After starting the week with a run lower toward 5 percent, mortgage rates have reversed course.
It started mid-day Tuesday and the culprit is Basic Economics. Here’s why.
Mortgage rates are based on the price of mortgage-backed bonds and — like most things — mortgage-backed bonds prices are based in Supply and Demand.
When bond supplies grow faster than the corresponding demand for them, bond prices tend to fall and when bond prices are down, bond yields are up.
Meanwhile, this week, the U.S. Treasury is making its largest weekly auction in history. $115 billion in new debt, to be exact. This means that before the week is through, $115 billion in new bond supply will have been introduced into the market and — so far — demand hasn’t kept pace with the new supply.
Prices are plunging.
For home buyers and rate shoppers, this is especially bad news because mortgage-backed debt is less desirable to investors than is treasury debt. As a result, when treasury debt loses values, mortgage-backed debt tends to lose value, too. Not always, but most of the time.
So, beginning with Tuesday afternoon’s auction, debt supplies have been growing faster than buyer demand.
Bond markets are suffering from an abundance of debt supply and it’s been a big reason why mortgage rates are rising. The week’s not over yet, either. $28 billion is due for auction Thursday.
If demand at the auction is similarly low, watch for mortgage rates to spike again.
Home values around the country appear to be leveling.
The Federal Housing Finance Agency’s latest Home Price Index report shows values up by nearly 1 percent in May versus the month prior.
Since peaking in April 2007, values remain off by 11 percent nationwide.
The FHFA Home Price Index is an interesting metric. Different from the Case-Shiller Index which collects data from just 20 U.S. markets, the Home Price Index reflects every U.S. home that backs a mortgage sold to Fannie Mae and Freddie Mac.
In this sense, the FHFA Home Price Index is more “national” than the Case-Shiller Index but the HPI has its flaws, too.
The House Price Index specifically excludes from its measurements the sales price on any home purchase with any of following traits:
Because of these exclusions, some analysts say the report is incomplete. The same could be said of every method of home valuation, however.
Therefore, what’s most important to today’s home buyers and sellers is that each of the “popular” home valuation reports shows similar patterns. Home prices appear to have stopped falling and may be even starting to recover.
It won’t be for a few years that we’ll be able to look back and point to the exact month that real estate bottomed. Nevertheless, considering how the data has presented as of late, it’s reasonable to think that we’ve already hit it. Certainly, that’s what the Home Price Index suggests.
For a region-by-region breakdown of the Home Price Index, visit the FHFA website.
April 4, 2009, marked the official start of the Making Home Affordable refinance program.
Expected to help 5 million homeowners, the Making Home Affordable program “looks the other way” with respect to falling home values, approving mortgage applications based on borrower payment history and benefit to the homeowner.
Not every homeowner is eligible for a Making Home Affordable refinance, however. There are 3 basic criteria that must be met.
First, your existing home loan must be backed by either Fannie Mae or Freddie Mac. Thankfully, both companies provide online lookup services. Start with the Fannie Mae site because Fannie has a greater market share and because Freddie Mac’s site requires your social security number.
Next, you must have a perfect mortgage payment history over the last 12 months. Even one payment made 30 days late disqualifies you from participating in the Making Home Affordable program. It is okay, however, if you were 20 days late on your payment and incurred late fees.
And lastly, the balance on your mortgage cannot exceed your home’s value by more than 5%. The math formula is (Mortgage Balance) / (Home Value). If the quotient is greater than 1.05 then your loan-to-value exceeds 105% and you are not eligible for Making Home Affordable.
Now, assuming you meet the criteria, there are some noteworthy details of the Making Home Affordable program:
There are other guidelines, too, and both Fannie Mae and Freddie Mac have dedicated portions of their website to the Making Home Affordable program. To the layperson, unfortunately, the information may be a bit technical.
Even the government’s fact sheet can be a little dense at times.
Therefore, if you have specific questions about the Making Home Affordable program and your own eligibility, first check to see if Fannie or Freddie is backing your loan. If your loan is currently owned by Fannie Mae, First Heritage Mortgage can help; however, we will not be able to help on loans that are currently backed by Freddie Mac.
Feel free to call me at 240-223-1730 if you have questions.
First Heritage Mortgage, LLC
6550 Rock Spring Drive, Suite 260, Bethesda, Maryland 20817-1131
Direct: 240.223.1730 • Toll-free: 866.833.LOAN • Fax: 240.223.1703
