Rates as of 11/20/08     

There is slight downward pressure on mortgage security rates despite Treasury rates continuing to plunge.  Stocks broke through previous lows in late trading yesterday and are down again today over 1%. Oil has touched on $50/barrel.

10-year Treasury rates are down .5% in the last two weeks while  mortgage rates are not much different.  This represents a "flight to safety" as U.S and foreign investors are preferring to buy Treasuries rather than mortgages and other debt instruments.

30-yr conforming mortgage rates are just about at the middle of their range over the last year.  Mortgage rates have been relatively steady for the last two weeks after being  extremely volatile in the previous month.  In October rates spiked over .5% following the 10/8 Fed rate cut.  The next week rates rallied to wipe out the increase.  The following week saw rates go back up .5% and in early Nov. went back down nearly .5%.    Where rates go from here is always the big question.

There remains a good chance that long term rates will go lower.  If credit markets continue to stabilize we should se long term mortgage rates rally.  Treasury rates have moved lower already as it has become clear that the economy will not come roaring out of this recession.  Decreasing inflation should help bring down longer term interest rates(more rate outlook analysis below)      __________________________

(all rates subject to rate adds for less than excellent FICO scores, higher LTVs, loan amount adjustments and for Cash out)____________________

RATE OUTLOOK (cont.)    

Normally we would expect the prospect for a worsening economy to put downward pressure on long term interest rates.  This is not happening now as credit crisis concerns are controlling the markets.  But when the markets settle down we should see long term rates improve.  With oil below $60 a slow economy, inflation should be lower in the next couple of years.  This is because a slow economy would cause the Fed to keep short term rates low for a longer time and a slow economy also wrings inflationary pressure out of the economy as consumers and businesses cut back.  Earlier in the year the stock and bond markets clung to the consensus that the "recession" would be short and mild and that the Fed and Congress actions would be successful in reviving the economic growth in the second half of 2008 and that unemployment will not get much above 5.5%.  That was way too optomistic as few foresaw the depth of the current economic crisis. Now the consensus has shifted toward thinking that the economy will not show much growth in the next year and will not have any significant growth until 2010.  This change in consensus is reflected in the stock market slide.  

The market volatility we have experienced this year is because there has been unusual uncertainty over the outlook for the economy.  Normally the consensus has a very high probability of happening.  But even now there is a chance of the economy being okay a year from now, as well as a chance that the economy could still be in a recession or a chance that things could be worse.    The wide range of possiblities for the economy over the next few years scares investors and will cause markets to be volatile until the outlook gets clearer. 

When mortgage rates get below 6% they are more likely to spike up then continue down.  The few people who got the great rates Wed. 1/23  a.m. were the borrowers who were in process waiting for the right moment to lock.  The same with the great rates on 3/17 or 9/16!.  While it is unlikely that rates will get that much lower, anything at 6% or better is very good for a fixed rate and should not be passed up. If you do not have a good fixed rate it makes sense for almost everyone to get one on the next dip in rates.  When the economy improves it could be several years before we see rates this low again especially because the actions to cure the crisis will almost certainly result in an inflation problem when the economy starts to grow again.  With all the uncertainty it makes sense to have your rate locked in for as long as possible.

WHAT DRIVES LONG TERM INTEREST RATES?Long term rates including mortgage rates react mostly to the expectation for inflation over the next 10 years so long term rates DO NOT move directly with the short term rate changes.  (See Frequently asked Question #1 to see graph of Fed Funds & mortgage rates).  The bond market actions most often preceed the Fed as the markets are able to analyze the same data that the Fed sees.  The law of supply and demand say increased borrowing from the gov't bailout of the financial system (as well as the huge budget deficit) will have an upward pressure on rates at some point when the economy recovers.

INTERMEDIATE TERM AND SHORT TERM RATES:  Short term rates are driven largely by the Fed's actions.  Intermediate term rates (3-7 yrs.) are in between and are much more influenced by the Fed's handling of short term interest rates.  Recently the conforming intermediate term loan rates have been much different than 30-yr. rates.  But the jumbo intermediate term loans are far below the jumbo fixed rates because of some lenders willingness to hold the intermediate term loans in their portfolios.

The Prime Rate is now  4.0% after the 10/29. cut, so prime tied HELOCs are very cheap money after having spiked to over 8% a couple of years ago.  Lender cutbacks have tightened the availability of this money significantly so it much harder to get a new HELOC and older HELOCs continue to be frozen by lenders as property values drop.

Recent Rate Trend: Conforming mortgage rates steadily improved from mid-June '07 until early December with the 30-yr mortgage falling from 6.75% to 5.75% over this period.  In December rates backed up as much as .5% as the markets focused on signs that inflation had increased in late 2007. Rates again dropped   bottoming out on January 22 & 23 when the conforming rates hit their historical lows seen at times in 2003 -2005.  Rates quickly popped up off these extreme lows.  Rates have cycled up and down this year in a very wide range with the 30-yr conforming fixed varying from below 5.5% to 6.5% at the high.  In late May to mid-July inflation concerns caused long term mortgage rates to spike to the highest levels since mid Aug 2007.  Rates held steady for a month before rallying in the late summer and come very close to the previous lows of this year in mid-September.  Rates swung back and forth in Oct.  nearing the highs and lows of the year.  Rates in early Nov. are in about the middle of the range they have been in during '08.

The Fed has cut short term interest rates by 4.25% since 8/07.  The next meeting is 12/16.   

Annual core inflation (without energy and food) has improved in recent months to be 2.2% which is slightly over the Fed's target of 1.0%-2.0%. Total inflation is down to 3.7%.  Inflation should continue to moderate if oil stays at or below $60.  In 2003  - 2005 when long term mortgage rates were below 6%, inflation was running only about 1%.  So we are actually lucky that long term rates are as low as they are given the inflation outlook.  With the current crisis inflation is not an immediate concern as there is huge asset deflation in housing and stocks that threaten our economy.  The Fed & gov't moves to fight this will be inflationary in the long run.  But the slow economy should cause inflation to drop significantly over the next year.

Borrowers with adjustable mortgages tied to Treasury & LIBOR indices and lines of credit tied to prime will be helped by the Fed rate cuts and low short term interest rates.  Option ARMs will come down too but not as fast.   The LIBOR index which normally is just above Treasury rates has shot up several percentage points due to the troubled interbank credit markets.  LIBOR has improved somewhat in recent weeks but this will negatively impact borrowers with ARMs indexed to LIBOR.

Call for information on additional products.  Rates are subject to change.  Call to confirm current rates.

MORTGAGE NEWS

CONFORMING & FHA LOAN LIMITS COMING DOWN!  Beginning 1/1/09 these loan limits for single family homes will decrease to $625,500 in high cost counties.(most of Bay Area). The conforming limit had been $417,000 in recent years and the FHA limit lower until March when these limits were temporarily raised to $729,750.  The lower '09 loan limit will hurt high cost areas like the Bay Area, but the borrowers between $417,000 and $625,000 will most likely see more liberal guidelines that will help refinancers.

ONLY THE SAFEST LOANS ARE GETTING THE LOWEST RATES:     Lending standards are continuously tightening and there are more risk based pricing "add-ons".  The conforming loans have increased risk based pricing this year by huge amounts.   Borrowers with lower credit scores get rates that are as much as .75% higher.  Before this year the conforming loans had no adjustments for credit score.  The pricing add-ons start with scores below excellent.  The rate add ons for rental property have increased a lot.  For example with 20% down payment an owner of investment property will have a rate about 1.5% above the rate for an owner occupied property.  Previous to this year the rate add on would have been about .375%.

$7500 tax credit -   The latest legislation provides for a tax credit for first time homebuyers.  This credit has to be repaid over 15 yrs, so in effect provides an interest free $7500 loan to first time homebuyers who buy between 4/9/08 & 7/1/09.  It phases out for singles making over $75k & couples making over $150k.

FHA LOAN PROGRAM FOR BORROWERS WITH NEGATIVE EQUITY (Hope for Homeowners)-  This legislation created a loan program where lenders would write down loans to 90% of current values.  Lenders are not required to participate.  Lenders and borrowers would share the future increases in home values.  This program started 10/1 but is off to a slow start and the outlook is that this program will not help much.  Lenders have loosened up on modifications in recent weeks but are generally not writing down principal.

JUMBO LOAN MARKET NOT YET RECOVERED-  The jumbo crisis is over a year old and it is still hard to find a 30-yr fixed rate below 8% without paying points.  Some portfolio lenders are making 5 and 7 yr. fixed loans at rates in the mid 6% range.  Fixed rates show no sign of improving soon.