What do you say when someone asks “Why are interest rates going up so fast”” or “Where do you see interest rates in a few months if I choose to wait to buy”? Mortgage rates are a very hot topic right now, especially as they have spiked up over 5% again after being as low as 4% a few months ago. Buyers are also getting very confused and frustrated why rates are rising so fast. Understanding what to say when anyone asks you about interest rates is going to be very important these days, because if buyers know that rates are going to continue to rise, many of them on the fence will make a decision to buy now. Here are 4 reasons to help you better explain why rates are rising, when someone asks you any questions about interest rates.

1. Mortgage bonds have been trading negatively which causes rates to rise

Understanding what determines mortgage rates is quite simple. Mortgage rates are traded everyday as mortgage bonds (MBS) just like stocks. They either go up or down in price on a daily basis. Here is a picture of a mortgage bond trading chart below. When bonds (green line) are trading lower mortgage rates (red) are higher and when bonds are trading higher mortgage rates are lower. Mortgage bonds have been trading lower recently which is driving rates up.

When bonds trade lower (green), lenders raise their rates and distribute “Reprices for the Worse” (see chart below) and republish these higher rates to the public. This trading of bonds directly correlates to the mortgage rates we see everyday from lenders.

When Bonds Trade Lower Mortgage Rates Increase

What economic events force rates to go up or down?

 
So what causes mortgage rates to go up or down and mortgage bonds to trade higher or lower? These are tied to some fundamental economic activities that take place everyday in our markets, by understanding these you will now be able to determine what direction rates will probably go for your clients.

2. A rising stock market causes rates to rise

Mortgage bonds compete everyday for investors dollars in the open markets. Stocks pay a higher rate of return so they are more risky, bonds have a lower return so they are seen as more stable and less risky. Remember: When there is weak economic news (higher unemployment etc), this normally causes money to flow out of Stocks and into more stable Bonds helping Bonds and home loan rates improve. When there is better economic news (lower unemployment, more homes sold etc) this normally has the opposite result, so investors will put their money into more risky stocks, thus causing mortgage rates to increase. Economic data has been improving recently so this is why rates have been rising. It is an interesting dynamic that generally worse economic news is good for mortgage rates!

3. Rising Inflation is causing rates to rise

is going to be a problem soon because of all this money that is being printed to pay for Government spending. So how will this affect mortgage rates? The bottom line is that as inflation increases, home loan rates will rise too. That’s because lenders know that a rise in inflation actually diminishes the value of the money they receive over the life of a loan, as the money they receive for payment simply won’t go as far. So when they see changes in inflation or even anticipate a rise, they increase their interest rates to make up for the loss in future buying power that will happen as a result of inflation. 

4. The 800 pound gorilla in the room..growing US debt is causing rates to rise

As ths US continues to add to its already burgeoning $1.5 Trillion dollar deficit, investors around the world who lend the US money by way of buying treasuires and bonds are going to demand a higher rate of return for the financing of US government spending. Because the larger the US debt level grows the higher the chances of a default sometime in the future, and so investors will price this accordingly. Just 3 months ago the 10 year bond rate (the 30 year fixed mortgage rate follows this) was at 2.5%, today it is at 3.75%..you can thank The Fed and Ben Bernanke for this, as they have been adding to the US debt load by way of printing money via their ”QE” Quantitative Easing programs, so investors are now demanding a higher return on their investment. So until the US gets its fiscal house in order and tackles the deficit, long term rates will continue to rise. 

Rising rates affect buyer budgets and loan approvals  

It is also very important to show buyers that rising interest rates will eat away any savings they could get from waiting for prices to dip again. Eventually a buyer needs to make a decision about what is most important, either their monthly payment or “finding the bottom of the market in terms of price”. Higher interest rates are going to affect buyers budgets dramatically too, while also affecting any current offers or loan approvals they may have. Lenders have tightened qualifying ratios recently, so make sure any increase in payments will still get approved.

For example, a pre approval that a buyer has had for 3-4 months at 4.5% that stretched their budget is no good when rates jump up to 5% or 5.5%. Perhaps they will not be able to afford the higher payment anymore and they will need to start shopping all over again for lower priced homes. Remember as rates increase 1% a buyer loses 10% in purchasing power. For example the monthly payment increases $255 a month for a $417k loan going from 4.5% to 5.5%, this is a car payment for some people and a lot of money for a family of 4 or 5. Make sure you are having conversations with buyers advising them that if rates do continue to rise, they need to know what their new higher payments will be and if that new higher payment still fits in their budget. Otherwise all those days spent writing up approval letters and showing homes at a particular price range will be to no avail.

What are rates at now? They are still at 40 year lows! 

With rates now back up over 5%, the question is where will they go from here? In their most recent rate forecast, MBA economists said they expect rates on 30 year fixed loans will climb to an average of 5.5% and higher by the 3rd quarter of 2011 and to an average of 6.1% during the final 3 months of 2012. But on a positive note, they are still at historical lows when you compare them with interest rates over the past 40 years.

In fact, did you know that the average 30 year fixed mortgage rate for the past 40 years is 9%! Share this historical rate chart below with clients that shows since 1970 the average rate has been 9%. Buyers don’t realize how lucky they are today that they have an opportunity to to buy a home with a rate of around 5%! With the current unrest in the world, there is a very good chance that in the future history just may repeat itself, because I am sure no one in 1975 (when rates were 8%) thought rates would ever go to 18%..they did by 1981. 

I hope you found this information helpful. There is no doubt that the interest rate markets are going to be very volatile for the next few months as the unrest in the Middle East is adding to the pressure on interest rates. If you ever want to discuss interest rates or what direction they may be going, please feel free to contact me. I study market information daily and subscribe to two mortgage bond companies that track mortgage bonds live everyday, so this ensures my clients always get the most accurate information and the lowest rates available. I look forward to chatting soon.

 Mortgage rates have been rising steadily over the past 90 days and are now back at 5%, it was only 3 months ago in November that rates were as low as 4%. Unfortunately they are going to keep moving higher over the next few weeks and months.  So with rates now on the rise, many potential buyers are going to make the decision to get off the fence and buy now or will decide to wait another 12-18 months. Here are 4 reasons to help you better understand why rates are going to move move higher.

What economic events force rates to go up or down 

So what causes mortgage rates to go up or down? These are tied to some fundamental economic activities that take place everyday in our markets, by understanding these events you will now be able to better understand what direction rates will probably go. 

1. What are mortgage bonds?

Mortgage rates are traded as mortgage bonds everyday just like stocks and they either go up or down in price. The interest rates we get everyday from the lenders are determined by how Mortgage bonds trade. When mortgage bonds are trading higher mortgage rates will go lower, and when mortgage bonds are trading lower rates will increase. Check out this chart below that shows how mortgage bonds have been trading lower, this has correlated in higher interest rates again at 5%. 

 2. Stocks versus bonds 

Mortgage bonds compete everyday with stocks for investors dollars in the open markets, stocks pay a higher rate of return so they are more risky than bonds, bonds have a lower return so they are seen as more stable and less risky.

Remember: When there is weak economic news (higher unemployment, weak housing figures), this normally causes money to flow out of Stocks and into more stable Bonds, helping Bonds and home loan rates improve, while strong economic news (lower unemployment, more homes sold) normally has the opposite result, so investors will put their money into more risky stocks, thus causing mortgage rates to increase. Economic data has been slightly improving in the past month so this has been increasing rates. It is an interesting dynamic that generally bad economic news is good for mortgage rates! 

3. Inflation and mortgage rates.

 Inflation is starting to be a problem and will be more so in the not so distant future because of all the new money (QE2) that is being printed by Ben Bernanke and the Federal Reserve to prop up the markets and pay for Government spending.

So how will this affect mortgage rates? The bottom line is that as inflation increases, home loan rates will rise too. That’s because lenders know that a rise in inflation actually diminishes the value of the money they receive over the life of a loan, as the money they receive for payment simply won’t go as far. So when they see changes in inflation or even anticipate a rise, they increase their interest rates to make up for the loss in future buying power that will happen as a result of inflation. 

4. European debt problems and US rates. 

There was a debt contagion spreading throughout the countries of the European Union that is starting to improve. 

So why does the Euro crisis affect rates in the US? Well anytime you hear of financial problems coming from Europe this usually causes a “flight to safety” of investor money into US markets. 

A flight to safety occurs when overseas investors are nervous about owning European debt and risky assets like stocks, but do not want to miss out on earning a return on their funds, so they allocate money into risk-free U.S Treasury debt to provide a safe-haven AND an investment return. As Treasury yields fall, prices of mortgage bonds move higher which in turn lowers mortgage rates. But recently the debt crisis in Europe has been improving and the ”flight to safety” move of funds into US markets has been slowing down, thus interest rates are starting to rise again.

Changing rates affect buyers purchasing power  

Unfortunately higher interest rates are going to affect buyers purchasing power and monthly mortgage budgets. A pre approval that the buyer has had for 2-3 months at 4% that stretched their budget might be no good now when rates are now over 5%. For example, on a $400k loan the monthly payment increases $238 a month when the rate jumps from 4% to 5%. 

Higher rates will also affect any current offers or loan approvals buyers may have. For example lenders have tightened qualifying ratios recently, so make sure any increase in payments will still get approved. 

 Knowing your maximum mortgage budget 

If you are looking to purchase a home, make sure you know what your maximum monthly mortgage budget is, and if rates continue to rise make sure that new higher payment still fits in your budget. Otherwise all those days spent writing up approval letters and showing homes at a particular price range will be to no avail. This is why understanding the dynamics of interest rates is very important, because if indicators are showing that rates will keep rising, you have already addressed this higher payment with your maximum monthly mortgage budget. 

I hope you found this information helpful. There is no doubt that the interest rate markets are going to be very volatile for the next few months because of the financial crisis in Europe. If you ever want to discuss interest rates and what direction they may be going, please feel free to contact me. I study market information daily and track mortgage bonds live everyday in the bond market, so this ensures my clients always get the most accurate information and the lowest rates available. 

With multiple offers going in on properties these days, it is important that the buyers offer is given every chance to stand out from the crowd and get accepted. With tougher lending rules now in place, the sellers are learning fast that only the most qualified buyers are getting their loans approved for financing. So from talking to several top agents recently who also list REO’s, I got the inside scoop on what it is they look for in the offers they look at. I want to share some of these tips so you can maximize the chances of getting your buyers accepted too. You can also use these pointers as a reference on your listings too, so you can determine the strength of the buyers offer you will eventually accept. 
 
Here are 4 tips to use when presenting an offer for your buyer. 
   

1. Provide a DU Underwriting approval with all offers
It is imperative that all buyers have an offer that is accompanied by a DU underwriting approval. A DU approval is when the buyers application has been ran through Fannie Mae’s or FHA’s automated DU (Desktop Underwriter) and will issue either an approval or a denial. A pre approval letter does not carry as much weight anymore even if it is from a direct lender, as essentially anyone can write up an approval letter even at a direct lender.
 
An offer letter accompanied by a DU underwriting approval will always place ahead of a basic approval letter, as a DU underwriting approval shows the most important information needed on a buyers profile to give the seller a good idea of the strength of the buyer. For example it lists the credit scores, the debt ratios and the type of loan they are approved for, as well as other information too. Also it is important to note that the DU underwriting approval must match up with the loan program the offer is submitted for, it is not uncommon for example, to have a buyer who has a FHA DU approval but will submit an offer with conforming financing. 

2. Provide proof of down payment funds
Always provide proof of where the down payment funds are coming from for the buyer. Make sure to send over recent bank statements or whatever asset account they are using for the down payment. Make sure there are enough funds in the statements you are providing to match the % of down payment the offer is for. Many times statements are provided but there are not enough funds to cover a 20% down payment for example. If the buyers are going FHA and are getting a gift from the parents, provide a copy of the gift letter from the parents.
 
3. Provide a copy of the buyers credit report (first page only)
If the buyers credit scores are very good, list them on the pre approval letter and point this out on the offer. Also provide a copy of the first page of the buyers credit report that lists the 3 credit bureaus and the 3 fico scores, make sure to black out their social security numbers for privacy issues. This is a great way to provide full transparency on your buyers offer, so the seller can see the credit strength of the buyers profile.
 
Now you may say that providing a copy of the buyers credit and bank statements is a private issue, but the seller can also say, if you don’t want to show everything on the buyers profile then we will consider someone elses offer.
 

4. Make sure the buyers approval is current
Make sure the date on the buyers approval is current. It is not uncommon these days for a buyer to be submitting offers for up to 6 months, so sometimes the pre approval letter or the DU underwriting approval has a date from 6 months ago. This will not fly as perhaps the buyers credit scores have dropped or they do not qualify for a particular loan program anymore. If the date is more than 30 days old make sure to run the buyers application through DU’s automated underwriter again. Remember Fannie Mae and FHA have been making changes to their DU underwriting guides quite frequently recently, so the buyer may not qualify for the particular loan program anymore if a few months have gone by.
 

Be prepared to answer the following questions on your buyer
Many times the seller may ask other questions in regards to a buyers profile to make sure they will qualify for financing. Here is a few examples that the seller may bring up in regards to your buyer.
 
1. What is the buyers employment situation?
Many times the sellers are now asking about a buyers employment situation to make sure they will meet the minimum underwriting requirements for a lender. For example, has the buyer just started a new job, is the buyer self employed, how does the buyer get paid? For example, a lot of lenders are requiring that a buyer be on a new job now for a few months at least, or if your buyer just started a new job, make sure they are salaried and not commissioned only, as most of the time the lenders need 2 years commissioned income to be able to use commission income.
 
If the buyer is self employed, make sure the buyer has filed their taxes for 2009, as some self employed people file extensions on their taxes. If they have not filed, then of course the lender will have to use 07 & 08 taxes to get approved, and if they had a bad year for one of these years they may not qualify for the loan anymore.
 
2. Does the buyer have any additional reserves or funds?
This is an important question these days, as sometimes the sellers are making sure that buyers have back up funds for a plan B just in case there is a change in the transaction that will require additional funds to close. For example, sometimes there are repairs needed on a property that will pop up on an appraisal that the seller will not pay for, or perhaps the appraisal may come in a few thousand short which may leave the buyer a few thousand short for closing, as the lender will only finance the loan based on the appraised value.
 
Here you do not need to provide any additional funds to the seller, but make sure if someone asks these questions that you know the buyer has additional funds for a Plan B scenario. Many times FHA buyers are breaking the bank to buy a home and this can be off putting to a seller in case any additional funds maybe required, it is always a good discussion to have with a buyer to make sure they have “access” to any emergency funds in case a situation arises.

 
Ask these questions on listings
A good idea would be to use the same format above for your listings and request the same information on all buyers. Keep a cheat sheet handy and ask all these questions to the loan officer providing the information for the buyer on your listing, then keep it in the file for the seller. Too many times, something pops up in a buyers profile and no one will know about it until the last minute. This way you will have addressed all the specifics on a buyers profile ahead of time.
 
Full transparency and communication is key to helping a buyers offer get approved from start to finish. I always perform this duty for all the listings I am in charge off, so only solid buyers will get through the door and will get approved for financing.
 
A note on Greece, the EU and mortgage rates

What a week last week was in the financial markets all over the world. The DOW at almost -1000 had its largest one day drop in history, supposedly caused by someone hitting the wrong key on a trade (yet to be confirmed, but the conspiracy theorists are running rampant). Whatever the reason behind the plummeting DOW, it has certainly brought back fear and uncertainty into the markets again.
 
Keep your eye on events in Europe as they DIRECTLY affect interest rates in our markets. For example mortgage rates dropped down to 4.75% last week when the DOW started plummeting, because when there is fear and uncertainty in the markets, investors will pull their funds from the high risk equity markets (stock markets) and flock to the safe haven of US Treasuries and Bonds, thus dragging down interest rates with them. Check out the huge spike in mortgage bonds below (this lowers mortgage rates) last Thursday which was directly proportional to the massive sell off in the DOW on the same day).
 
    Mortgage bond market last week when DOW Plummeted 

 
Remember: When there is weak economic news (Euro zone problems, higher unemployment etc), this normally causes money to flow out of Stocks and into more stable treasuries & Bonds, helping Bonds and home loan rates improve. But if there is strong economic news (lower unemployment, Euro Zone problems getting fixed, more homes sold etc) investors will pull their money from the lower yielding bond markets and put their money into more risky higher yielding stocks, thus causing mortgage rates to increase. It is an interesting dynamic that generally bad economic news is good for mortgage rates.
 
I hope that these tips above help you and your business, remember the more work that is done upfront to ensure the buyers financial profile and offer is solid, the better chances everyone has of meeting their goals. If you have any questions about any of the information above, or you need help getting a buyer approved, please do not hesitate to contact me directly at 858-200-9602. I look forward to chatting soon.  
 
 

  

   
  

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