Zero-points rates on conforming loans up to $417k and super-conforming loans up to $625,500 have moved up in recent weeks because the Fed has executed its mortgage bond buying differently than expected (more on this below). So the pricing trend across most banks has been to offer favorable terms on points. Normally one point gets borrower about .25% to .375% lower in rate, now it gets .625% to .875% lower in rate. This means borrowers break even on a one-point buydown in 12-18 months. Good news: the new stimulus packages coming are likely to raise super-conforming loan limits to $729k.
Even better news for loans above $729k: 30-year fixed jumbo rates for single family residences (SFR) are looking very competitive at 6.625%. Purchase prices and down payments below:
SFR purchases up to $1m require 20% down
SFR purchases up to $2m require 25% down
SFR purchases up to $3.57m require 30% down
SFR purchases up to $5.38m require 35% down
This is critical for higher priced markets like San Francisco, and the long-term 30yr fixed term is relevant in a market environment where inflation could push rates up in the coming years.
HOW FED MORTGAGE BOND BUYING AFFECTS RATES
When the Fed started buying mortgage bonds five weeks ago, the goal was to push mortgage bond prices up and yields (or rates) down. Since the program was announced in November, markets went wild with rumors of 4.5% rates. Below is a breakdown of what’s actually going on … keep in mind that this rate discussion is focused on loans up to $417k.
When the Fed program started, it was thought they’d buy mostly 4% coupons, and since mortgage bonds at this level represent consumer rates of about 4.5% to 5%, that’s why there was buzz about 4.5% rates. Instead they’ve focused heavily on higher coupons, especially the 5.5% coupons in recent weeks, which represent outstanding loans in the 6% to 6.5% range. This does two things: (1) it drives rates down enough to allow existing mortgagees with these 6% to 6.5% rates to refinance, and (2) It provides quick payback on the Fed’s investment when these loans refi.
If the Fed isn’t heavily buying lower coupons like 4% and 4.5%, it doesn’t help drive rates down to the levels often discussed in the press. Also not helping rates to drop lower is private selling pressure. Right after the Fed announced their MBS buying program on November 24, private investors piled into lower-coupon MBS as a way to get in ahead of the government buying, which brought zero-points rates from 6.375% to 5.125% as of January 5.
But now private investors are selling to take profits and the Fed is focusing on higher coupons, so both of these factors work against zero-points sub-5% rates. As of today, zero-points 30yr fixed mortgages up to $417k are about 5.375% versus 5.25% two weeks ago. Remember: these are average rates on loans up to $417k. If buyers pay one point (1% of the loan amount), they will get 5%. Better and worse rates are present in the marketplace.
So why is the Fed focusing on higher coupons? They need to spread out their budget as long as possible. So even if rates don’t drop significantly from here, the Fed’s strategy makes it unlikely that rates will spike near term. And again, the 1-point rates are still highly attractive and record lows.
TARP II & STIMULUS UPDATES
Today, the Senate passed an $838 billion stimulus bill by a vote of 61-37. Now a joint Senate-House committee must reconcile this and the previously passed House stimulus package. One notable difference is that the Senate proposes a primary home purchase tax credit up to $15k and the House proposes waiving the repayment requirement for a $7,500 tax credit that already exists for first-time home buyers.
Stock markets were underwhelmed by Treasury Secretary Tim Geithner’s bank rescue proposal today. In short, it calls for the creation of a $500b to $1t public/private investment fund to provide financing for illiquid securities still on bank balance sheets. Former Treasury head Hank Paulson originally proposed that TARP funds be used to buy illiquid securities but instead TARP phase one was used to directly inject capital into banks after it was deemed too difficult to value the illiquid securities.
This new program would take more time to figure out how to value securities and take some of the pressure off the government if private investment was also part of the plan. Geithner also said Treasury would continue to inject TARP funds directly into banks but this time with more restrictions on executive pay and acquisitions. The plan was light on details as to banks’ requirements to redeploy TARP funds for specific purposes.
Conforming ($200,000 – $417,000) – 1 POINT
30 Year: 5.0% (5.21% APR)
FHA 30 Year: 5.0% (5.21% APR)
15 Year: 4.875% (5.08% APR)
5/1 ARM: 5.75% (5.96% APR)
Super-Conforming ($417,001 to $625,500 cap by county) – 1 POINT
30 Year: 5.375% (5.52% APR)
FHA 30 Year: 5.375% (5.52% APR)
Jumbo ($625,500 – $3,500,000) – 1 POINT
30 Year: 6.625 % (6.83% APR)
10/1 ARM: 6.25% (6.39% APR)
5/1 ARM: 5.375 % (5.52% APR)
Scenarios assume full doc pricing on purchase or rate/term refi (but not cash-out refi) loans for borrower with 720 FICO score or greater, at least 20% equity, and 6-12 months reserves left over after close (retirement assets counted at 70% of value for reserves). Better and worse rates apply to specific client profiles. Better rates are also available using tax deductible points. ARM rates adjust the first month after initial fixed period shown, and once per year thereafter until year 30. Adjusted rate calculated by adding 2.25% margin to 1yr LIBOR index at time of adjustment. At first adjustment LIBOR+margin cannot exceed start rate+5%, subsequent yearly adjustments can never be greater than 2% per year, total of all adjustments for 30yr life of loan can never exceed start rate+5%. This is not a loan commitment nor a loan guarantee, rates based on loan amount ranges shown and rates available at the time of production. Rates subject to change without notice. California Department of Real Estate license #01376428. Equal Housing Lender.
Julian D. Hebron