Mortgage Market Update: 10/15

banks dont want to lend to one another. It is NOT a liquidity issue, it is a TRUST/CONFIDENCE issue.

Clearly, banks are hoarding and dont trust one another. They have to deal with their own problems and capital raising from now on is from govt's, not private sector.

Contributing to longer end of the curve, is upcoming MASSIVE TREASURY issuance, credit worthiness of USA may come into question (not downgraded, just questioned), or our friendly funders may become not friendly or dump their holdings.

Im short long end of curve and one side effect of all this at long end, is HIGHER RATES! Get ready

Noah:

Agreed. It really is scary. There is huge uncertainty and fear, and banks are questioning each other's ability to repay their debt.

Meanwhile the DOW is back below 9,000.

Hi MortgageMan

I look at this website www.bankrate.com. I've been looking at this website for daily mortgage rates for about 6 months. I believe I read a positive review of this site, although it has been 6 months so I'm not sure. Although it seems as if rates have gone up substantially from last week and even yesterday to today, they are quoting a rate almost 100BPs less than your quote for conforming loans.

Have you heard of this site and if so, is it just an ad trying to draw people in? If not, then why is there rate so much lower than yours? Are the rates you described above what we should consider generally prevailing rates for conforming loans for high credit rating individuals?

Thanks MM

AA:

Bankrate.com is not considered to be an accurate guage of the mortgage market at all. Rates on the site are not updated that often and a bait & switch technique via a low rate advertisement to lure clients in, is pretty much standard procedure.

Don't forget that it is not as easy to quote rates now a days, as Fannie & Freddie now charge risk based premiums that are significantly different for every person. Point being that there is no uniform rate for everyone and every scenario is different, so I try to quote rates using a "good credit score, 20% down scenario".

Also don't forget that conforming rates are usually uniform across the board and may vary between each bank by a maximum difference of 25bps due to special discounts that, that bank may be offering.

It kinda bothers me that the rest of the world is blaming the US for this debt crisis. Sure sub prime was a catalyst, but bad lending and bubble like mentality existed all over the world. With the US being so much more transparent than other places (even England - notice how RBS was just bailed out, although they have been swearing they had no problems for months) the admission of guilt has been far higher here. I would be surprised if much more egregious over-valuation of property markets and bad underwriting were not present in the submerging markets countries.

Jeff,

"It kinda bothers me that the rest of the world is blaming the US for this debt crisis."

If the media doesn't blame USA for the problems, how will they conveniently blame Bush and the republicans for creating this mess?

FYI: I think everyone is to blame, prudent folks were the extreme minority here (hopefully they will be the winners after this)

if they continue to blame us, WHO WILL BUY THE TREASURIES THAT WILL FUND ALL THESE RESCUE PLANS AT REASONABLE RATES AND CONTINUE TO BUY FOR YEARS TO COME?

MortgageMan,

I'm glad to hear your one of the few in that industry who kept realistic in their lifestyle choices. I'm sure you'll pull through this tough time and come out in a better, stronger position for the next upswing.

On the other hand, I don't have much compassion for those who lived the mcmansion and hummer lifestyle. No matter how you make your money and how infinite the earnings potential seems, the smarter, more prudent person will understand that having the best looking car/house/wife/kids birthday party on the block shouldn't be your highest priority.

Mortgage Man:

I have a question for you. I have a long-term lock on my condo at a great rate - sub 5.25% on a ARM jumbo paying less than a point. I have been underwritten and approved and my appraisal came in above contract price (albeit six weeks ago, before the latest mess). My question is - what can go wrong? Is there anyway the bank can wake up the day of closing and decide not to fund my loan (thus putting me in default and putting my deposit at risk). Is there anyway the bank can simply cut back on my LTV (currently 60%) and only fund 50% or less? Am I protected by my committment or does the bank always have the option to opt out? Wouldn't they WANT to opt out, given that the current market is a point or more than what I was quoted and locked? Clearly, if my bank ceased operations, I would not expect them to fund my commitment. Would I have recourse to (gulp) sue?

In theroy, I am ready for my closing but I would like to know your thoughts as to what can go wrong.

Pal:

First off, congrats on locking into a phenomenal rate!

You are already ahead of the game.

Here's the deal: If you have a commitment and it is pretty clean, and is from a reputable lender, I think you should be OK.

Here is how things work: If you are approved for a loan and guidelines change, the new guidelines will not affect your loan if you have a underwriting approval. Therefore if financing guidlines change from 60% to 50% on NYC Condo's, the lender will be obligated to stick to their commitment.

Yes, the bank can at any time pull their commitment HOWEVER it has to be for a reasonable purpose AND they MUST issue a declination letter if they pull it. When you receive a declination letter, you can have your deposit money back without a question. This happens very rarely and usually with unqualified borrowers.

For peace of mind, I would recommend the following:

1. Make sure with your loan officer/broker that all of the info is updated on their Condo Database and you are fully approved by the Condo Department. LENDERS ARE GETTING VERY STRINGENT ON CONDO FINANCING.

2. Make sure your loan officer/broker receives a "Clearance to Close" authorization at least 1 week before closing.

3. Confirm with your loan officer/broker that they have every condition satisfied for the underwriters AND if they don't, what they will need from you.

Good luck!

blame is what Europeans do. but they also buy our stuff, emulate our financial system and poach our technology. big problem facing us will be deflation peppered with a four year run at quasi-socialist statism under a vertically integrated Democrat-controlled government. they will shrink the pie here at home. the breadth and depth of private equity deals that are clogging the pipeline will take years to reprice and monetize. to make things worse, a lot of the assets that should be moving at distressed prices now, are sitting underneath management platforms that are still pretending they bring value to the equation (i.e Lehman, AIG, etc.). until this gridlock gets busted, you can't move forward. my guess for manhattan residential is that we see an average price PSF in the $500 to $600 range by 2010.

PCModem:

Thank you!! I agree with you. Everyone including people who make an excellent living, should definitely save for the future and should always have something for a rainy day.

One request: Please type in "nyc" in the "Keyword" box, next time you post. I had to retreive your comment from the Junk area.

Thanks again!!!

Well, yes, many people should have been more prudent. But many just found themselves falling behind trying to provide the basics, or something slightly better. The price of housing, health care, groceries, education and energy have gone through the roof. Incomes have not, and unemployment has been rising. Many people have been overextending themselves just to keep food on the table and pay the bills. Not everyone has been insanely profligate. Much of the overextension was caused by people trying to afford a decent place to live, and believing the media and the "experts" who said prices were not going to get any lower. Yes, $600K for an 1100 sf shack in Orange County seems insane. So does $450K for a 300 sf studio in Manhattan. You really can't generalize.

Brenda,

Agreed.

I think we all know that the damage has been done and now its time to learn from our mistakes. Moreover, I think lenders will be the first to admit that their underwriting practises were lax at some point in time.

At the end of all of this, I think most people will realize how important it is to have some savings. I realize that not every person can attain this, but if you are living in $700k home with a mortgage, you should at the very least realize that anything in this world can happen and you have to be prepared financially.

Noah

Great blog by the way. Question - take the typical $1.5 million new development 2 bed 2 bath high end luxury condo located in a prime Manhattan location - what do you think it will be worth in 12 months time?

Alan - thx..I would guess

a) if seller is NOT distressed and markets/prices properly ---> 1.2M - 1.3M

b) if seller IS distressed ---> 1.15M - 1.2M

Just like in investing when markets seize up and investors are holding the bag and we see who is swimming naked, we will soon find out which Manhattan homeowners are swimming naked!

Some will be forced to sell. Its happening already.

I hate predicting the market, but clearly readers know I am bearish near term. I think we are down 10% from peak levels right now, and in 12 months I would expect to be down another 10-15% from peak levels.

If mortage rates keep climbing, then what will that do to apartment prices? They're going to fall obviously, but can we expect them to drop even lower to account for the higher rates buyers will be getting on their mortgages?

I think that Noah's prediction is reasonable, but there is huge uncertainty and tail risks. NYC real estate is being hit by a perfect storm... the wealth effect of a 40%+ decline in the stock market, a broken wall street business model (layoffs and lower income/bonuses going forward), economic weakness, fear of a depression, and higher jumbo rates to name a few factors. It is now clear that inventory and price cuts are escalating. At the very least, the risk has gone up!

7.125% for a 30 year conforming and 8.125% for a jumbo 5 year ARM are excessively higher than where the market is currently priced.

Clearly there are many specifics that are involved with pricing for a specific mortgage, but generally speaking those rates are too high to remain on many lender's rate sheets.

A conforming loan up to $417,000 for a single unit is currently priced at 6.375% with no points.

Portfolio lenders are offering Jumbo 5 Year ARMs at 6% with no points.

Don't watch the Treasury market, it has nothing to do with mortgage rates. It's all about mortgage backed securities (MBS).

The National Association of Realtors has it dead on:

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aQ7NzXW0Sr34

Yea the NAR has been spot on for their calls since 2006.

True, rates are based on MBS, but most people dont watch those. If 10YR goes from 3.5% to 4%, you will see a rise in lending rates.

However, these are crazy times and there was a period where 10YR fell significantly and lending rates didnt because MBS risk was repriced and lenders became more risk averse.

trust me, if 10YR moves from 4% to 5%, lending rates will rise!

4%-5% on the 10 year rates will rise without question, that's a significant jump.

Most importantly, consumers need to understand the fact that mortgage rates do not have a direct relationship to the Treasury market.

When investors liquidated their MBS holdings and bought Treasuries earlier this year, someone who thought the Treasury market drives mortgage rates would be ecstatic watching that yield. Except for the fact that mortgage rates were climbing as the yield on the 10 year was shrinking.

Rates will not come down as much as anyone would like until the MBS market outgains the Treasury market. That's not happening until Paulson starts buying MBS.

Still floating a loan that should go to settlement around Thanksgiving. What do you think rates will be like in 2 weeks or so? Do you think we will see the five's again?