The Mortgage Perfect Storm

I left off last time talking about the Mortgage Perfect Storm.

Many of you are inquiring about the direction of rates in the near future, so here is my insight:

Rates will remain VERY volatile this year - why? Because the markets are receiving mixed messages on several different fronts. I am going to comment about them below.

What concerns me more than the volatility of rates are the changes we are seeing in the mortgage industry in regards to lending criteria and falling values.

Here are some comments about rates:

1.) The Feds are currently reducing rates to provide liquidity to the markets and fend off a pending national recession (too bad they haven't been paying closer attention to Michigan, which has been in a single state recession now for well over a year) When the Feds reduce short term rates it can have the affect of reducing longer term mortgage rates as well. The key to whether mortgage rates fall in relation to the short term rates is the amount of inflation, risk and demand present in the market for mortgage backed securities.

In other words, if the Feds reduce short term rates a lot (like they did last week) and bond traders on Wall Street feel that this move will curb a recessionary period, land the economy on solid ground and potentially produce a stonger economy and thus increases in the cost of goods - they will see that as an inflationary move and potenitally sell out of long term bonds causing RATES TO GO UP. This is what we saw temporarily last week.

2.) The credit markets are still very sore from the loan losses incurred from mixing sub-prime mortgages with traditional mortgages and suffering from increased default rates as a result. Investors are now very skeptical of putting their money back into anything mortgage related. This causes a lack of demand and thus a liquidity crunch because there is less money to lend.

Here are the 2 BIGGEST Issues I see this year:

3.) Lending Criteria and Falling Values - The biggest problems I see this year is that lenders are tightening their belts with credit standards. I have seen more changes in 90 days than I have in the last 7 years. No Ratio loans have been eliminated, 100% financing has for the most part been eliminated and risk based pricing (higher rates - the riskier the loan) is just a sample of change.

Falling property values will become exacerbated with the implementaion of these new guidelines. What I mean, is that we were already seeing a smaller borrower pool due to the Michigan economy, but with fewer loan programs to choose from, there will be fewer buyers - this will force the market to reduce prices even more as more competition for homes on the market increase.

The only good news to all of this is that you will eventually see a balance between homes on the market and buyers willing to buy them. When will this happen? Hard to say.

I will plan on updating this with comments as news is received.

Congratulations to the many of you who listened to my advice and have or are in the process of getting out of ARMs, or improving rate!!!

If you have not had the opporutnity to benefit from the recent moves, I do believe that we will see another swing in the next 60 days. The best thing to do is be prepared - I have created a Rate notification by e-mail alert that should help. We just have to keep our fingers crossed that more mortgage programs are not eliminated and that values hold steady.

Until the next post - Jon