9 Ways That "Waiting For Mortgage Rates To Fall" Can Come Back To Haunt You

In late-November, as mortgage rates fell into the fives, homeowners helped to start a mini-Refi Boom. This week, however, self-doubt crept in.
Rest easy, friends. You're not missing out.
See, it's well-known that 0-point mortgage rates touched 4.500 percent Wednesday. But it's a little less well-known that those 4-and-a-half percent rates lasted less than 60 minutes. And when the rates were gone, they were gone.
The press isn't doing a follow-up on it, but that same 0-point loan is now priced at six percent, instead. Owie.
Nevertheless, the Plunge-and-Surge has Refi Boom Homeowners wondering whether it would be good idea to cancel their refinance-in-process and wait for rates to fall back into the 4s.
Speaking frankly, this is a terrible idea. And I have 9 really good reasons why.
1. You could unexpectedly lose your job. Nearly 2,000,000 people have been fired in the last 12 months and each week, more layoffs are announced. No job, no mortgage approval.
2. Mortgage lenders could reduce loan-to-value limitations. Suddenly, having a 20 equity stake may not be enough. You may need 25 percent or more. Homeowners with jumbo and investment mortgages are especially susceptible here.
3. Your home could be damaged in a winter storm. In Chicago, large snowfalls can ruin a roof. The same can happen in Seattle. Or Nevada. Then, as soon as a state Governor requests federal aid, mortgage lenders put start to put closings on hold pending home re-inspection. Damaged homes don't get their new mortgages.
4. Mortgage insurance rates could rise. Private mortgage insurers have lost billions this year and have twice raised premiums to even up the balance sheets. Default rates show few signs of abatement so it's likely that PMI rates will rise again in 2009.
5. You could fall ill or get injured. Even for insured Americans, medical issues are the second-most common trigger-event for home foreclosures next to income curtailment. If illness should keep you from working, or leads to long-term disability, your likelihood of getting a home loan is dramatically reduced. Nobody ever expects to get sick.
6. Banks could tighten lending guidelines. Well, we already know this is happening. With each passing week, it gets tougher to borrow mortgage money for one reason or another.
7. A nearby foreclosure could lower your home's value. Mortgage rates are highly sensitive to a home's value versus the amount of money borrowed against it. Foreclosures (and other "fire sales") bring down the Fair Market Value of every home nearby. This leads to higher loan-to-value ratios and, therefore, higher mortgage rates.
8. Your credit score could fall unexpectedly. Credit scores are meant predict the likelihood of mortgage default and the model appears to have failed these past few years. Anecdotally, there's evidence that the credit bureaus are correcting that. Carrying high balances or opening new tradelines appears to be more damaging to credit scores than it used to be. Lower credit scores means higher mortgage rates.
9. Mortgage rates could rise, not fall. Look, nobody knows what rates will do tomorrow. Anyone who says they do is lying. The only thing predictable about mortgage rates is that they're unpredictable. Take what you can, when you can. You can always refinance again later.
And, if you want to throw a 10th reason in there for good measure, use this: It's bad karma to cancel a loan. The Mortgage Gods never forget and -- someday -- it'll come back to bite you in the arse.

What Deflation Does To Mortgage Rates

Starting December 13, 2008, Many Mortgage Approvals Will Require Larger Downpayments And More Home Equity

• In a move that will stymie thousands of would-be home buyers and homeowners, Fannie Mae announced another round of mortgage guidelines changes last week.
  


• Unlike past revisions in which Fannie Mae tightened debt ratio and credit scoring requirements, however, the newest underwriting updates zero in home equity and home buyer downpayments.
  


• This is consistent with the emerging underwriting philosophy that Collateral is King.
  Paraphrasing Jeff Spicoli:
  No home equity, no downpayment, no dice.
  

Effective December 13, 2008, Fannie Mae will enforce the following single-family residence restrictions:

• Primary residence, "cash out" refinances are limited to 85% loan-to-value


• Second home, cash out refinances are limited to 75% loan-to-value


• Investment properties cannot be refinanced without a 25% equity position
  

Each bullet point represents a 5 percent tightening over the previous guidelines.
Now, to be clear, Fannie Mae isn't the only source for mortgage money. The others are comprised by the FHA, the VA, and an innumerable amount of portfolio lenders. To date, these groups have yet to announce similar loan-to-value restrictions.
But, because Fannie Mae (along with Freddie Mac) guarantees almost half of the nation's home loans, it does swing a big stick. Historically, when Fannie Mae gets tight with its money, the other groups tend to follow.
Starting 60 days from now, qualifying for a conforming mortgage will require more home equity than at any time since 2003.
Now, there are a lot of people sitting around right now, waiting for mortgage rates to fall before buying or refinancing their home.
I'd offer a more prudent idea: Just get on with it already.
None of us can predict what where mortgage rates will go. Recession, inflation, whatever -- it's a big mystery. But, we do know with 100% certainty that guidelines will tighten effective December 13, 2008, and it will prohibit Americans from getting access to mortgages.
We know this because Fannie Mae published it on its Web site.
If you're buying a home or in need of a refinance, consider moving up your timeline. If rates fall after-the-fact, you can always try to refinance into something less expensive. But if guidelines shut you out, there's nothing you can do about in hindsight.
If you know you need mortgage money now, just take care of it. Great low rates don't mean a thing if you can't get qualified. And starting December 13, 2008, the qualifying hurdles are going to be raised.

If Your ARM Is Adjusting In November 2008 Or In 2009, You May Be A Victim Of Bad Timing

An adjustable-rate mortgage is a mortgage for which the interest rate remains fixed for some period of time, after which it can change based on some pre-determined rules.
A shared rule among adjustable rate mortgages is the formula by which they adjust.
Expressed as a formula, it reads:
(Adjusted Rate) = (Variable) + (Constant)
For conforming, full documentation mortgages made since 2003, the variable was often assigned to the 12-month LIBOR, and the constant was often fixed at 2.250.
So, to take the formula and apply it to the real world, the adjusted mortgage rate on a resetting ARM is equal to whatever the 12-month LIBOR is at the time of adjustment, plus 2.250 percent.
As the variable in the equation, of course, LIBOR is of paramount concern to homeowners.
LIBOR stands for London Interbank Offered Rate, but the acronym doesn't really matter to homeowners with ARMs. What does matter is that LIBOR is getting slaughtered.
LIBOR is the interest rate at which banks lend money to each other. And, as banks get munsoned worldwide, financial firms are raising LIBOR to offset the risk of their peers going belly-up. Since Lehman Brothers failed last month, LIBOR is up nearly 40 percent.
If you were looking for evidence that banks are nervous about their future, this should do nicely. Unfortunately, homeowners with ARMs are feeling the pain, too.
Last Month: A 5-year ARM adjusts to 5.203 percent
This Month: A 5-year ARM adjusts to 6.308 percent
Applied to a $300,000 mortgage, LIBOR's rocket-ride drains an additional $2,500 from a household budget over the course of a year.
Until order is restored in global banking system, LIBOR should continue to rise. This is bad news for homeowners with ARMs adjusting in November, December, or in the early part of 2009. Mortgage rates will adjust higher, causing pain for homeowners with 2003-vintage, 5-year ARMs at 4.000 percent.
There is some good news, however.
Mortgage rates on most news loans are lower than what an adjusted mortgage rate would otherwise dictate. If you have equity in your home and a good credit score, it may be smart to refinance into a brand new mortgage as opposed to letting your existing mortgage adjust.
Contact your mortgage lender to see which plan fits your best.

For How Long Is Your Mortgage Rate Quote "Good"? Try 3 Hours and 51 Minutes.

Exhibit A: Wall Street investors are making life difficult for mortgage rate shoppers.
It used to be that mortgage lenders issued pricing on a Monday morning and those rates were good for the entire week. Rate shopping was easy back then because everybody could take their time.
Today, not so much.
Because Wall Street has been somewhat manic lately, mortgage lenders have had to publish mortgage pricing -- on average -- 2.07 times per day since August. That's more than 10 times per week.
Mortgage rate shoppers have been caught in the crossfire because many are unaware of how quickly the ground is moving beneath them. The classic story is the homeowner that "wants to sleep on it", only to find that rates moved a quarter-percent overnight. Changes like that happen more often than you think.
See, all year, stock markets and bond markets have been fighting over the same investment dollars and it's making mortgage rates act like crazy.
Mostly, this is happening because Wall Street has not been real strong on moderation this year -- it's either everybody in, or everybody out.
This lemming-like behavior has led to the highest levels of volatility in market history.
So, for rate shoppers, just being aware of what's happening on Wall Street is half of the battle. When there's encouraging news about the economy, stock markets tend soar at the expense of bond markets, including the mortgage-backed bond markets. This is bad for mortgage rates and pushes them higher.
Then, in the other direction, when there's discouraging news about the economy, stock markets tend to tumble and bond markets tend to do quite well. This is good for mortgage rates and helps them ease lower.
Shopping for a mortgage is a complicated process. It didn't used to be, but it is now. In addition to mortgage guidelines that disqualify new groups of "fringe borrowers" weekly, mortgage rates are highly volatile and extremely unpredictable. And to add another layer of uncertainty, mortgage lenders are closing their doors and loan officers are leaving the business.
What good is a great rate is your lender won't be there to close it?
In a market like this, a piece of solid advice is to saddle up with a lender you trust instead of looking for the absolute lowest rate and fee combination. It's important to save money but one of the little secrets of the business is that good lenders are usually among the cheapest to work with anyway.

Mortgage Rates Are Falling On The Combined Impact Of The Bailout Bill And The Washington Mutual And Wachovia Seizures

With mortgage rates moving faster than the Spread HD offense this morning, let's take a few minutes to recap what's going on, and what's causing rates to fall.

First, the bailout.
Late Sunday, Congress drafted the Emergency Economic Stabilization Act of 2008 bill and it goes to vote sometime today. The key provision in the bill that's helping mortgage rates is on Page 110.

The passage reads, summarized:
The U.S. Treasury gets access to $250 billion immediately
The U.S. Treasury has to ask the President for its next $100 billion
The U.S. Treasury has to ask Congress for its next $350 billion

Because of how the bill is worded, the U.S. Treasury can't go spending taxpayer money willy-nilly, lessening the likelihood of monetary supply inflation nationwide. This is good because anytime inflation pressures ease, mortgage rates stand to benefit and this is one of the catalysts for today's rate drop.

Another reason why rates are falling is death of banking giants Washington Mutual and Wachovia.

It's no coincidence that these two institutions shut down within 3 days of each other. Both were heavy pushers of the now-famous Negatively Amortizing Mortgage, the time-bomb assets of which clogged the banks' respective balance sheets.

Consider: When Washington Mutual was rescued bought by JP Morgan Chase & Co. and the buyer devalued WAMU's portfolio by a massive $31 billion, it forced investors to reassess Wachovia's mortgage portfolio, too.

Within minutes, Charlotte-based Wachovia lost a quarter of its value and was a Dead Man Walking. Then, before even a weekend could pass, Wachovia had been packaged and sold to Citigroup with the help of the U.S. government, leading to another $42 billion in mortgage portfolio writedowns.

That's $73 billion in mortgage losses practically overnight.
Surprisingly, this is good news for mortgage borrowers because each time a bank acknowledges losses like this, the mortgage market as a whole gets one step closer to discovering what an individual home loan is really worth on Wall Street.

In fact, it's this exact conundrum that defines the mortgage market domino chain, dating back to July 2007. If markets could just accurately answer "What is a mortgage worth?", this little credit mix-up thing would be over.

WAMU and Wachovia hitting the showers brings us one step closer, and at least for today, brings mortgage rates down.

WaMu becomes biggest bank to fail in US history

NEW YORK - As the debate over a $700 billion bank bailout rages on in Washington, one of the nation's largest banks — Washington Mutual Inc. — has collapsed under the weight of its enormous bad bets on the mortgage market.

The Federal Deposit Insurance Corp. seized WaMu on Thursday, and then sold the thrift's banking assets to JPMorgan Chase & Co. for $1.9 billion.

Seattle-based WaMu, which was founded in 1889, is the largest bank to fail by far in the country's history. Its $307 billion in assets eclipse those of Continental Illinois National Bank, which failed in 1984 with $40 billion in assets; adjusted for 2008 dollars, its assets totaled $67.7 billion. IndyMac, seized in July, had $32 billion in assets.

One positive is that the sale of WaMu's assets to JPMorgan Chase prevents the thrift's collapse from depleting the FDIC's insurance fund. But that detail is likely to give only marginal solace to Americans facing tighter lending and watching their stock portfolios plunge in the wake of the nation's most momentous financial crisis since the Great Depression.

Because of WaMu's souring mortgages and other risky debt, JPMorgan plans to write down WaMu's loan portfolio by about $31 billion — a figure that could change if the government goes through with its bailout plan and JPMorgan decides to take advantage of it.

"We're in favor of what the government is doing, but we're not relying on what the government is doing. We would've done it anyway," JPMorgan's Chief Executive Jamie Dimon said in a conference call Thursday night, referring to the acquisition. Dimon said he does not know if JPMorgan will take advantage of the bailout.

WaMu is JPMorgan Chase's second acquisition this year of a major financial institution hobbled by losing bets on mortgages. In March, JPMorgan bought the investment bank Bear Stearns Cos. for about $1.4 billion, plus another $900 million in stock ahead of the deal to secure it.
JPMorgan Chase is now the second-largest bank in the United States after Bank of America Corp., which recently bought Merrill Lynch in a flurry of events that included Lehman Brothers Holdings Inc. going bankrupt and American International Group Inc., the world's largest insurer, getting taken over by the government.

JPMorgan also said Thursday it plans to sell $8 billion in common stock to raise capital. Its stock rose in midday trading Friday on the New York Stock Exchange, gaining $1.90, or 4.37 percent, to $45.36.

The downfall of WaMu has been widely anticipated for some time because of the company's heavy mortgage-related losses. As investors grew nervous about the bank's health, its stock price plummeted 95 percent from a 52-week high of $36.47 to its close of $1.69 Thursday. On Wednesday, it suffered a ratings downgrade by Standard & Poor's that put it in danger of collapse.

WaMu "was under severe liquidity pressure," FDIC Chairman Sheila Bair told reporters in a conference call.

"For all depositors and other customers of Washington Mutual Bank, this is simply a combination of two banks," Bair said in a statement. "For bank customers, it will be a seamless transition. There will be no interruption in services and bank customers should expect business as usual come Friday morning."

Besides JPMorgan Chase, Wells Fargo & Co., Citigroup Inc., HSBC, Spain's Banco Santander and Toronto-Dominion Bank of Canada were also reportedly possible suitors. WaMu was believed to be talking to private equity firms as well.

The seizure by the government means shareholders' equity in WaMu was wiped out. The deal leaves private equity investors including the firm TPG Capital, which led a $7 billion cash infusion in the bank this spring, on the sidelines empty handed.

WaMu ran into trouble after it got caught up in the once-booming subprime mortgage business. Troubles then spread to other parts of WaMu's home loan portfolio, namely its "option" adjustable-rate mortgage loans. Option ARM loans offer very low introductory payments and let borrowers defer some interest payments until later years. The bank stopped originating those loans in June.

Problems in WaMu's home loan business began to surface in 2006, when the bank reported that the division lost $48 million, compared with net income of about $1 billion in 2005.

At the start of 2007, following the release of the company's annual financial report, then-CEO Kerry Killinger said the bank had prepared for a slowdown in its housing business by sharply reducing its subprime mortgage lending and servicing of loans. Alan H. Fishman, the former president and chief operating officer of Sovereign Bank and president and CEO of Independence Community Bank, replaced Killinger earlier this month.

As more borrowers became delinquent on their mortgages, WaMu worked to help troubled customers refinance their loans as a way to avoid default and foreclosure, committing $2 billion to the effort last April. But that proved to be too little, too late.

At the same time, fears of growing credit problems kept investors from purchasing debt backed by those loans, drying up a source of cash flow for banks that made subprime loans.

In December, WaMu said it would shutter its subprime lending business and reduce expenses with layoffs and a dividend cut.

The bank in July reported a $3 billion second-quarter loss — the biggest in its history — as it boosted its reserves to more than $8 billion to cover losses on bad loans. Over the last three quarters, it added $10.9 billion to its loan-loss provisions.

JPMorgan Chase said it was not acquiring any senior unsecured debt, subordinated debt, and preferred stock of WaMu's banks, or any assets or liabilities of the holding company, Washington Mutual Inc. JPMorgan also said it will not take on the lawsuits facing the holding company.
JPMorgan Chase said the acquisition will give it 5,400 branches in 23 states, and that it plans to close less than 10 percent of the two companies' branches.

The WaMu acquisition would add 50 cents per share to JPMorgan's earnings in 2009, the bank said, adding that it expects to have pretax merger costs of approximately $1.5 billion while achieving pretax savings of approximately $1.5 billion by 2010.

"This is a definite win for JPMorgan," said Sebastian Hindman, an analyst at SNL Financial, who said JPMorgan should be able to shoulder the $31 billion writedown to WaMu's portfolio.
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