Mortgage Market Update February 23, 2010

As usual lately, there has been some interesting news affecting mortgage rates. Over the past two weeks rates have been on the rise. The causes of this increase have been numerous.

Mortgage rates are closely linked to the current rate of the Federal Governments 10 Year Treasury Bond. The 10 Year Treasury rate has increased from 3.55% to 3.80% over the past 2 weeks and mortgage rates increased from 5.0% to 5.25%. What caused this increase?

One of the main factors influencing rates right now is the Federal Government issuing massive amounts of new debt on a weekly basis to fund the budget deficit. Recently, these auctions have been met with lackluster demand as foreign buyers of US debt at some point decide that there is only so much US debt they are willing to hold. This lackluster demand for new US Gov’t bonds causes the rates paid on these bonds to rise so that investors will be encouraged to purchase them.
The other factor that influences interest rates in general is current economic news. Interest rates are generally lower in poor economic times and move higher when the economy is good. Rates have been very low over the past 18 months due, in part, to the weak economic times we have been experiencing. When the economy starts to heat up investors fear inflation and inflation erodes the value of fixed income investments, so, investors require higher rates of return to make up for those losses.

Recently, the news reports have been a bit more positive than expected and this has caused concern that inflation might start to rise and that makes interest rates go up. The latest news has included:

1) Producer Price Index (PPI) went up 1.4% with the core rate up .3%, according the report issued February 17, 2010. Both readings higher than expected. PPI measures the prices that companies pay for the raw materials they need to produce goods. This report means it was more expensive to make products. When it’s more expensive to make an item producers will naturally want to increase the price of the product and an increase in the price of products is – inflation
2) January Industrial Production, also released February 17, 2010, increased by .9%. This is an indication that manufacturers are busier than expected. A sign the economy may be heating up
3) Finally, the Federal Reserve Bank increased the Discount Rate last week by .25%. The Discount Rate is the interest rate the Fed charges to member banks for short term loans. It is more of a symbolic move than anything else but it is an upward move of a key interest rate that the Fed controls and could mean the Fed will start increasing the Federal Funds rate at some point in the near future. This would have a much more direct impact on interest rates in general

So, mortgage rates have moved up a touch, but, are still very very low!

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Good Faith Estimate 2010: An Improvement?

The New Good Faith Estimate: Is it Easier to Understand?

Over the past year the Federal Government has made some sweeping changes to the way mortgage loans are originated, how appraisals are ordered and how and what is disclosed to the consumer. The change I want to address here is a change in what’s known as the Good Faith Estimate (GFE). The GFE has always given potential borrower four bits of crucial information when shopping for a loan:
1) The terms of the loan – Loan amount, interest rate and number of years to repay
2) The total costs of obtaining the loan broken down by mortgage costs and prepaid taxes, insurance and interest
3) The total cash needed to close including closing costs, prepaid items and down payment
4) The total monthly house payment including all taxes and insurance
Here is the old form Good Faith Estimate which covered all of the important information on one page – pretty efficient and I’d say, easy to understand.

← Here is Page 1 of the new GFE. The new form is 3 pages long. It does a good job of giving you the basic loan terms.
It loses ground on the monthly payment as it only shows the principal and interest payment on the loan and does not tell a borrower what the total monthly cost of the home is including taxes and insurance. This is a very important number!

At the bottom it gives you “Total Estimated Settlement Charges”, however, this figure includes things that, in Michigan, a home buyer generally does not pay for, and as a result, overstates the settlement costs (in my example the costs are overstated by $2,796 – quite a large amount!)

←This is the Page 2 of the new Good Faith Estimate. This page is right on the money except for two items:

1) HUD has stated that the cost of Owners Title Policy should be listed regardless of who pays for it. Why, I ask? If the buyer is not paying for it, it should not be included in the settlement charges to the buyer.
2) Transfer Tax also must be included in the buyer’s settlement charges. In Michigan, the seller pays the transfer tax (in 99 out of 100 cases).

So, when you get to the buyers total Settlement Charges they are overstated, as I mentioned above, by $2,796! Maybe it’s just me, but, shouldn’t we stick to telling the buyer specifically what they have to pay for? Why not include the seller’s real estate commission here too?

←Finally, Page 3 of the new form. This page summarizes the loan terms, loan payment and total estimated settlement charges. It also gives the buyer a table where they can write in offers from different lenders so they can make comparisons. This page could be pretty handy. I like it.

It also lets the borrower know that the Lender is required to honor their stated Origination Charges and that other specific settlement costs cannot change by more than 10% at closing. I actually love this because it keeps unscrupulous loan officers from quoting low costs and then increasing them at the last minute due to some contrived change in the borrower’s circumstances. Page 3 is a hit and the rules that go with it are great too.

In the final analysis, the New Good Faith Estimate should not include closing costs that the buyer does not pay. It should include the total payment including property taxes and insurance so a borrower can evaluate if they can afford the home. It also should tell a borrower what their total cash to close is including only their closing costs, all property taxes and insurance and the down payment so they are prepared for what they will be required to pay. My question – Why change a 1 page form, which has all of the necessary information on it, into a 3 page document which does NOT give complete and accurate figures to a borrower? Answer – Who knows? Your Federal Government in action. See you next time . .

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