Mortgage Bites :: SoundBiteBlog.com

Everybody loves a sale! It’s easy to get so caught up in the illusion of saving money that we either spend more than we should or we squander hours (and money) trying to find an even better deal.

About two weeks ago the Wall Street Journal announced, in a very short article, that the U.S. Government is considering a fixed 4.5% interest rate for mortgages in an effort to stimulate the economy. The article was very short; about 6 sentences. It quoted no sources and gave little information. But, boy did it cause a flurry in the newspapers and on the Internet. And ironically, almost immediately, activity in Mortgage Offices slowed down. The telephones got busier, but mortgage application activity slowed down noticeably. Why? Because everybody loves a sale!

Shortly after the WSJ article was published, the telephone started ringing. Clients wanted to know when they could sign up for the new 4.5% interest rate. All of the callers I spoke with were disappointed to find out that this program is not available. It may become available at some point in the future, nobody knows. It’s just an idea at this time, not a fact. Our Government might institute the idea, they might not. Almost every phone call ended the same way. “Well, I think I’ll wait to see when that new program starts and I’ll get my mortgage then”, or a variation of this comment.

It didn’t seem to matter that 5.125% was available that day. Nor did it matter that over the next week rates dipped slightly (they can’t dip much right now because they are already so low). Almost everybody had their sights set on 4.5% and nothing else would do. Many people, it seems, want to wait for the “maybe”. In the meanwhile, incredibly low, very attractive interest rates are being overlooked while an entire segment of the population waits for something better!

I can’t help but wonder how many hundreds of thousands of dollars will be lost to homeowners who are so focused on the 4.5% interest rate that they will ignore terrific interest rates already available. Will you be one of the people looking backwards thinking “What was I thinking? 5.25% was a great rate!”.

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The banking system in the USA is in crisis. The Fed keeps lowering Federal interest rates, but mortgage interest rate predictions are still going up – how can this happen? And what might it mean for home owners today?

The relationship home owners need to grasp to understand interest rate predictions is the interplay between interest rates set by the Fed and mortgage interest rates charged by mortgage lenders.

Interest rates that are set by the Fed flow into the cost of funds to mortgage lenders. Banks and other lenders don’t possess all the funds they lend out when a mortgage is written – they borrow on the wholesale market 90% or more of what they lend out to home owners, at interest rates lower than the mortgage rates they charge home owners for their mortgages.

Banks make their profits from the difference between what they pay when they borrow money, and what they charge when they lend it out.

When the Federal Reserve lowers interest rates, it lowers the borrowing costs for financial institutions, so you would think that mortgage interest rate predictions would fall. However, financial institutions may choose not to pass on the savings to mortgage holders.

The reason for this is not greed – there is adequate competition in the mortgage lending market to ensure that no bank or other lender can profit unfairly. The real motivation is that being a bank that lends for mortgages just became a whole lot more risky, and risk tends to make banks raise interest rates.

Financial institutions are everyone more interest to compensate for their losses on the few who will miss payments on their mortgages.Until the current housing market settles, risks for lenders will remain elevated, and mortgage rates forecast will continue to be high.

The Fed can’t lower interest rates indefinitely. The actual interest rate (called the “nominal” rate) includes inflation. To find the “real” interest rate, you need to subtract the inflation rate from the nominal interest rate.

Today, when you do that, you get a negative number! This means that nominal interest rates are not even high enough to keep up with inflation.

Clearly, this is a situation that cannot continue for long. Sooner or later, probably sooner, the Fed will have to raise interest rates to at least break-even levels, matching the rate of inflation. As soon as it happens, the prime interest rate rise will flow through into mortgage interest rates. The only way is up for the mortgage interest rate forecast.

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Posted in Mortgage Bites | 6 Comments »

Continuing trouble for two of the Country’s largest mortgage lenders

KIRO TV reported that Governor Gregoire is making moves to remove Countrywide Mortgage’s license to do mortgage business in the state of Washington this morning. This is just the most recent problem Countrywide has had to deal with. Countrywide is currently being sued by the State of Illinois (for defrauding borrowers) and being sued by the State of California. I wonder what the Bank of America stock holders think of their purchase now. I guess they wouldn’t be able to call it Countrywide anymore.

Edit 6/26/2008 – Gov. Gregoire announces $1,000,000 fine for Countrywide

Edit 6/26/2008 - The Department of Financial Insitutions has added this banner to  the front page on their website.

Washington Mutual is facing difficulties of it’s own. Union members picketed WAMU’s last shareholders meeting in reaction to the news that WAMU has arranged a $7 billion (yes, billion) cash infusion to try to hold back the floodwaters of bad loans on their books. The shareholders question if $7 billion is enough. You can read the details in the Seattle PI.

In a related article, the PI reported the rather stunning numbers involved in Washington Mutual’s move into credit cards for borrowers with “blemished” credit. Although WAMU insists it is a “very prudent, fiscally conservative approach”, the article reports that the bank added 660,000 new credit card customers in the first quarter of 2008. Mr. Dreman, of Dreman Value Management, LLC (whose company owns 28.8 million shares of WAMU stock) stated “They’re up to their necks in everything bad”.

 I’ll ask the obvious question. Does it make sense to use new high risk credit card accounts to offset the losses from high risk mortgages?

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Tags: countrywide mortgage, governor gregoire

Yesterday I decided not to publish an article about the troubles one of our own is having in Kitsap County. I hate to see a local company struggling. But Westsound Bank’s struggle has just become very public. Both the Kitsap Sun Newspaper and the Seattle Times published articles this morning concerning Westsound Bank’s recent SEC filing.

Yesterday’s information came as no surprise to those of us in Kitsap County mortgage lending. The abrupt departure of a key employee last month and the almost immediate closing of the mortgage lending department at West Sound Bank caused quite a stir, raised numerous questions from locals and created considerable concern among area builders and property developers.

The NASDAQ has Westsound Bank as the worst performing stock for the day. Share values fell almost 43%.

Westsound Bank is under investigation by both the FDIC and Washington State’s DFI (Department of Financial Institutions). There is more speculation and rumor, than facts available right now. But there is no doubt, the next few months will be difficult ones for the Bank.

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Tags: FDIC, SEC, washington state DFI, westsound bank

Life can be overwhelming at times. It happens to us all. There’s information overload, the mounting costs of everything from gasoline to college educations, the internet explosion, health care cost increases, international strife, the whole political tennis match, FHA reform, rising foreclosure estimates in America and the day-to-day business of living while raising families. Have you tried to help your children with their homework lately? It’s no wonder many Americans consider “letting the house go back to the bank” as a viable solution to the ever-present stress of living life.

As a solution to debt problems, Foreclosure may not provide the financial relief some homeowners are seeking. Rather than ending up with a more managable budget after foreclosure, many consumers are horrified to find they must still make payments to a lender on a home they no longer own. The problem didn’t get better, it got worse.

Homeowners with significant equity in their homes tend to fight vigorously to save them. Homeowners who believe they have little to lose in equity, are more apt to “throw in the towel” when financial times get tough. These homeowners often get hurt the worst. And its not uncommon.

A deficiency balance occurs when the proceeds of the sale are insufficient to cover all the costs associated with the property being sold. First, there is the mortgage (sometimes there are more than one). Then there are late fees, attorney fees, court cost and any penalties that were assessed during the Foreclosure process. Sometimes there are back taxes that must be paid and unpaid utility bills. Once all these amounts are added up, they often exceed the amount of money generated by the sale of the property by tens of thousands of dollars. Now the homeowner is a renter with a huge liability owed on a home they no longer own as well as the cost of rental housing.

One of the hardest things for any of us to do is to keep a clear head while under financial pressure. It is the one time we can ill afford to make a poor decision. A decision to allow a home to be foreclosed that results in this scenario, does nothing to alleviate the stress a homeowner with financial trouble is under. It just prolongs the misery. Think twice before “throwing in the towel”. Is there ANY other way to work your way out of this tight spot?

To make matters even worse, if the Lender decides to “Forgive” the deficiency balance, don’t be surprised if the IRS labels this as Income and demands taxes on the money. They have done it many times in the past.

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Posted in Bites of Washington, Credit Bites, Foreclosure, Miscellaneous, Mortgage Bites | 5 Comments »

Tags: Foreclosure, kitsap real estate, washington state foreclosure