Thursday, January 31, 2008

Mortgage Rates

These are turbulent times with many changes happening at lightening speed. These changes will affect your business and personal lives so we are trying to give you valuable updated information in a concise manner regarding 1) recent moves by the Fed 2) the effect on mortgage rates currently and predicted 3) proposed changes to Fannie Mae, Freddie Mac and FHA 4) How do you capitalize on the changing environment

First, as you all know, the Fed lowered the fed funds rate yesterday by .5% after a .75% drop 8 days earlier. These dramatic moves set a record for the sharp drop in a short period of time. This DID NOT immediately lower mortgage rates except on ARMs of 1 year or 6 months. Longer term mortgage rates are not directly linked to the fed funds rate or any short term index. Mortgages ultimately wind up as MBS (mortgage backed securities) which are traded on Wall Street. The opinions of the Traders are what directly affect our mortgage rates. Therefore the Trader's reactions to the Fed moves determine rates. The traders are making moves daily whereas the Fed only does so about every 45 days, normally. So yesterday after the move, mortgage rates were worse than last Tuesday prior to the Fed making a 1.25% cut to Fed Fund rates. Don't listen to Matt Lauer on this subject listen to us.

We do expect that the continuation of economic news reflecting a slowing economy will lead to lower mortgage rates. In fact, we are seeing that today. We are optimistic and excited about the probability of lower rates and perhaps the return of a "normal" yield curve. As you may know, in the past 2 years you could get a 30 year fixed rate at or below the rate on a 5/1 ARM. Borrow money on a 1 month LIBOR plus one percent and your rate was higher than a 30 year fixed rate just a month ago. This is not normal - even a UGA finance major knows that. We believe that over the next few months we may return to something like this: 1 year ARM = 5.0% - 5.25%, 5/1 ARM = 5.375% - 5.625%, 30 year fixed rate = 5.75% to 6.25%. This would be a good sign of a normalizing market just as more prudent risk management by lenders has been the start of normalcy.

What is the good news from a lower fed funds rate? Rates on Home Equity Lines of Credit (HELOCs) will be lower. For those of us who sometimes use our HELOCs to aid in cash-flow management our expense of borrowing has dropped by 2.25% in the past few months. Prime was 8.25% in August and today it is 6%. Anyone with an ARM,(1yr, 2yr, 3/1, 5/1 etc.) that is coming up on an adjustment in the next 6 months will not experience as much increase in their rate. The media has created great fanfare around the adjusting mortgages coming due this year. This drop may not fix everyone's problem but it will help. Many of these home owners may choose to refinance and lock-in a lower rate, especially if they expect to be in their home for at least 2 more years. Many businesses borrow based on Prime or LIBOR and their expense will decrease which will help the overall economy.

You likely have heard that Fannie Mae, Freddie Mac & FHA may be increasing their maximum loan amounts. This proposal is included in the President's "economic stimulus package". The proposal has passed the House and is currently in the Senate. As I understand it, the increase will be 125% of the average sales price for each area. I can not yet say how much, if any, this would increase the "conforming limit" over the current $417,000. We are trying to determine the "average sales price" for the Jacksonville MSA. When and if, the stimulus package passes and is signed into to law we will let you know.

How can you capitalize on lower rates? If you are a borrower determine if you could be borrowing money at a lower interest rate and what your expense to refinance your loan would be. If you can recapture the expense of a refinance in less than 2.5 years then you should consider the refinance - know your numbers. If you are selling real estate, be informed and advise your clients - sellers and buyers. If you are an investor, you may consider buying property to take advantage of lower priced homes and lower interest rates. Remember if the rates for borrowing are decreasing the rate you will get on your investments like money market and CDs will decrease. Maybe real estate is a better place for your discretionary investments.

Should you have any questions on the information presented here, please call or email us. We are happy to help you "know your numbers". Determine your current loan amount(s). Is your rate fixed or adjustable? If adjustable, when? What is your current rate? How long will you own this property? If you can answer those questions then we can tell you at what rate you should pull the trigger. Please call or email us to discuss. Have a great February!

Ben Stephens Alan Vanderheiden

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