HARP Extended Through 2018

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The U.S. government deploys several resources for Americans who need help financing a home purchase, including the popular FHA Loan program. But unbeknownst to some, there are also tools available for current homeowners who have fallen behind on their mortgage payments.

One of them is known as the Home Affordable Refinance Program managed by the Federal Housing Finance Agency, a wing of the Treasury Department. Although it was set to expire in September, HARP has been extended once again, continuing to offer homeowners additional options if they find themselves underwater on their mortgages.

Background of HARP

HARP was originally created as a direct response to the housing crisis and economic recession that began in 2008. During this time, as property values around the country plummeted, large numbers of mortgage borrowers found themselves paying off home loans that were now more expensive than the market value of their house. This caused millions to slip into foreclosure, especially with homeowners who had just recently bought had not yet built up significant equity.

The surge in foreclosures around this time was abetted by the fact that many of these homeowners were unable to refinance and gain some relief from ballooning debt. Conditions in the U.S. real estate market at the time made it unfeasible for financial institutions to save these loans from foreclosure.

To rectify this complex problem, the FHFA authorized federal lenders Fannie Mae and Freddie Mac to enact HARP. Beginning in March 2009, HARP offered refinancing services to homeowners who met certain qualifications. These qualifications remain mostly intact in the current iteration of HARP, which may offer assistance to mortgage borrowers who:

  • Are paying off a mortgage originated on or before May 31, 2009 and is currently owned by Fannie Mae or Freddie Mac.
  • Have a current loan-to-value ratio (LTV) over 80 percent. LTV is the amount of debt owed on the loan divided by the home’s current value, expressed as a percentage.
  • Are up-to-date with their mortgage payments, and have a history of on-time payments over the last year.
  • Either live in the home as a primary residence, or consider it a second home or investment property with no more than four units for rent.

The official website of HARP offers tools for users to find out if their mortgage meets most of these qualifications, and guides them through the application process.

Does HARP work?

Some policy analysts had speculated that after nearly eight years and previous renewals, HARP would soon be on the chopping block for federal budget planners. Its renewal through 2018 is therefore a demonstration of its success as well as the need that still exists.

A study from the Urban Institute found that despite early struggles, HARP could now be considered “arguably the most successful housing policy initiative coming out of [the 2008 housing crisis].” The FHFA estimated that HARP refinanced around 2 million loans just in its first two years, a figure that has since surpassed 3.5 million. With HARP borrowers saving an average $200 per month on their mortgage, the program has provided cumulative savings of approximately $35 billion since its inception.

HARP activity peaked around 2012, but its selective criteria means there are likely few homeowners who would still qualify. The FHFA estimated that as of March 2017, roughly 143,000 U.S. homeowners could still take advantage of the program, but that this was likely an overestimation of the number who will actually do so.

Regardless, the continuation of HARP for another year solidifies its legacy as a landmark policy achievement. That’s particularly true, according to the UI study, because HARP needed to be overhauled several times after its inception before it began refinancing loans en masse. Several of these modifications turned out to be forebears to the way mortgage lenders do business today:

  • Instead of paying for in-person home appraisals, qualifying properties were processed through an automated valuation system.
  • Mortgage insurers adopted a unified approval process to move coverage from old policies to new ones easily.
  • Fannie Mae and Freddie Mac increased competition among lenders by reducing the number of underwriting assurances they required for HARP loans.

The Urban Institute concluded that these three changes to the program were largely responsible for its success in reducing refinancing risks for mortgage lenders and passing savings onto the homeowner. The FHFA has also created additional homeowner assistance programs in the mold of HARP, taking these lessons and applying them to other aspects of the home finance market.

With HARP here to stay, both homeowners and mortgage lenders are in a great position to work more effectively and keep the U.S. housing market as robust as ever.

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No Reason to Be Afraid This Time of Year

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Halloween approaches. We suspect that it’s a favorite holiday for a certain cadre of people. Some people revel in fear. They seek it out; they search for reasons to be afraid. 

Fear is a draw to many financial-market participants as well. The financial website ZeroHedge.com has carved a niche for itself by appealing to the draw. Most everything ZeroHedge reports is reported with a slant to highlight fear: Stories of financial bubbles, impending market crashes, inevitable economic collapses, runaway inflation abound. If you seek a reason to worry, ZeroHedge is the website for you. 

This isn’t to say that there isn’t a need for contrary (or negative) opinion. The world isn’t all sunshine and lollipops. ZeroHedge serves a purpose; it can keep you grounded. Our attention was piqued by a ZeroHedge article titled “Housing Starts, Permits Collapse in September (Spoiler Alert: It Wasn’t Just the Storms).” 

A catchy title, to be sure, but there was no collapse.

Yes, permits were down in September. Specifically, they were down 4.5% month over month.  But when you examine the numbers more closely, you’ll find that they were up where it really mattered.  Permits for single-family homes rose 2.4% to an 819,000 annualized rate in September. Year over year, permits for single-family homes are up 9.3%.

As for housing starts, overall starts were down, but the important single-family segments was up. Single-family starts were up 9.1% year over year.

So, accentuate fear, if you must. At the same time, don’t ignore the possibility that the glass is frequently half full.   

We believe it is more than half full when it comes to housing, particularly the new home market.  Home builders appear to share our optimism. 

After dipping in recent months, home-builder optimism returned with a vengeance in October. The Home Builder Sentiment Index rebounded four points to post at 68 (a posting above 50 is positive). Builders were particularly cheerful on the sales outlook. This component of the index was up five points to post at 78. 

New-homes sales were robust at the beginning of the year, but they faded during the summer months. This latest report on housing starts points to new-home sales regaining momentum.  We expect the new-home market, both starts and sales, to enter 2018 as it entered 2017 — on a rising trend.

A bubble in housing?

We don’t see it. Even after five years of exceptional gains in home prices and building activity, it’s worth noting that single-family starts and completions remain significantly below historical norms. We expect to see a few more years of increasing housing starts and completions, at least in the single-family segment. We see no reason to fear the outlook on housing. 

 

All Quiet on the Rate Front

Everyone expects Federal Reserve officials to raise the federal funds rate at their December meeting. What’s more, most everyone expects the Fed to slowly and predictably reduce its balance sheet over the next couple years. Because everyone shares similar expectations, we’ve seen little movement in interest rates this month. 

We also haven’t seen the next dip in mortgage rates that we thought could occur after rates rose in September. We could still get one, though. It’s worth noting that North Korea’s leader Kim Jong Un has amped up his belligerent posturing in recent days. Markets are also nervous about the prospect of Catalonia breaking away from Spain. We could see more investors seek a haven in the usual assets — U.S. Treasury securities and gold. Should that occur, we could see the dip that has generally followed the rise over the course of 2017. 

Today, though, it’s mostly sideways, as it has been for most of October. This isn’t bad. A rate range of 3.875%-to- 4% is still the going range on a top-tier 30-year conventional loan on the national scene.  In the grand scheme of mortgage-rate history, this is still a good rate.  Of course, we all want a little better, but a little better doesn’t appear likely in the immediate future. 

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Time for Another Rate Dip?

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The commercial will be right one of these days. Whether “one of these days” is tomorrow, next week, next year, or next decade, we can’t say. 

Lenders have warned repeatedly in print and radio ads over the past five years that higher interest rates will soon befall us. The rationale is predicated on historically low interest rates (which can’t last) and the Federal Reserve raising interest rates (which it has). 

Here we are in 2017 and mortgage rates, though not at historical lows, are still low by historical standards. Rates have trended higher in recent weeks, but the trend is best measured in basis points (one basis point being 1/100 of a percentage point), not full percentage points. 

Consumer price inflation continues to trend stubbornly low by Fed standards. The Fed is fixated on consumer price inflation continually rising 2% annually. Something it has yet to do. What’s more, few market participants expect a ramp-up in inflation. Rate remain low at the long end of the yield curve.

A quote of 4% on a 30-year fixed-rate mortgage is the prevalent quote across the country, according to Mortgage News Daily. Depending on the supply-demand paradigm, time of day, lender incentives, alignment of the stars, and what not, 3.875% will materialize. If recent past is prologue, 3.875% (and lower) could materialize more often. 

We’ve mentioned more than a few times that this lending market has been characterized by a repetitive cycle. The market has oscillated between peaks and valleys every few weeks or so: The December peak gave way to the January valley. Rates rose from the January valley to the March peak, which gave way to an April valley. Rates rose from the April valley to the May peak, which gave way…. You get the picture. 

The latest valley occurred in early September. The latest peak was last week. Rates have eased since. 

Does another valley loom?

We’ll give our best answer, as equivocating as it may be, it could: The stock market has been lackadaisical of late. Third-quarter earnings exceptions have ratcheted lower. Gold and silver prices have trended higher. (The opportunity cost of holding gold and silver falls when market participants expect falling interest rates.) 

The real question is to float or lock? We’re not alone in noticing the peak-and-valley cycles that have occurred this year. Borrowers who have anticipated another valley by floating have been disappointed not to see a robust bond-market rally, which would lead rates lower.

This isn’t to say that locking is the default position. All it takes is one slice of bad news — an earnings miss by a major corporation, a downgrade in GDP growth, another North Korea dust-up, a political scandal — and we could get that bond market rally that drops us into another valley. It’s not like it hasn’t happened before.

Buy Low, Sell High (Easier Said Than Done)

It sounds so simple: buy when others are selling, sell when others are buying. So simple, yet so few can do it. Contrarianism is contrary to most people’s nature. 

But it’s not contrary to everyone’s nature. Bloomberg ran a story this past week on investors buying flood-damaged Houston homes for forty cents on the dollar. Bloomberg goes on to tell us that such a contrarian strategy has paid off in the past. Buyers were able to take ownership of New York co-ops and office towers at a deep discount when the city was on the verge of bankruptcy in the mid-1970s. 

More recently, contrarian investors snapped up residential properties on the cheap after the 2008 financial crisis. We remember those days. Though despair filled the air, we continually implored people to focus on the full half of the glass. This, too, will pass, we reasoned, and so will the opportunity to buy real estate so cheaply. The housing market today has proved us right. 

The takeaway from  Bloomberg’s Houston story is to venture into areas where other people are afraid to venture. Instinctively, most of us want to remain with the herd and adhere to the trend. But if we can see things the way they could be and not as they are and act accordingly, a lot of money can be made. We expect a lot of money will be made by Houston’s intrepid real estate investors. 

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The Difference between Loan Officers at Banks and Private Lenders

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Homebuyers on the hunt for a mortgage in 2017 have more options at their disposal than ever before. As always, name-brand banks continue to dominate the conversation regarding home loans. But increasingly, new homeowners are finding it easier and more cost effective to finance their home purchases with the help of a private mortgage lender.

While they each share the same goal, private mortgage lenders differ from their big bank counterparts in a few key ways. Homeowners should familiarize themselves with the best private mortgage lenders before signing onto a loan. After all, closing that loan could very well mark the beginning of a years-long relationship.

How private lenders differ

At any financial institution, the person who reviews and approves mortgage applications is called a loan officer. But despite similar titles, there are some significant differences between a loan officer working at a typical bank and one at a private lender.

What does a loan officer do, and how do those duties differ depending on their institution? One of the biggest differentiators between the two can be seen in legally mandated licensing and registration requirements:

  • A loan officer working at a depository institution, like a bank or credit union, must be registered under the National Mortgaging Licensing System. Once approved under this federal system, the loan officer is authorized to conduct business in all 50 states.
  • Private lenders, however, are held to a different, arguably higher standard. Since they are considered “non-depository institutions,” loan officers at a private lending firm must not only be registered under the NMLS, but also must obtain a license in the state where they will operate.

This additional license requirement means private lenders must undergo at least 20 hours of state-mandated coursework, as well as at least eight hours of continuing education per year. The course requirements vary by state but usually include extensive coverage of federal and state lending laws, ethics courses and other technical training.

 

 

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The Normal Rate of Interest over History

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Is the current interest-rate environment a unique environment? 

The answer, in short, is no.

Sydney Homer and Richard Sylla show in their magnum opus A History of Interest Rates that interest rates can remain remarkably sedate (at high or low levels) over a long period. At other times, they can remain remarkably volatile. Over the thousands of years of interest-rate history, it’s all been seen before. 

Homer and Sylla show that real estate loans in ancient Greece held an 8%-to-12% range for two consecutive centuries before the range moved down to 6.67%-to-10% for the subsequent two centuries. In London in the 18th century, the average mortgage rate ranged between 4% and 4.75%.

On our side of the Atlantic, the rate on a mortgage for a borrower of high credit standing was 5.1% in 1900. For most of the first 65 years of the 20thcentury, mortgage rates ranged between 5% and 6%.

Then interest rates (including mortgage rates) began trending significantly higher in the 1970s.

The range in rates has been quite wide over the past 36 years. Quotes as high as 18.375% on a 30-year mortgage were the norm in 1981. Quotes as low as 3.5% occurred last year.  A range of 3.875%-to-4.25% has been the norm for the past year. 

Could market volatility return, with volatility marked by a rising trend? 

Here we are in 2017 with a Federal Reserve determined to raise interest rates and tighten the money supply. We can lean on recent history to gauge a potential outcome.

The Federal Reserve shifted to a policy of increasing the federal funds target rate in 2004. The rate was increased in measured steps to 3% from 1%. The yield on the 10-year U.S. Treasury note barely budged, though, averaging 4.5%.  Over the same time, the rate on a 30-year fixed-rate mortgage ranged between 5.5% and 6%. 

The Fed has taken a similarly measured approach over the past 12 months. Rates on long-term credits have responded similarly, as well: They rose slightly on rumor, but then have drifted lower after the news. 

We’d bet on rates remaining sedate, but we wouldn’t bet the farm. History shows that it wouldn’t be abnormal for the rate range we have today to hold. Then again, history also shows that it wouldn’t be abnormal for rates to be quoted 10 percentage points higher a decade from now. 

The environment we have today isn’t unique, but neither is it necessarily permanent. 

It’s All Relative

Housing-market proponents are on guard against President Trump’s tax-reform plans. The plans include doubling the standard income-tax deduction to $24,000 for a married couple and eliminating deductions for state and local taxes. 

If the plans come to fruition, the mortgage-interest-rate deduction (MID) would become less valuable relative to the new standard deduction. Fewer people would itemize, so fewer people would use the MID. The reduced value of the MID benefit will reduce the incentive to buy a home. This is what many MID proponents claim. 

The NAR has been most vocal for maintaining the higher relative value of the MID. The NAHB, which frequently stands with the NAR, has taken a slightly different tack. The NAHB has backed away from the MID campaign and has lobbied more for other incentives, such as homebuyer tax credits, remodeling tax credits, and the exclusion of all capital gains from income taxes. 

Our preference would be to maintain the MID at its high relative value. But if it losses its relative value, we’re not overly worried. Buyers still have a strong incentive to own a home.  

Rarely do any of us do anything for monetary gain alone. The economic analysis downplays the satisfaction of homeownership. Most people prefer to own than to rent; most people prefer to live in a neighborhood of owners than renters. This is based on a psychic benefit, not a monetary one.

The psychic benefit of homeownership is a stronger incentive than many housing proponents acknowledge. What’s more, the psychic benefit is frequently a stronger motivator than the monetary benefit. The numbers matter, to be sure, but so does human nature.  We shouldn’t overlook that.

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Fed to Shrink Balance Sheet

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Federal Reserve officials wrapped up their latest meeting (which occurs every six weeks) and announced what most market watchers expected them to announce: The Fed will shrink its massive balance sheet. The balance sheet holds mostly Treasury securities and mortgage-backed securities (MBS) — roughly $4.5 trillion of them. 

The Fed’s new policy has widespread ramifications. The Fed’s balance sheet correlates positively with base money supply. The larger the balance sheet, the more money the Fed has injected into the economy.

Here’s how it works: Primary dealers (mostly investment banks) buy Treasury securities and MBS and then turn around and sell them to the Fed. The Fed pays with newly minted money. Fed demand for the securities and the influx of new money work to keep interest rates low. 

Now the Fed is ready to reverse course.

After massively expanding its balance sheet (and the base money supply) following the 2008 financial crisis, the Fed seeks to shrink its balance sheet (and the base money supply) to more normal levels. The Fed had long ago ceased expanding its balance sheet with new purchases. The modus until now has been simply to reinvest the proceeds from maturing Treasury securities and MBS into newly issued Treasury securities and MBS, thus holding the base money supply high but steady. 

Going forward, the Fed plans to retain more of the money received from maturing Treasury securities and MBS. This will reduce the Fed’s demand for Treasury securities and MBS. It will also reduce the money supply. Lower demand and reduced money supply could keep interest rates on a rising trajectory. 

Interest rates rose into the Fed’s meeting last week. Market participants anticipated the Fed’s plans, and anticipation was manifest in rising interest rates.

But how quickly will rates go up?

Not quickly at all.

The Fed’s plan is to start with a $10 billion roll off in October, which will increase quarterly until it reaches $50 billion by October 2018. Considering the Fed’s balance sheet holds $4.5 trillion of securities, we’re looking at a slow, multi-year reversing process.

Fed Chair Janet Yellen was also quick to hedge. Yellen mentioned that “policy is not on a preset course.” In other words, if conditions warrant, the Fed could quickly reverse course.

There is an old saying pertinent to financial markets: “Buy the rumor, sell the news.” Act one way on rumor, act the other way when the rumor is confirmed. If past is prologue, mortgage rates could dip again in the coming weeks as more market participants act the other way.

 

Blame It on Harvey?

Home builder sentiment eased in September after rallying in August. Most of the easing occurred in the South, which was impacted by two hurricanes.

Sentiment was down despite home starts rising nationwide in August. Single-family starts were up 1.6% to 851,000 units on an annualized rate. Starts should show more growth once the water subsides in Texas and Florida. Additional building will occur to replace lost homes.

As for existing homes, sales were down 1.7% in August. Hurricane Harvey was to blame. Overall sales were dragged down by a decline in sales in the South. No surprise here: Buying and selling will always take a backseat to surviving.  

Of course, there’s more to current existing-home sales than hurricanes. Lack of inventory continues to bog down sales in many markets. But some reprieve has occurred on pricing: The median price of an existing home actually fell 1.8% to $253,500 in August.  

The good news is that this too shall pass (hurricane season). The housing market remains healthy. Near-term Interest-rate uncertainty and immediate weather won’t change that. We still expect housing to lead the economy (as it has) into 2018. 

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Rates Ascend, but Stocks and Median Incomes Look Strong

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We’ve counseled borrowers to lock on the dips in recent months. The latest dip was deeper and more prolonged than most, but it was still a dip. It has become less of one this past week.

Many investors have cycled out of the haven investments — namely U.S. Treasury securities — and cycled into riskier investments, namely stocks. Treasury prices are down, stock prices are up. This means Treasury yields are up as well. The yield on the 10-year U.S. Treasury note is up 10 basis points in the past week. Mortgage rates have been up nearly as much. 

Despite the rise, opportunities still exist to lock a 30-year fixed-rate conventional mortgage below 4% on a best-case scenario. The opportunity, though, has become less prevalent in recent days. The opportunity could become even less prevalent in subsequent days.

Across the Atlantic, consumer-price inflation made a surprise appearance. Inflation in Great Britain spiked to 2.9% on an annualized rate. The unexpectedly high inflation number stoked speculation the Bank of England may raise interest rates sooner than later. 

Because markets are interdependent, it’s hardly beyond the realm of possibilities that the same surprise could occur on our side of the Atlantic. We noted last week that inflation may not be manifest in consumer prices, but it has been manifest in investment and asset prices. It’s just a matter of time before inflation manifests in consumer prices. When it will manifest is anyone’s guess. Because it’s anyone’s guess, borrowers assume a risk for waiting. 

Why the focus on inflation?

Few factors influence the long-end of the credit yield curve as much as consumer-price inflation. Even if we get only a whiff that a change is in the air, long-term interest rates will be the first to experience it. Rates can spike higher with little warning. 

As for the here and now, quite a few prescient borrowers have exploited the latest dip. Mortgage purchase applications rose 11%, according to the latest weekly data provided by the Mortgage Bankers Association. The increase lifts the year-over-year gain to 7%. 

The MBA also tells us that credit availability is again on the rise. The MBA’s Mortgage Credit Availability Index increased 0.7% to 180.2 in August. The purse strings aren’t quite as loose as they were this past spring, but they’re close enough.

 

Good News: Middle-Class Rising

So much for the meme on the stagnating middle class. 

The U.S. Census Bureau reports that America’s middle class had its highest-earnings year ever in 2016. 
The Census Bureau reports that median household income rose to $59,039. The previous high was $58,655 in 1999. (The figures are presented in inflation-adjusted, not nominal, dollars.) The Census Bureau chalks up the rise in earnings to more people finding full-time jobs, or better-paying jobs, last year.

Stagnation was (and is) unlikely even without rising wages. We’re continually better off because our wages continually buy more for less. Thanks to Moore’s Law, we frequently pay less for superior quality.

For example, purchasing a television demanded 127.8 hours of work from the average worker in 1959. The average worker in 2013 could purchase a television with only 20.7 hours of work, according to data from the American Enterprise Institute. And let’s not overlook quality. The 2013 television far exceeds the quality and features of the 1959 television. We’re all getting a bigger bang for our bucks. What’s more, we’re all getting a bigger bang, even if the bucks are held constant. 

The good news is that the bucks aren’t held constant. The latest Census Bureau data prove that the middle-class wages are rising. We’re confident that the rise will propel housing forward. After all, less money as a percentage of income spent on reoccurring consumer goods, means more money available to spend on higher-priced durable goods. Owner-occupied homes are a higher-priced durable good.

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