Mortgage Interest Rates
Mortgage interest updates courtesy of Mark King, Fairfield Mortgage. For a quick response call Mark at 770.314.3991.
After reaching the lowest levels in decades, mortgage rates have shot higher over the past few weeks, but why? The simplest explanation is that when investors look ahead, they see few reasons for mortgage rates to move lower and many possible causes for them to move higher. To fully understand this explanation, though, it is important to understand the unusual developments during the month of November and to look at all of the factors influencing mortgage rates at this time.
The story begins in late August when the Fed hinted that they would initiate a new stimulus program to purchase US Treasury securities, a process now famously known as quantitative easing. The news of this stimulus program created a strong demand for bonds, including mortgage-backed securities (MBS), and mortgage rates fell lower. Fast-forward to November 3rd when the Fed announced that they would indeed buy $600B. of US Treasury securities between now and the middle of 2011. At that time, many predicted that rates would fall even lower during the winter months ahead. A couple of days later, however, mortgage rates actually began to do the opposite and rose for the following four reasons:
1. Foreign and domestic opposition to quantitative easing. The announcement of the program was met with substantial opposition from other countries and from many US politicians and economists. Investors had viewed the $600 billion figure as a first step which would likely be increased in the future. It is clear now that the Fed will face strong resistance to an expansion of the program, in fact, this resistance could be strong enough to end the program early.
2. Stronger than expected economic data. Stronger growth decreases the need for additional Fed stimulus, and it generally leads to higher inflation. A few key reports released just after the Fed announcement caused investors to raise their outlook for economic growth.
3. Concerns about lower foreign demand for US securities. The quantitative easing program pumps dollars into the economy, and the increased supply weakens the value of the dollar relative to other currencies. When foreign investors sell US securities, they must convert the US dollars they receive into their own currency. If the value of the dollar falls, then the value of their US investment falls in relative terms to their own currency. As a result, foreign investors may reduce their purchases of US securities, including mortgage-backed securities (MBS), which would cause yields to increase.
4. Rising foreign rates. China's announcement of a rate hike was another negative for US mortgage rates. Yields must rise in other markets to compete with higher yields in Chinese markets.
The recent news has not been uniformly negative for mortgage rates, however. Current inflation levels remain extremely low. In fact, the Consumer Price Index data released last week showed that annual core inflation dropped to a record low in October. Bottom line, though, when mortgage rates reached such extremely low levels, it left them in a position to reverse direction very quickly, and that is what has happened in November. December and January should be very interesting...
If it’s too high, underwriters get nervous and get out their red pen. If it’s too low, realtors get nervous and call their loan officer. If it's right around the sales price, everyone's happy! What is it? The appraisal, of course! An appraisal is a key component of the mortgage process. It provides assurance to the lender that if the loan isn’t paid back, the lender could recoup any losses through the sale of the property. Here are some key facts regarding this important piece of the loan approval process.
Appraisers are independent experts
Appraisers are beholden to no one. They are independent third-parties hired by lenders to render an opinion on what a home is worth, based on specific data. Recent guidelines put into place by Freddie Mac and Fannie Mae prohibit anyone tied to the sales side of the mortgage process (loan officer, processor, etc) discussing the appraised valued with the appraiser. Appraiser independence is a big deal in the mortgage world today and has forced many lenders to use impersonal national appraisal firms that are low on customer service. At Fairfield Mortgage, however, we only use the best appraisers in Georgia that have been cherry-picked by county and are the very best in each given area.
Appraisers use data and experience
Appraisals are based on opinion, but that opinion is steeped in data that supports the conclusion. A common practice for appraisers is to compare similar properties that are superior and inferior in features, size and condition to the subject property, making adjustments between them to support the final value. This practice, called bracketing, would work like this. A comparable property might have a fireplace whereas the subject property does not. Or, the square footage might be greater in the subject property compared to the other comparable properties. Appropriate positive or negative adjustments are made to the subject property's value accounting for differences in features (or lack of them), so the properties are compared as closely as possible.
Adjustments based on market and not cost
Some home remodeling projects will deliver a healthy return on the investment, but others do not. A seller may have paid $30,000 to install a pool, but the current market is only willing to increase the price they’ll pay for that pool by $15,000. Adjustments are based on what the market values the improvements, not the cost or opinion of the seller.
Appraisals are a snapshot.
As market conditions change, so will the appraised value of a home. Appraisals capture the value at a specific point in time, but as we know, the housing market can change quickly. Thus, the value of a home in the Fall of 2010 might be a lot different than the value of the same home in the Fall of 2009. This is why appraisers are instructed to primarily look back only 3-6 months for data and appraisals are normally only good for four months.
The appraisal piece of the mortgage puzzle, is more complicated and controversial today than ever before. That is why it is critical to work only with lenders that use an in-house appraisal desk and the very best in appraisers. At Fairfield Mortgage, our appraisers always involve the realtors involved in the transaction before turning in a low appraisal. They will always ask for more data because they want to turn in a value that works if at all possible. Like everyone at Fairfield Mortgage, they are looking for ways to make deals work, not the opposite. Experience the difference. Experience Fairfield Mortgage!