by Chris Brown
February 2008

As I have been fielding many phone calls lately regarding recent Fed rate cuts and what this means for mortgage rates, I wanted to take a brief moment of your time to update you on events and hopefully parlay this into preparing you for any opportunities to improve your mortgage situation.

What Triggers Mortgage Rates?

Let me start by defining what certain rates mean and translate this back into what triggers mortgage rates to move. What the Fed cut on January 22nd by 0.75% and then again on January 30th by another 0.5% is the FED FUNDS rate. The cumulative drop brought the Fed Funds rate down from 4.25 to 3.0%, currently. What the FED FUNDS rate is what banks charge other banks on overnight loans and as such is totally controlled by the Federal Reserve (not to get off on a tangent, but to quickly explain the reason that banks loan money to other banks is because they need to keep a minimum amount of cash reserves in deposits; they cannot reinvest everything). Where in the mid-to-long term, the Fed lowering the Fed funds rate is usually a good sign for other interest rate indices to follow that pattern, often in the short-term, interest rates move opposite from the Fed Funds move. This is what has happened this past week and a half.

The main correlative factor in determining 1st trust deed mortgages rates is the 10-YEAR US TREASURY BOND. This index is traded on the open market every business day and as such is not directly controlled by anyone (it works just like the stock market). Initially, after the Jan. 22 Fed rate cut, the benchmark 10-year T-bond rallied. Conforming loan rates (loans $417,000 and under) came within 0.5% of the 50 year lows we hit in August 2003 & March 2004. In the last hour of the day on January 23, there was a major sell-off in the 10-year bond, causing the yield to go up (this money was in large part transferred to stocks and hence, why the Dow had a 600 point reversal in that last hour). On January 23rd, the 10-year bond hit a low of 3.30, but has risen to 3.67 at the close of Jan. 30; this has caused mortgage rates to go up approx. 0.5% in the past week. The good news here is the bond rallied in the last hour of the day after the Fed made their cut yesterday.

CONFORMING LOAN UPDATE

Conforming 30-year loan rates (loan amounts $417,000 and under) have been steadily going down up until last week and currently sit in the 5.5- 6.5% range (depending if you are paying costs/points or if you are not). Again, remember, one week ago they briefly were down 0.5% from here and I believe we will see these rates dip below what they are at today at various times this year. The other excellent news regarding conforming loans is that the Federal government is trying to pass a bill that would temporarily raise the conforming loan limit to $625,000 (& possibly as high as $790,000) in high-cost areas (i.e. California). Congress has put a self-imposed deadline of February 15th to get this bill signed off on, so this could happen quickly. For those of you that are near or under this new conforming loan limit, you will have an excellent chance to refinance into a lower rate.

JUMBO LOAN UPDATE

Jumbo loans are loans that are currently greater than $417,000 (see above for possible new limits). The jumbo mortgage market is still feeling the ill effects of the mortgage liquidity crisis that hit Wall Street on August 3rd, 2007. More specifically, many of the investors that typically buy jumbo mortgages do not so do anymore and the ones that still do, do so at a much higher premium than has been the norm for the past decade. For most of the past decade, the spread between conforming and jumbo rates has only been approx. 0.25% (with jumbo rates being higher). Currently that spread is closer to 1.0% (over 4 times the “normal” spread). Thus, 30-year jumbo mortgage rates are currently sitting in the 6.5-7.5% range (again depending on if you pay are paying cost/points or are not). I do think that gradually this year the jumbo mortgage market will materially improve and that these current spreads will diminish.

EQUITY LINE 2ND’s

Now here are mortgage rates that are improving! Going back to the Fed Funds rate, what usually is lowered exactly in conjunction with this rate is the PRIME RATE. Of course, the prime rate is what virtually all equity lines are tied to. Thus, with the recent 1.25% cumulative drop in the Fed Funds rate this past week, the prime rate will go down by that same factor (from 7.25 to 6.0%). One other comment about equity lines- they are a whole lot tougher to get these days, so feel fortunate if you have one! Basically, banks no longer will do STATED INCOME equity lines.

One comment about the mortgage rate estimates above; of course, we can go lower than these ranges if you paid multiple points and also for loan programs that have less than a 30-year fixed term, but I wanted to at least give you good reference points.

PERSONALIZED RATE WATCH ALERT

Many clients call in and tell me to watch rates as it pertains to their mortgage situation. I encourage these calls, but also wanted to let you know that at all times, I have on my desk a spreadsheet with each one of our client’s pertinent loan info (date last funded, loan program, interest rate, adjustment dates, etc.). Being that our business is based upon repeat and referral business, this spreadsheet is my single most important tool. Especially now that rates are coming down, I am scouring it daily to try to find refinance opportunities.

I also wanted to comment that if you currently have a rate in the 6% range, this is damn cheap money (on an after tax-basis, this is closer to 4% money!) and where we always look to better your situation, this is far better than a majority of homeowners. Believe me if we see rates cut to 0.5%, like they have been in Japan and deflation results like it has there, we will all have far worse worries, as this type of environment kills the incentive to save (a deflationary economy results in less purchasing power over time). By the way, I don’t think this will happen, but if rates were this low and the economy did not respond, that spells trouble. I think a far likelier outcome is the onset of “stagflation”, a stagnant and probably recessionary economy with inflation present at the same time. Where this is not good either, it is better than a deflationary economy.

Volatility in all markets is going to be the norm for the next 12-18 months, so the best advice I can give to weather the storm is to stick to your investment plan and try to reduce revolving debt. Remember to always try to keep your credit card usage below 50% of each card’s high credit limit and not incur any lates (keep in mind that even if you are perfect with paying on time, but have high credit card balances, i.e. over 50% of limit, this will materially depress your credit scores). If you keep your credit scores up, you are going to poise yourself to best take advantage of any refinance opportunities.

WE NEED REFERRALS

Where much of the mortgage industry is busy trying to refinance past clients out of the inferior loan products they put them into (i.e. Option ARM’S, prepayment penalties, etc.), a great majority of our clients are already on low fixed rate financing. This limits our refinance opportunities (although as mentioned, we are closely looking to do this on a daily basis). We are asking for your help in growing our client base. I personally promise that any clients you refer will receive exceptional service and the best pricing, as well as hopefully having a very trusted mortgage advisor in the future. I think many people learn the hard way, but having this relationship can literally make the difference in your financial future. This is all too evident by all the homeowners facing rate increases they can’t handle, prepayment penalties they didn’t know about, etc.

Along these lines, we would very much appreciate getting an introduction to your CPA or financial planner, whereby we could speak to them about forming an alliance. As well, perhaps you have an affinity group we could get involved in (I know many of you are on this “Linked In,” but I need to educate myself on how to maximize these type of networking arrangements).

As always, I will always have you, my valued clients’ best intentions in mind, as I firmly believe that in the long run, this will lead to the most success (a great example of this is advising many of you that asked about converting super low 5-10 year fixed rates that were adjusting in future years to hold off on refinancing as rates would get even lower in late 2007 & 2008; not doing transactions does not benefit me at all, but my advice turned out to be right on). Please call me whenever you want to do an evaluation of your mortgage situation or even if you just have some questions.

Best Regards,

Chris Brown