to determine the most suitable relief option.

The new policy appears in a June 10 update to Freddie Mac's Single-Family Seller/Servicer Guide.

The company said this move goes above and beyond the requirements of the Service Members Civil Relief Act (SCRA), which protects servicemen and women from creditors only when they are on active duty.

Paying off mortgage to buy stocks creates risk

2005-06-13T10:11:00.000-07:00

ADVICE: PERSONAL FINANCE
Paying off mortgage to buy stocks creates risk
By ERIC TYSON
King Features Syndicate

Q: Should I pay off my home mortgage early? I am single, just turning 40 and have two years left before the interest rate rises on my 30-year adjustable rate mortgage, which is fixed for the first three years at 4.5 percent. I owe about $125,000. I have been a saver all my life, and this is my only debt. I entered into the ARM last year with the idea that I would pay it all off in three years, so I am not concerned with what future interest rates will do. I could pay off the mortgage now and still have about $40,000 in savings, but 4.5 percent interest doesn't seem too bad considering the tax benefit on mortgage interest. But if the rate rolls over at 6.5 percent in two years, does it make the most sense to pay it off and start investing the additional free cash flow in stocks at that time?

A: The answer to your question depends on how you're investing your spare cash. If you were keeping it in a savings account earning just 2 percent to 3 percent, you'd be better off paying your mortgage off now.

You didn't say how you invest your money, but I would say that at your age you should be reasonably aggressive. You should have about 70 percent or so in stocks with the remainder in bonds. With that kind of a mix, you should earn more than the cost of the mortgage.

Note, though, the key word being "should." To earn more than the cost of your mortgage, you must take a fair degree of risk.

If your mortgage rate goes to 6.5 percent in two years, I would think very strongly about paying off the mortgage, especially since you'd still have a major cash buffer.

If you take this course of action, then you could gradually feed excess monthly cash flow into a mixture of mostly stocks and to a lesser extent bonds (ideally in a tax-advantaged retirement account).

Q: What is the advantage of putting nondeductible funds into an IRA? Are there any limitations on the amount of money one could put into an IRA that is nondeductible?

A: The advantage of contributing money without an upfront tax deduction into an IRA is that the investment earnings compound without taxation until withdrawal. The investment earnings would be taxed when they are withdrawn. The annual contribution limit is $4,000 (but if you're age 50 and up, you may contribute up to $4,500 per year).

With the newer Roth IRAs, into which you also make nondeductible contributions, under current tax laws, your investment earnings also compound without taxation. Upon withdrawal, however, your Roth IRA investment earnings are not taxed so long as you meet basic requirements.

Not everyone may contribute to a Roth IRA — married taxpayers with adjusted gross income in excess of $160,000 and single taxpayers with an AGI above $110,000 are not eligible.

So long as you are eligible for a Roth IRA, I would recommend contributing to that over a nondeductible regular IRA.

Mortgage Rates Defy Fed and Delight Consumers

2005-06-10T09:28:00.000-07:00

By DAVID LEONHARDT - NYTimes.com

For the last year, the Federal Reserve has been conducting a relentless campaign to raise interest rates. In that same year, the rates that matter the most to many people - mortgage rates - have drifted back down, returning to near 30-year lows.

Low mortgage rates have lifted the nation's long housing boom to a new level, creating jobs and wealth but also worries that some local markets have turned into bubbles. Mortgage refinancing has also taken off again, injecting cash into households at a time when incomes are growing no faster than inflation for most workers.

"It's been fantastic," said Ed Schreyer, a 38-year-old executive in Cincinnati who has refinanced his mortgage seven times since buying his home in 2001 and refinanced the mortgage on a Colorado vacation home twice since buying it in 2003. "It's more cash in my pocket and less money going out the door."

Testifying before Congress yesterday, Alan Greenspan, the Fed chairman, called the current situation "clearly without recent precedent." Even as the Fed has lifted its benchmark short-term rate eight times since last summer in an effort to choke off inflation, the average rate on a 30-year mortgage has fallen to 5.61 percent, from 6.3 percent, according to BankRate.com. Mortgage rates are now slightly higher than they were in 2003, when they were the lowest in at least three decades.

In effect, the bond market - where long-term interest rates, including those for mortgages, are set - is stimulating the economy while the Fed is trying to stabilize it.

In his testimony, Mr. Greenspan warned that the economy faces significant imbalances and made it clear the Fed is not finished ratcheting up interest rates.

The list of reasons for the falling rates is both long and controversial, taking in everything from the aging of the population to the economic growth of China. Economists generally argue that investor psychology also plays some hard-to-define role and that rates will soon rise. But they have been making the same prediction for the last year.

"Since I've been in the business in the mid-1980's, this is the biggest disconnect between the bond market and the economy I've ever seen - easily," said Ethan S. Harris, the chief United States economist at Lehman Brothers and a former Fed staff member. "You've got almost the exact opposite response in the bond market from the normal response."

Although they have vexed policy makers and economists, falling long-term rates have benefited Americans across the economic spectrum.

Bernard Post recently locked in a low mortgage rate for the next 30 years on a house in East Hampton, N.Y., so he would not have to worry if rates finally did start rising. "Essentially what I'm doing is buying some certainty in an uncertain world," said Mr. Post, 62, a lawyer in Manhattan.

Calvin S. Jackson, a 53-year-old college math teacher in Atlanta, decided he would start looking to buy his first house even though home prices have been rising.

"The current market makes it very, very encouraging to borrow money, to take a chance and buy a home," Mr. Jackson said. "This is the time to move."

In the past, a two-point increase in the Fed's benchmark rate has typically led to a one-point rise in long-term bond rates. Simple logic suggests that when the cost of borrowing money for a year goes up, as it has, so should the cost of a 30-year loan.

The Fed, after keeping its benchmark rate unusually low in the wake of the 2001 recession, began raising it almost a year ago as inflation picked up. At about 3 percent, annual inflation remains lower than it has been for most of the last generation, but it has begun pinching incomes and Fed officials are concerned it might accelerate.

Low interest rates, which encourage people to borrow and spend money, spur demand for goods and tend to push up their prices.

Since last June, the Fed has raised its benchmark interest rate, which sets the interest banks charge each other for overnight loans, to 3 percent, from 1 percent. Other consumer interest rates, like those on credit cards and car loans, have increased during the last year, but only slightly.

"It's a conundrum," Richard J. DeKaser, chief economist of the National City Corporation, a major mortgage lender based in Cleveland, said borrowing a word from Mr. Greenspan to describe the growing gap between long-term and short-term rates. "It's in defiance of economic fundamentals."

Speaking by satellite on Monday to a monetary conference in Beijing, Mr. Greenspan named four widely cited causes for the mystery, but he cast doubt on each one. The most obvious explanation is that investors simply think the economy is weaker than Fed officials do. That would cause people to bid up the prices of bonds, which are a conservative investment; bond prices and interest rates always move in opposite directions.

But if the decline in rates were all about the economy, pieces of good economic news would halt it, even temporarily. That has not happened, Mr. Greenspan said.

He also questioned the widely held belief that foreign banks have kept rates low by buying United States Treasury bonds. Those purchases help keep foreign currencies inexpensive relative to the dollar and allow other countries to continue exporting cellphones, cars and other goods to the United States.

Mr. Greenspan argued that the effect of these purchases on interest rates had been only "modest," though. Long-term rates in other countries, where foreign banks have not been such active buyers, have also dropped, he said.

Two other factors- the fall in inflation caused by globalization and the buying of long-term bonds by pension funds trying to shore up their finances as baby boomers approach retirement - are helping keep rates low. But they do not explain the pattern of the last year, Mr. Greenspan said.

"World demographic trends are hardly news," he said.

The most similar period to the last year might be the late 1980's, when the Fed was raising its benchmark but mortgage rates stayed roughly flat, even dipping somewhat in late 1988. But rates were far higher then than they are now, making investors confident the Fed would soon take back its rate increases, which it did.

Today, the Fed seems unlikely to lower its rate anytime soon.

That has caused some mortgage bankers to urge homeowners to grab a 5 percent or 6 percent mortgage while they still can. "I think people have one more moment to lock in a low rate," said Ellen Bitton, chief executive of Park Avenue Mortgage, which has offices in New York and Palm Beach, Fla.

That might end up being great advice. It is also very similar to what bankers were saying a year ago.

Long-term mortgage rate falls to 5.56%

2005-06-09T11:40:00.000-07:00

30-year loan drops to lowest level since April '04, Freddie Mac says; lowers end-of-year forecast.

June 9, 2005: 11:30 AM EDT

NEW YORK (CNN/Money) - Long-term mortgages fell to the lowest rate since April 1, 2004, mortgage finance firm Freddie Mac said Thursday.

The rate on 30-year, fixed-rate loans averaged 5.56 percent this week, with an average 0.6 point payable upfront, down from last week's average of 5.62 percent, according to the mortgage finance firm's survey.

A year ago, the 30-year fixed-rate loan averaged 6.30 percent.

Freddie Mac said the average for the 15-year mortgage edged lower to 5.14 percent this week from 5.20 percent the previous week, with an average 0.5 point payable upfront.

The 15-year loan averaged 5.67 percent this time last year.

"The May employment report came in at less than half of what was expected last month, which pushed bond yields -- and mortgage rates -- down further," said Frank Nothaft, Freddie Mac vice president and chief economist.

"Consequently, markets are now speculating whether the Fed will continue raising rates at the same pace that it has been, or will it begin to moderate the frequency of its actions.

"Taking into consideration the fact that mortgage rates have fallen from the earlier peak at the end of March, we have lowered our forecast for long-term rates. We now expect that the 30-year fixed-rate mortgage rates will likely end up somewhere between 5.9 percent and 6.2 percent by the end of this year," Nothaft added.

Five-year, adjustable-rate mortgages slipped to an average 5.01 percent this week, with an average 0.5 point payable up front, down from last week's average of 5.10 percent.

There is no data available for year-over-year comparisons since Freddie Mac only began tracking these rates this year.

One-year, adjustable-rate mortgages also fell to average 4.21 percent this week, with an average 0.7 point payable up front, down from the previous week when it averaged 4.26 percent.

At this time last year, the one-year adjustable-rate loan averaged 4.14 percent.

Navigating the mortgage rate waters

2005-06-08T09:43:00.000-07:00

5 Tips: Making the current mortgage rate environment work for you.
June 8, 2005: 11:30 AM EDT
By Gerri Willis, CNN/Money contributing columnist

NEW YORK (CNN/Money) - These days, economists and weathermen have about the same accuracy. Remember when economists were saying that mortgage rates were on the rise? Wrong. Rates have been falling.

In fact, over the past year, rates have come down almost a full percentage point to 5.5 percent on a fixed 30-year loan. Homebuyers are continuing to lock in rates at 40-year lows.

But experts say there may be more here than meets the eye. Here are today's five tips for homeowners, buyers and sellers.

1. Get the big picture.
Mortgage rates have a big impact on the health of the housing market. Typically, low rates translate into a red-hot market. However, this recent easing of interest rates could have a negative effect on the market.

According to Dean Baker, co-director of the Center for Economic and Policy Research, low rates could add fuel to the fire in cities where prices have already climbed dramatically, punching prices to even higher, more unsustainable levels.

The real danger, he says, is that these bubbles collapse, leaving homeowners with mortgage debt that is higher than their properties are actually worth.

David Lereah, chief economist of the National Association of Realtors, a national trade organization, also sees danger in the lower rates. He says today's low interest rates aren't offsetting the jump in home prices, and therefore hurting affordability.

For example, if you bought a median house at $200,000 last year with a thirty-year fixed loan at 6 percent, you would be paying about $1,199 a month. This year, even with the thirty-year fixed at 5.6 percent, and a 9 percent increase in appreciation, your monthly payments would cost you $52 dollars more.

2. Buyers should lock in.
You might feel like you missed the low-interest-rate bandwagon, but the truth is, the hype has just calmed down. Low interest rates are still here, and are even near historic lows.

There's no telling where they'll go next, but you'd be wise to consider locking in a low rate while you can. By waiting until mortgage rates tick higher to realize they've hit their bottom, you're hurting yourself.

Slight differences in your rate can amount to considerable savings over the life of your loan.

Chris Kemper, spokesman at National City, one of the nation's largest home lenders notes, "Just a half percent rate difference on a $100,000 loan at today's rates can mean a difference of over $30 each month in interest. That's $360 each year, or more than $10,000 over the life of a 30-year loan."

3. Sellers should celebrate.
If you already own a home, you may be sitting on a gold mine. High prices and low interest rates equal the perfect selling conditions. The rate of rising home prices in April shot up at a pace not seen in twenty-five years.

"You can get top dollar right now," according to Certified Financial Planner Doug Flynn. People focus on their monthly payments. People don't care if rates were 8 percent ten years ago according to Flynn.

If you're trying to determine if this is a good time for you to sell, you should focus on your local scene. If you're talking about your property as your primary residence, the decision should have to do with where you want to live, not what you think is going on with the real estate market, says Bob Walters an economist at Quicken Loans.

4. Catch refi-fever.
Now is a great time to refinance, according to Greg McBride, a senior financial analyst at Bankrate.com. He advises those with an adjustable rate mortgage or an interest-only loan, to lock in a fixed rate instead.

But be warned: the closing costs on refinancing run in the thousands. Use this general rule of thumb: if your interest rates aren't cut by at least a half of a percentage point, don't bother going through a refinancing.

The number one mistake people make when they refinance is not shopping around, says McBride. Compare lenders and check out other banks.

Refinancing can also help you lose some weight on your jumbo loans. (These are for loans around $360,000 dollars). What was considered jumbo a year ago, may not be jumbo today. You can lose those hefty interest payments and refinance into a conforming rate.

For example, if you took out a $350,000 jumbo thirty-year mortgage last year with a rate of 6.5 percent, today that conforming rate is 5.6 percent.

But you may not need to refinance to get rid of your Private Mortgage Insurance payments. With the steady rise in home values, you may have built enough equity to get rid of those payments. Note that you have to have lived in your property for at least two to five years to fulfill seasoning requirements. So, run an appraisal and prove your property has appreciated.

5. Attention couch potatoes.
So you're not looking to buy, don't want to sell and you're happily tuning out the market watchers' predictions. You can still put lower rates to use.

Think about taking out a Home equity loan to free up some cash for all those household renovations you'll "get around to." Or if you already have a floating rate line of credit, consider replacing it with a fixed Home Equity loan that will give you a better rate.

Just putting a $10,000 investment into your bathroom can give you 100 to 168 percent return on your investment, according to Homegain.com.

How interest-only mortgages differ from conventional loans

2005-06-07T10:40:00.000-07:00

Daily Democrat - Woodland, CA

Unlike a conventional 30-year mortgage, interest-only loans don't require payments toward the amount anywhere for the first three to seven years. After that initial grace period, borrowers face much higher monthly payments.

In contrast, a conventional 30-year mortgage with a fixed rate spreads the financing costs evenly over the life of a loan - a formula that generates higher monthly payments during the first three to seven years.

The two different approaches can make a big difference, particularly in expensive housing markets in the San Francisco Bay area, where large loans are required to close deals.

A conventional 30-year mortgage for $650,000 with a fixed rate of 5.625 percent would require monthly payments of $3,742, according to Michael Harrington, president of Summit Mortgage Advisors in San Francisco. An interest-only loan with a fixed rate of 5 percent for the first five years of the mortgage would require monthly payments of $2,708 during the first 60 months.

In the first five years of the loan, the borrower with the conventional mortgage would pay a total of $224,520, lowering the outstanding debt to about $602,000. The borrower with the interest-only mortgage would have paid $62,000 less during the same time, but still would owe $650,000, or $48,000 more than the borrower with the interest-only mortgage.

Mortgage companies change to get more business

2005-06-06T17:09:00.000-07:00

Monday, June 06, 2005
Ed Green - Business First - Mlive.com

As mortgage rates have crept higher from recent all-time lows, the refinancing boom that generated record volumes for mortgage businesses has dwindled.

As a result, brokers and lenders in the Louisville area are trying new ways to market mortgage loans to consumers.

Many of the area's largest mortgage businesses have begun focusing their efforts on attracting a steadier flow of income from new loans rather than focusing on refinancing volume, which is dictated primarily by low rates.

Officials with area banks and mortgage companies also say they are challenged with educating consumers about popular, new mortgage products, which might or might not be good financial options for consumers. Largest mortgage firms report drop in loan volume

According to information compiled for this week's list of the area's largest mortgage brokers, the overall volume of loans made last year by 17 of the 20 largest mortgage brokers in the Louisville area fell 7 percent from 2003.

The three firms not included in the calculations did not report volume figures for 2003.

The overall volume of those loans was $4.07 billion, compared with $4.37 billion made by the same firms during the previous years.

The average loan amount fell to $136,364 from $138,626 in 2003.

The overall volume of loans made by the 10 largest lenders on Business First's list fell last year to $3.49 billion from $4.67 billion in 2003.

The average loan amount rose to $156,506 from $148,623 in 2003.

Many of the brokers and lenders surveyed for the lists said the drop in loan volume is directly related to the higher average interest rates for mortgage loans.

The average mortgage rate nationally still is less than 6 percent so far this year, according to information from the Federal Home Loan Mortgage Corp., also known as Freddie Mac.

But local sources said most homeowners already have refinanced, locking in the historically low rates offered during the past two years.

As a result, there no longer is a large market of consumers looking to refinance.

Jeff Houk, CEO of First Commonwealth Mortgage, the third-largest mortgage broker on this year's list, said his firm "definitely" experienced a drop in business as a result of fewer refinancings.

Both the mortgage lenders and mortgage brokers lists are ranked by total volume of loans closed.

First Commonwealth, based in Louisville, closed 4,766 loans in 2004 for a total volume of $592.3 million. During the previous year, the company closed 5,415 loans for a total volume of $689.9 million.

"Refinancing slowed down quite a bit," said Houk. "So we shifted our business a little bit" to concentrate marketing efforts toward loans for purchases.

In 2004, refinancings made up about 70 percent of First Commonwealth's business, compared with about 98 percent in 2003, Houk said.

Don Rupert, president of Louisville's Mortgage Network Inc., echoed Houk's comments about fewer refinancings.

In 2003, more than half of the firm's volume came from refinancings, Rupert said. Last year, 65 percent of Mortgage Network's business came from purchases, and only 35 percent resulted from home refinancings.

Mortgage Network's overall loan volume dropped to $65.9 million in 2004 from $163.8 million in 2003. The number of loans closed fell to 452 from 1,160.

The firm dropped from No. 4 on last year's mortgage brokers list to No. 11 this year.

"It really hurt us," said Rupert, adding that the decline in business has not resulted in layoffs of any full-time employees. Some firms changing strategy to respond to higher rates

Rupert, Houk and others said their volumes of loans from purchases have remained steady or risen slightly, but that new loans are becoming a larger percentage of their overall volumes as a result of the decline in refinancings.

The increase in purchase loans in 2004 mirrors a strong year for area home sales -- a trend that in continuing this year, according to Lisa Stephenson, executive vice president for the Greater Louisville Association of Realtors.

The number of homes sold in the Louisville area by members of the Realtors association grew by nearly 8.7 percent in 2004, to 13,916 from 12,805 in 2003.

So far this year, home sales through April are up about 8 percent from 2004, with 4,152 homes and condominiums sold.

That increase is one reason that businesses such as Mortgage Network are concentrating more on marketing to home buyers rather than trying to attract refinancing business from existing owners, Rupert said.

"We've stepped up our efforts in trying to attract purchase business by soliciting that customer base as well as real estate agents," he said.

David Vest, executive vice president and chief lending officer for Republic Bank & Trust Co., reports similar changes in mortgage activity.

Vest, whose company ranks as the largest area mortgage lender for the fourth straight year, said his firm also has seen a drop in refinancing business but "purchase volume has increased significantly."

Overall mortgage loan volume for Republic fell to $804.9 million through 4,850 loans in 2004, down from $1.41 billion through 10,357 loans in 2003.

"We constantly work to stay in front of the Realtor community," said Vest. "We make calls, give coupons (to Realtors) to give to purchasers. That purchase business is very important to our success."

Relationships between Realtors and mortgage lenders and brokers is not uncommon, said Stephenson, adding that several mortgage businesses are affiliate members of the Realtors association.

Stephenson declined to comment on specific relationships, but she said the real estate and mortgage industries work hand in hand to help home buyers with purchases. New loan products also becoming popular

According to information submitted for Business First's mortgage lists, a range of new products also are helping lenders and brokers keep business.

Although several of those who responded to the list survey could not be reached for interviews prior to Business First's press deadline, many said in their surveys that popular new loans being sought by borrowers in Louisville are interest-only and five-year, adjustable-rate loans.

The five-year ARM -- a "hybrid" because it has properties of fixed and adjustable loans -- has become such a popular offering that the Federal Home Loan Mortgage Corp. began tracking its average rate nationally this year, according to the Freddie Mac Web site, www.freddiemac.com.

As of May 19, the average rate nationally for a five-year ARM loan was 5.07 percent, compared with 5.71 percent for a traditional 30-year, fixed-rate loan.

Vest said the five-year ARM, which offers a fixed rate for the first five years and then converts to an adjustable-rate loan, has become the bank's most popular mortgage product.

"We purposely priced our (five-year, adjustable loan) between the 15-year and 30-year products," said Vest. "Sometimes there is a significant savings" with an adjustable rate if the buyer isn't going to stay in the home for 15 or 30 years. Interest-only loans are options for some

Interest-only loans also are gaining the attention of many consumers, especially those who want low monthly payments, according to mortgage officials.

First Commonwealth's Houk said he thinks the new loans have "gained a little traction here recently."

But his firm still closes primarily 30-year, fixed-rate loans.

"Interest-only loans are good" options for some people, but "you've got to be the right borrower," said Houk, adding that he might suggest them for a client who has irregular income, such as someone in sales.

Rupert compared the popularity of the two products to the increase in previous years of "no money down" loans. "The advantage of interest-only payments, (is that) it gives the borrower greater flexibility in their monthly payments. The borrower can choose how much they pay on the principal."

Houk added that the loan products "are really for an astute borrower."

"You have to have a little bit of risk tolerance and discipline," he said.

Mortgage rates are puzzling; some fear quick rise

2005-06-03T11:44:00.000-07:00

Interest rates have been rising, but not mortgage rates. That's good for home buyers but has left economists puzzled and spurred fears of a real-estate investment bubble.

BY NELL HENDERSON
Washington Post Service

Mortgage rates were supposed to be rising by now, helping to gradually cool the nation's red-hot housing market.

The Federal Reserve has been raising short-term interest rates steadily for nearly a year. The economy is growing at a healthy pace. Energy costs are up. If history were a guide, long-term rates would be rising, too.

But they are not. Even Fed Chairman Alan Greenspan has called this a "conundrum."

Defying predictions, U.S. mortgage rates are lower than they were a year ago and are falling. That's a large part of why home sales and prices are at record highs and are fanning worries of a real-estate investment bubble.

The rate on the average 30-year, fixed-rate mortgage nationally fell to 5.62 percent this week, the lowest rate since mid-February and below the 6.32 percent level of a year ago, according to mortgage financier Freddie Mac. The average 30-year rate in Florida fell to 5.367 percent Thursday.

"The housing market is going to be robust if rates stay where they are," said Freddie Mac's chief economist, Frank Nothaft. "But it's hard for me to fathom why they would stay this low for long."

While home buyers cheer the bargain borrowing costs, some economists admit to being puzzled and concerned. If mortgage rates keep sliding, they will pump up any bubble. But if rates snap up suddenly, a bubble could pop, with both prices and investment dropping sharply, hurting many borrowers and investors.

In Miami, this possibility is particularly troubling, with more than 60,000 condominium units planned or under construction in the next few years.

"That's what everyone's worried about," said Bill Heffernan, president of Totalbank in Miami. "What are interest rates going to be 18 to 36 months from now when all these condos come on board? If rates shoot up, how many people are going to close on their units?"

For now, the home mortgage business at his bank is booming. "People still feel like they can get a cheap mortgage," Heffernan said.

Global financial markets, not any government body, determine long-term interest rates through their bond trading each day.

High demand for bonds pushes up their price and drives down their yield, yield being their effective interest rate after factoring in their purchase price.

A combination of factors keeps driving demand and pushing rates down, forces that have "much more to do with speculation, hedging and politics than . . . with actual investment merit," wrote Peter Schiff, president of investment firm Euro Pacific Capital, in a recent analysis. "Once these forces reverse, expect bond prices to plunge and interest rates to soar."

Mortgage rates are largely determined by the yield on the 10-year Treasury note.

Last June, when the Fed's benchmark short-term rate was 1 percent, the 10-year yield was 4.69 percent and the average 30-year mortgage rate was 6.25 percent.

Since then, Fed officials have raised their benchmark federal funds rate, which is charged on overnight loans between banks, to 3 percent and indicated they plan to move it higher to keep inflation in check.

But the 10-year yield has fallen below 4 percent, to 3.88 percent earlier this week -- the lowest level since March of last year.

Some analysts are now predicting it will keep sliding. Merrill Lynch's interest-rate committee last week lowered its yield forecasts, projecting the 10-year Treasury to yield 3.8 percent by year's end.

Morgan Stanley's chief economist, Stephen S. Roach, on Tuesday predicted that the yield could reach 3.5 percent in the next year.

That represented a turnabout for someone who had insisted for months that interest rates would eventually rise as part of a correction of the nation's huge trade deficit.

7 ways to spot a shady mortgage lender

2005-06-01T09:55:00.000-07:00

Too-good-to-be-true rates, rock-bottom fees? Tread carefully as you refinance, especially if you have less-than-perfect credit.

By Jay MacDonald, Bankrate.com

Johnny Bell had a new deck and other home improvements in mind when he refinanced his home in Oxford, Miss., last summer.

Make that almost refinanced.

Bell spotted attractive terms on a television ad, contacted the lender and locked in a cash-out refi at 5.125% with $350 upfront as a processing fee toward a 45-day closing.

Then trouble began. First, the company delayed the closing, saying it was behind on the paperwork. Then it asked for proof of reserve funds and Bell complied. After 90 days, the company informed Bell that his "locked" rate had gone up to 6.2%.

"I got angry," Bell recalls. "I told them I was definitely not paying more interest. They started making excuses for why it had taken so long, putting the blame on Fannie Mae for requiring the reserves. But the interest rate didn't have anything to do with the reserves."

After two more months of futile telephone calls, Bell walked away from the deal, received his $350 back and built his deck out of pocket.

"It was bait and switch," he said. "It took me five months to not refinance."

Signs of a bad loan

Bell's experience isn't isolated. For the last couple of years, low interest rates, aggressive marketing tactics, scant industry oversight and investors who want to put their money into real estate instead of the stock market have contributed to the ideal operating environment for predatory lenders.

In many cases, it's all too easy for a trusting homeowner anxious to leverage a home's value or lock up a low rate to fall prey to less-than-upfront lenders. W.C. Fields maintained that you can't cheat an honest man. But when it seems that everyone is getting a loan and you've been promised rock-bottom interest rates and negligible fees, it's hard to resist.

Some deals, however, are indeed too good to be true.

According to the Federal Trade Commission, you may be signing on for trouble if a lender:

Encourages you to falsify your application information to get the loan.
Urges you to borrow more than you need.
Pushes you to accept payment terms that you can't realistically meet.
Fails to give you the required disclosures (e.g., APR, rescission rights, etc.).
Shows up at closing with a totally different loan product than you agreed to.
Asks you to sign blank forms. ("It'll speed things up. We'll fill in the blanks later, trust me.")
Denies you copies of documents you signed.

And if you miss a warning sign early in the process, a bad loan often resembles the Tar Baby from an Uncle Remus story: The further in you get, the harder it can be to get out. Bad lenders are counting on the likelihood that the farther you travel down the loan-process road, the more you will have invested in earnest money, deposits, inspection fees, design plans and contingencies that accelerate your momentum to close.

Chicago real estate attorney Tom Polinski recalls a recent closing where the buyers found out that their lock had expired four days earlier and their interest rate would be 1.5% higher.

"We were at the closing table, and they didn't want to walk away. Had they done that, they would have been in breach of contract and the seller would have had to decide if he wanted to sue them for specific performance because he, in turn, was buying another house. You always get that domino effect. It would have been a mess," he says.

With little recourse, the buyers settled for a $750 reduction in fees and closed, vowing to refi at the earliest opportunity.

"I see a lot of it," Polinski admits. "I can't tell you the last time I went to a closing where the buyer has known a reasonable time in advance, even 24 hours or more, what their bottom-line closing costs were going to be. The lenders are notoriously slow in getting those figures to the closing, so we have to try to estimate what the buyer is going to need. And estimate on the high side, because if it's short, they won't let you close."

Preying on the powerless

Predatory lending practices are most visible in the subprime market, which serves lower-income individuals with credit problems.

Respectable subprime lenders serve an important social function by offering credit on fair terms to individuals who otherwise might never be able to build home equity. Predatory lenders, however, are a scourge on these same neighborhoods, taking advantage of elderly, less-educated and non-English-speaking individuals by offering egregious loan terms that would drain equity and eventually lead to foreclosure on their homes.

Norma Garcia, senior attorney for the nonprofit Consumers Union, has been fighting for more than a decade to stop predatory lenders from preying on the powerless. In her March testimony before the House Committee on Financial Services, Garcia expressed concern at the tremendous growth of the subprime market in general and subprime refis in particular.

Nationally, subprime originations increased from less than 5% ($35 billion) in 1994 to nearly 13% ($160 billion) in 1999. The predatory hot spots, Texas and California, were even worse: Texas subprime refis grew from 6% of all refis in 1997 to 33% in 2000, California subprime lending grew from 4% in 1993 to 20% in 2000.

"Not all subprime loans are predatory," Garcia points out, "but virtually every predatory loan we have seen is a subprime loan."

That's because shady lenders, like predators everywhere, tend to target the easiest prey, people with poor credit who have few other options. But Garcia notes that individuals with spotless credit also fall victim to bad loans.

"Loans that are good subprime loans might in another sense be predatory for someone who has good credit. We see this a lot among the elderly and in communities of color -- people with perfectly good credit who don't have a sense of what's happening out there in the lending world," she says.

Garcia says that to simply spout "buyer beware" isn't enough.

"There are definitely people who are ripping others off. To the extent that there are individuals who are being placed in loans with interest rates and fixed fees that are much higher compared to that person's credit-risk profile, that should be a crime," she says.

"Some states require lenders to put borrowers into the best loans for which that buyer may qualify. We would love to have that be extended to all loans, but it isn't and there is a lot of resistance and pushback from the lending lobby to protect against new laws aimed at regulating the industry."

California is currently in the midst of a test case to see if a weaker state anti-predator statute should supersede a tougher ordinance passed by the city of Oakland that fills in the gaps left by the state law. Garcia has similar concerns about any minimum industry standards that could one day be forthcoming at the federal level.

"We can see that minimum standards might be a good thing, but we don't want to prevent states that have serious problems from closing the gap," she says.

Firing the 'bad actors'

The mortgage industry has dug in its heels against government regulation at any level that would restrict access to credit.

A.W. Pickel, president of the National Association of Mortgage Brokers, says a few "bad actors" shouldn't spoil it for an industry that is committed to providing as many financing options to as many customers as possible. In addition to calling for more pre- and post-license training, NAMB has put forth its own solution to the predator problem.

"We promote the ability to do a national registry that would basically keep bad guys out of the business," he says. "For instance, we now actually register every loan officer. Unfortunately, we don't register loan officers inside a bank. So you could have a bad actor who would be working for a licensed broker or mortgage broker but then they go to a bank and they don't have to be licensed."

Although Pickel admits he would never use an online lender, he defends their right to peddle their products. The problem, he says, is not the shady deals, but the public's inability to accept what mortgage brokers take for granted: If it seems too good to be true, it probably is.

"What amazes me is that people don't use their common sense. Somehow people think that this person who is giving them 5% is telling the truth when everybody else in town doesn't have it. You ought to call guys in your local community and check their references. Even in your own community, you want them to put it in writing. You want them to stand by their word."

Selling your home? Make sure the price is right

2005-05-31T10:12:00.000-07:00

PETER DAVIDSON (bankrate.com)

The key to selling your home within a reasonable amount of time could very well be the price tag you hang on it _ whether you're in a buyer's market or a seller's market, and whether you use an agent or sell it yourself.

Setting the correct asking price is the most important step in the process of selling your home," says William F. Supple Jr., author of "How to Sell Your Own Home" and publisher of "Picket Fences," a monthly magazine for homeowners.

Homes that are overpriced don't sell, says Supple, and they scare away potential buyers.

"Homebuyers look at houses in ranges," explains Supple. "Set a price that's too high and they won't even bother to take a look at it. Buyers are immersed in the market. They've seen lots of properties and probably know the reasonable price ranges for properties they are interested in. Homes that are overpriced will generate no offers, no negotiations, no sale," says Supple.

They will, however, drive potential buyers into the arms of the competition _ which means your property could sit unsold for a long period of time and become "shopworn," leading agents and buyers to conclude that something must be wrong with the property.

Set your price too low, on the other hand, and you'll leave a pile of money on the table.

So how can you figure out the right asking price? Fortunately there are resources available to you that will help you determine the fair market value for your home, which is what a buyer is willing to pay you and you, the seller, are willing to accept.

One of them is a comparative market analysis, a written study that compares your house to others like it in your area that sold recently or are on the market.

A comparative market analysis will give you give you factual information about the houses: Number of bedrooms and baths, square footage, such amenities as fireplaces and swimming pools, as well as the listing prices and the sold prices. Getting the analysis is very easy: call a real estate agent, even if you are planning to sell your home on your own. The agent will happily come to your home and generate a comparative market analysis and suggested listing price for you in the hope of getting the listing eventually.

"Homeowners don't spend enough time studying how to price their home," says Ilyce R. Glink, author of "50 Simple Steps You Can Take to Sell Your Home Faster and for More Money in Any Market." She recommends getting a market analysis from three different agents who do the most business in your neighborhood. They will be most familiar with details of homes in the area that have been marketed successfully or unsuccessfully and what impact those details had.

The comparative market analysis, however, can be incomplete, dated and may not take into account things like curb appeal or a great view. That's why some experts recommend getting a professional appraisal as well. Besides, says Supple, some real estate agents may inflate the value of your home just to get the listing.

A professional appraisal is a good especially if you're selling without a broker. It may cost you $300 or more, but it's a good investment. If your eventual buyer gets a mortgage the lender will require one anyway, so you may as well get an accurate idea of the maximum amount lenders will be willing to finance.

The appraiser will inspect your property thoroughly, noting its features, construction and amenities. Then will come a market analysis, comparing your property to recent sales in your area.

The written report will identify the appraised value. Remember _ that's not the same as "market value," which Supple says "is the highest price that a property will bring in an open and competitive market."

But it gives you an excellent starting point for pricing your home. "In a seller's market, a good rule of thumb is to add 10 to 15 percent on to the appraised value," says Supple. "In a buyer's market, add 2 to 3 percent."

Reverse mortgage can be a fine pick

2005-05-03T11:46:00.000-07:00

Bruce Williams
The Cincinnati Post

DEAR BRUCE: I am an active realtor at 78. My wife is a part-time secretary at the age of 74. We own our home free-and-clear that has a current market value between $200,000 and $225,000. The local real estate market has been appreciating 5 percent a year for quite a few years. In the past 12 months, the appreciation has been about 15 percent and I would not be surprised if it continued at an annual rate of 10 percent to 15 percent. I have been investigating the idea of obtaining a reverse mortgage, as we would like to be a little more independent since our total income depends completely on our working income and Social Security. We have no retirement or pension plans. Everything I have learned so far about reverse mortgages seems to be positive, but I am certain that there has to be a caveat or two to these programs. Would you elaborate for me? - W.B. Roseburg, Ore.

DEAR W.B.: Reverse mortgages have a place in many people's financial futures. The older one is, the better deal it is and the reason for that is simply, the older you are the shorter your life expectancy. The lender is prepared to advance you more money knowing they will get theirs after your demise. The only advantage of the appreciation will likely come for your heirs, not for you, since you have mortgaged the house and it will not be sold until your death. You should know there is nothing to prevent a reverse mortgage from being paid off simply by selling the house. In other words it's not necessary to continue to draw it down. Even after it's completely drawn down, it isn't necessary to remain in the house forever. It can be sold, the mortgage company will be paid and you will receive the residual. On balance, as long as you understand these details, a reverse mortgage may very well be in your interest. You should understand that as long as you stay in the home and pay the taxes, even though you've exhausted whatever equity could be borrowed against, you cannot be required to leave the house. You are granted life rights.

DEAR BRUCE: My wife and I have a number of credit cards that have been collected over the years. Now we primarily use only two of them. What would happen to our credit rating if we suddenly cancelled all of the others, which range from 1 to 10 years of association? I've heard that if you cancel the card before its second year that this is worse for your credit rating than keeping it. Is there a guideline? - G.W., via e-mail

DEAR G.W.: As long as you're not paying any type of fee for the cards and you're not looking for credit elsewhere, what's the difference? The only danger in keeping them is if you do apply for credit, they're liable to determine that you have too much credit available and deny you. I don't know of any reason why you would be penalized for canceling them. I'm wondering why you have so many to begin with. Keep them or cancel them as long as there is no cost to you; I don't think it matters.

DEAR BRUCE: We have our retirement in place and some minimal investments in mutual funds. I would like to have a certain amount of money directly deposited from my paycheck into a savings account each pay period. Is there any account available that would gain interest, has no fee for a withdrawal and doesn't require a minimum balance? - Reader, via e-mail

DEAR READER: Sometimes looking for the easiest possible way is not the smartest thing to do. If you are having it deposited directly into some account that you're not riding herd on, and if a payment is missed, how are you going to know? Would it be too much trouble to have the money directly deposited into your checking account? Your statement would show the deposit each month and you could write a check for whatever savings vehicle you choose. It doesn't seem to me that this would be an over-burdensome chore for you, and it would be worth the effort.

Many home buyers heed a call to ARMs

2005-05-02T12:02:00.000-07:00

As rates for traditional mortgages rise, more buyers are opting for adjustable rate mortgages, or ARMs.

BY MICHAEL E. KANELL
Cox News Service

The more Americans start to catch a whiff of rising mortgage rates, the better adjustable rates look.

A growing number of consumers are moving away from the traditional, 30-year fixed mortgage and instead are snagging an ARM -- the adjustable-rate mortgage -- to either purchase a home or refinance the one they own.

The reasons vary, as do the risks.

When rates start to rise, some people leap from an adjustable to a fixed rate. They want the security of knowing that, no matter what, they are ''locked in'' to one payment for the life of the loan.

TAKING A GAMBLE

Yet some homeowners choose ARMs, gambling on higher rates down the road so they can afford a pricier home now. Some like the flexibility -- they decide whether to pad the house payment each month -- while still others figure they'll move before the rate does.

Though rates in recent weeks have dipped, most economists expect them to rise again in coming months. Among the reasons: The Federal Reserve has been lifting short-term rates, inflation has been rising and the economy has been growing.

Worriers warn the trend toward ARMs makes consumers and the broader economy more vulnerable.

Advocates scoff -- what could be wrong with an option that lowers monthly payments and gives borrowers more flexibility?

Choice and lower cost are an unbeatable combo, said Nick Schittone, 32.

He and his wife have a seven-year ARM on their Atlanta home. They pay about $500 a month less than before they refinanced.

''It's all about flexibility and options,'' he said.

About one of every three mortgages is an ARM, an increase from less than one in eight just four years ago, according to the Mortgage Bankers Association.

A traditional fixed rate ''locks in'' one interest rate and one monthly payment amount. An ARM's rate holds steady only for a set period, maybe years or just months. The shorter the initial period, the lower the starting rate.

HIGHER PAYMENTS

After the ARM's initial period ends, the rate adjusts, its new level linked to some financial instrument, such as the five-year Treasury note. So if rates have risen at that point, a borrower would face higher monthly payments.

For some, an ARM is a way to get more house for the same monthly payment. For others, it is the only way they can afford to own a home at all.

A person borrowing $200,000 at the fixed rate of 5.5 percent, for example, would pay $1,135 each month in principal and interest, said Brooks Campbell, senior vice president of Vanguard Mortgage.

By comparison, if you have just $800 you can devote to a monthly payment and you took the fixed rate, you could qualify for only a $140,000 home, Campbell said.

But here's the catch: That adjustable could jump as much as 5 percentage points in 2010, he said. 'If you say that in five years maybe you will still be in the house, I say, `Let's look at a 30-year fixed.' ``

ARMs can also allow borrowers to have more cash on hand. That lure is even stronger in interest-only ARMs, which let borrowers keep their required payment at its barest minimum. They add nothing each month to the equity they have in their home -- unless they choose to.

Take that $200,000 loan, for example: An interest-only adjustable at 4.625 percent would mean a monthly payment of just $770.83.

Jason Green, 36, and his wife bought a house in Cumming with a fixed-rate mortgage set at 7.5 percent in 1999. But rates kept dropping, so they refinanced. Twice. Now, they have a five-year ARM at 4.75 percent. ''I am betting that over five years, it won't go to 7.5 or 8 percent,'' Green said. ``It's a gamble.''

An interest-only ARM puts a premium on borrowers' savvy: If homeowners can budget money to frequently pay down part of the principal, they not only cut their long-term obligations, they amass equity in their homes.

THE EQUITY ISSUE

If they cannot afford to -- or if they pay just the minimum -- they gain no equity. An owner who pays only interest is betting the home will grow in value. If it doesn't, he or she could walk away with nothing, or even owing money.

ARM and interest-only mortgages are signs that borrowers are getting better about fitting their mortgages to their financial situation, said Bob Walters, chief economist of Quicken Loans.

After all, he argued, fixed rates have risks, too: Most of what a borrower pays in the first few years is interest, and being locked in to one rate is pointless if the borrower doesn't keep the mortgage.

``In this world, borrowing long and paying the premiums doesn't always make sense.''

What worries economists most is the idea of millions of homeowners simultaneously slamming into a financial wall, unable to make monthly payments or unable to sell their homes. For homeowners, loss of income is the greatest danger. A rate that goes up only adds to the potential for problems.

Bill aims to kill mortgage loan program for immigrants

2005-04-29T12:18:00.000-07:00

Associated Press

MADISON, Wis. - Republicans are proposing legislation aimed at shutting down a state program that makes it easier for illegal immigrants to get home loans.

The bill would forbid the Wisconsin Housing and Economic Development Authority from helping people without Social Security numbers get mortgage loans.

The agency, created by legislators more than 30 years ago, started the mortgage loan pilot program last year for people with Individual Taxpayer Identification Numbers instead of Social Security numbers.

The agency has since helped provide 61 loans to people with ITINs through partnering banks, which write the loans that WHEDA finances through tax-exempt bonding. Many ITIN holders live and work illegally in this country, even though they pay taxes.

"It makes a mockery of our laws to have a special program designed to benefit illegals," said state Sen. Glenn Grothman, R-West Bend, who wrote the Senate version of the bill. "And it makes anybody who is patiently waiting to enter this country legally look like a fool."

The measure needs approval from both houses of the Legislature and Gov. Jim Doyle's signature to become law.

ITINs were created in 1997 for the Internal Revenue Service for foreign citizens who needed to pay taxes in the United States but could not obtain Social Security numbers. The government issued about 7 million ITINs as of last year.

Some banks already issue mortgage loans to immigrants with ITINs, but WHEDA is believed to be the first and only quasi-government organization to buy such loans from the banks.

WHEDA's executive director, Antonio Riley, said the agency is expected to help people being underserved by the private sector. He noted Wisconsin's Latino population increased by 107 percent between 1990 and 2000, and the state's Hmong and Somali populations also are growing.

"By meeting these markets, we grow homeownership and the property tax grows. It is a win-win," Riley said. "It's not as if they are building in suburbia; they are building in inner cities and Hispanic neighborhoods. We do not use taxpayer dollars to do this."

He said the immigrants must meet the same lending criteria as other low-income people who benefit from WHEDA-financed loans.

The Wisconsin Bankers Association opposes the proposed legislation.

"The bankers we talked to, our members, felt vested in their communities and wanted all types of community development tools at their disposal," said Mike Semmann, the association's government relations director.

Long-term mortgage rates tumble

2005-04-28T10:15:00.000-07:00

30-year hits 5.78%,15-year falls to 5.33%; 1-year hits 4.21%; lender says inflation may be in check.
April 28, 2005: 11:37 AM EDT

NEW YORK (CNN/Money) - Long-term mortgage rates fell for the fourth straight week, Freddie Mac said Thursday, adding that Fed may not see inflation to be as great a threat as previously thought.

The mortgage firm said that when inflation is thought to be in check, mortgage rates naturally drift downward.

The average rate on 30-year fixed-rate mortgages fell to 5.78 percent this week, with an average 0.6 point payable up front, down from 5.80 percent last week, Freddie Mac said.

Last year at this time, the rate on the 30-year fixed-rate loan stood at 6.01 percent.

The 15-year mortgage rate averaged 5.33 percent, down from 5.36 percent. The loan averaged 5.35 percent a year ago.

"The market was disappointed on the news of lower consumer confidence and lower orders for durable goods," said Frank Nothaft, vice president and chief economist at Freddie Mac.

"These numbers suggest that the Fed will remain restrained in its practice of raising short term rates, which may be an indication the Fed doesn't see inflation to be as great a threat as the markets previously had thought it would be."

"And when inflation is thought to be in check, mortgage rates naturally drift downward as they did this week."

Five-year adjustable-rate mortgages (ARMs) averaged 5.20 percent, with an average half of a point payable up front, down from 5.22 percent the week before. There is no data available for a year-to-year comparisons since Freddie Mac only began tracking this loans this year.

One-year adjustable rate mortgages (ARMs) averaged 4.21 percent, down from last week's 4.26 percent, with an average 0.6 point payable up front. At this time last year, the one-year ARM rate averaged 3.75 percent.

Freddie Mac's average mortgage rates are based on a survey of 125 lenders nationwide.

New home sales surged a record 12.2 percent in March.

Mortgage applications up as rates dip

2005-04-27T11:28:00.000-07:00

Washington, DC, Apr. 27 (UPI) -- U.S. mortgage applications rose 6.3 percent in the latest week ended April 22, the Mortgage Bankers Association reported Wednesday.

The group said its market composite index, which measures loan application volume, rose to 712.4 on a seasonally adjusted basis.

Lending rates fell in the latest week, with the average 30-year fixed mortgage rate falling to 5.75 percent from 5.83 percent, while the 15-year loan fell to 5.33 percent from 5.4 percent.

Housing Experts Wary of Bubble Fatigue

2005-04-25T10:58:00.000-07:00

April 24, 2005 3:06:00 PM ET
By Ilaina Jonas

NEW YORK (Reuters) - Bubble or not, the U.S. housing market has stayed afloat at a high altitude for the past two years.

So what do experts look for as the first signs of fatigue in a frothy housing market?

Mark Zandi, chief economist for Economy.com, said it won't be buyers who will disappear. Instead, he believes disgruntled sellers will bring the market to a halt.

"People will start pulling their homes off the market if they think they can't sell it at a 'fair price,' which is now perceived to be a very high price," he said.

While debates about whether the robust housing market will burst like a bubble or land like a slowly deflating balloon dominate discussions everywhere -- from think tanks to cocktail parties -- most agree that what goes up must come down.

"You'll see transactions fall off very rapidly," Zandi said. "It's not that prices are coming down. It's that there's nothing selling. The first piece of data where you get a sense of that is not home sales. It's mortgage applications."

If applications fall, particularly in periods where interest rates rise, a housing freeze is likely to arrive.

"That would indicate to me after a week or two (of lower mortgage applications) that something fundamental is going on in these markets," he said.

According to the Mortgage Bankers Association's latest survey, applications for U.S. home mortgages decreased last week. Its seasonally adjusted index of mortgage application activity fell 1.6 percent to 672.6 in the week ended April 15.

The dip in mortgage applications came despite a drop in fixed mortgage rates, which some analysts believe is an indication of waning housing demand.

Fixed 30-year mortgage rates averaged 5.83 percent last week, excluding fees, down 12 basis points from 5.95 percent the previous week, according to the MBA.

BEWARE OF AGGRESSIVE BORROWING

Douglas Duncan, chief economist at the Mortgage Bankers Association, believes the biggest factor that will drive a decline in housing demand will be interest-rate changes, particularly a sharp shift higher.

"Rates have been so low for so long. But if the 30-year fixed-rate mortgage rate passed the 7 percent mark any time soon, we may see a pause in housing," he said.

Zandi and Duncan are in the camp of those who believe that there is a housing bubble in certain markets that are "infected" by speculative buyers. These are markets in which buyers have no intention of living in the house. Instead, they plan to quickly sell the property and reap the benefits of rapidly rising housing prices.

An increase in aggressive borrowing, practiced by those who look for interest-only or variable-rate loans, also would signal a housing bubble about ready to burst, those in the bubble camp said.

The housing bubbles exist in California, the Pacific Northwest, parts of the Mountain West, all of Florida and along the East Coast from Boston to Washington D.C.

"Bubbles don't pop overnight," Zandi said. "They continue to build for long periods of time. Look at our experience with the stock market. We were worried about a stock market bubble for over three years before it actually burst."

Others look at not so conventional signs.

"When developers start talking about a housing bubble bursting," said one New York developer, who did not want to be identified, "that's when you have one."

Van Davis, chief executive of Foxtons North America, is in the other camp that believes there is no bubble. He said that yes, housing prices will go down, but the demographic demand from immigrants and children of aging baby boomers, will rule out the bubble-and-bust scenario.

"California has been frothy over the past 18 months," Davis said. "I hear things are cooling down significantly."

Davis keeps an eye on inventory -- measured in the amount of time it would take to sell the current number of homes available -- to gauge the market. Right now, it would take about 4.2 to 4.3 months to clear the current inventory.

"By any historic measure, a balanced market is six months," he said.

During the tough real estate times from about 1988 to 1993, inventory levels approached 13 months.

Should you pay off your mortgage? Maybe not

2005-04-22T12:30:00.000-07:00

John Waggoner - USA Today

Your great-Uncle Jack, inventor of the left-handed monkey wrench, left you $250,000. You can either invest it or pay off your mortgage. Which is better?
If you have a low mortgage rate and a long investment horizon, then it's better to invest it. And, no, property isn't where you should put Jack's jack.

Let's start with the basic question: Should you pay off the mortgage early? Your best assumption is that the return on paying off your mortgage is the same as your mortgage rate. If you are paying 5.91% on your mortgage, the current national average, then you're saving 5.91% interest on your principal over the term of the loan. This basic rule comes with many caveats.

•Taxes. If you pay off your mortgage, you'll lose the mortgage deduction on your federal income taxes. That lowers your overall return from repaying the mortgage. (Taxes also lower the return from most other investments.)

More important, the mortgage interest deduction, either by itself or with other deductions, is typically more than the standard deduction on your federal income taxes. Of all the people who itemized in 2003, 82% claimed mortgage interest as a deduction. Unless you're a real saint, it's probably your mortgage that allows you to itemize deductions and pay less in taxes.

•Leverage. If you pay off your mortgage, you'll also lose the advantage of using someone else's money to invest. Let's say that your mortgage is paid off, and your home gains 5% in price this year, to $210,000 from $200,000. You've gained $10,000.

But let's say you had $20,000 in equity in your home and a $180,000 mortgage. If you were to sell your home for $210,000, you'd repay the $180,000 loan, keep the $20,000 in equity and pocket $10,000 — without tying up $200,000 of your own money.

•Liquidity. If you suddenly need money, you may not be able to sell your house quickly. You'll also have to pay a broker's commission to do so. True, you can tap a home equity line of credit — but then you're back where you started before you paid off your mortgage.

But to really make the decision, you have to compare your return with another investment. Over long periods of time, you could probably beat 5.91% by investing in stocks. The stock market has averaged a 10.4% gain since 1926, according to Ibbotson Associates, a Chicago research firm.

And there's the rub. Investing in this kidney stone of a market would make most people balk. When people talk about paying off their mortgage, they're often considering investing the money they save in real estate. Stocks have gone nowhere since 1999, but home prices are going wild in many parts of the country. "I talk to one or two people a week who ask about buying another house and just flipping it," says Malcolm Makin, a financial planner in Westerly, R.I.

That's not the time to load up on real estate. Although the word "bubble" is batted around too frequently — true bubbles are rare — you can make a strong argument that housing gains will ease:

•Rising rates. Every quarter-point increase in mortgage rates eliminates potential buyers from the market. The Mortgage Bankers Association thinks the rate on 30-year fixed-rate mortgages will rise to 6.6% by the end of 2005, and 7.3% by the start of 2007.

•Cooling prices. Home prices, like stock prices, don't normally double in a year or two. Typically, home prices rise 1 or 2 percentage points above inflation, currently running at 3.1%.

•Soaring expectations. In 1999, people would talk about how much they made from their tech stocks. These days, the topic is usually how much they have made from their houses. That's not a good sign. People who buy now are "doing the same thing they did with tech stocks," says Tim McIntosh, a financial planner in St. Petersburg, Fla. Should home prices actually fall, the magic of leverage will work in reverse. If you buy a $200,000 house with $20,000, you'll be in trouble if your home price falls 10% to $180,000.

And just as some people don't have the temperament to be investors, some don't have the psychological makeup to be landlords. There's nothing quite like tenants who view paying rent as optional, or discovering a renter's spouse planted in the zinnias.

When should you pay off your mortgage? If you're close to retirement, the mortgage is near its end, and your alternatives are low-yielding bonds or bank CDs. For a retiree on a fixed income, losing a major expense means a big boost in lifestyle.

Fox hails U.S. mortgage program for Mexicans

2005-04-19T10:09:00.000-07:00

The Associated Press/MEXICO CITY

Over 1,000 Mexicans living in the United States are taking advantage of a program allowing emigrants to obtain a mortgage to buy a home in Mexico, Mexican President Vicente Fox announced Monday.

Fox offered praise Monday for the Mortgage Program for Migrants, throwing the government's support behind the loan program started more than a year ago when several of the country's mortgage providers opened offices in the United States.

Fox said the program, funded by the Federal Mortgage Society, will bring further investment to Mexico and help achieve his goal of getting 600,000 mortgages provided this year.

"It's only fair that migrants receive a reward for the contributions they make day after day," Fox said at the annual meeting of the National Housing Council.

About 372 Mexicans in the United States have already obtained a mortgage for a home in Mexico, and another 872 applications have been made.

Mexico's special purpose financial companies, known by their Spanish acronym as Sofols, have been behind the initiative.

Hipotecaria Su Casita, the second-largest Sofol, has provided about 200 home loans since opening its first U.S. office in September 2003 in Denver.

Eduardo Uranga, who runs the program for Su Casita, said the company hopes to triple that amount by the end of this year by opening offices in Dallas, Chicago and Los Angeles, and through alliances with regional U.S. mortgage brokers. Su Casita recently reached agreements with First Jersey Mortgage Services in New Jersey and Monterey Funding in California.

Uranga said getting the government's formal backing should boost the program's public profile.

"When we started a year and a half ago, one of the most important barriers was that too many Mexicans in the U.S. didn't trust it because it was something new," he added.

Mexico's largest Sofol, Hipotecaria Nacional, has also gained a greater presence in the United States since being acquired last year by BBVA Bancomer, a unit of Spain's Banco Bilbao Vizcaya Argentaria (BBVA).

Hipotecaria Nacional already has offices in New York and San Diego, and its Spanish parent company bought Valley Bank in California last year and is completing its acquisition of Laredo National Bancshares Inc. in Texas.

Meanwhile, Credito Inmobiliario, Mexico's fourth-largest Sofol, is participating in the program through offices in Chicago and Houston.

Guillermo Babatz, who heads Mexico's Federal Mortgage Society, said at the annual event that the ever-increasing flow of money sent home by Mexican migrants demonstrates the program's potential.

Reverse mortgage applicant 'shocked' by up-front fees

2005-04-18T10:17:00.000-07:00

When are loan costs worth the risk?
Monday, April 18, 2005

DEAR BOB: I am currently applying for a reverse mortgage. But I think you should warn readers about the high up-front fees so that it is not a big shock, as it was to me. The closing costs in my situation will be almost $15,000. But in my case it is worth paying these expenses for a lifetime of tax-free income? – Ruth G.

DEAR RUTH: Yes, the up-front loan fees to obtain a senior-citizen tax-free reverse mortgage seem high. But they really are quite reasonable if you stay in your home for more than five years.

Before you obtain your reverse mortgage, the lender must provide you with a Total Annual Loan Cost (TALC) disclosure chart based on two years, your life expectancy, and even beyond your expectancy. If you keep your reverse mortgage only two years, the annual interest rate, including up-front loan costs, will usually be at least 12 percent, often more. But at 10 years, your annual cost typically drops to a much more reasonable 6 percent or 7 percent interest.

That's why I constantly advise against obtaining a reverse mortgage unless you plan to stay in your home at least five years. There are so many reverse mortgage advantages I can't list them all here. A great new book explaining this topic is Tom Kelly's "The New Reverse Mortgage Formula," available at bookstores, public libraries, and www.amazon.com.

HOW CAN MOM GET HOME TITLE BACK FROM HER KIDS?

DEAR BOB: I am a widow, 68, who made a stupid mistake about five years ago. Shortly after my husband died, my two adult sons convinced me to deed my home to them in case I had to go to a nursing home like my husband did before he died. Now I want to sell my home and move to Florida or Arizona. But they don't like my idea and refuse to sell the house so I will have the money to buy a retirement home in a warm climate. I think they like having me nearby to babysit the grandkids. What can I do? – Alice H.

DEAR ALICE: Because you no longer hold title to the home you are living in, there isn't anything you can do to force your sons to sell the house and give you the money to buy a Florida or Arizona retirement home.

Your sad situation shows why I constantly advise it usually is better to inherit real estate than to receive it as a gift before death.

Although I hope you retained a written life estate in the house and can live there as long as you desire, your life estate has little or no market value. The reason is when you die, your life estate dies.

Unless you have some written agreement with your sons, or can prove fraud or duress, I know of no way you can get back the title to your home so you can sell it. Consultation with a local real estate attorney is suggested, but don't get your hopes up.

HUSBAND AND WIFE CAN SPLIT UP TO CLAIM $500,000 TAX BREAK

DEAR BOB: My husband and I own a duplex where we have lived in one unit for almost 20 years. It has greatly appreciated in market value. A Realtor told us he can get a price that will give us a roughly $350,000 net profit. Having religiously read your articles every weekend for a long time, we know we can only use our $500,000 principal-residence-sale exemption on the profit from the sale of our personal unit. We would still owe capital gain tax on the profit from the sale of the rental unit. My question is can I (or my husband) move into the rental unit, live there for 24 months, and then can we claim the $500,000 principal-residence-sale exemption? – Cynthia R.

DEAR CYNTHIA: Yes. You can kick out the rental unit tenant and then move into the rental unit for at least 24 months before selling the property. In fact, you can both move in together. The tax reason is you have already met the 24-month occupancy test for your current unit.

After 24 months occupancy of the former rental unit, then the entire property will qualify for the Internal Revenue Code 121 principal-residence-sale tax exemption up to $500,000.

However, I must warn you, Uncle Sam will "recapture" the depreciation you have deducted on the rental unit so your $500,000 exemption won't eliminate that special tax. For full details, please consult your tax adviser.

ARE FEES PAID TO MORTGAGE BROKERS TAX DEDUCTIBLE?

DEAR BOB: Are fees paid to a mortgage broker tax deductible? – Laura D.

DEAR LAURA: If you paid a loan fee, usually called "points" (each point equals 1 percent of the amount borrowed) on a principal residence acquisition mortgage, that loan fee is tax deductible as itemized interest in the year of your home purchase.

However, if the fee is paid to obtain any other type of mortgage, such as a refinance, then it can only be deducted over the life of the mortgage.

For example, if you paid a $1,000 loan fee to refinance your home mortgage with a 30-year mortgage, for the next 30 years you can deduct $33.33 of that loan fee as itemized interest.

Because of this usually small deductible annual amount, I suggest that when obtaining any mortgage other than a principal-residence acquisition loan, it is often best to obtain a so-called "no cost" home loan rather than paying a loan fee. For full details, please consult your tax adviser.

HOW CAN HOME SELLER PROTECT AGAINST ZEALOUS INSPECTOR?

DEAR BOB: I understand the value of a professional home inspection to home buyers. But I have also heard of horror stories from the seller's viewpoint. Over-zealous home inspectors have found minor defects. As the prospective seller of a 35-year old home, I expect our home has some flaws. What recourse, if any, do sellers have for over-zealous home inspectors? – Ken P.

DEAR KEN: As a home seller, before putting your home on the market for sale, you should have your own professional inspection made (along with a termite inspection and other customary local inspections, such as energy efficiency, radon, building code compliance, etc.).

I have done this many times. Then I usually have the recommended repairs completed before the home is exposed to the market. If I don't want to make the repairs, I just disclose the defect to prospective home buyers.

This technique is very impressive to home buyers. My experience has been buyers usually accept my professional inspection reports. If they don't, chances of their own inspectors finding defects are very rare.

DON'T FILE SMALL HOMEOWNER'S INSURANCE CLAIMS

DEAR BOB: You won't believe this, but a deer headed full force into the sliding glass door of our patio, smashing the glass. We were home and called the local humane society who quickly put the deer out of its misery. The humane officer said such incidents, while not frequent, happen because the deer was probably sick. My question is should I file a claim with my homeowner's insurance company for the $1,860 cost of replacing the glass and the damaged door frame? I have a $500 policy deductible. A neighbor tells me not to file a small claim like this (which I can afford to pay from my pocket). What would you do? – Steven V.

DEAR STEVEN: If you asked this question three years ago, I would have said file the homeowner's insurance claim. However, most homeowner's insurance companies have become extremely nasty in the last few years toward their policyholders.

Today, if you file too many claims, your insurer might cancel your policy. Or, your annual premiums could be increased substantially. If I were in your situation, I would do two things: (1) raise your deductible to at least $1,000 to save on premiums, and (2) not file that $1,360 claim.

CLEAR UP TITLE PROBLEM NOW RATHER THAN WHEN IT'S TOO LATE

DEAR BOB: In a recent article, you advised a widow how to remove her late husband's name from their home title. You said it depends how they held title. I recently checked our deed and it just lists my husband's name and mine. Nothing is said about being joint tenants with right of survivorship, tenants in common, or any other method. We have owned our home over 20 years. Can we change how we hold title? – Francine B.

DEAR FRANCINE: Yes. All that is usually needed is to record a quit claim deed from yourselves to yourselves, listing the title method you prefer.

It would be smart to clear up your method of holding title now while you are both alive and alert. Consult with a local real estate attorney for the best method of holding title in your state and situation to avoid probate when one spouse dies.

One method that always works is to sign a quit claim deed of your house title into your living trust so you maintain control but avoid probate. Also, each state has a "default" or presumed method of holding joint title between spouses if no method is specified. Take action now to resolve your title uncertainty.

The new Robert Bruss special report, "How to Get Started Investing to Earn Big Real Estate Profits," is now available for $4 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet download at www.bobbruss.com. Questions for this column are welcome at either address.

Slower Growth Expected for Global Economy

2005-04-13T14:09:00.000-07:00

By THE ASSOCIATED PRESS
Published: April 13, 2005

Filed at 12:14 p.m. ET

WASHINGTON (AP) -- The global economy's growth is expected to slow this year, while still turning in a solid performance, as high energy prices weigh a bit on activity, the International Monetary Fund reported Wednesday.

After bounding ahead by 5.1 percent in 2004, the global economy is projected to grow by 4.3 percent this year, the IMF said in its latest World Economic Outlook. The forecast for 2005 is unchanged from an estimate the IMF released in September.

"The global economic expansion has remained broadly on track, evolving largely as expected," the IMF said. "Forward-looking indicators appear consistent with solid expansion in 2005, although rising oil prices are an increasing risk."

Next year, the IMF is forecasting the world economy to expand by 4.4 percent, slightly faster than the 2005 projection.

The IMF's forecasts are based on an assumption that world oil prices would average around $46.50 a barrel this year and $43.75 in 2006.

Spare oil production capacity will probably remain low, the IMF said. That, along with strong demand, will keep supplies tight. Thus, any unexpected supply disruption or change in demand could lead to gyrating prices.

"Not only can we not rule out price spikes, we cannot also rule out price plunges, " said Raghuram Rajan, the IMF's chief economist.

"Oil price volatility makes business more cautious about investing, especially in the oil sector itself where investment is needed throughout the production chain," he said. "In turn, low investment will continue to limit excess capacity, keeping volatility high, and perpetuating the vicious cycle."

For the United States, the IMF is predicting economic growth will increase by 3.6 percent this year, as well as next year. While that would be a moderation from the brisk 4.4 percent growth registered in 2004, it would still be considered healthy.

"The United States continues to hum," Rajan said.

The projection of 3.6 percent economic growth this year for the United States is up a tad from the IMF's previous estimate in September and is in line with forecasts made by other economists. The more moderate U.S. economic growth projection reflects a number of factors, including the toll of high energy prices as well as the Federal Reserve's interest rate boosts, private economists say.

In the United States, oil prices surged to an all-time high of $57.27 a barrel at the beginning of April. But they have retreated in recent days-- hovering above $51 a barrel on Wednesday.

China's economy, which grew by a blistering 9.5 percent last year, is expected to cool only a little. The IMF is projecting growth of 8.5 percent in 2005 and 8 percent in 2006.

"Global growth remains unduly dependent on the United States and China," the IMF said. "Growth in the euro area and Japan -- together accounting for nearly one-fourth of global output -- has once again been disappointing."

In the euro area -- Germany, France, Italy and Spain -- the economy is expected to grow by just 1.6 percent in 2005, the IMF said. That would be less than the IMF previously estimated for the region and would be down from a 2 percent increase posted in 2004. In 2006, economic output should improve somewhat -- increasing by 2.3 percent.

For Britain, economic growth should clock in at 2.6 percent this year and next, which would be slower than the 3.1 percent increase in 2004.

For Japan, the IMF is predicting economic growth of only 0.8 percent this year-- a big slowdown from the 2.6 percent increase registered in 2004. Japan's economy should expand by 1.9 percent in 2006.

Even with high energy prices, interest rates increases by the Fed in the United States as well as by other countries' central banks should keep inflation from becoming an immediate problem for the global economic expansion.

"Inflation is expected to remain moderate in the near future," the IMF said. Still, the situation bears close watching, it added.

Higher interest rates could cool the red-hot housing market in some parts of the world, Rajan said. However, in the United States, the housing market -- while displaying some mixed signals -- remains in good shape.

U.S. mortgage rates fell Tuesday

2005-04-12T16:07:00.000-07:00

Tue Apr 12, 2005 04:33 PM ET

NEW YORK, April 12 (Reuters) - The average rate on a 30-year U.S. mortgage with no upfront points fell 1/8 of a percentage point on Tuesday to 6 percent, according to BestInfo Inc.

If the mortgage market on Wednesday continues in its current direction, rates may remain the same.

The 30-year mortgage rate with one upfront point fell 1/8 of a percentage point to 5-3/4 percent.

The 30-year mortgage rate with two upfront points fell 1/8 of a percentage point to 5-1/2 percent.

The Mortgage Point Monitor is provided exclusively to Reuters by BestInfo. The company, formerly BestRates Inc., is a Dover, Vermont-based provider of mortgage market analysis.

On the Money: Adjusting Your Mortgage

2005-04-11T16:28:00.000-07:00

The Popularity of Adjustable Rate Mortgages Is Expected to Climb as the Fed Raises Interest Rates

By EILEEN ALT POWELL - Associated Press

NEW YORK, April 11, 2005 — As interest rates rise, more families are opting for adjustable-rate mortgages when they buy or refinance their homes. Unlike the traditional fixed-rate mortgages, which lock in a set rate for 15 years to 30 years, adjustable-rate mortgages typically start with low interest rates that rise over time.

The Mortgage Bankers Association, a Washington, D.C., trade group, says adjustable-rate mortgages, or ARMs, have accounted for more than a third of home lending activity in recent weeks, and their share could increase as the Federal Reserve continues to push up interest rates in coming months.

Families look to ARMs to keep their early monthly mortgage payments low. But because the rates on their loans can move up with the market, sometimes adjusting monthly, families risk having to pay considerably higher payments in the future.

Mari McQueen, a senior editor with Consumer Reports, worries that many Americans are too focused on monthly costs.

"I think consumers are approaching home mortgages the way they approach buying cars, focusing just on the lowest possible payment," McQueen said. "It's understandable, given the extremely high housing prices we're seeing across the country.

"But people are fixated on 'Can I afford this now?' and not considering what it will cost over time."

Options Are Plentiful

A variety of adjustable rate — and adjustable payment — mortgages are now on the market.

Keith T. Gumbinger, vice president of HSH Associates, a mortgage information service based in Pompton Plains, N.J., said the most popular are the hybrid ARMs, which promise a fixed rate for the first three, five or seven years and then adjust annually, generally in lockstep with Treasury rates.

The interest rate on a hybrid 5-1 ARM currently averages 5.66 percent nationwide, while the 7-1 ARM carries a rate of 5.90 percent, according to HSH data. When they begin adjusting, the increase can often be 2 percentage points a year or more; fully adjusted, the rates on the ARMs would both approach 12 percent.

By comparison, the rate on a traditional 30-year fixed rate mortgage averages 6.17 percent rate.

But the initial monthly payment on a $200,000 mortgage under the hybrid 5-1 ARM would be $1,156, or $65 less than the monthly payment for a 30-year fixed rate mortgage. Families who opt to pay interest only in the first few years could lower their monthly payment even further, to $943.

These hybrid mortgages are often chosen by young couples who aim to "trade up" to bigger homes in the near future, hopefully before the mortgages on their existing homes begin to adjust.

But if families don't sell or refinance their homes and the ARMs adjust upward, "they could find they've taken on more than they can handle," Gumbinger warned.

Choosing Your Own Monthly Payment

Another increasingly popular ARM is the payment option loan. These mortgages allow families to choose how much they want to pay each month — a minimum fee that doesn't fully cover the interest, an interest-only payment or a full payment that covers both principal and interest.

Kent Fullerton, 34, and his wife Cindi, 35, chose an option payment ARM when they refinanced their four-bedroom ranch-style home in Costa Mesa, Calif., in March. They have a 4-month-old daughter and hope to have more children.

"We know we're taking some risk with the new mortgage," he said. "But we didn't want a 30-year fixed mortgage because we're thinking we'll want to sell this house in a couple of years … and we got a better rate on the ARM."

Anthony Hsieh, president of LendingTree.com in Charlotte, N.C., an online service that helped the Fullertons find their mortgage, said young couples are especially attracted to ARMs because "affordability is their key concern."

The payment option loan is actually a "negative amortization loan" through which buyers can make early payments that don't fully cover principal and interest; the shortfall is added back into the loan, he said.

Hsieh gave this example. A home buyer takes a $160,000 adjustable payment loan with a 1 percent "teaser" rate. The minimum payment option is then set at $514.62 a month. After several months, the rate on the loan goes to the current market rate, say 5.5 percent. That would require a payment of $733.33 a month to cover just the interest or $908.46 to cover interest and principal. The rate — and thus the payment — adjust monthly after that, based on Treasury bill rates.

The family using this loan, Hsieh said, can opt for any of the payments in any given month, "which can be a good deal for people with seasonal income or who want to control their cash flow."

Home buyers can later step up monthly payments to make up for earlier shortfalls or they can hope that the appreciated value of their homes will cover the total loan when they sell the home, Hsieh said.

Like Gumbinger, Hsieh worries that as ARMs proliferate, home buyers may be exposed to risks they don't fully understand.

"The older generation remembers when interest rates were in the teens and remembers how much that can hurt when you have an adjustable-rate mortgage," he said. "The younger generation has only known the low interest rates — in the single digits — since the mid-1990s…There could be a sharp learning curve here."

Getting best mortgage deal

2005-04-06T14:45:00.000-07:00

Personal Finance
Jean Chatzky - NY Daily News

Alan Greenspan and his Federal Reserve Open Market Committee recently raised short-term interest rates for the seventh time in a row. Greenspan also indicated he's starting to worry about inflation. And, not surprisingly, mortgage rates - which rose in anticipation of the meeting - popped.

Today, a 30-year fixed-rate loan is averaging about 6.13%,according to HSH.com, the country's largest publisher of mortgage rate information.

That's about a quarter of a point higher than it was a month ago, and nearly a half point higher than it was at the beginning of the year. And chances are, the hikes aren't over.

Experts are looking for rates at 6.4% two months from now and 6.75% by year's end.

That may not be pricey by historical terms, but it's a douse of cold water to a country that got pretty used to rates in the low fives.

If you're out shopping for a mortgage in this rising-rate environment, what do you need to know to get the best deal possible?

Time it right.

Choosing the mortgage that's best for you is a matter of pinpointing the amount of time you expect to spend in this house.

For example, if you think you're going to be there until your babies go to college (or longer), then you want to lock into a 30-year fixed-rate loan where the payments in year 30 will be the same as they are today. But, if you think you'll be out of there in, say, five or seven years tops, you can shave a bit off your interest rate by opting for a 5-1 adjustable rate mortgage or a 7-1 ARM that is fixed for the first five or seven years respectively before the adjustments begin.

Right now, 5-1s are about a half a percentage point cheaper.

Shop around.

There's no one best source for mortgages, says HSH.com mortgage guru Keith Gumbinger - unfortunately that means you have to really do your homework to find the best deal.

Start locally with the banks in your area, then check credit unions, an online lender (LendingTree.com, for instance) and have a mortgage broker give it a go as well. Don't worry that all this hunting will damage your credit score. All inquiries into your file from mortgage lenders within a 14-day period are considered a single look.

Don't bite off more than you can chew.

Look, I know the New York (and for that matter, Connecticut and New Jersey) markets are all a little overheated - there are very few places in the country that aren't. But buying a home that you can only qualify for with an income-only loan is a very dangerous proposition. It means you're stretched too thin.

If something happens to your income stream - if you fall ill or are unable to work or lose your job - it's likely you won't be able to maintain your house payments. And although people in recent years have been able to count on appreciation in the equity of their home to bail them out, with rates rising you simply can't do that anymore.

Mark Zandi, chief economist with Economy.com, explains that there's a real risk - not necessarily a big risk, but a real one - that if rates rise higher or faster than economists are expecting we could see home prices fall.

Then people who've borrowed most or all of the equity in their homes may find themselves under water. If they need to sell, they may owe more on the loan than they are able to get from a buyer. Ask anyone who went through that the last go-round - it's absolutely no fun.

GSE bill may hurt mortgage debt market - experts

2005-04-05T13:28:00.000-07:00

Tue Apr 5, 2005 02:26 PM ET

NEW YORK, April 5 (Reuters) - Legislation proposing a new regulator for Fannie Mae and Freddie Mac could hurt mortgage-backed securities prices if the home loan giants are forced to cut their mortgage portfolios, industry experts said on Tuesday.
A bill offered on Tuesday would create a regulator to succeed Fannie and Freddie's current watchdogs, and would give the new entity the authority to reduce or raise the size of companies' portfolios.

However, the bill does not include statutory limitations on the mortgage portfolios, a stringent curb analysts said they were concerned about.

"There has been some concern that if the agencies are forced to shrink their portfolios, then that support in the mortgage market could go away," said Martin Mitchell, manager of government and mortgage bond trading at Legg Mason in Baltimore, Maryland.

"It is a concern of not having the underlying buying in the market if we sell off and see spreads widen," Mitchell said, adding that prices of mortgage-backed securities had not shown any reaction on Tuesday to the proposed legislation.

The Bush administration, strong advocates of reforming the housing giants, have said they support the portfolio curbs.

Any move to reduce the mortgage portfolio of the government-sponsored enterprises could also impact the amount of U.S. agency debt that is purchased by foreign central banks, market watchers said.

"If over the course of time there is a question over the financial solvency or management of our government (sponsored) agencies, then there may be a reason for Asian (investors) to decrease their demand for bonds issued by those agencies," said Michael Woolfolk, senior currency strategist with the Bank of New York in New York.

"It could materially and negatively impact demand for that class of assets temporarily," Woolfolk said.

Foreign central banks are seen as a key buyers of U.S. debt, and U.S. debt traders are wary of any sign of a decrease in that appetite.

Mitchell, however, downplayed the potential for any cut in foreign central bank buying.

"Unless there is a credit implication, where (the GSEs) would lose their implied backing with the U.S. government or their implied triple-A rating is diminished in any way, it shouldn't have too much of an impact on overseas appetite," he said. (Additional reporting by John Parry in New York)

Very interesting…

2005-04-04T11:41:00.000-07:00

Mortgage rates are rising, so now might be the time to shed your adjustable-rate loan and lock in a deal.

BY GAIL MARKSJARVIS
Pioneer Press

Now's your chance.

If you have an adjustable-rate mortgage, adjustable home-equity loan or a home equity line of credit, and you know you won't be able to afford higher payments, you cannot afford to put your head in the sand.

Mortgage rates have been rising, and economists are predicting that the 4 percent ARM of last year could become 7 percent by the end of next year. On a $200,000 mortgage, that would mean payments would jump from $955 a month to $1,331 — a hefty blow to any household budget.

No one can be sure that will happen, of course. Mortgage rates are erratic — climbing on days when economic data point to faster growth in the economy and falling on days when it looks like the economy might falter.

Even the savviest of economists admit they can't predict the future with certainty because political and financial events come out of the blue — affecting the economy and interest rates. If you doubt it, think: the 2001 terrorist attacks, the war in Iraq, gasoline prices jumping from about $1.20 a gallon to $2.16 in just a few months.

But don't let uncertainty lull you into wishful thinking. If economists are right about the future, people who have been ignoring rising interest rates could be kicking themselves in a year.

Thinking about it now could let them lock in mortgage rates that are still considerably lower than they've been through history.

Last week, the national average for 30-year fixed mortgages was 6.08 percent — a much better deal than the 6.9 percent that is expected next year. (For insight into predictions, refer to the column I wrote in Sunday's business section. Find it at www.twincities.com. On the left side of the home page, click on "business," then "columnists" and then my name.)

Then, take out your loan documents and consider your worst-case scenarios. If you are sure you can handle the highest rates your ARM will adjust to, you can put the documents away. But if you can't, you have to think seriously about your choices. Here's what to consider:

How long will you be staying in your home?

About two-thirds of people with ARMs have been able to lock in low rates for three- or five-year periods. After that, their interest rates may jump as much as 2 percent a year as long as they don't exceed a lifetime cap — maybe 10 to 12 percent.

You may kick yourself in the future if you are stuck with a 10 percent rate when you could have locked in at last Friday's 30-year fixed 5 7/8 percent. Yet, if you are sure you will be moving before your mortgage can start adjusting upward, there is no reason to give up the temporary comfort of a low rate, says Lending Tree president Anthony Hsieh.

But think about your future realistically.

Your family may be growing, and you may want a larger home in three years, but will you make a move regardless of market conditions? Many economists currently are predicting that home values will stagnate or even fall from today's frothy levels. If you had to sell your home at a loss, would you still move in three years?

Where can your home equity loan go?

The interest on some of these loans can climb into the teens, taking payments to levels families never anticipated during a period of stable low rates in 2003. But now Hsieh says it wouldn't be unrealistic to face rates of 9 percent within the next three years.

His advice: Think about refinancing both your home-equity loan and your mortgage. Although this may give you a higher interest rate than you were paying on your fixed-rate mortgage, locking in the combination prevents the home equity loan from soaring.

Trying to figure out if this is worthwhile may seem overwhelming, but calculators on the Internet help you see your alternatives clearly. At www.bankrate.com, click on "calculators," and then play with a variety of them — especially "Should I refinance?" and "Fixed or Adjustable?" If you don't have access to a computer, it would be worth a trip to a public library to use the Internet calculators.

Reliable mortgage brokers will also help, but to test their advice, talk to at least three. Sampling banks and mortgage companies will give you a variety of views and bolster your confidence. Make sure they aren't comparing apples and oranges, and beware if their closing costs on a loan are over 2.5 percent.

If you can't lock in the full mortgage, consider locking part.

Many suburban families who wanted to avoid private mortgage insurance but couldn't afford down payments on expensive homes stretched their way into homes during the past few years by using two mortgages — both requiring that they pay only interest and no principal.

They were secure at first because interest rates couldn't rise for the first two years. But with that period about to end, Terry Sullivan, Burnsville branch manager of Klein Mortgage, suggests they consider a fixed-rate loan on at least the largest mortgage. That way, they can remove some of the uncertainty of the future, while retaining payments that won't break the household budget.

Opportunity will knock, he says, if fixed 30-year mortgages drop to 5 3/8 percent — a level that isn't likely to be repeated for long periods in the future if forecasts are correct.

Beware of ads.

Loans are based on economic conditions and financial triggers like the prime rate, Libor or 10-year U.S. Treasury Bonds. So, if you encounter a lender offering a rate far lower than others, there is probably a catch that you won't like when you figure out what you missed initially in the fine print.

Roger Harrington, a St. Paul broker, is troubled by recent radio ads telling people they are paying too much if their mortgage rate is over 4 percent. The advertised loans carry a dangerous catch.

They allow homeowners to pay an artificially low interest rate, but they aren't really saving money. Instead, their apparent savings are just poured back into the loan, so an original $100,000 loan may become $104,000 in a year, and even $125,000 several years later.

Why should a person care if that gets them a low interest rate?

Because they very well could owe more money than they will ever receive if they must sell their house.

Change your view of housing.

There has been a mania in the housing market that is not likely to continue.

Nationwide, homes have climbed 11 percent in the past year, and virtually every economist I have talked to says it cannot continue. Already, this market is showing some slowdown.

When interest rates are rising, fewer people will be able to buy homes, so sellers may have to settle for less money. Some may even have to sell homes for less than they paid.

Consequently, now is not the time to buy a house hoping to sell it fast. Nor is it wise to take on a loan thinking you will build up equity simply through a fast-growing market.

Watching mortgage lenders should tell you those most in the know think you could have trouble paying for your home or selling it.

Hsieh says throughout the mortgage industry, lenders are making sure they won't be vulnerable if people can't afford their payments and need to sell at a loss. Lenders are demanding larger down payments so borrowers think twice about walking away from their homes without paying the lender. And they are probing credit histories — looking for indications that if borrowers face financial stress, they will sacrifice whatever they must to meet their house payments.

Two new loans for buyers

2005-04-01T10:57:00.000-08:00

Both devised for first-time owners

By Gregory J. Wilcox, Staff Writer, Sacramento Bee

The state today will begin offering two products structured to help first-time home buyers -- free mortgage payment insurance and a 35-year, fixed-rate interest-only loan.

They are part of the California Housing Finance Agency's effort to ease the sting of rising home prices that are squeezing many first-time buyers from the market.

"With the increasing cost of real estate, the challenge for Californians to purchase their first home has never been greater," said Theresa Parker, the agency's executive director.

The agency says its interest-only PLUS loan will reduce mortgage payments by hundreds of dollars per month. Borrowers just make the interest payment for the first five years, then the principal plus interest kicks in.

But holders of these mortgages will know how much their monthly payments will be increasing because the interest rate won't adjust.

The rate on these kinds of loans can go up once the principal becomes due.

"What we're trying to do is create a loan product that would help people that don't really have sufficient income to qualify for these expensive houses," she said.

HomeOpeners is a free mortgage protection program. If a borrower loses a job, the monthly payment is automatically covered for six months.

Parker said this buys homeowners peace of mind if they lose their job for a while. The insurance covers up to $2,500 a month and is in effect during the first five years of a loan.

They are the latest in a portfolio of specialized loans that help first-time homebuyers get in the market.

CalHFA's below-market mortgage rates are available to first-time home buyers who meet certain requirements, including income and home sales price limits.

There are separate price limits on new and used homes in what the agency calls targeted areas, census tracts where 70 percent or more of the families have an income equal to 80 percent or less of the state median.

For example, in Los Angeles County the purchase price limit is now $549,601 for a new house and $671,735 for one in a targeted census tract, 22 percent higher than the year-ago level.

For a resale house, the price limits are $457,608 in nontargeted areas and $559,298 in targeted areas, the agency said.

To qualify for the program, a single person or couple cannot earn more than $78,600 and for a family of three or more, the cap is $91,700.

Parker said loans in this usually range between $250,000 and $325,000.

The median price in most communities around the county are well above this price level.

Savvy shoppers who do a lot of research and shopping might be able to find a property, though.

Jim Hamilton, president of the California Association of Realtors, said condominiums might be the best bet in high-cost areas.

"There are a lot of loan products out there and this is one more avenue to take. It sounds like a pretty good program," he said.

U.S. 30, 15-year mortgage rates up for 7th week

2005-03-31T10:45:00.000-08:00

Thu Mar 31, 2005 01:06 PM ET

WASHINGTON, March 31 (Reuters) - U.S. interest rates on 30- and 15-year mortgages rose for the seventh consecutive week as inflation pushed home borrowing costs higher, according to a report issued on Thursday by mortgage finance company Freddie Mac.

U.S. 30-year mortgage rates rose to an average of 6.04 percent in the week ended March 31 from 6.01 percent a week earlier. Last week, 30-year mortgages topped 6 percent for the first time since July 2004.

Fifteen-year mortgages rose in the week to an average of 5.58 percent from 5.56 percent.

One-year adjustable rate mortgages (ARM) averaged 4.33 percent, up from 4.24 percent last week. The increase in the one-year ARM brought it to its highest level since 4.35 percent in the September 6, 2002, week.

A year ago, 30-year mortgage rates averaged 5.52 percent, 15-year mortgages 4.84 percent and the ARM 3.46 percent.

"Financial markets currently are very inflation sensitive, putting upward pressure on mortgage rates," Frank Nothaft, vice president and chief economist, said in a statement. "However, several economic indicators suggest that the economy isn't overheating and that inflation is relatively contained."

On Wednesday the Commerce Department said U.S. gross domestic product grew at a 3.8 percent annual pace in the fourth quarter of last year, the same as estimated a month ago. That was slightly under the 4 percent pace Wall Street analysts had forecast but still reflected healthy growth.

Wall Street will be keeping close watch on Friday's employment report to gauge the health of the job market and the overall growth of the U.S. economy.

U.S. employers likely added about 220,000 jobs in March, notching another strong month of hiring after a hefty 262,000 gain in February.

Freddie Mac said lenders charged an average of 0.7 percent in fees and points on 30- and 15-year mortgages and 0.8 percent on the one-year ARM, all unchanged from last week.

Freddie Mac also said the hybrid "5/1" ARM, set at a fixed rate for five years, then adjustable each year following, averaged 5.43 percent, up from 5.35 percent last week.

Freddie Mac is a mortgage finance company chartered by Congress that buys mortgages from lenders and packages them into securities for investors or holds them in its own portfolio.

Mortgage Applications Increased Last Week

2005-03-30T13:51:00.000-08:00

March 30, 2005 07:23:00 AM ET

NEW YORK (Reuters) - Applications for U.S. home mortgages increased last week as higher home purchasing activity offset a decrease in refinancing at a time when mortgage rates are rising, an industry group said on Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity increased 2.4 percent to 674.3 in the week ended March 25, partly offsetting the 9.5 percent decline the week before.

The overall increase was fueled by the MBA's purchase index, a gauge of loan requests for home purchases, which rose 5.5 percent to 470.9, after it lost 3.5 percent the previous week.

The increase was offset by the MBA's seasonally adjusted index of refinancing applications, which dropped 2.0 percent to 1857.2, after falling 16.5 percent the prior week.

But applications for adjustable-rate mortgages (ARMs) -- which have relatively low initial rates that "adjust" in line with market trends after a fixed period -- rose as a percentage of all mortgage applications, climbing to 36.6 percent from 33.5 percent the prior week.

"Rates on 30-year fixed-rate mortgages have increased 34 basis points in the last month. Following this increase in rates, the market attained a record high ARM (adjustable-rate mortgage) share this week, both in terms of number of loans and dollar volumes," Michael Cevarr, MBA's director of industry surveys, said in a press release.

Fixed 30-year mortgage rates averaged 6.08 percent last week, excluding fees, up 13 basis points from 5.95 percent the previous week.

One-year ARM rates averaged 4.39 percent last week, excluding fees, up 27 basis points from 4.12 percent one week earlier.

Refinancings also decreased as a percentage of all mortgage applications, falling to 37.8 percent, from 39.5 percent the week before.

The MBA's purchase index, a gauge of loan requests for home purchases, rose 5.5 percent to 470.9, after it lost 3.5 percent the previous week.

The MBA's survey covers approximately 50 percent of all U.S. retail residential mortgage originations, and has been conducted weekly since 1990.

Respondents include mortgage bankers, commercial banks and thrifts.

GM in Talks to Sell Mortgage Unit Stake

2005-03-29T10:49:00.000-08:00

March 29, 2005 12:47:00 PM ET

DETROIT (Reuters) - General Motors Corp. (GM) said on Tuesday it is in advanced talks to sell off a majority stake in its GMAC Commercial Mortgage unit, driven by funding constraints and its own poor credit rating.

A 50 percent stake in the unit is worth about $1 billion, JP Morgan analyst Himanshu Patel estimated.

No definitive agreement has been made, and GM's finance unit GMAC intends "to retain a significant equity interest in the business," GM spokesman Jerry Dubrowski said.

"We're now engaged in advanced discussions with a consortium of investors regarding the sale of a majority stake in Commercial Mortgage."

The commercial mortgage unit originates and services mortgages in a variety of business sectors and generated profits of $204 million last year.

Dubrowski declined to comment on one media report identifying buyout firm Kohlberg, Kravis Roberts & Co. as a top contender for the more than 50 percent equity stake in GMAC Commercial Mortgage that it is up for grabs.

But he took issue with recent reports saying that GM, which has about $23 billion in cash, was orchestrating the sale to add to its cash horde.

"That's really not the case," Dubrowski said. "If there were cash that would come from such a transaction, it would not flow back to General Motors. It would stay within this business. That's the whole point of it, to be able to have funding," he said.

"The capital markets are constrained right now, and as a result of that you know introducing the new investor into the business would help expand its growth more rapidly and more profitably."

Dubrowski was referring to the fact that GM is facing a possible credit downgrade to "junk" status by at least two leading rating agencies. And the embattled auto giant, which had more than $300 billion in debt outstanding at the end of 2004, is increasingly in need for alternative funding sources for some of its businesses.

GM, which has been losing market share and is struggling to revive profits at its core automotive business, warned earlier this month that it expects 2005 overall profit to be as much as 80 percent below its prior forecast.

Despite what some might call negative factors behind the planned sale of GMAC Commercial Mortgage, Patel in a note to clients on Tuesday billed it as a "positive" development that could help improve both GM and GMAC's liquidity.

"Broadly speaking we think the market would be pleased with any such transaction," he said.

Home Sellers Fret As Mortgage Rates Rise

2005-03-25T10:01:00.000-08:00

03.25.2005, 12:41 PM

(AP) A four-bedroom ranch home with a finished basement and swimming pool overlooking a golf course fairway in one of Georgia's top school districts should be a steal for $309,000.

Not for owner Sherry Hersh, who blames rising interest rates for keeping her home on the market for nearly a year.

"It's made it more difficult to sell it," says Hersh, who runs a small promotional products company out of her suburban Atlanta home. "It's made me more conscious of what I will get for the house in order to buy a new house."

Real estate and mortgage experts from Los Angeles to Chicago to Atlanta say Hersh's case could become more common in the wake of the Federal Reserve's decision this week to increase the overnight bank lending rate for the seventh time since last June. Because that helped push up other interest rates - including the yield on the 10-year Treasury note, which tends to influence mortgage rates - they say it could take longer for people to sell their homes at the prices they want.

So far, though, signs of a slowing of the housing juggernaut are mostly anecdotal.

New-home sales soared by 9.4 percent in February, the government reported on Thursday. And while sales of previously owned homes dipped 0.4 percent last month, the results still were better than analysts were forecasting.

At the same time, the median price for new homes - where half sell for more and half sell for less - rose 5 percent from a year earlier to a record $230,700 in February. For existing homes, the median price was $191,000 last month, an 11 percent increase from the same month a year ago. And stories of bidding wars pushing sales prices far above their asking price continue to circulate in many markets, including New York City and the suburbs of Washington, D.C.

Even so, economists are forecasting that home sales and ever-escalating prices are likely to cool if mortgage rates continue to head higher this year. Rates on 30-year, fixed-rate mortgages rose this week for the sixth week in a row and now average just above 6 percent nationwide. A year ago they averaged 5.4 percent.

"What's happening with rates is hurting the seller worse than it is the buyer, and home prices will flatten out if not go a little lower," said Bob Long, president of the Georgia Association of Mortgage Brokers.

In California, some industry observers are projecting a gradual slowdown in prices as borrowing costs rise and affordability becomes an even more acute issue.

"The picture for California has been great, but I think it has started changing," said Bruce Norris, president of The Norris Group, a real estate investment company. "There's certainly going to be upcoming weakness in California because we've just about gotten to the point where we've priced our typical buyer out of his ability to make the monthly payment."

High-end homes in parts of Chicago, those priced at $1 million and up, aren't selling as fast as they did in recent months, said Barbara Frankel-Abrams, vice president of sales at Jameson Realty Group.

"Maybe carrying a quarter percent increase (in interest) is more formidable at that price," she said.

Sin City's housing market has been hot during the period of low interest rates over the last several years. But some mortgage agents in Las Vegas believe that rising rates could start to put the brakes on their housing boom, making it more difficult for sellers.

"People have decided they're not going to pay the astronomical prices for homes," said Las Vegas mortgage agent Connie Hooten.

Not everyone is predicting that ballooning home sale prices will burst with rising interest rates.

In Phoenix, the market has been so hot, it's going to take a while for it to cool down, said Jay Butler, director of the Arizona Real Estate Center at Arizona State University. And in the Boston area, Maggie Tomkiewicz, president of the Massachusetts Association of Realtors, said that if anything, rising rates may lead to increased home sales in the short-term, as buyers anticipating further rate hikes try to jump in the market while rates are still reasonable.

"Buyers say, 'Let's get out there in the market and get it done,' " she said.

That sentiment has been lost on Sherry Hersh and her husband, who works at a local Home Depot Store designing kitchens and bathrooms. They have already lowered the price of their Marietta, Ga., home by $30,000 and still haven't gotten a good offer despite the home being appraised at $365,000.

The average sales price for a single-family detached home in metro Atlanta fell to $234,876 in January from $238,369 in December, while the average number of days a home stayed on the market before selling increased from 81 to 84 days over that period.

"We've had some offers, but they've been very, very low and by builders who want to basically knock our house down and build a $500,000 home on our property," Sherry Hersh said.

Associated Press Writers Alex Veiga in Los Angeles, Ken Ritter in Las Vegas, Herbert McCann in Chicago, Mark Jewell in Boston and Jacques Billeaud in Phoenix contributed to this report.

Breaking through 6%

2005-03-24T11:08:00.000-08:00

Thirty-year mortgage hits highest level in eight months

By Steve Kerch, MarketWatch
Last Update: 11:39 AM ET March 24, 2005

CHICAGO (MarketWatch) -- The 30-year mortgage topped 6 percent this week, the first time that the U.S. benchmark has been above this level in eight months, Freddie Mac said Thursday.

The mortgage agency said the national average interest rate on a 30-year loan was 6.01 percent in the week ending Thursday, up from 5.95 percent a week earlier. The last time the loan averaged more than 6 percent was July 24, 2004, when it stood at 6.08 percent.

The jump, which comes two days after the Federal Reserve raised interest rates for a seventh straight time, was the sixth in a row for fixed-rate mortgages as tracked by Freddie Mac (FRE) in its weekly survey.

Many economists have been surprised that long-term rates such as mortgages have remained as low as they have in light of the tightening moves adopted by the Federal Open Market Committee.

"Renewed concern over the threat of inflation pushed up long-term mortgage rates, while the most recent FOMC statement caused short-term rates to float upwards," said Frank Nothaft, Freddie Mac chief economist. "Although mortgage rates have risen these past six weeks, they still remain at very affordable levels."

This, he added, "would explain why new home sales figures were surprisingly high in February. Although mortgage rates are beginning to rise, we have yet to experience much of a slowdown in the housing market."

Indeed, the latest numbers on home sales confirm the contention that rising mortgage rates have not taken a toll on the nation's housing market. Sales of existing homes were robust in February, and sales of new homes ranked as the second-best on record, data this week showed. See story on existing-home sales. See story on new-home sales.

Although home sales have held up well, mortgage refinancing by the same token has taken a big hit. Refinance activity is down 60 percent from year-ago levels, the Mortgage Bankers Association said this week.

In the Freddie Mac survey, the national average for the 15-year loan, a popular choice among those refinancing mortgages, was 5.56 percent, up from 5.47 percent a week earlier.

Five-year Treasury-indexed hybrid adjustable-rate mortgages averaged 5.35 percent, up from 5.31 percent. And one-year Treasury-indexed ARMs averaged 4.24 percent, up from last week when the average rate stood at 4.20 percent.

The two fixed-rate loans and the hybrid ARM required the payment of an average 0.7 points to achieve the rate; the one-year ARM needed 0.8 points. A point is 1 percent of the loan amount, charged as prepaid interest.

Rates are now significantly above their year-ago levels, when the 30-year averaged 5.4 percent, the 15-year was at 4.7 percent and the one-year ARM's rate was 3.36 percent. Freddie Mac only started tracking the hybrid ARM this year.

But economists don't anticipate mortgage rates will rise all that significantly from here, predicting the 30-year loan will end 2005 somewhere between 6.25 percent and 6.5 percent.

Steve Kerch is the real estate editor of MarketWatch in Chicago.

Mortgage Market Feels Some Pain

2005-03-23T09:58:00.000-08:00

By TSC Staff - TheStreet.com
3/23/2005 8:18 AM EST

The recent run-up in long-term market interest rates appears to be weighing on mortgage lending.

The Mortgage Bankers Association Wednesday said its survey of activity for the week ended March 18 was down 9.5% from a week ago and 39.3% from a year ago. Mortgage lending has now declined in five of the past six weeks.

Purchases decreased by 3.5%, while applications for refinancing slumped 16.5%.

"The increase in mortgage rates has reduced application activity across the board, particularly for refinances. Refinance applications are down more than 60% relative to this time last year," the MBA said.

Most mortgage rates mirror the yield on the 10-year Treasury note, which has jumped from 4.00% in early February to an intraday high of 4.62% Tuesday, following the Fed's latest increase in the federal funds rate. The yield is now at its highest level since last July, reflecting concerns that the central bank will take a more aggressive approach in raising interest rates because of growing inflationary pressures.

Refinancing constituted 39.5% of all mortgage activity, down from a 42.9% share in the previous week. Adjustable-rate mortgage, or ARMs, accounted for 33.5% of all activity, vs. 32.4% in the previous week -- perhaps reflecting consumers' anticipation of the Fed's latest quarter of a percentage-point increase in short-term rates.

The average rate on 30-year fixed-rate mortgages increased to 5.95% from 5.91% a week ago.

The average rate for 15-year fixed-rate mortgages increased to 5.49%, vs. 5.47% in the previous week.

With rates rising, it becomes less attractive for home owners to refinance by trading in a higher rate on an existing mortage for a lower one on a new note because any savings may be offset by closing costs.

Interest rate losers and winners

2005-03-22T14:06:00.000-08:00

Some businesses are particularly at risk, but there are companies that might be worth a look.

March 22, 2005: 4:01 PM EST

By Chris Isidore, CNN/Money senior writer.

NEW YORK (CNN/Money) - There are far more corporate losers than winners in a rising-rate environment but if you look hard enough, there are a few companies that should benefit as interest rates climb.

Some of the problems from rising rates may be balanced if the economy keeps growing solidly, economists said. And some of the companies facing problems have woes that go beyond borrowing costs.

"In general, a rising rate environment slows down growth, so most companies are not going to go as good as when rates are low," said Jay Bryson, global economist for Wachovia Securities.

Several sectors are particularly vulnerable if rates continue to climb, as expected in the months ahead. And there are some niche financial companies that could benefit from higher rates, though it's tougher to pick the winners.

Loser: Automakers

As the warning from GM revealed last week, automakers have problems with costs, market share declines and rising health care expenses that go beyond the interest rates they pay.

But GM and Ford will have additional problems as rates rise. Both companies have used low interest financing offers to keep buyers coming to dealer showrooms, and rising rates increase the costs of those incentives. Chrysler Group parent DaimlerChrysler also has been using financing incentives.

In addition, GM and Ford have seen their finance arms become major profit drivers, as the income from those units balances losses from automaking. Now, with rates spurting up, those incentives are going to be tough to maintain.

"That's going to be a bigger problem going forward," said Dan O'Brien, senior trader at LaSalle Futures Group. "The majority of the income is made on the financing side, not on making cars anymore."

Loser: Mortgage lenders

For much of last year as the Federal Reserve raised its fed funds rate, mortgage rates stayed low, spurring more home refinancing and borrowing, and strong profits for lenders. That's finally started to change.

The Mortgage Bankers Association found applications fell by a about a third in the week ended March 11 from a year earlier. Mortgage rates are up about three-tenths of a percentage point since early January, according to Freddie Mac, and are likely to keep climbing.

Countrywide Financial, a leading mortgage lender that gets 80 percent of its business from home loans, has seen its stock sink 15 percent in the last two months on concerns about rising rates. Washington Mutual (down $0.66 to $39.76, Research), the nation's largest thrift and another leading home lender, has seen its stock fall 5 percent.

Mortgage lending has also been hurt by factors beyond the interest rate environment.

Financing firms Fannie Mae and Freddie Mac (have been hit by questions about their accounting practices, leading to management shakeups. And last month Fed Chairman Alan Greenspan urged Congress to impose limits on the two companies' mortgage portfolios to avoid what he called "almost inevitable" problems for the nation's financial system.

Winner: Some banks

Picking banks that will benefit from rising rates can be tricky. If short-term rates rise faster than long-term rates, it can squeeze profit margins for many banks.

That's what happened much of last year as the Fed raised short-term rates while the yield on 10-year Treasury notes stayed pat or even fell. The squeeze on margins could get worse in the current environment.

"Most people expect that the Fed will hike short-term rates more than the 10-year (yield) will go up this year," said Wachovia's Bryson.

Still, there are some banks set to benefit from the rising rates, said Denis LaPlante, analyst with Keefe Bruyette & Woods (KBW), an investment bank concentrating on financial services.

LaPlante said most major banks are diversified enough that the expected changes in rate spreads probably won't significantly change investors' outlook for the institutions.

But banks that have a large source of their funds coming from low-rate deposits, such as checking accounts, or which do a large amount of their business lending to businesses at rates pegged to the prime rate, which mirrors moves by the Fed, are well positioned to gain.

He pointed to two whose business is tightly focused enough to benefit from rising rates -- Silicon Valley Bancshares and Comerica Inc.

KBW has an "outperform" rating on Silicon Valley, but only a "neutral" rating on Comerica, partly because of its exposure to the auto industry. But those are the two companies best positioned to benefit purely from rising rates, said LaPlante.

"Silicon Valley certainly has a very cheap funding base that makes a lot more money in rising rate environment," said LaPlante. "Comerica is kind of pure play on commercial lending side."

Winner: Credit card companies

Credit card issuers also may benefit from higher rates, according to KBW, which has an outperform rating on MBNA Corp. and Capital One Financial Corp., the two largest firms to get a majority of their earnings from credit cards.

"The interest rate environment is part of our thesis," said Stephen Schulz, KBW analyst. "We think that rising rates and a slowdown in mortgage markets could be a positive for growth."

Low mortgage rates have cut into credit card revenue as people used refinancing proceeds to pay off card balances. In the past the card companies have seen their cost of funds rise as rates rose.

But Schulz said MBNA and Capital One have diversified their sources of funds since rates were last rising, adding it's unlikely that higher rates will cause significantly higher defaults and loan losses for card companies.

"That credit quality for credit card issuers is more closely tied to employment levels than interest rates," he said.

7 ways to spot a shady mortgage lender

2005-03-21T12:51:00.000-08:00

Too-good-to-be-true rates, rock-bottom fees? Tread carefully as you refinance, especially if you have less-than-perfect credit.

By Jay MacDonald, Bankrate.com

Johnny Bell had a new deck and other home improvements in mind when he refinanced his home in Oxford, Miss., last summer.

Make that almost refinanced.

Bell spotted attractive terms on a television ad, contacted the lender and locked in a cash-out refi at 5.125% with $350 upfront as a processing fee toward a 45-day closing.

After two more months of futile telephone calls, Bell walked away from the deal, received his $350 back and built his deck out of pocket.

"It was bait and switch," he said. "It took me five months to not refinance."

Signs of a bad loan

Some deals, however, are indeed too good to be true.

According to the Federal Trade Commission, you may be signing on for trouble if a lender:

Encourages you to falsify your application information to get the loan.
Urges you to borrow more than you need.
Pushes you to accept payment terms that you can't realistically meet.
Fails to give you the required disclosures (e.g., APR, rescission rights, etc.).
Shows up at closing with a totally different loan product than you agreed to.
Asks you to sign blank forms. ("It'll speed things up. We'll fill in the blanks later, trust me.")
Denies you copies of documents you signed.

Chicago real estate attorney Tom Polinski recalls a recent closing where the buyers found out that their lock had expired four days earlier and their interest rate would be 1.5% higher.

With little recourse, the buyers settled for a $750 reduction in fees and closed, vowing to refi at the earliest opportunity.

Preying on the powerless

Predatory lending practices are most visible in the subprime market, which serves lower-income individuals with credit problems.

"Not all subprime loans are predatory," Garcia points out, "but virtually every predatory loan we have seen is a subprime loan."

Garcia says that to simply spout "buyer beware" isn't enough.

"We can see that minimum standards might be a good thing, but we don't want to prevent states that have serious problems from closing the gap," she says.

Firing the 'bad actors'

The mortgage industry has dug in its heels against government regulation at any level that would restrict access to credit.

Residential Mortgage Foreclosure and Delinquent Payments Decline

2005-03-18T09:44:00.000-08:00

Fri, 18 Mar 2005 10:23:45 EST - MortgageNewsDaily.com

In a press release and subsequent press conference Thursday, the Mortgage Bankers Association (MBA) cited fourth quarter 2004 figures in reporting a decline in the rate of delinquent payments on and pending foreclosures of residential mortgages since both the third quarter of 2004 and the end of 2003.

MBA's 132nd quarterly survey (dating back to1970) covers 38.7 million first mortgages on one-to-four unit residential properties. The survey base itself has increased dramatically, now reviewing the status of 500,000 more loans than in the previous 2004 report and 1.5 million more than in the year-end 2003 survey. It now covers over 80 percent of the approximately 48 million mortgage loans outstanding in this country, and includes more than half of the non-prime mortgage market.

MBA collects information by loan type (prime, sub-prime, fixed rate (FRM) and adjustable (ARM) mortgages,) and by guarantor, (Federal Housing Administration (FHA) and Veterans Administration (VA.)) Fannie and Freddie are included in the prime figures. In other words, the survey is a pretty comprehensive picture of what is going on out there.

Since the fourth quarter of 2003, delinquency rates (gathered in 30 day, 60 day, and 90 day plus "buckets) fell for all loans types. Prime loans were down from 2.37 percent to 2.22 percent and sub-prime loans from 11.53 percent to 9.88 percent. FHA loans were down two basis points to 12.21 percent, and VA loans dropped 103 basis points to 6.96 percent.

Prime loans decreased both in the last quarter and the last year: fixed rates down 11 basis points since the third quarter and dropping from 2.11 percent to 2.04 percent, seasonally adjusted since 2003. ARMS were down 70 basis points to 2.11 percent for the year; 12 basis points on a quarterly basis.

The real story, however, is the delinquency rates for sub-prime loans. FMAs in this category were down 143 basis points (to 9.07) and ARMS a dramatic 338 basis points (to 9.52 percent) on an annual basis. Quarterly figures are -60 and -70 basis points respectively. MBA offered no specific explanation for these sub-prime drops.

State laws regarding foreclosures differ, and so does the time-line for pending foreclosures which can take two or three year to resolve in states utilizing a "judicial foreclosure process," Nonetheless, the "foreclosure inventory," those homes that are in active foreclosure, has decreased slightly (6 basis points to 0.49 percent) for prime loans and a rather dramatic 165 basis points for sub-prime.

Actual foreclosures also decreased for sub-prime loans. They were down 2.10 percent to 1.37 percent. Prime loan and VA foreclosures remained virtually unchanged (0.20 percent and 0.48 percent respectively.)

Bucking the trend, however, were foreclosures of FHA loans. In the fourth quarter of 2004 these set a record high rate of 0.91 percent, a steep increase of 14 basis points since 2003.

And, since last quarter, the seasonally adjusted percentage of new foreclosures (those just moving from delinquent into the foreclosure inventory category) increased 2 basis points for prime loans, 11 basis points for sub-prime, and 7 basis points for FHA loans while decreasing .03 percent for VA guaranteed loans.

In a telephone press conference following the noon release of data, Doug Duncan, MBA's chief economist and senior vice president commented on the figures and made a few projections for the future.

Mr. Duncan cited the 4 percent growth in the U.S. economy during the fourth quarter of 2004, the addition of 190,000 new jobs, and continued low interest rates as major contributors to the improved delinquency rate. On-time mortgage payments, he noted, constitute 96 percent of all payments. He predicted that slow but steady economic growth and a commensurate increase in jobs would likely mean continued declines in delinquencies for the next few quarters.

However, Mr. Duncan cited the need to monitor the many "young" portfolios. The rash of new home purchases and refinances, particularly of the cash-out variety, and the continued popularity of ARMs, may present problems in the future. Historically, new loans perform well, but as they age more problems arise. The very young loans that are out there in large numbers may prove vulnerable to problems down the line. Cash-out loans were down .03 percent in the fourth quarter (to 56% of all refinances, but still well above the 44% seen in 2003), and ARMs continue to represent about a third of the mortgage market. ARMs may present a risk if rising rates cause uncomfortable increases in monthly payments once the initial loan period ends and rates adjust.

In response to questions, Mr. Duncan said that the spike in FHA foreclosures is probably a result of declining "good credit" in the FHA loan base. Private markets are producing new products that have eroded FHA market share, computerized underwriting has moved some households out of the FHA customer base into sub-prime or even prime markets, and rapid appreciation of house values has allowed many FHA customers to refinance into conventional loan products. Processing of FHA loans is also more expensive, leading lenders to steer away from FHA loans where other options are available. The result, he said, is a weaker or higher risk portfolio. This, he continued, is a problem that must be dealt with and a task force is now studying the problem.

High real estate appreciation areas such as California have been to an extent, immunized against delinquencies and foreclosures, presenting homeowners with a ready market if they must bail out of mortgages because of financial difficulties. As home value escalation slows, regulators should be watching these high cost areas, alert to patterns in the composition of new loans and any weakness in underwriting

The next MBA survey will be released in mid June.

Mortgage Applications Increase Last Week

2005-03-16T11:09:00.000-08:00

Mar 16, 2005 — NEW YORK (Reuters) - Applications for U.S. home mortgages increased last week, as purchasing and refinancing activity rose despite sharply higher interest rates on fixed loans, an industry group said on Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity increased 3.2 percent to 727.6 in the week ended March 11, after dropping 0.7 percent the week before.

Lower interest rates on adjustable-rate mortgages may have countered the impact of significantly higher rates on fixed loans, economists said.

Fixed 30-year mortgage rates averaged 5.91 percent last week, excluding fees, up 22 basis points from 5.69 percent the previous week.

At the same time, one-year ARM rates decreased to 4.19 percent from 4.43 percent the prior week.

The MBA's ARM index climbed 9.6 percent to 5169.9 from 4717.3 one week earlier.

"The ARM index increased almost 10 percent last week while fixed rates jumped almost a quarter of a point. The ARM index is now at its highest level since mid-December 2004," Michael Cevarr, MBA's director of member surveys, said in a press release.

ARM applications also rose as a percentage of all mortgage applications, climbing to 32.4 percent from 30.5 percent one week earlier.

The MBA's seasonally adjusted index of refinancing applications rose 4.2 percent to 2267.5, after falling 4.6 percent the prior week.

Refinancings also increased as a percentage of all mortgage applications, rising to 42.9 percent last week, from 42.6 percent the previous week.

The MBA's purchase index, a gauge of loan requests for home purchases, increased 2.5 percent to 462.8, adding to the 2.7 percent gain the previous week.

The purchase index has increased for the third consecutive week and is currently at its highest point of the year.

The MBA's survey covers approximately 50 percent of all U.S. retail residential mortgage originations, and has been conducted weekly since 1990.

Respondents include mortgage bankers, commercial banks and thrifts.

Banks Find Mortgage Clientele in Undocumented Immigrants

2005-03-15T11:05:00.000-08:00

BY KATHERINE REYNOLDS LEWIS
Newhouse News Service

Dalila and William Timal look like any other couple signing a home mortgage. They've picked out paint colors for their new four-bedroom house in Indianapolis and can't wait for their 18-month-old son to play in the yard.

But they differ in one way from many others you'd see at a loan officer's desk: Neither is a U.S. citizen or legal resident. The Timals came to this country from Guatemala in the late '90s and illegally overstayed their visas.

They're the beneficiaries of a new program by Cincinnati-based Fifth Third Bank, basing mortgages on an individual taxpayer identification number, or ITIN.

Nationwide, increasing numbers of financial institutions offer such loans. They view customers like the Timals as part of their communities, not to mention a critical business opportunity. Just among the nation's roughly 6 million undocumented Latinos is a potential $44 billion market for homes, according to the National Association of Hispanic Real Estate Professionals.

"People need somewhere to live," said Ann Baddour, senior policy analyst with Texas Appleseed in Austin, a nonprofit group that uses volunteer professionals to solve social problems. "It's not new that people are buying homes; what's new is that banks are financing it."

The Timals saved up a $3,000 down payment for their loan. "We've been working so hard to have the money ready," Dalila Timal said in an interview.

"It's a house with a lot of space for us, it's a quiet area, it's near to the schools. I think it's a good neighborhood," she said. "It's good because it's going to be ours."

A person requests an ITIN from the Internal Revenue Service if he or she isn't eligible for a Social Security number, but must file a tax return. And while groups opposed to illegal immigration have pressured the IRS to work with immigration officials, experts say U.S. Immigration and Customs Enforcement concentrates on deporting violent criminals and people suspected of terrorist connections.

The growth of ITIN mortgage programs is an example of how day-to-day life in America has adapted to the reality of as many as 10 million undocumented immigrants. The IRS accepts their tax payments, employers recruit them, and companies seek them out as customers.

Yet they have no legal right to work or remain in the United States, and are denied full benefits afforded to citizens. To buy homes, many have used a borrowed or false Social Security number, jeopardizing their legal right to the property. Without access to the traditional banking system, they have been easy targets for predatory lenders charging excessive interest.

Araceli and Javier, a Milwaukee couple, heard horror stories of immigrants losing their homes because of ballooning mortgage payments. But when they recently bought the house they were renting, they used an ITIN to get a fixed-rate mortgage that replaced their $600 monthly rent with a $454 payment. They send the bank $600 a month anyway, to pay off the loan early. They agreed to be interviewed on condition that their last name not be used, for fear of immigration enforcement.

Their lender, Mitchell Bank, hasn't had a single late payment or delinquency on the $3.5 million of ITIN mortgage loans it has made since 2000, said James Maloney, chairman. "These are our best-performing assets," he said. "These are folks who are appreciative of the fact that we're willing to take a chance on them."

Others offering the loans include Neighborhood Housing Services of America based in Oakland, Calif., Banco Popular in Houston, and the Self-Help Credit Union based in Durham, N.C.

Second Federal Savings of Chicago has made $90 million of ITIN loans in the past nine months, said Mark Doyle, chief executive.

Also in Chicago, First Bank of the Americas has executed $12 million in such mortgages since April 2004, said Frank Montanez, vice president for loan origination. "We see it not only as part of our charter, to help provide housing, but it's consistent with good business," Doyle said. "We have an outstanding credit history with that market. ... They have a good work ethic; they have a pride of ownership."

At Texas Bank in Fort Worth, ITIN mortgage customers often come in person after a sweaty day's work to make loan payments in cash, said Joe Barnhart, president of the mortgage division. The program is so popular that once in a while, someone with a valid Social Security number submits an ITIN application.

"Most of these loans don't get refinanced; most of these houses don't get sold and paid off compared to other groups of loans, which makes them more valuable to us," Barnhart said. "A much larger proportion of these borrowers pay ahead on their loans than the general population."

The Wisconsin Housing and Economic Development Authority offers ITIN mortgages through banks in the state, for a total $5.8 million so far, said Antonio Riley, executive director. The authority, a state-created organization that sells bonds to finance its operations, made $407 million in traditional loans last year.

"The growth in the homeownership market is in the minority and immigrant populations," Riley said. "We don't see what can be so controversial about helping people realize the dream of homeownership."

Detractors criticize the mortgages as encouraging illegal immigration, which strains the country's infrastructure and opens the door for terrorists.

"It is a threat to national security and public safety and is morally bankrupt," said Dan Stein, president of the Federation for American Immigration Reform, a Washington-based group that favors tighter immigration controls. "It breeds ultimate contempt for laws."

Banks "ought to be part of the solution in insuring that people who apply for mortgages and conduct other business are here legally," Stein said. "They went down the road of making a fast buck in a way that is frankly, in our view, inconsistent with the spirit of patriotism and federal law."

Supporters of ITIN mortgages point to the benefits that accrue when renters become homeowners: Crime drops and real estate values rise as residents take better care of houses and invest time and money in the community. "People who own their own homes have a much greater stake in their neighborhoods," Riley said.

Critics often overlook the fact that many households with an undocumented immigrant also include a legal permanent resident or U.S. citizen, frequently a child who was born here, said Harry P. Pachon, president of the Los Angeles-based Tomas Rivera Policy Institute, which researches issues that affect Latino communities.

"Everybody likes to think of this as a dichotomy where you're legal or you're illegal; it's really a pipeline," Pachon said. "Today's illegal immigrant is tomorrow's legal resident."

In addition to accepting ITINs, banks are being flexible when they look at creditworthiness, since many immigrants don't have a traditional credit history, said Anna Paulson, a senior economist at the Federal Reserve Bank in Chicago. For instance, the bank may consider rent and utility bill payments, or a history of sending money to family overseas as evidence that a customer is a good risk.

There are signs the ITIN mortgage market is maturing.

One company, Milwaukee-based Mortgage Guaranty Insurance Corp., now offers private insurance on the loans, which reduces risks for banks and makes the mortgages easier to resell. The Federal Deposit Insurance Corp. is helping a group of Midwest banks to develop ITIN programs.

Freddie Mac, the Federal Home Loan Mortgage Corp., is studying whether to buy the mortgages from banks, spokesman Douglas Robinson said.

Without the participation of a major institution like Freddie Mac or Fannie Mae, the Federal National Mortgage Association -- which together hold 37 percent of U.S. residential mortgage debt -- the spread of ITIN mortgages will be limited, Paulson said. Right now, most banks making the loans must hold onto them, rather than selling them for cash that could be used for additional mortgages.

"This is a bottleneck in this market," she said.

Strengthening economy boosts 30-year mortgage rates

2005-03-14T10:09:00.000-08:00

March 13, 2005

BY MARTIN CRUTSINGER
ASSOCIATED PRESS

Rates on 30-year mortgage rates hit the highest level in seven months, reflecting four straight weeks of rising rates, a national mortgage survey reported.

Freddie Mac, the mortgage company, said its weekly survey showed that rates on 30-year, fixed rate mortgages averaged 5.85 percent last week, up from 5.79 percent the previous week.

It was the fourth consecutive weekly increase after 30-year mortgages had fallen for six straight weeks, hitting a low for this year of 5.57 percent the week of Feb. 10. Rates now stand at the highest level since the 30-year mortgage averaged the same 5.85 percent the week ending Aug. 12.

Analysts said that last week's good news on employment, showing that the economy created more than a quarter-million jobs in February raised worries in financial markets about possible future inflation caused by stronger-than-expected economic growth.

"Last Friday's employment report reinforced the perception that the economy is on sure footing, leading bond markets to push interest rates higher again this week," Freddie Mac economist Amy Crews Cutts said Thursday. "Although inflation remains tame, the recent spike in oil prices does put inflationary pressures on the economy and was an additional factor causing higher interest rates."

Still, analysts said mortgage rates should rise only gradually this year if the Federal Reserve keeps to its current course of gradual quarter-point increases in short-term rates.

Freddie Mac is forecasting that the 30-year mortgage will be around 6.25 percent at the end of the year.

Sales of both new and existing homes set records for four straight years, but analysts are predicting a slight fall-off in the sales pace this year as mortgage rates continue rising.

Other mortgage rates were up as well last week, Freddie Mac reported.

Rates on 15-year, fixed-rate mortgages, a popular option for refinancing, rose to 5.38 percent last week, up from 5.33 percent the previous week. Rates on one-year adjustable-rate mortgages climbed to 4.24 percent last week, compared to 4.14 percent the previous week.

Five-year hybrid adjustable rate mortgages averaged 5.22 percent last week, up from 5.17 percent the previous week. These hybrid mortgages have a fixed rate for five years and then adjust each year after that.

The nationwide averages for mortgage rates do not include add-on fees known as points. The 30-year mortgage, 15-year and five-year ARM all carried a fee of 0.6 point. The one-year ARM had a financing fee of 0.7 point.

A year ago, 30-year mortgages averaged 5.41 percent while the 15-year mortgage was at 4.69 percent and the one-year ARM was at 3.41 percent. Freddie Mac does not have historical data yet on the five-year ARM.

For more information, go to the Freddie Mac Web site, www.freddiemac.com

Mortgage Bonds Vulnerable as Bank Demand Wanes

2005-03-11T12:09:00.000-08:00

Fri Mar 11, 2005 11:39 AM ET

NEW YORK (Reuters) - A top executive at one of the nation's largest banks confirmed what many in the mortgage bond market have been fearing: There is waning demand for mortgages among commercial banks.

SunTrust Banks Inc. Treasurer Gary Peacock said Thursday that while he does not expect the bank to aggressively sell mortgage-backed securities (MBS) down the road, he does anticipate letting mortgage assets run off of the portfolio as they reach maturity.

"It is a possible risk that when loan demand grows they (banks) are going to be forced to sell MBS," he said at the Reuters Banking Summit.

SunTrust tends to keep shorter duration assets on its portfolio, such as hybrid adjustable-rate mortgages as opposed to 15- and 30-year fixed rate mortgages.

At the summit, held at Reuters offices in New York, Peacock said that as the U.S. economy picks up steam, it is inevitable that funds will be redeployed into business lending and away from mortgages.

The Atlanta-based bank has been a substantial buyer of MBS, ranking 11th in the nation at the end of the fourth quarter of 2004, with $18 billion of MBS on its books, according to JP Morgan.

SunTrust tends to keep shorter duration assets on its portfolio, such as hybrid adjustable-rate mortgages as opposed to 15- and 30-year fixed rate mortgages.

An improving U.S. economy is expected to boost demand for bank commercial and industrial (C&I) loans. To fund these loans, banks may opt to stop buying or shed their massive holdings of mortgage bonds.

That's unwelcome news to investors in the $4-trillion plus mortgage-backed securities (MBS) market since the loss of these key buyers could herald a longer-term drop in MBS prices.

"Many times we have seen banks exit the market, and sell, not just slow buying, when they feel rates are headed higher," said Bill Chepolis, senior MBS strategist, fixed income group, at Deutsche Asset Management in New York. "Right now the supply/demand factor in the (mortgage) market is more driven by the lack of supply...if demand from banks evaporated, then MBS would trade poorly."

The U.S. banking industry has benefited from massive growth in the mortgage sector that was fueled by record-low interest rates and the strongest housing boom in U.S. economic history.

This coincided with a substantial reduction in commercial and industrial (C&I) loan demand, leaving banks with plenty of excess cash to invest.

With interest rates at record lows, banks invested in the fixed income market through "carry" trades, transactions which involve borrowing at low, short-term rates and buying longer-dated investments, such as MBS and Treasury bonds.

But with the Federal Reserve on track to continue its policy of monetary tightening, that lucrative trade is quickly losing its luster.

That, coupled with recent increases in C&I loan demand, could be a harbinger of lower bank MBS holdings.

FANNIE, FREDDIE SUPPLY PRESSURES

MBS have been languishing in recent weeks on expectations of heavy supply and lower demand from two of the mortgage market's biggest players, Fannie Mae and Freddie Mac .

Fannie Mae said late-February that it plans to deleverage its mortgage portfolio to meet its 30 percent capital surplus requirement by its regulator, the Office of Federal Housing Enterprise Oversight, as it faces a massive restatement of earnings.

The mortgage giant will need to reduce its retained portfolio from $890.8 billion reported at the end of January to $825.8 billion by the end of September, according to Citigroup research.

That is on top of the $6.4 billion of mortgage securities Fannie Mae sold in January. Freddie Mac has also been an active seller, dumping $7 billion in the same month.

To Deutsche Asset Management's Chepolis, who oversees approximately $25 billion in MBS, this is not a positive development for MBS.

Headwinds Ahead For Mortgage Stocks

2005-03-10T12:20:00.000-08:00

Bill Martin, FindProfit, 03.10.05, 9:55 AM ET

NEW YORK - I spent this past Monday in New York City, visiting with a range of our hedge fund industry subscribers and contacts. These meetings always provide us with a new flow of ideas and perspectives and give us a chance to test some of our own ideas against some of the best investment minds around.

One of my more intriguing meetings was with a subscriber of ours who covers the financial services sector for a mid-sized hedge fund. His particular expertise is subprime financing, an area that is right up our alley given our short positions in Accredited Home Lenders (nasdaq: LEND) and Indymac (nyse: NDE).

Like us, this contact is a bear on the real estate and financial services markets. He, too, thinks that things have gotten too hot in the consumer real estate market and that lending standards have degraded terribly. For the year ahead, he thinks we'll see spreads continue to narrow and overall rates continue to rise, while credit quality will begin to show its ugly side. He painted some outright doomsday delinquency scenarios for some of the subprime focused mortgage REITs.

For the mortgage REIT sector as a whole, he sees earnings quality diminishing this year as funds use balance sheet expansion and increased leverage to offset narrowing spreads and a more competitive environment. By next year, most of these funds will find themselves max leveraged right into the teeth of a toughening real estate and credit environment, while interest rates will likely be higher. As a result, he sees earnings falling by 30% at the best-run mortgage REITs next year, while the worst run REITs could struggle to break even. Add in a rising interest rate backdrop, which will lower the value of those earnings, and this group could face a pending double whammy.

For those who do business in the subprime origination market (this is the hottest part of the market right now, as weaker borrowers increasingly "stretch" to afford more expensive real estate), like Accredited Home and Indymac, he doesn't see the recent competitive origination pricing environment abating anytime soon. To support his view, he said that barriers to entry for the origination business are low and industry capacity remains high, while many of the hyper-efficient larger players--such as Countrywide (nyse: CFC)--are increasingly competing in the subprime market.

Our contact was kind enough to provide three short ideas, all of which intrigued us, which he said we could share.

The first was PHH Corp. (nyse: PHH). PHH was just recently spun out of Cendant (nyse: CD), after Cedant failed to find a buyer for its mortgage operations. The combined company includes both mortgage operations, as well as a corporate fleet management (for cars) service. The two businesses are completely unrelated, and our contact argues that Cedant was only able to get the deal done by including the fleet business. He says that the mortgage operation is a very poorly positioned business, and that the total company remains overvalued--even at these values.

The second idea was combination mortgage REIT and investment bank, Friedman Billings Ramsey (nyse: FBR). After posting a red-hot 2004, he said that FBR's underwriting business is going to struggle this year, as investors increasingly lose their interest in mortgage REIT, subprime REIT and related deals. This area is FBR's specialty, and if the poor performance of recent FBR deals like ECC Capital (nyse: ECR) and Saxon (nasdaq: SAXN) are any indication, the company has already seen its high water mark of deal volume for this cycle.

He added that because FBR participates in most of its own offerings (i.e., buying for its own portfolio), the company's book value has and will continue to come under pressure.

Finally, while the mortgage REIT side of FBR should be able to hit its numbers in 2005, due to balance sheet expansion, those earnings should come under pressure next year (for the reasons outlined above). He argues that a more fair valuation for FBR is $13 per share, not the $19.25, or 2 times book value it currently commands.

The other short idea he shared is H&R Block (nyse: HRB). Unknown to many investors, H&R Block owns a significant mortgage business. In fact, this unit has powered a good chunk of the company's earnings gains in recent years. H&R Block shares fell last year due to the rising pressures in this business, but have recently spiked up due to an upbeat earnings report. A lot of the earnings excitement came from a surprisingly strong performance in HRB's mortgage unit. Our contact believes that there are quality of earnings issues in that recent mortgage unit performance, and he says that the company chose to sacrifice quality in favor of quantity--as evidenced by the huge increase in fourth-quarter originations versus more typical levels. He is shorting this recent HRB strength.

We haven't done any recent work on these ideas (we've followed FBR and HRB in the past), but our contact is talking our language on these ideas, given our existing real estate/credit quality headwinds theses. We plan to zero in a bit more on each of them, specifically focusing on the HRB idea, which appeals the most to us.

Excerpted from a March 8, 2005, report in FindProfit.

Geography plays key role in reverse mortgage loan limits

2005-03-09T10:32:00.000-08:00

Imbalance exists between urban, rural areas
Tom Kelley

Wednesday, March 09, 2005

The increased loan ceilings on the nation's most popular reverse mortgage program will do little to help senior homeowners in many of Western Washington's rapidly appreciating neighborhoods.

That's because the Home Equity Conversion Mortgage (HECM), insured by the Federal Housing Administration, stipulates the single-family loan limit for the particular area where the home is located affects the size of reverse mortgage that a borrower can get. The FHA loan limit varies by county and typically changes annually in an attempt to keep pace with rising home prices.

The FHA loan ceilings are archaic and too broad. They do not help a homeowner with even a marginally expensive home in the countryside because loan ceilings are lower for non-metropolitan and rural areas and higher for higher-priced metropolitan areas. Some counties have FHA limits between these two extremes.

However, once the value of a home exceeds the FHA loan limit for the area, the size of the HECM can't get any larger. What would significantly improve the product is a single national limit, enabling homeowners with expensive homes in low-cost regions the ability to tap as much equity as those elders in high-cost areas of the country. The ability to borrow should not be curtailed by geographic location.

The common misperception of prospective borrowers is that they can qualify for a reverse mortgage equal or close in size to the value of their home, or at least the local FHA loan limit. This isn't the case. The actual loan amount will be equal to a smaller amount than these two figures (but still a substantial fraction of the home's value), in order to ensure that there will likely be sufficient equity left in the home when the loan comes due to assure full repayment.

A very rough rule of thumb to estimate your maximum reverse mortgage loan amount is to use your age, minus five years, as the percentage you can take from your net equity. For example, if you are a 75-year-old person with a $200,000 home owned free and clear in a mid-expense area of the country, the maximum reverse mortgage line of credit you could expect to receive would be $137,000 before closing costs. (Seventy percent – 75 minus 5 – of $200,000 is roughly $137,000). And, because of the complex formula of most of the reverse mortgage products, mom and dad probably will be unable to tap all of the equity in the family home anyway.

The size of a reverse mortgage is also affected by the type of loan chosen. In addition to the HECM, which accounted for 90 percent-95 percent of all reverse mortgages made in 2004, there are two other reverse mortgage products. One is the Fannie Mae Home Keeper loan. The other is Cash Account, a proprietary "jumbo" reverse mortgage product developed by Financial Freedom Senior Funding Corp., based in Irvine, Calif. The Cash Account is usually taken out on more expensive homes because it permits a much larger reverse mortgage than HECM or Home Keeper.

The borrower (minimum age 62) has several choices on how to take out the funds from a reverse mortgage. The proceeds can be taken as a lump sum, line of credit, fixed monthly payment or a combination. For most lines of credit, an added benefit is that the unused amount of the line of credit grows automatically each year based on a formula. In some cases, the credit line grows at a rate half a percentage point higher than the interest rate on the loan.

"Folks with million-dollar homes often have the same needs as those with lower home values," said Financial Freedom's Jim Mahoney. "They are taking the money and using it in ways they never thought they would because their incomes have been fixed - or perhaps falling with the performance of their stock portfolios. This is way very safe, secure way for seniors to stay in their home, continue to gain in the appreciation and pass on a nice estate to the heirs with the leftover equity.

"We believe our time has come. If you look at the fact that home values continue to increase in many parts of the country, this is great liquidity tool for seniors in their retirement planning, estate planning and just meeting their day-to-day cash needs."

The reverse mortgage industry has made positive strides, especially since 2002. The advent of the streamline refinance, ability to lock the expected interest rate at application or closing (whichever is lower) and the consumer protection requirement of a mandatory counseling before application all took place within an 18-month period.

Create your own debt reduction

2005-03-08T12:54:00.000-08:00

Biweekly plan can pay off fast with discipline
By SCOTT BURNS
Universal Press Syndicate

The key to debt reduction is principal payments. The more you pay down the principal, the faster the loan will be paid off.

Note, I have not mentioned simple interest. Increasing the number of payments you make on the same loan has virtually no impact on your debt, whatever the biweekly mortgage zealots out there claim.

You can understand with a simple illustration. You can duplicate it for yourself if you have a financial calculator. Suppose that you want to borrow $100,000 and that the interest rate is 6 percent. A normal 30-year mortgage with 12 monthly payments a year will set you back $599.55 a month. That's $7,194.60 a year for 30 years.

What would happen if you made two payments a month?

Calculate the interest over 24 periods a year instead of 12 and dial in 720 monthly payments over 30 years and your payment will be $299.64 twice a month. That's $7,191.36 a year for 30 years. Increasing the number of payments will save you a whopping $3.24 a year in interest. Not a lot of magic there. It also wouldn't work very well if you had to mail the payments because the additional postage (12 times 37 cents, or $4.44) would cost more than the interest saved.

But there's still hope.

Suppose you could arrange a money pipeline to your lender so you could make daily payments. Suppose the additional transactions were free. Wouldn't simple interest, with daily principal payments, do magical things?

Sorry.

The same $100,000 loan would cost $19.69 a day. That's $7,188.41 a year. Your savings over the traditional 12 payments a year would be $6.19 a year. No one on the planet will get out of debt simply by increasing the number of payments in a year.

What will reduce debt quickly?

Pay more per payment. This will increase the amount of principal paid per period. In the next time period there will be less debt outstanding to accrue interest. As a result, your next payment will require less interest, leaving more money to pay principal. The more you increase the principal payment per period, the faster your debt will disappear.

Therein lies the so-called magic of biweekly mortgages. In a biweekly mortgage the payment on a traditional monthly payment mortgage is divided in half, and you make 26 payments. That means you make the equivalent of 13 monthly payments a year, not 12 payments. So you are paying more principal. Your mortgage will be paid off faster.

How much faster?

You can figure it out using the same financial calculator. Take the monthly payment, divide by 12, and add that amount to each of 12 monthly payments. Do this and you have created the equivalent of a biweekly mortgage. You are paying in an amount equal to 13 payments a year.

The $100,000 mortgage for 30 years at 6 percent, for instance, would have a payment of $649.51 a month ($599.55 plus $49.96). That extra principal payment would pay the loan off in 294.5 payments or 24.5 years. You'd knock 5.5 years off your mortgage and save $39,268 in interest.

Make the equivalent of 14 mortgage payments a year, adding $99.92 to each payment, and your 30-year mortgage will be paid off in 251.5 payments, or about 21 years. That's a savings of nearly nine years and $65,051 in interest.

It doesn't take much extra to get impressive results.

The fastest way to get out of debt altogether is to use the power of principal payments to accelerate debt reduction. Both the MS Money and Intuit Quicken software packages have calculators that allow you to enter your various debts and create scenarios for getting out of debt.

In both calculators, the key to rapid debt payoff is to continue a constant total payment even after an obligation is paid off. The result is a quick pyramiding of extra principal payments, even if you don't increase your original total debt payment. The Quicken debt reduction calculator is available as an online tool at: www.quicken.com/planning/debt.

For people with multiple credit cards, the constant total payment strategy will produce a radically fast reduction in debt. All they have to do is stop adding new debt.

US mortgage bond prepayments rise in Feb - Freddie

2005-03-07T10:13:00.000-08:00

Mon Mar 7, 2005 10:22 AM ET
By Julie Haviv

NEW YORK, March 7 (Reuters) - Prepayments on U.S. mortgage bonds increased last month in response to a drop in mortgage rates in late January and early February, Wall Street analysts said on Monday.

Analysts estimated that about $49 billion in fixed-rate mortgages that backed bonds guaranteed by Fannie Mae (FNM.N) and Freddie Mac (FRE.N) were paid down in February, compared to January's $46 billion.

February's prepayment speeds reflect borrower response to an average 30-year mortgage rate of 5.77 percent, according to Credit Suisse First Boston analysts.

February's prepayment changes on mortgage-backed securities came in line to slightly faster than Wall Street expectations, with the speed on Freddie Mac's mortgage bonds increasing more than Fannie Mae's issues.

After last month's prepayments, net issuance of fixed-rate mortgage bonds was approximately negative $6 billion versus the positive $8 billion registered in January.

Paydowns on fixed-rate MBS are seen rising by 35 to 40 percent to $68 billion in March, according to JP Morgan. That is because there are 3.5 additional collection days in the month and seasonal turnover is 30 percent higher, the firm said. Also, the Mortgage Bankers Association's refinancing index implies a significant pick-up in activity.

JP Morgan said the trend upward should end in April where it expects a drop of about 10 percent, due to the recent back-up in mortgage rates and two fewer collection days.

Fannie Mae faces billions more in new losses

2005-03-03T11:29:00.000-08:00

Report: Regulator may force another restatement
Reuters
Updated: 8:33 a.m. ET March 3, 2005

NEW YORK - Fannie Mae may have to recognize as much as $2.8 billion in additional derivative losses because of new accounting concerns raised by its federal regulator, The Wall Street Journal reported in its online edition on Thursday, citing sources familiar with the matter.

The losses would be in addition to the estimated $9 billion in losses related to derivatives that the mortgage giant already has said it will recognize as it prepares to restate its financial results.

The Journal’s estimate of new losses comes after Fannie Mae’s statement last week that its regulator, the Office of Federal Housing Enterprise Oversight (OFHEO), had identified new issues with its accounting. But its statement did not include specific details or indicate the likely size of losses.

The Journal based its estimate of the new losses on Fannie Mae’s second-quarter 2004 financial report, the most recent report it has filed with the Securities and Exchange Commission, which indicated the company had $2.76 billion in cumulative losses on derivatives called mortgage commitments, or undertakings to purchase mortgages.

While Fannie Mae reflected those losses on its balance sheet, the Journal said it didn’t include them in its earnings or regulatory capital, and would therefore have to be included in any restatement.

U.S. mortgage rates unchanged Wednesday - BestInfo

2005-03-02T13:12:00.000-08:00

Wed Mar 2, 2005 03:52 PM ET

NEW YORK, March 2 (Reuters) - The average rate on a 30-year U.S. mortgage with no upfront points was unchanged on Wednesday at 5-7/8 percent, according to BestInfo Inc.

If the mortgage market on Thursday continues in its current direction, rates may remain the same.

The 30-year mortgage rate with one upfront point was unchanged at 5-5/8 percent.

The 30-year mortgage rate with two upfront points was unchanged at 5-3/8 percent.

The Mortgage Point Monitor is provided exclusively to Reuters by BestInfo. The company, formerly BestRates Inc., is a Dover, Vermont-based provider of mortgage market analysis.

JPMorgan to Spin Off Buyout Unit to Avoid Conflicts

2005-03-01T12:45:00.000-08:00

March 1 (Bloomberg) -- JPMorgan Chase & Co., the second- biggest U.S. bank, plans to spin off its main buyout business next year after clients complained that the company was putting its interests ahead of theirs.

JPMorgan will separate JPMorgan Partners LLC, which has about $13 billion of assets, after the firm invests all of its current fund, the bank said in a statement today. Jeffrey Walker, 49, who helped start JPMorgan Partners in 1984, will remain as head of the company's 120 investment executives.

The New York-based bank, which has a market value that's about half as large as Citigroup Inc.'s, is reorganizing four weeks after Bill Price, co-founder of U.S. buyout firm Texas Pacific Group, said competition from JPMorgan may force him to steer advisory and financing work away from the firm. JPMorgan competitors, including Credit Suisse First Boston and Deutsche Bank AG, already have taken steps to divest their buyout units.

"The decision doesn't surprise me because tensions in the industry have been talked about for some time," said Mark Pacitti, a partner at Deloitte & Touche LLP in London. "Buyout firms are the source of substantial fees for banks."

JPMorgan, which invested about $4.2 billion in JPMorgan Partners's current $6.5 billion fund, plans to invest no more than $1 billion in JPMorgan Partners's next fund. Stephen Murray, head of JPMorgan Partners's buyout group, and Chief Investment Officer Arnold Chavkin will stay in their positions after the separation, JPMorgan spokeswoman Brooke Harlow said.

Banking Fees

"We have determined that they can best achieve their desired scale independent of JPMorgan," said David Coulter, JPMorgan's vice chairman, in the statement. Shares of JPMorgan rose 65 cents, or 1.8 percent, to $37.19 at 12:27 p.m. in New York Stock Exchange composite trading.

JPMorgan will retain One Equity Partners LLC, a smaller buyout business with $2 billion assets that was acquired in last year's takeover of Chicago-based Bank One Corp. Earlier today, the Wall Street Journal reported that JPMorgan Partners will be separated from the parent company.

Bank One Chief Executive James Dimon is now president of JPMOrgan.

Buyout firms, which typically use loans and bonds to fund two-thirds of each takeover, boosted their acquisitions by 45 percent last year to a record $180 billion, making the firms important sources of Wall Street profits, according to data compiled by Bloomberg. New York-based Blackstone Group LP, manager of the world's biggest buyout fund, has said it alone paid $1.4 billion to investment banks in the past two years.

Goldman's Stance

Goldman Sachs Group Inc. is pursuing a strategy of investing alongside buyout firms rather than competing against them for stakes in closely held companies. This tactic has helped Goldman gain market share in advising and arranging financing for buyouts.

New York-based Goldman was the world's top adviser of leveraged buyouts in 2004, with a 27 percent share, up from 22 percent in 2003, Bloomberg data show.

JPMorgan Partners has invested more than $15 billion during its 21-year history. That included $2 billion of investments last year in companies such as IMO CarWash Group Ltd., a developer of automated car washes in the U.K. It also owns stakes in PQ Corp., a Valley Forge, Pennsylvania-based maker of chemical and glass materials, and ABB Ltd.'s oil, gas and petrochemicals business.

The buyout business had gains of $1.43 billion in 2004.

Cutting Capital

In December 2002, JPMorgan cut to 10 percent from 20 percent the share of the bank's capital it committed to the buyout unit, after a spate of investment losses hurt earnings. The unit had a gain of $27 million in 2003, compared with a $733 million loss in 2002.

"This is in line with what they've been preaching and in line with what Jamie Dimon has done in the past: A commitment to strong, steady growth, and taking out volatility," said Hilary Hayes, who helps manage $4 billion, including JPMorgan shares, at Victory SBSF Capital Management in New York. "Things don't stay sexy forever; 2001 and 2002 were fairly painful in this line of business."

Texas Pacific, whose takeovers include the Burger King fast- food chain, last year lost out to JPMorgan in the purchase of U.K. drugmaker Warner Chilcott Plc.

JPMorgan teamed with New York-based Credit Suisse First Boston in October to outbid Texas Pacific, Blackstone Group LP and Kohlberg Kravis Roberts & Co. for Warner Chilcott. The winning bid was 1.62 billion pounds ($3.1 billion), trumping the losers' 1.56 billion-pound offer.

"It's clearly the case they had ambitions to build a very large private equity firm," said Chris Davison, a buyout industry analyst at Almeida Capital Ltd. in London. "It appears to have come to the point where it was impossible to achieve" that within JP Morgan.

CSFB's Exit

Credit Suisse Group, CSFB's Zurich-based parent, announced plans in December to spin off its buyout unit. "We don't want to compete with our clients," said Brady Dougan, 45, CSFB's chief executive, in an interview in January.

Texas Pacific's Price said in an interview in Davos, Switzerland, on Jan. 27 that he planned to give more work to CSFB because of the bank's decision.

JPMorgan's Harlow said as recently as January that the bank was "committed to this business."

Morgan Stanley, the world's second-largest securities firm, and Deutsche Bank, Europe's No. 3 bank, split off their buyout units during the past two years. UBS AG, Europe's largest bank, stopped making buyouts.

Mortgage rates keep existing home sales strong

2005-02-28T13:14:00.000-08:00

Associated Press

Sales of existing homes edged down a slight 0.1 percent in January as attractive mortgage rates continued to support strong demand in the housing market, a real estate trade group reported.

The National Association of Realtors said existing single-family homes and condominiums were sold at a seasonally adjusted annual rate of 6.80 million units in January, down from a revised 6.81 million units in December.

The median price for a home sold was $189,000 in January, an increase of 10.5 percent from January 2004.

The strength in January came from sales of condominiums which rose by 2.3 percent to an annual rate of 858,000 units. This offset a 0.5 percent decline in sales of single-family homes which dropped to 5.94 million units.

Even with the small overall decline in sales, demand for homes remained strong, according to the group. The supply of homes fell to a record low of 3.7 months, the amount of time it would take to sell all of the homes on the market at the January sales pace.

Low mortgage rates spur luxury home sales

2005-02-25T11:05:00.000-08:00

By Daniel Taub and Kathleen M. Howley, Bloomberg News

California luxury-home prices surged last year, led by a record annual increase of 27.7 percent in Los Angeles, as low interest rates spurred purchases.
The average price of luxury homes in the Los Angeles area gained $428,000 to $1.97 million from a year earlier, according to a study Thursday by San Francisco-based First Republic Bank. The bank defines luxury homes as those valued at more than $1 million.

Low interest rates and a limited supply of luxury homes in California contributed to the rise in prices, First Republic Bank said. The rate on a 30-year fixed mortgage averaged 5.84 percent last year, compared with 6.96 percent over the preceding five years, according to mortgage buyer Freddie Mac.

In San Diego, the average luxury home price last year rose 16.4 percent to $1.84 million, and in San Francisco it increased 13.7 percent to a record $2.55 million.

Some common features of homes in First Republic's index are 3,000 to 6,000 square feet of space, three to six bedrooms, and three to six bathrooms, the bank said. First Republic Bank began compiling the Prestige Home Index with Case Shiller Weiss, a Cambridge, Mass.-based home-price research company, in 1995. The index uses data going back to 1985.

The index includes homes in the cities of Beverly Hills, Malibu and Pacific Palisades near Los Angeles; the Northern California neighborhoods of Piedmont, Tiburon and Sonoma; and the San Diego communities of Coronado, La Jolla and Carlsbad.

Los Angeles and Salinas were the least affordable U.S. metropolitan housing markets in the fourth quarter of 2004, according to a study of 160 U.S. markets released today by the National Association of Home Builders in Washington and Wells Fargo & Co., based in San Francisco.

In Los Angeles and Salinas, only 5.2 percent of residents earning a median income could afford to buy a median priced home, according to the study. The two cities tied as the least affordable market, at No. 159. In comparison, Lima, in northwest Ohio, was the most affordable U.S. city, with 94 percent of its residents able to buy an $84,0000 median-priced home.

Cumberland, Md., was the second most affordable city, with 92 percent of median-income households able to buy a $71,000 median-priced home.

Make rising home value work for you

2005-02-24T09:50:00.000-08:00

Your Money
Sandra Block
USA Today

Your home may not look like a castle, but if you live in a hot real estate market, people will pay a king's ransom to buy it.

Consider, for example, the lucky denizens of Las Vegas. The median home price in that metropolitan area rose 47% in the fourth quarter from a year earlier, according to the National Association of Realtors. A record 62 metro areas reported double-digit increases during the fourth quarter.

For folks who bought their homes before the boom, this is heady stuff. But short of selling and moving to Beaumont, Texas — where the median home price is $87,800 — how do you take advantage of your home equity? Some ideas:

Torpedo PMI. Home buyers who put less than 20% down on their mortgage typically have to pay private mortgage insurance. Under the federal Homeowner's Protection Act, your lender must cancel PMI when your equity reaches 22% of the original value of your home. The law applies only to loans made on or after July 29, 1999. And because automatic termination is tied to the original value of your home, not its current market value, reaching the threshold can take years.

However, if your home has appreciated in value, you may be able to jettison PMI sooner. Here's how:

If you've lived in your home for at least two years and your home value has increased, ask your lender to cancel your PMI. Your lender probably will require an appraisal, and you'll have to pay for it, says Keith Gumbinger, vice president of HSH Associates, a consulting firm. Even after the appraisal, there's no guarantee your lender will agree to scuttle PMI.
Refinance your mortgage. When you refinance, your home will be appraised. If your new loan makes up less than 80% of your home's value, you can say goodbye to PMI. Mortgage rates are still at historic lows, so you should be able to refinance for the same rate you're paying now, says Bob Walters, chief economist for Quicken Loans. But by eliminating PMI, you can reduce your payments by hundreds of dollars a year, he says.

Shift into reverse. The real estate boom has created a quandary for many older homeowners: Their home may be worth $1 million, but they can't afford to buy groceries.

One solution is to downsize, but many senior citizens don't want to move. For those homeowners, an increasingly popular option is a reverse mortgage.

A reverse mortgage allows senior citizens to earn tax-free income by tapping the equity in their homes. The loan doesn't have to be repaid until the homeowner moves, sells the house or dies.

You must be at least 62 to qualify for a reverse mortgage, and if the home is jointly owned, both owners must be at least 62. Lenders base the size of the loan on three factors — the age of the borrower, current interest rates and the value of the home — says James Mahoney, chief executive of Financial Freedom, one of the nation's largest providers of reverse mortgages.

Because interest rates are low and home values are high, now is an ideal time to consider a reverse mortgage, Mahoney says. You can arrange for monthly payments, a lump sum, a line of credit or a combination.

The maximum loan limit for a federally insured Home Equity Conversion Mortgage, which accounts for about 90% of reverse mortgages, is $312,896. Financial Freedom also offers a "jumbo" product for qualified homeowners who want to borrow more.

If you think you might move in a year or two, a reverse mortgage probably isn't a good idea. Upfront costs, which are similar to those for a traditional mortgage, can be steep. While those costs will be rolled into the balance, it doesn't make sense to pay them for a short-term loan.

For more information about reverse mortgages, check out the AARP's Web site, www.aarp.org/revmort. For a list of lenders, go to www.reversemortgage.org.

Retire high-cost debt. This is probably the most popular use for home equity, and at today's rates, it's still smart. The average interest rate on a home equity line of credit is 5.79%, vs. 13.4% for a variable-rate credit card, according to Bankrate.com. Rates on home equity lines are variable, so the interest rate could increase. But borrowing from your home remains "the cheapest form of financing you can get," Walters says.

There are lots of other ways you can spend your equity: Buy a second home, for example, or update your kitchen. But don't get carried away. Home prices have been known to decline. If that happens, your equity will provide a much-needed cushion. And an unused line of credit can provide low-cost financing in an emergency.

"Home equity is your hole card," says Phillip Cook, a financial planner in Torrance, Calif. "Don't do anything stupid with that asset."

Mortgage Applications Down Last Week

2005-02-23T10:48:00.000-08:00

Feb 23, 2005 — NEW YORK (Reuters) - Applications for U.S. home mortgages decreased last week as a drop in home purchasing activity offset a marginal increase in refinancing, amid a rise in interest rates, an industry group said on Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity decreased 0.6 percent to 727.9 in the week ended Feb 18, after falling 0.5 percent in the MBA's prior week survey.

A sharp rise in interest rates may have dampened demand for mortgages.

Fixed 30-year mortgage rates averaged 5.67 percent last week, excluding fees, up 17 basis points from 5.50 percent the previous week.

Despite the increase, mortgage rates remain historically low, which encouraged a modest amount of U.S. consumers to refinance their existing loans.

The MBA's seasonally adjusted index of refinancing applications climbed 0.1 percent to 2532.0, adding to the 4.1 percent gain the prior week. It marked the fifth gain in the past six weeks.

That is also the highest level of refinancings since the week ended April 16, 2004 when the index reached 2,550.3.

Refinancings made up 49.3 percent of all mortgage applications last week, down from 49.9 percent the previous week.

But low mortgage rates failed to spur home purchasing activity last week, possibly due to an increase in adjustable rate mortgages which are favored by many new home buyers.

The MBA's purchase index, a gauge of loan requests for home purchases, declined 1.3 percent to 417.8, after dropping 4.8 percent the previous week.

Applications for adjustable-rate mortgages made up 30.7 percent of total applications, unchanged from the previous week.

One-year adjustable-rate mortgage rates averaged 4.18 percent, up from 4.10 percent one week earlier.

On Personal Finance | A mortgage that puts interest first

2005-02-22T12:11:00.000-08:00

By Jeff Brown
Inquirer Columnist
Philly.com

Sunday's column on mortgages looked at the pros and cons, given today's interest rates, of the most widely used loans, such as fixed-rate ones and adjustables.

But what about the lesser-known types? Here's a look at one: the interest-only mortgage. To back up for a second, the monthly payment on an ordinary mortgage has two main components. One is principal, which pays back a portion of the money you borrowed. The other is interest - a payment for the use of the lender's money. With an interest-only mortgage, the payment covers just the interest. You pay the principal later.

Since the monthly payment does not include principal, it's lower than it would be on a conventional loan of the same size. A borrower can save some cash or qualify for a larger loan. But over the long term, the interest-only borrower pays more. Here's why:

Standard fixed-rate mortgages are "amortized" over a given number of years so that the monthly payment is always the same. It's as if the remaining loan balance is multiplied by the interest rate each year to determine the interest owed that year.

During the first year, when the outstanding principal is very large, the lion's share of each month's payment is for interest. Over the years, principal gets smaller. The interest payment therefore gets smaller, too, and an ever-larger portion of the fixed monthly payment goes to principal.

In the final year, with just a small principal remaining, everything's reversed: Virtually all of the payment is for principal; just a tad, for interest.

With an interest-only loan, the principal doesn't get smaller. So it's like making the first month's payment over and over again. (For what follows, my thanks to HSH Associates, the Pompton Plains, N.J., mortgage-data firm.)

On a $100,000 loan for 30 years at 6 percent, the monthly payment on a conventional mortgage would be $600 - $500 in interest, $100 in principal. With an interest-only loan, you'd pay just the $500 in interest.

Although this sounds good, the interest-only deal will cost more in the long run. With one type, for example, you pay only interest for the first 15 years, then interest and principal for the next 15. In every month, the remaining principal is larger than it would be with a standard loan, so the interest payment is bigger.

Total interest with a $100,000 conventional fixed-rate loan at 6 percent for 30 years would be about $116,000. Use an interest-only loan with the same rate but no principal payment for 15 years, and total interest would come to $142,000.

With the interest-only loan, the borrower pays $100 a month less for the first 15 years - $500 a month instead of $600. But in the final 15 years, she pays $844 a month due to the large debt remaining. Because the principal is high, interest payments are high. And the principal has to be paid off in 15 years instead of 30, so monthly principal payments are bigger than with a conventional loan. Why would anyone get an interest-only loan if it would cost more in the long run? As I said, some are drawn by the prospect of qualifying for bigger loans. Some have other uses for that $100 a month. And others - gamblers and folks with sophisticated approaches to finances - see investment opportunities.

Suppose you got the interest-only loan and invested the $100 you'd save during each of the first 180 months. At an 8 percent annual return, that would grow to $34,600 in 15 years. With a good enough investment return, this fund could more than offset the high monthly payments in the final 15 years - you'd earn a profit.

A real pro would also consider inflation and other factors, figuring that every dollar saved now might be worth more than two or three inflation-ravaged dollars spent in the distant future.

But unless you know how to do those sophisticated financial calculations, best steer clear of interest-only deals.

For most of us, they're too hot to handle.

Tax deductions vary for home-equity loans

2005-02-21T11:42:00.000-08:00

Many borrowers don't realize they might not be able to deduct all of the interest they pay on home equity loans.

BY SUE McALLISTER
Knight Ridder News Service

Low mortgage interest rates made 2004 another big year for refinancing. And home-equity borrowing in the United States reached a record-high level last year, according to a recent study.

Americans took out $431.3 billion of home equity loans and lines of credit, according to SMR Research, a market research firm in New Jersey, 35 percent more than in 2003.

Yet many borrowers don't realize they might not be able to deduct all of the interest they pay on home equity loans. That would depend on how much they borrowed and what they used the money for. Taxpayers subject to the Alternative Minimum Tax face stricter limitations on what they can deduct.

First, it's important to know that in ''tax-speak,'' there are two kinds of mortgage debt: home acquisition debt and home equity debt.

Acquisition debt is a mortgage or mortgages you take out ''to buy, build or substantially improve'' your main or second home. In general, you may deduct the interest you pay on up to $1 million in home acquisition debt.

So let's say you took out a home equity loan and you used it to remodel your kitchen for $40,000. For tax purposes, that amount is considered part of your ''acquisition'' debt because it was used to improve the home. You can deduct the interest on that debt, as long as your total acquisition debt is $1 million or less.

From the IRS's standpoint, home equity debt is different. It is money you borrowed from your equity and used for purposes other than buying, building or improving your home. Only interest paid on $100,000 of equity debt is deductible as mortgage interest.

If you used a home equity loan to pay your child's college tuition, for example, you can deduct only the interest you paid on the first $100,000.

For more information, refer to IRS Publication 936, ''Home Mortgage Interest Deduction,'' or consult a tax advisor.

Fed Chief Urges Cutback in Scale of 2 Big Lenders

2005-02-18T11:43:00.000-08:00

By EDMUND L. ANDREWS
NYTimes.com

WASHINGTON, Feb. 17 - The Federal Reserve chairman, Alan Greenspan, urged Congress on Thursday to sharply scale back Fannie Mae and Freddie Mac, the giant and troubled government-sponsored mortgage companies.

His comments were the first on the matter since Fannie Mae acknowledged major violations of accounting rules and forced out its chief executive in December. Mr. Greenspan said that the two companies had grown so big that they posed a "substantial risk" to the economy.

Under pressure from banking regulators and the Securities and Exchange Commission, Fannie Mae is being forced to restate its financial results for the last three and a half years and may have to reduce its earnings by $9 billion. Freddie Mac went through similar trouble in 2003, when it acknowledged that it had used accounting gimmicks to smooth out its earnings between strong and weak years.

Mr. Greenspan, who has long criticized both companies, said they had been able to borrow almost unlimited amounts of money at below-market rates by virtue of the widespread but false impression among investors that the federal government would ride to their rescue if necessary.

"Given no limits on what they can put in their portfolios," he told members of the House Financial Services Committee, "they can, by merely their initiative, create an ever larger increase in portfolio, which, given the low levels of capital, means they have to engage in very significant dynamic hedging to hedge interest rate risks."

"We have found no reasonable basis for that portfolio above very minimum needs," Mr. Greenspan continued, proposing that the two companies reduce their portfolios of mortgage loans to about $100 billion or $200 billion from a combined total of $1.7 trillion today.

A spokeswoman for Fannie Mae had no comment on Mr. Greenspan's testimony.

In the past, the two big financiers have argued that they provide a significant savings to home buyers through their programs and that holding mortgage portfolios has always been part of their business.

Mr. Greenspan's comments came as Congress and the Bush administration attempt sweeping changes in how Fannie Mae and Freddie Mac are regulated.

Both companies were created by Congress to reduce the cost of home loans, and do so primarily by buying up mortgages and bundling them into securities that are then sold in the financial markets.

Mr. Greenspan emphasized that the companies did a good job of securitizing home mortgages, but he said they were taking on too much risk by letting their own portfolios of loans balloon in the last decade.

"If you get large enough in that type of context and something goes wrong, then we have a very serious problem," he said in response to a question from Representative Richard H. Baker, Republican of Louisiana. "At this stage, the risk is, as best I can judge, virtually negligible. I don't believe that will be the case if we continue to expand."

Mr. Baker, who is among those preparing legislation to regulate "government-sponsored enterprises" like Fannie Mae and Freddie Mac, made clear that he wanted to slow the companies' borrowing and expansion. "I have come to the conclusion, in view of the G.S.E.'s portfolio growth over the last several years, that the rate of growth is indeed a concern," he said.

Many Bush administration officials agree, with some characterizing Fannie Mae as less a mortgage company than an enormous hedge fund.

But the two companies have powerful political support and have been able to fend off restrictions for years. Supporters include the real estate brokerage industry as well as home builders and many mortgage lenders around the country. The companies, based in Washington, have cultivated ties to lawmakers and continue to enjoy support from many Democrats.

Mr. Greenspan has taken a dim view of Fannie Mae and Freddie Mac, which enjoy privileges that include a special credit line with the Treasury Department.

The Federal Reserve angered the two companies with a study last year concluding that their shareholders, not home buyers, received most of the economic benefit from their ability to borrow money at below-market rates.

Low mortgage rates baffle Greenspan

2005-02-17T10:26:00.000-08:00

By Brett Arends
Thursday, February 17, 2005
Bostonherald.com

If you haven't refinanced your mortgage recently, perhaps you should.

That, at least, appeared to be the hint from Federal Reserve Chairman Alan Greenspan yesterday during semi-annual testimony to Congress.

Greenspan said he was baffled that long-term interest rates were currently so low, calling it a conundrum" that defied experience.

It may simply be a short-term aberration" of the market, he warned.

Meaning: watch out.

If you're waiting to refinance, this is the opportunity you've been waiting for," argued Greg McBride, economist at Bankrate.com. When even Alan Greenspan is mystified about why rates are this low, that's a pretty clear signal that they will ultimately move higher."

Long-term mortgage rates, which are set by the market, recently hit an 11-month low of 5.59 percent. Usually they rise when, as recently, the Federal Reserve raises short-term borrowing costs.

Ken Taubes, fixed-income director at Pioneer Investments, compared Greenspans's warning to his famous late-1990s caution against irrational exuberance" on Wall Street.

And Putnam economist David Kelly called it fair warning and last call to people still piling into the bond market: Long-term rates shouldn't be this low."

However, Greenspan slyly omitted the remarks from his speech, letting them appear only in his written testimony. Bond prices rose only slightly yesterday.

His spoken address was sunnier, arguing the economy was expanding at a reasonably good pace, with inflation and inflation expectations well anchored" and predicted notable increases in employment" ahead.

Merrill Lynch economist Cathy Bostjancic noted Greenspan also quietly raised this year's economic growth forecast to 3.75 percent from 3.5 percent.

U.S. Housing Starts Rose 4.7% in January to 2.159 Million Pace

2005-02-16T11:37:00.000-08:00

Feb. 16 (Bloomberg) -- U.S. housing starts unexpectedly rose to a 21-year high in January, paced by record construction of single-family homes, the Commerce Department said today in Washington.

The 4.7 percent increase in new construction to 2.159 million housing units at an annual rate followed a revised gain of 14.3 percent the month before. The median forecast of 66 economists surveyed by Bloomberg News called for a decline to 1.925 million. Today's number exceeded every estimate.

Payroll growth and mortgage rates that averaged less than 6 percent last year fueled demand. Rates fell in January, giving a further boost to construction.

"The housing industry remains quite strong," Lynn Reaser, chief economist at Banc of America Capital Management in St. Louis, said before the report.

Building permits, an indicator of future construction, also surged, rising 1.7 percent to an annual rate of 2.105 million, the highest since May. January was the seventh month in which permits exceeded 2 million.

Starts of single-family homes rose 2.7 percent to 1.76 million, the highest ever, from 1.71 million a month earlier. Starts of townhouses, apartments and other multifamily dwellings rose 14 percent to 399,000 thousand units at an annual rate.

New construction rose in two regions, the South and West. In the South, starts rose 18.8 percent to 1.139 million at an annual rate. Starts rose 1.9 percent in the West to 540,000. Starts fell 24 percent in the Northeast to 150,000 and 12.5 percent in the Midwest to 330,000.

Completions Fall

The number of homes authorized but not yet started fell 4.8 percent in January to 204,100. Houses already under construction last month rose 1.3 percent to 1.296 million at an annual rate.

Housing completions fell 0.8 percent to a 1.915 million rate. Single-family completions fell 3.7 percent to 1.599 million.

The average rate on a 30-year fixed mortgage fell to 5.71 percent in January from 5.75 percent in December, and averaged 5.84 percent for all of last year. Those remain within a percentage point of the record low 5.21 percent in June 2003, according to figures from Freddie Mac, a government-chartered provider of mortgage financing.

"These mortgage rates mean the first six months of the year won't be so bad for housing," said Anthony Chan, senior economist at JPMorgan Fleming Asset Management in Columbus, Ohio. "It's not a permanent situation though. Housing is going to slow down in the second half of the year."

Jobs and Housing

The National Association of Realtors and the Mortgage Bankers Association share Chan's expectation of a slowing housing market. The real-estate association forecast earlier this month that sales of existing homes will slow to 6.54 million from 6.68 million, sales of new homes will slow to 1.11 million from 1.18 million and housing starts will slow to 1.92 million from last year's 1.95 million, which were the most since 1978.

Total home sales would still be the second highest on record.

Continued job growth will be more important to the market than interest rates, which the Mortgage Bankers Association forecasts will rise to between 6.25 percent and 6.5 percent by the end of the year as rate increases by the Federal Reserve work their way into mortgages.

"In the long run jobs are the key," said Douglas Duncan, chief economist at the mortgage bankers group. "People who don't have a job are not a very good candidate to buy a home."

Monthly job growth this year may average 174,000, according to a survey of economists published Feb. 14 by the Federal Reserve Bank of Philadelphia. That's down from a previous forecast of 181,000, which was also the average for all of 2004.

Job growth averaged 137,000 a month in November through January, compared with 200,000 in the prior three months.

Best of Two Worlds

Chan says 125,000 new jobs are needed each month to absorb increases in the working-age population.

"We've got the best of both worlds right world right now," Donald Tomnitz, chief executive officer of D.R. Horton Inc., said before the report. "There are jobs being created, incomes are up, unemployment is down and mortgage rates have dropped."

D.R. Horton is the largest U.S. homebuilder by market value. Tomnitz said the Fort Worth, Texas, company expects to deliver 50,000 homes this year, compared with a record 43,567 last year.

Smith Barney analyst Stephen Kim says the homebuilding industry is poised for a fall. Homebuilders' "earnings growth should moderate," he said Feb. 10 in a note to clients.

John Silvia, chief economist at Wachovia Corp. in Charlotte, North Carolina, sees the housing industry creating its own problems as mortgage lenders struggle to meet sales targets elevated by past record years.

"We just don't have the same pent-up demand for housing anymore," Silvia said before the report. "As a result, lenders are turning to less-qualified borrowers to hit their revenue targets. In the short run, you hit your targets, but over the next two or three years delinquency rates are going to go up."

Homeowners’ biggest deductions: mortgage interest, property tax

2005-02-15T11:35:00.000-08:00

SUE McALLISTER
San Jose Mercury News

Owning a home means different things to different people – but all homeowners share one thing in common: an appreciation for the tax breaks they get.

There can be numerous tax benefits to owning a home, the most important being the deduction of real estate taxes and mortgage interest from your taxable income.

If you bought a home last year, the "settlement documents" you received when you closed on your house – also known as a HUD-1 statement – should show how much property tax you paid at that time.

If you paid taxes to your county tax collector during 2004, you should have your own records of those payments.

Note to new homeowners: Hold on to your closing documents. They will help you calculate your taxes when you sell the home.

If you bought a home in 2004, you can also deduct the full cost of any "points" you paid when you got your mortgage, in most cases. A point is equal to 1 percent of the mortgage amount and is usually paid up front in exchange for a lower rate on the loan. Your closing documents will show how much you paid in points.

If you refinanced a mortgage in 2004, however, you must deduct any points you paid for the new loan gradually over the term of the loan. If you refinance again, you can deduct any remaining balance of points at that time, unless you refinance the mortgage with the same lender. If you do that, you’ll deduct the remaining balance over the life of the new loan.

Most homeowners will also be able to deduct the amount they paid in mortgage interest last year. But there are exceptions, so you may want to consult a professional tax preparer, or read IRS Publication 936 on "Home Mortgage Interest Deduction" to ensure your interest payments can legally be deducted.

In general, if your mortgage(s) fit into one of the following categories, you can deduct all the interest you paid:

Mortgages taken out on or before Oct. 13, 1987, called "grandfathered" debt.
Mortgages taken out after the above date and used to buy, build or improve your home, provided that these mortgages and any grandfathered debt equaled $1 million or less.
Mortgages taken out after the above date that were used for something other than buying, building or improving your home, provided these mortgages equaled $100,000 or less, and all the mortgages on the home equaled no more than the home’s fair market value.

Claudia Hill, owner of Tax Mam Tax Services Group in Cupertino, Calif., said many homeowners don’t realize there is a limit on how much interest they can deduct if they used the proceeds of a home equity loan to pay college tuition or credit-card debt, for example.

By Jan. 31, your mortgage lender should have sent you a statement showing the total interest you paid in 2004. If you purchased your main home last year, it will also show deductible points paid during the year.

If you have a second home, you usually can deduct the full amount you paid in mortgage interest for that home, too, provided that your total mortgage debt doesn’t exceed $1 million.

If you rent out your second home, there are some exceptions to this. See Publication 936 for details or consult a tax preparer.

Hawaii mortgage business cooling fast

2005-02-14T13:13:00.000-08:00

By Harold Nedd
Pacific Business News (Honolulu)

With the frantic refinancing boom largely over, earnings are tumbling in Hawaii's mortgage business, enough to take some steam out of the superheated housing market.

Already, some firms have begun downsizing to adjust to the end of the boom.

Others are lending in riskier parts of Hawaii's mortgage market, making loans to people with flawed credit histories and offering products that require only the interest to be paid for the first few years.

One big player has bailed out of the business in the state altogether.

Gayle Ishima, president of Mortgage Bankers Association of Hawaii, said lender profits are being squeezed by falling demand and a pricing war.

"There's excess capacity in the industry and everybody is going after the same group," said Ishima, who left Bank of Hawaii in November 2001 to help form Hawaii Home Loans.

"We used to do $75 million a month on average in 2003, now we're doing $50 million a month," Ishima said.

The industry's problems could be compounded by the accounting woes at Fannie Mae, the government-sponsored company that buys mortgages from lenders to increase the efficiency of the mortgage-finance market.

If Fannie Mae is forced by government regulators to scale back its purchases of mortgages from lenders, it could dampen sales of new and used homes, as could a spike in interest rates.

"That's a concern," said David Todani, senior vice president of the Treasury Department at American Savings Bank, the No. 5 lender in the state. "That probably means our pricing could move higher."

Statewide, the mortgage refinancing business started to cool when the Federal Reserve began hiking interest rates last spring.

Still, mortgage lending in Hawaii hit $27.6 billion last year, up from $26.8 billion in 2003, according to Title Guaranty, which tracks the local mortgage industry.

The outlook for this year isn't as rosy.

Hawaii mortgage lending is expected to drop between 10 percent and 15 percent in 2005 as interest rates rise.

That forecast hasn't stopped the big players from pushing ahead, rapidly taking market share from the rest of the pack.

First Hawaiian Bank, which rose from No. 4 to No. 3 in the rankings, is pushing its loan officers to cultivate relationships with real estate agents, builders and others who influence home buyers' decisions about where to borrow.

"We're relying on strong relationship banking," said Vern Omori, senior vice president of the real estate division. "We're going out to get new business by catering to real estate agents."

To keep its loan pipeline full, Bank of Hawaii, the state's No. 1 residential lender, is pushing home-equity lines of credit and pre-qualifying as many would-be borrowers as possible.

"The mortgage business is not what it used to be," said John Gray, the bank's executive vice president and mortgage banking manager. "We're down by 50 percent. We were doing half the business in 2004 that we did in 2003. But we're bullish on what we think this year looks like for us."

Others such as First Horizon Home Loans, which moved into the market after Washington Mutual moved out last September, are left to fight for the remaining business, employing more liberal lending standards to qualify a broader pool of customers.

It's a strategy that some analysts fear could cause defaults to rise.

"Not everybody wants to deal with the credit-challenged folks," said Hiroshi Imamura, vice president and Hawaii district manager for First Horizon. "But you have to position yourself in this market to do all things, or you're not going to get your share this year."

Eight months before Washington Mutual put out its "for sale" sign, it was lending $200 million a month. That figure plunged to $50 million by the time it pulled out and First Horizon stepped in, Hiroshi said.

"We're below $50 million right now and 90 percent of our staff moved over from Washington Mutual," he said.

Others have struggled to adapt, too.

Hawaii Home Loans' Ishima said they have eliminated 10 mortgage-related jobs from a peak of 100 within the past year.

Ishima said the company also is doing about $10 million less business a month than a year ago.

"We've had a drop in mortgage business," she said, "but not as large a drop as a lot of others."

30-Year Mortgage Rates Decline for Sixth Week

2005-02-11T10:27:00.000-08:00

From Associated Press

Rates on 30-year, fixed-rate mortgages averaged 5.57% for this week, down from 5.63% last week and the lowest since April, mortgage company Freddie Mac said.

Rates on 15-year, fixed-rate mortgages, a popular option for refinancing, fell to 5.10%, down from 5.14% the previous week. Rates on one-year adjustable-rate mortgages dipped to 4.11%, down from 4.23% last week.

Five-year hybrid adjustable-rate mortgages averaged 4.99%, down from 5% last week. These mortgages have a fixed rate for five years and then adjust each year after that.

The nationwide averages for mortgage rates do not include add-on fees known as points. The 30-year and one-year mortgages each carried 0.8 point while the 15-year and five-year ARMs carried a fee of 0.7 point.

Lenders Chafe at Service Fee

2005-02-10T09:45:00.000-08:00

By Matthew Goldstein
Senior Writer
TheStreet.com
2/10/2005 7:07 AM EST

Such is the power of Fannie Mae (FNM:NYSE) and Freddie Mac (FRE:NYSE) in the mortgage market that the two government-formed titans are able to impose a pair of esoteric fees on lenders that end up being paid by nearly everyone who buys a house.

Neither fee is well-known. One covers the cost of having Freddie or Fannie guarantee a loan from default, something they do for the vast majority of mortgages written in the U.S. The other goes to the bank "servicing" one of those mortgages, a process that entails collecting monthly interest payments, assessing late fees and paying taxes and insurance premiums.

Now, a group led by Countrywide Financial (CFC:NYSE) is pushing Fannie and Freddie to cut the current servicing fee in half, a step that could reduce costs for homebuyers. The campaign has opened a deep rift among mortgage lenders and spooked small ones, who fear they will become vulnerable to takeover if their larger brethren are freed from the servicing-fee burden.

The servicing fee currently adds 0.25 of a percentage point to a loan's interest rate, a standard that has held steady for more than a decade.

For mortgage banks that specialize in servicing, the levy can generate a lot of income. So it might seem odd that some mortgage lenders are behind the push.

Nevertheless, the drive to reduce the fee does make sense to a company like Countrywide in light of various intricacies of mortgage servicing, a capital-intensive business that entails a good deal of risk. While loan servicing is a potentially lucrative enterprise, it can be particularly difficult to manage since it is affected by both the direction of interest rates and the behavior of homeowners.

Using a complicated formula, a mortgage bank must predict how much income can be generated from each mortgage over the life of the loan, while estimating prepayment rates and various fees. In the mortgage business, the asset is referred to as a loan's mortgage-servicing right, and lenders must hedge against a fluctuation in its value. To support the necessary interest-rate hedges, a mortgage firm must set aside capital.

Lenders backing the fee reduction are willing to sacrifice a little income if it means setting aside less capital to support their hedging activity. These firms contend the fee reduction will permit them to better spend that capital on developing other areas of business.

That's a big reason Countrywide, which has one of the nation's biggest mortgage-servicing businesses, is lobbying hard for the fee reduction.

"The amount mandated today makes no sense at all based on the cost of servicing,'' said Countrywide Chairman and CEO Angelo Mozilo, during a conference call earlier this week. "We're working very hard on it with both Fannie and Freddie.''

Indeed, Countrywide has good reason to lobby for the fee reduction, after announcing disappointing fourth-quarter earnings on Feb. 2. Profits at the Calabasas, Calif.-company slid 39% from a year ago because its hedging strategy for its $838 billion servicing portfolio failed to predict the sharp convergence of short-term and long-term interest rates.

The hedging snafu at Countrywide, coupled with a $92 million impairment charge on the value of the portfolio, led to a $278 million pretax loss in the servicing business, compared with $83 million in pretax earnings in the fourth quarter of 2003.

A reduction in the servicing fee might have mitigated some of the losses in the firm's servicing business.

"The main issue you hear from the proponents is the cost of capital,'' says Doug Duncan, chief economist for the Mortgage Bankers Association. "Any institution that holds servicing rights will have to hold capital to support those assets.''

Paul Miller, a mortgage finance analyst with Friedman Billings Ramsey, says the industry is putting a lot of pressure on Fannie and Freddie to trim the servicing fee. He says it's become an important issue for mortgage banks, which traditionally have been averse to keeping a lot of capital tied up.

"Countrywide views this as being capital intensive,'' said Miller. "They want to free it up and use it elsewhere.''

So far, Fannie and Freddie, which both have been saddled with major accounting scandals in the past two years, aren't saying much on the topic. The mortgage giants say they are reviewing the issue and have had several meetings with the Mortgage Bankers Association on the matter. It's believed if one of the mortgage finance firms moves to cut the servicing fee, the other would follow.

But not all the big players in the mortgage business are lining up with Countrywide. Indeed, except for Countrywide, few are publicly commenting on the issue. Officials at Washington Mutual (WM:NYSE), Wells Fargo (WFC:NYSE), Bank of America (BAC:NYSE) and PHH (PHH:NYSE), the recently spun-off mortgage arm of Cendant (CD:NYSE), all declined to comment.

While sources said Seattle-based WaMu is siding with Countrywide in the dispute, Wells Fargo is quietly leading the opposition. People familiar with the issue say Wells doesn't believe the cost savings for homeowners will be significant and is fearful about the impact on profits.

Reducing capital allocations is not as big a concern to Wells because big commercial banks are required by bank regulators to maintain far higher capital ratios than mortgage banks.

Mike McMahon, a Sandler O'Neill mortgage banking analyst, says some smaller lenders also oppose trimming the servicing fee because it could lead to consolidation in the industry. For many smaller servicing firms, the lost revenue outweighs any gains they'll get from maintaining less capital in support of their hedging strategy.

"It would make mortgage servicing an even lower-margin business and more competitive,'' said McMahon. "Perhaps it would increase the pace of consolidation."

Ameriquest Mortgage Spots Are Winners in Super Bowl Competition

2005-02-09T11:08:00.000-08:00

By STUART ELLIOTT
Published: February 9, 2005
NYtimes.com

HERE is a look at some of the highlights, lowlights and sidelights of the commercials that appeared during Super Bowl XXXIX on Sunday, traditionally the biggest day of the year for advertising as well as football.

'QUEST' FOR THE BEST Super Bowl advertisers love to conclude their commercials with surprise endings, because such spots typically perform well in postgame consumer surveys. One marketer, Ameriquest Mortgage, proved to be the dark horse of the night with commercials that surprised from start to finish.

Ameriquest ran two hilarious commercials by the Los Angeles office of DDB Worldwide, owned by the Omnicom Group, which were part of an ad package that included sponsorship of the halftime show. The spots cleverly used everyday events to demonstrate the consequences of jumping to conclusions, intended to underline the campaign's theme: "Don't judge too quickly. We won't." In one commercial, a woman walks in on an accident-prone man cooking her dinner to find what appears to be, but is not, a cat-ricide in the making.

Little was expected of Ameriquest's commercials because the company was a first-time Super Bowl advertiser. Also, Ameriquest had not provided previews of the spots to most reporters before Sunday, leaving anticipation at low levels.

But the dark horse galloped across the finish line in fine form; for example, both commercials landed in the top 10 of the USA Today Ad Meter, coming in at No. 2 and No. 9 out of 55 spots ranked during the game, besting brands with far higher profiles like Pepsi-Cola.

"We were pretty methodical," said Kevin Morefield, executive vice president for strategy and marketing at Ameriquest in Orange, Calif., reviewing reels of old Super Bowl spots and asking consumers "what they want in a Super Bowl ad."

"They told us they like ads they've never seen," he added, "so while it feels good to get free promotion before the event, our surprise would have been spoiled."

MONKEY DO, MONKEY DON'T If Ameriquest was a stealth marketer during the Super Bowl, some advertisers with larger public presences also indulged in stealthy marketing.

For instance, CareerBuilder, a company owned by three major newspaper publishers that operates a job-search Web site (careerbuilder.com), gained enormous publicity for three commercials it ran during the game featuring chimpanzees as dysfunctional office workers.

The campaign, by Cramer-Krasselt in Chicago, also has an element intended to be discovered by computer users on their own: a Web site supposedly put up by the imaginary company for which the chimps work, Yeknom Industries (yeknominc.com).

"Yeknom" is "monkey" reversed.

"We're going after 20-somethings with a viral campaign," said Peter G. Krivkovich, the president and chief executive of Cramer-Krasselt, "and if they spend time on the site, it eventually bounces them back to careerbuilder.com."

One section of yeknominc.com is devoted to a tongue-in-cheek call to boycott careerbuilder.com because of what the mock site decries as a "slanderous television campaign that uses editing tricks and disinformation to make Yeknom Industries the butt of their jokes."

WEARING OF THE (EMERALD) GREEN? Another advertiser, the Emerald of California brand of nuts sold by Diamond of California, is joining CareerBuilder in using the boycott parody in a viral campaign.

Last week, reporters received e-mail messages complaining that a leprechaun named Finnegan O'Reilly had been eliminated from the Emerald Super Bowl spot while three other characters - the Easter bunny, Santa Claus and a unicorn - were kept in.

The e-mail messages directed reporters to a Web site (angryleprechaun.com), supposedly put up by the "International Leprechaun Federation." The elaborate spoof includes advisories against visiting the real Emerald Web site (emeraldnuts.com), which in turn includes on its home page a link bearing the label "Don't go to angryleprechaun.com."

"Our national Super Bowl spot was a first-time event for us, so it was very important we made that media spend work in every way," said Sandra McBride, vice president for marketing at the Emerald unit of Diamond in Stockton, Calif. "We thought a great way to expand our footprint was to explore ways to make the spot live online."

The idea was inspired by the fact that an earlier version of the commercial included the leprechaun, Ms. McBride said, adding: "As much as we loved him, it didn't quite fit in. But we had this great material."

I HATE NY? One moment in the Emerald Super Bowl commercial puzzled some viewers. They wondered why the actor playing a father who misleads his daughter, to avoid sharing his Emerald nuts with her, can be glimpsed wearing under his button-down shirt a T-shirt that reads "New York."

The T-shirt raised some eyebrows because, as Bob Garfield, the ad critic for the trade publication Advertising Age, wrote in a review in this week's issue, the father is presented as a selfish liar.

"There's not any particular meaning to it," said Jeff Goodby, co-chairman and creative director at Goodby, Silverstein & Partners in San Francisco, the Omnicom agency that created the Emerald commercial as well as the leprechaun Web site.

The actor may have been wearing the T-shirt, Mr. Goodby said, because at one point there was talk of making the commercial part of an earlier campaign his agency created for Emerald.

That campaign featured silly situations based on phrases that, like "Emerald nuts," begin with the letters "e" and "n," including "Egyptian navigators" and "extreme nurses."

Under that plan, the father was going to represent "exaggerating New Yorkers," Mr. Goodby said, adding: "I don't think there was any reason to pick on New Yorkers. You're really sensitive back there."

IN LINE TO GO ONLINE Many other marketers that bought commercial time during the Super Bowl also sought to gain additional exposure for their pitches by incorporating more transparent Internet elements into their spots.

Many of those efforts paid off, according to data released yesterday by comScore Media Matrix, a division of comScore Networks that measures Web site audiences.

For instance, traffic on Sunday to the Budweiser beer Web site (budweiser.com), generated by commercials bought by Anheuser-Busch, increased 594 percent, comScore Media Matrix reported, compared with the average traffic on the four preceding Sundays. That was also an enormous gain compared with last year, when comScore Media Matrix data showed minimal traffic to budweiser.com during Super Bowl XXXVIII.

Traffic on Sunday to the Cadillac Web site (cadillac.com), generated by a spot for the Cadillac division of General Motors, increased 171 percent, according to comScore Media Matrix, compared with average traffic on the four preceding Sundays. That also was an increase from last year, when cadillac.com traffic rose 94 percent on Super Bowl Sunday, compared with average traffic on the four preceding Sundays in 2004.

Among other Web sites that were found to have marked increases in traffic on Sunday, which are being attributed to their Super Bowl spots, are ameriquestmortage.com, apple.com/itunes, godaddy.com, olympusamerica.com and subway.com.

Ameriquest Accused of Unfair Practices

2005-02-08T13:37:00.000-08:00

February 8, 2005
Andrew Galvin and Jeff Collins

Ameriquest Mortgage Co. faces allegations that it misled and overcharged borrowers, falsified loan applications and saddled low-income and minority homeowners with loans they couldn't afford, public records show.

Ameriquest, based in Orange, is one of the nation's largest lenders to borrowers who have tarnished credit histories or other difficulties getting loans.

Among the legal actions pending against Ameriquest:

Connecticut banking regulators moved last month to yank lending licenses from Ameriquest and an affiliate, accusing the company of repeatedly overcharging its customers, state documents show.

Class-action status was sought in a suit filed last month in federal court in San Francisco on behalf of all Ameriquest borrowers. It alleges the company's loan officers have demonstrated a pattern of unfair and illegal practices.

Ameriquest declined to comment on the Connecticut regulatory action or the California lawsuit, citing a company policy of not commenting on pending legal matters.

The allegations against the company were first reported Friday by the Los Angeles Times.

"We are a nationwide lender and ourvgoal is to continue to lead the industry through best practices and providing superior products and services," Ameriquest said in a statement. "We hold ourselves to the highest standards and ethical practices, and do not tolerate unethical or improper behavior by our employees or our vendors."

Ameriquest is a so-called subprime lender that makes loans to people who have credit problems, heavy debt burdens, or are self-employed. Subprime loans carry higher interest rates and fees than traditional bank loans.

The subprime mortgage industry has been growing rapidly since the mid-1990s.

The Federal Reserve reported that subprime loans grew 25 percent annually from 1994 to 2003. In comparison, overall loan originations rose 17.6 percent. As of 2003, subprime loans made up 8.8 percent of all loans.

Orange County is a hub of subprime lending, with four of the top five lenders headquartered here, according to a Mortgage Bankers Association report from October.

The report said New Century Mortgage Corp. of Irvine is the nation's largest subprime lender, originating more than $23.9 billion of single-family mortgages in 2003. Ameriquest ranked third, at $18.9 billion.

Ameriquest has aggressively sought a high profile. It has plastered its name on everything from blimps to a Texas baseball stadium to the Super Bowl half-time show. And company officials are major political donors.

Ameriquest also marketed itself as a leader in rooting out so-called "predatory lending" practices, which include packing loans with excessive fees and commissions. In 1999, Ameriquest was one of the first subprime lenders to adopt specific lending guidelines designed to eliminate bad practices.

However, Ameriquest has been the subject of far more complaints to the California Department of Corporations than New Century in recent years.

From 2000 to 2004, consumers filed 134 lending complaints against Ameriquest compared to 39 for New Century, said department spokeswoman Susie Wong.

Wong declined to say whether the department is investigating the complaints against Ameriquest.

In Connecticut, a hearing is scheduled for March 31 on the Connecticut Department of Banking's proposal that 24 lending licenses held by Ameriquest and a subsidiary not be renewed.

Ameriquest has been accused of charging excessive refinance fees by 179 Connecticut customers in the past three years -- 39 of them after the firm settled with the state over similar allegations by agreeing to pay nearly $670,000 in refunds and penalties.

Losing the licenses could mean that Ameriquest would stop offering loans in Connecticut. The company also faces as much as $5.5 million in additional penalties.

In the San Francisco civil suit, Ameriquest is charged with failing Ito make required disclosures to borrowers, falsifying Iborrowers' income amounts on loan applications and saddling borrowers with bigger payments than they can afford.

For example, the suit contends that an Ameriquest employee inflated the income on a loan applicationE of Nona Knox, an African-American homeowner in East Palo Alto. The extra income was attributed to a "music academy" purportedly owned by Knox's late husband, although no such academy existed and Knox's husband was not a music teacher.

Allegations of misdeeds are a blow for a company whose executives have been prominent donors to campaigns for state and national political posts.

Ameriquest's co-chairpersons, Dawn and Roland Arnall, each raised at least $200,000 for President George W. Bush's re-election campaign. Arnall family members and 155 Ameriquest employees together contributed $242,500.

Ameriquest and three of its subsidiaries contributed $1 million to Bush's inaugural last month.

The company also contributed $100,000 to oppose the 2003 recall of California Gov. Gray Davis before giving $157,400 to the campaign of the man who replaced him, Gov. Arnold Schwarzenegger.

Source: (c)The Orange County Register

Mortgage-interest write-offs top list of tax-reform untouchables

2005-02-07T16:57:00.000-08:00

Homeowner subsidies run up the U.S. deficit but continue to be a political hot potato.
By Kenneth R. Harney | Washington Post Writers Group
Posted February 6, 2005

It's federal tax-reform season at the White House, with a new presidential commission drafting a potentially radical streamlining of the Internal Revenue Code by midyear.

But President Bush already has pulled some of the biggest tax-system goodies off the reform table. Tops on the list of untouchables: The massive benefits that American homeowners receive annually in deductions from their federal income-tax filings.

How big are those benefits? Very. Congress' bipartisan Joint Committee on Taxation recently toted them up and found that in 2005 alone, homeowners will receive more than $116 billion in direct-tax subsidies. Although homeowners may not feel subsidized, Congress has rewarded them for years -- but not renters -- with tax preferences as a matter of public policy. And with the homeownership rate approaching a record 70 percent, that policy has been highly effective.

Now to the costs of stimulating all that home buying. According to the joint tax committee, American homeowners this year are expected to receive:

$72.6 billion in tax deductions for their mortgage-interest expenses. The tax code allows homeowners to write off interest on first and second mortgages -- including equity lines and loans -- up to an aggregate $1.1 million worth of their mortgage debt. That, in turn, has encouraged millions of Americans to convert billions of dollars of nondeductible credit-card debt and auto loans into tax-subsidized home-equity debt. At the same time, interest deductibility on primary mortgages has helped buyers afford ever-larger loans on ever-pricier houses. Renters receive no such subsidies.
$22.9 billion in tax benefits through exclusions of capital gains on sales of principal residences. This category has ballooned since 1997, when Congress first sanctioned tax-free treatment of up to $250,000 (for single filers) or $500,000 (for married joint filers) on the profits from home sales.
The $250,000 to $500,000 exclusions are available on homes owned for just 24 months and can be used without limit every 24 months. Even homeowners who sell within less than 24 months can pocket profits tax-free, provided their early sale was caused by employment or health changes, or by "unforeseen circumstances."
$19.6 billion in write-offs for local property taxes paid on owner-occupied residences.
About $1 billion for interest subsidies on local and state bond programs that provide low-cost mortgage money for moderate-income home buyers.

Tax preferences for homeownership represent a chunk of the federal deficit, but they are so ingrained into home prices, mortgage affordability, construction and local revenues that virtually no politician on Capitol Hill -- or in the White House -- suggests publicly that they need to be pared or ended.

Who pockets the tax code's generous subsidies to homeowners? When the joint tax panel examined distribution of mortgage-interest preferences in 2004, it found that people in the highest-income bracket, with $200,000 in annual incomes and above, represented less than one-half of 1 percent of all homeowners who took mortgage-interest deductions. But they got 22 percent of the $70.2 billion in mortgage-interest tax write-offs that year.

That shouldn't be shocking. After all, those homeowners tend to pay the biggest mortgage bills, and are in the highest tax brackets, where deductions provide heftier savings. But the distribution pattern changes as you descend the income ladder:

Homeowners with incomes between $75,000 and $100,000 comprised 19.3 percent of those taking write-offs, but pocketed 18.2 percent of the deductions. In the next bracket down, homeowners with incomes between $50,000 and $75,000 were the biggest single group to take deductions -- 26.4 percent -- but got 16.1 percent of the $70.2 billion total. Owners with incomes of $30,000 to $40,000 represented nearly 10 percent of all owners claiming mortgage-interest write-offs, but got just 3.1 percent of the total tax-savings pie.

The same distribution curve holds for other homeowner-tax subsidies as well. Top-income households were 3.8 percent of all homeowners claiming property-tax write-offs in 2004, but received 15 percent of the total. At the other end of the spectrum, homeowners with incomes between $30,000 and $40,000 were 9.4 percent of all those taking property-tax write-offs, but ended up with 3.7 percent of the benefits.

Whatever your philosophical take on numbers such as these, remember: Absent some political revolution on Capitol Hill, homeowner-tax subsidies are here to stay. You might hear about proposals to rein them in later this year -- putting a lid on mortgage-interest deductions or scaling back capital-gains exclusions. But even before you hear about them, they will be stone dead politically.

CarsDirect Buys Two Home Mortgage Web Sites

2005-02-04T09:27:00.000-08:00

By KATE BERRY
Los Angeles Business Journal Staff

Online auto retailer CarsDirect expanded its toehold in the home mortgage market on Thursday, announcing the purchase of two Web sites, BestRate.com and LoanApp.com.

El Segundo-based CarsDirect, a venture-funded company best known for its two automotive Web sites, CarsDirect.com and Autos.com, launched an online brokerage service called Loanstore.com last year. Another of its six Web sites, CheckInterestRates.com, displays the lowest interest rates from a host of lenders. (CarsDirect collects a fee from lenders for the referrals.)

Bob Brisco, chief executive of CarsDirect, said the two new Web sites, which were purchased from Myers Internet Inc. of San Jose, accelerated the company’s strategy of gobbling up ecommerce sites that involve “large ticket” transactions.

“We find the mortgage businesses to be very complementary with our auto business,” said Brisco. “An increasing number of consumers are looking to the equity in their homes as a less expensive way to finance their auto purchases, and there is overlap in lending institutions.”

He said the new sites will streamline the process of searching online for the best interest rates on a home mortgage.

The deal, for an undisclosed sum, also includes Myers’ mortgage technology platform that will allows CarsDirect to expand the sites quickly, and a marketing agreement with Myers in which the company can gain access to as many as 5,000 mortgage brokers.

Privately-held CarsDirect has 300 employees in El Segundo and Canada. It received a $280 million investment in venture capital in 1999 and has a large number of investors including Amazon.com, Idealab, Kleiner Perkins Caufield & Byers, Liberty Media, Oracle Corp. and Soros Private Equity Partners.

Mortgage rates stall

2005-02-03T09:55:00.000-08:00

By Holden Lewis • Bankrate.com

Mortgage rates stalled this week, with barely a change across the board.

The benchmark 30-year fixed-rate mortgage slipped to its lowest point since October 2004, falling 1 basis point to 5.67 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.32 discount and origination points. One year ago, the mortgage index was 5.72 percent.

The benchmark 15-year fixed-rate mortgage inched up 2 basis points to 5.16 percent. The benchmark one-year adjustable-rate mortgage held steady at 4.48 percent.

Mortgage bankers often talk of the spread, or difference, between different mortgage products. Let's take a look at the narrowing spread between the 30-year fixed and the one-year adjustable. A month ago, the average rate on a 30-year fixed was 5.81 percent and on the one-year ARM, 4.38 percent. Subtract the ARM rate from the fixed rate and you have a spread of 1.43 percentage points. In the following weeks that spread has shrunken to 1.32 percent, then 1.27 percent, then 1.20 percent, and this week's 1.19 percent.

A year ago, the spread was 2.04 percent. When compared to the 30-year fixed, a one-year ARM was a much better deal a year ago than it is now.

Naturally, you would assume that ARMs are less popular now than a year ago, when they were comparatively a better deal. That would be an erroneous assumption. A year ago, about 27 percent of mortgage applications were for ARMs; last week, it was more than 32 percent, according to the Mortgage Bankers Association.

It's a bizarre world when ARM rates go up and fixed rates go down, and people embrace ARMs anyway. Bankers attribute this head-scratching development to the rise of the hybrid mortgage, and specifically a hybrid called the 5/1 ARM.

A 5/1 ARM has an initial rate that's higher than that of a one-year ARM, but lower than that of a 30-year fixed. It keeps that initial rate for five years and then is adjusted annually thereafter. There are also 3/1, 7/1, 10/1 and other hybrid ARMs.

The Mortgage Bankers Association doesn't differentiate between one-year and hybrid ARMs in its weekly statistics. Bankers believe that the 5/1 hybrid makes up about 40 percent of new ARMs and is supplanting the one-year as the most-popular adjustable. Freddie Mac started tracking weekly movements in the rates of 5/1 ARMs, and Bankrate.com will replace the one-year ARM with the 5/1 ARM in its weekly index, starting next month.

A lot of people "would tell you the 30-year fixed-rate loan isn't the loan of choice anymore," says Doug Perry, senior vice president of Countrywide Home Loans. "There are a lot of experts who say when you're getting a 30-year fixed-rate loan, you are overbuying that fixed-rate period. And you're paying extra every month."

Perry agrees with most experts when he says hybrid ARMs are a good fit for lots of people, because most homeowners don't hold their mortgages for 30 years -- they sell the home or refinance the loan long before then. But he is reluctant to give general advice, because everyone's situation is different.

US mortgage applications rise; refinancing buoys

2005-02-02T11:15:00.000-08:00

Wed Feb 2, 2005 10:32 AM ET
By Julie Haviv

NEW YORK, Feb 2 (Reuters) - U.S. applications for home refinancing came roaring back last week as consumers rushed to take advantage of mortgage rates that remain historically low, an industry trade group said in Wednesday.

The Mortgage Bankers Association's seasonally adjusted index of refinancing applications surged 16.6 percent to 2,253.9 in the week ended Jan. 28, more than erasing the 5.7 percent drop the prior week.

The MBA said refinancings made up 48.7 percent of all mortgage applications last week, up from 46.5 percent the previous week.

"Consumers are matching their mortgage to their situation. When personal needs change, people are refinancing their mortgage to match," said Bob Walters, chief economist at Quicken Loans, the nation's largest online mortgage lender and one of the 20 largest retail mortgage lenders in the U.S., according to National Mortgage News.

The MBA said its seasonally adjusted index of overall mortgage application activity increased 7.3 percent to 706.4 in the week ended Jan. 28, after decreasing 3.6 percent in the MBA's prior week survey, driven by the increase in refinancings.

However, other economists took a more cautious view of the data.

"I wouldn't read to much into these (MBA indexes) numbers since they can be very volatile on a week-by-week basis," said Celia Chen, director of housing economics at Economy.com, an economic consulting firm. "Mortgage demand picked up, but it does not reverse its recent downward trend."

The increase in the index came even as fixed mortgage rates, among the most popular mortgages, rose slightly last week.

Fixed 30-year mortgage rates averaged 5.61 percent last week, excluding fees, up 3 basis points from 5.58 percent the previous week.

RATES DIM HOME PUCHASES

Mortgage rates are still at the lowest level in several months but were not enough to spur interest in home purchasing.

The MBA's purchase index, a gauge of loan requests for home purchases, edged up 0.3 percent to 440.3, marginally offsetting the 2.0 percent loss the previous week.

With the Federal Reserve poised to raise short-term interest rates Wednesday afternoon and in the months ahead, mortgage rates are expected to move higher in 2005.

"The larger story, though, is where Federal Reserve policymakers will take shorter term rates and what effect that will have on the mortgage market," Quicken's Walters said.

In fact, recent housing data indicates that a slowdown in what has been one of the hottest sectors of the economy may be developing.

Earlier this week, the government reported that sales of new U.S. homes rose a smaller-than-expected 0.1 percent in December to a 1.098 million unit rate, undershooting Wall Street forecasts for a 1.20 million unit rate in the month. But, 2004 as a whole was the strongest year on record.

Lower rates on adjustable-rate mortgages may have been behind the increase in refinancing applications last week.

One-year adjustable-rate mortgage rates averaged 4.08 percent, down from 4.21 percent one week earlier. At the same time applications for adjustable-rate mortgages rose to 32.5 percent from 31.7 percent of total applications.

While it is still likely that the MBA's weekly index will rise sporadically, Economy.com's Chen said the trend will continue downward due to rising mortgage interest rates and lack of pent-up demand.

Calif. court rules out local subprime mortgage laws

2005-02-01T10:30:00.000-08:00

Mon Jan 31, 2005 07:29 PM ET

SAN FRANCISCO, Jan 31 (Reuters) - Local governments in California may not impose lending rules for mortgages carrying high interest rates for people with risky credit backgrounds, the California Supreme Court ruled on Monday.
Writing for the majority in a 4-3 decision, Justice Janice Rogers Brown said California's legislature has exclusive authority over mortgage lending laws.

Allowing local governments to go beyond state rules on "predatory" lending in the subprime mortgage market would create a market filled with "potentially hundreds of competing and inconsistent measures," Brown wrote.

IRS places $500K in tax liens on Kierl Financial

2005-01-31T11:02:00.000-08:00

By Jerry Siebenmark

Wichita Business Journal
Updated: 7:00 p.m. ET

Jan. 30, 2005A 6-year-old, locally owned financial services company is facing more than half a million dollars in federal tax liens.

The Internal Revenue Service filed two tax liens late last month against Kierl Financial Group Inc., at 7309 E. 21st St. N., totaling $509,910.

Ken Kierl, the company's owner, did not return calls for comment on the liens.

The company, according to a 2002 Business Journal article, had specialized in investments, wealth management, mortgage financing, insurance and tax accounting services. According to the Kansas State Bank Commissioner's office, the company is licensed as a mortgage loan originator.

Kevin Glendening, deputy commissioner of consumer and mortgage lending for the bank commissioner's office, says the company is not due for license renewal until 2005.

He says he was not aware of the federal tax liens against Kierl Financial Group.

"We didn't have specific information about this," he says.

Glendening says tax liens are one element his office considers when renewing any mortgage loan originator's license.

"We generally do review their financial situation at least at renewal time, if not more frequently," Glendening says.

Kierl Financial last renewed its mortgage originator license in September 2003.

In the Wichita area, mortgage lenders say business is slow on the refinance side, but steady on the home purchasing side.

"It's brutally slow in the refinance end," says Chris Green, Wichita branch manager of American Home Mortgage. "Most of the people who wanted to refinance have already done it."

That's despite interest rates in the market of around 5.5 percent, a rate that Green says is near historical lows.

Nationally, the mortgage origination business is down and is expected to continue to fall through 2005: from a record $3.9 trillion in 2003 to $2.4 trillion in 2005, according to Freddie Mac.