Neither of my kids, or it seems their friends, have credit cards

There is a trend developing with younger people not wanting to have or use traditional credit cards as a means of credit currency. In addition, many of my client's are miffed when I tell them they must open additional credit cards in order to raise their credit scores to secure the lowest possible mortgage interest rate. 

Phil Brewer, the National Underwriting Manager for Peoples Bank, writes, "No credit is most definitely better than 'bad credit'. Revolving debt is both a blessing and a curse.  If used correctly - payments made on time and the balance maintained at 50% of credit limit or less, it is a blessing and helps improve the credit score.  The flip side is that if the payments are not made on time, or if the balance is constantly at the max or near the max, it will drive down the credit score. Credit Agencies do look for and build the credit score based on a 'good' mix of credit types. What or who defines 'good' is an interesting question, but it is built into their scoring mechanism.  Revolving debt is like the old saying: 'Lenders only want to lend to those who don't need it.' The Credit Agencies want you to have revolving debt but they don't want you to use it. We are beginning to see an increase in the need to use non-traditional credit references, which in turn only slows down the process and makes the approval harder and more selective." Probably not the same for jumbo - Gail D. noted that, "As far as Jumbo financing is concerned yes, this is true that having little to no credit is hurtful.  In fact most, if not all, investors require a certain number of open and active trade lines for qualification."

Mortgage Rates Improved Yesterday and Today

Mortgage rates added a second day of improvement to yesterday's more tentative gains, falling just slightly faster than any other day this month.  While the improvements scarcely make a dent in the recently severe collection of losses, they're part of the consolidation that would necessarily precede any attempt to bounce back.  The question remains whether or not such a bounce back is in the cards, and that may not get a fully informed answer until next week.  That doesn't mean we can't improve in the short term, however, and today is evidence of that as 30yr Fixed  best-execution fell out of 4.75's reach and is once again centered on 4.625%. 

Shorter term rates are still under 4.00%! Today, you could get a rate of 3.875% with NO POINTS!

Markets were somewhat motivated by today's GDP data, but we saw plenty of evidence of the bigger picture ebbs and flows being in place regardless of data.  That evidence points to the consolidation that's taking place heading into the last trading day of the quarter on Friday.  The economic data can still play a part in pushing rates higher or lower within that bigger range, but that range is more likely to define the highs and lows that are possible for the rest of the week.  The conclusion is that we're temporarily in the most balanced position we've seen since before the FOMC events that kicked off all the nastiness. 

This doesn't necessarily mean we've turned the corner, but we have leveled off for now.  For safety seekers, this is a good opportunity to lock.  For risk takers, this is sets up a baseline from which to take more risk, provided you lock if rates move back to yesterday's levels or above.  Unfortunately in this environment, those levels could be overshot significantly with one rate sheet. For those of you simply watching rates and "hoping" for an improvement, there is still some hope, but markets are still clearly being cautious about next week's Jobs report, and barring the unforeseen, don't look eager to undertake a significant correction before then.

Interest Rates Rising Won't Necessarily Drive Home Prices

Interest rates alone don't drive home prices.

If the past few economic recoveries say anything about interest rates, it's that the costs of taking out a home loan have almost no bearing on home prices.

Across 20 cities tracked by the Standard & Poor's Case-Shiller home price index, prices in May posted the biggest gains since 2006; the index rose 10.2% during the first three months this year.

The rebound has been driven by factors beyond borrowing costs, particularly as banks have tightened lending standards. For one, job growth has helped make families more willing to buy. Even though unemployment remains relatively high, employers have added jobs for 32 months in a row.

The situation today that differs from past high appreciation trends, is over 30% of buyers are cash buyers, circumventing the labored mortgage origination process. In addition, the unemployment level and economy was much stronger on the 1997-1999 and 2003-2007 boom years. 

3 Reasons Why Increased Mortgage Rates Won't Slow the Housing Recovery

Mortgage rates increased this week after Federal Reserve Chairman Ben Bernanke put investors on notice that the central bank is prepared to begin phasing out its economic easing program. I've included an article from Fortune putting things in perspective. 

• 3 Reasons why higher mortgage rates won't slow the housing recovery

Mortgage Interest Rate Report - Impact of DOW Correction - June 20th, 2012

Data Provided by Freddie Mac's Primary Mortgage Market Survey®  Week ending on 6/20/2013 Interest Rate Fees & Points Margin  30 Year Fixed Rate 3.93 % 0.8 N/A  15 Year Fixed Rate 3.04 % 0.7 N/A  5/1-Year Adjustable Rate 2.79 % 0.5 2.76  1 Year Adjustable Rate 2.57 % 0.4 2.77 For up-to-the-minute local mortgage interest rate information, contact:  Tom Drasler at Direct (714) 478-3153  Week ending on 6/13/2013 Interest Rate Fees & Points Margin  30 Year Fixed Rate 3.98 % 0.7 N/A  15 Year Fixed Rate 3.10 % 0.7 N/A  5/1-Year Adjustable Rate 2.79 % 0.6 2.76  1 Year Adjustable Rate 2.58 % 0.4 2.76

This is not intended as an advertisement of interest rates as defined by Regulation Z, Section 226.24. Data is provided by Freddie Mac's Primary Mortgage Market Survey (PMMS) and is provided for informational purposes only. The financial and other information contained herein speaks only as of the date posted above. Freddie Mac, and/or the sender of this information, is not responsible for business decisions made based on the reported results of the PMMS. In general, the data presented were calculated from information collected Monday through Wednesday of the same week that the PMMS is released and may not reflect mortgage rates, fees or points currently available.

Fixed rates drop slightly this week

"Mortgage rates were relatively unchanged this week as market participants awaited the Federal Reserve's (Fed) monetary policy announcement. The Fed stated that economic growth has been expanding at a moderate pace and that labor market conditions have shown further improvement, although the unemployment rate remains elevated. It noted inflation has been running below the Fed's longer-run objective as well. As a result, the Fed will continue its bond-buying program at the current pace and maintain its highly accommodative monetary policy stance."

"The Fed also affirmed that the housing sector has strengthened further. For instance, single-family housing permits increased nearly 2 percentage points in May to an annualized pace of 649,000 homes, the most since May 2008. In addition, homebuilder confidence in June rose to its highest reading since March 2006."

– Frank Nothaft, vice president and chief economist, Freddie Mac My Opinion: I recommend all borrowers who are currently in escrow that they Lock now!  Borrowers must remember rates are still at 40 year lows. For those of us who are baby boomers remember mortgage rates at 16% in 1984. There is too much uncertainty and volatility in the financial markets right now. I recommend taking the rates on the table NOW and don’t look back. Tom

Bernanke Announces Retirement: What Will Happen Now to Interest Rates?

We've talked about the pressure being placed on interest rates due to speculation that the Fed's will be easing off of QE3 sometime in the short term, which has artificially kept mortgage rates the lowest we've seen in over 50 years.

This morning the press seemed consumed with Ben Bernanke's retirement. That aside, the Fed's QE3 has held interest rates artificially low for quite some time, and there is plenty of conjecture about what will happen when it stops, and when that will be. My guess is that the sun will come up regardless, that borrowers will borrow and people will buy homes. But that is just a guess, given that they were doing those things when rates were well above 15%. There are many smart folks that think any change in Fed policy won't happen until 2014, but the market has become increasingly skittish. Even if "tapering" is really the same as tightening, QE and hiking rates are 2 different things.

Yesterday, with no real news, rates went higher on the release of a questionable article about how the Fed is close to commencing easing off its bond purchases. It was one reporter's opinion, but nonetheless moved the markets and agency MBS prices worsened .250 in a matter of minutes. By the close of the bond markets at 2PM PST, current coupon prices were worse .250 and the 10-yr was at 2.17%. There is one thing to note, and that is the June NAHB Home Builder confidence index posted a large increase to the highest level since April 2006. 

My recommendation is if you're looking to refinance or if you're in the process and haven't yet locked in a rate yet, lock in NOW! Remember the old saying "Pigs get Slaughtered". 

Rates Have Bottomed and Are a Thing of the Past

I think rates hit a bottom a month ago and are now a thing of the past. Borrowers reset your mindset; rates are still at 40 year lows even with a .5 point across the board increase.

Mortgage rates rose in the afternoon, after beginning the day unchanged to slightly higher compared to Friday afternoon.  That means lenders recalled their initial rate sheets from this morning and put out new sheets with higher costs.  This is typically a result of market volatility and today is no exception as market participants are anxious for Wednesday's FOMC Announcement and press conference.  The revised rates in the afternoon are in line with Thursday's offerings, suggesting best-execution rates between 4.125% and 4.0%

Lock In a Refinance Mortgage Rate NOW or FLOAT?

Dear Refi Clients:

If we’re going forward with your refinance, I highly recommend locking immediately!

Rates are climbing, of course, but it seems as if they'll keep rising more sharply than usual until their movements get the respect that some investors feel they deserve.

Shorter-term rates remain fairly flat, but as soon as the term to maturity exceeds one year, rates begin a marked upward trend that seems to refuse to stop. It is as if the market were somehow doing all it can to get the message to us. "This is the time; it's not a rehearsal that will soon turn south again."

The 2-year Treasury security has edged up to 0.29%--then the yield curve begins to take off. At five years, it bolts to a full 1%. At 10 years, it has made its way up to 2.05%. And at 30 years, it stands (as this is being written) at 3.21%.

This is a strong advance in rates that starts at the longer end and tapers off at the shorter end. That can confuse borrowers into thinking the longer-term rates will gradually decline back toward the shorter-term rates, regaining the luster of historically lower rates. That's very unlikely, though.

Longer-term rates may be the harbinger of the future, as investors deal with the fact that the inevitable direction for longer-term rates (which have been kept low by Federal Reserve programs) is up. Clearly, if the props from the Fed are eased and/or removed, and rates at the longer term are allowed to go where they would be without the constant support from the Fed, they will rise. As the market digests this fact, rates anticipate the inevitable upward moves by starting to rise.

What would bring rates back down? A shock to the relative calm in the credit markets could frighten investors back into the safe haven of Treasury securities, one suspects. As we have noticed for dozens of months, bad news sends investors into Treasury securities, and that takes rates lower. Rates decline because investors believe that lower rates will help the economy through a tough time. But if the economy looks good, rates will rise. And if rates on new Treasury securities rise, then the value of older Treasury securities bearing lower interest yields falls.

With virtually nothing being done about the Sequester, and government budgetary problems flapping in the wind, it is reasonable to keep in mind that we could have adequate bad news to take rates lower again, and make investors all over the world both frightened and grumpy.

But the underlying trend here is for rates to rise. Remember that an investors' holdings in bonds lose value -- he or she loses money -- if rates rise. That being so, more and more investors are currently unlikely to invest in bonds or bond-related investments. So we see odd things like crude oil futures becoming attractive to investors who want a play on a stronger economy in the near- to mid-term future.

The movements of bonds are rather complex and counter-intuitive, and I'm amazingly capable of saying bonds will lose value when in fact what I mean to say is that they may gain in value but pull out your machete and hack your way through the jungle. What you will find is a market whose longer-term rates, the rates the Fed has for months most strongly and effectively influenced, are undergoing a cyclical change.

Soon, we may be reading articles in the financial press about how higher rates will flatten the real estate recovery. They are very unlikely to, though because part and parcel of the process is a growing awareness that superbly low rates could slip away unused if we don't get off the stick and make use of them.

It's time.

Higher Mortgage Rates Won’t Kill Housing Recovery

Mortgage rates are back above 4% for the first time in a year, but the rate rise probably isn’t going to be enough to take the wind out of the sails of the housing market rebound.

The Mortgage Bankers Association reported on Wednesday that rates jumped to 4.07% last week for the 30-year fixed-rate loan, up from 3.9% in the previous week. At the beginning of May, rates stood at 3.59%, according to the same MBA survey.

Mortgage rates tend to track yields on 10-year Treasury notes, which have jumped as anxious investors sell off Treasury securities amid signs that the Federal Reserve may begin to slow down the bond-buying program it launched last year. Bond yields rise as prices fall. By midday Wednesday, yields on the 10-year Treasury were 2.09%, down from a high of 2.24% last week but up from a low of 1.62 at the beginning of May.

What does it all mean for the housing market? Already, refinancing activity has fallen like a rock. Mortgage lenders had more business than they could handle last year thanks to major refinance demand. Mortgage originations hit a five-year high as rates dropped to their lowest levels on record and as the government revamped a major initiative to refinance loans backed by Fannie Mae and Freddie Mac even if borrowers owe more than their homes are worth.

Refinancing might still make sense for some borrowers who haven’t taken advantage of government initiatives and who have high mortgage rates, but as long as rates stay above 4%, refinancing activity will be muted for everyone else. Loan applications to refinance dropped 20% last week from the previous week and is at its lowest level since November 2011, according to the MBA.

Home buyers, however, will be less sensitive to rates than those seeking a refinance. A rule of thumb holds that every one percentage point increase in mortgage rates makes homes about 10% more expensive for buyers by increasing the monthly mortgage payment. The bottom line: if higher rates are here to stay, that could take some of the edge off of recent price increases.

There are two big reasons to suggest modest increases in rates won’t cause major damage for the housing market. First, all-cash purchases have accounted for a significant share of home sales in recent months. Second, housing is still extremely affordable — and mortgage rates, even at 4.07%, are lower than they have been at almost any time from the early 1950s until August 2011.

“Housing can remain affordable by historical standards even if interest rates rise,” wrote Goldman Sachs economists Hui Shan and Marty Young in a research note this week. They say interest rates, given the recent half-percentage point rise, don’t change their expectation for home prices to rise by 4% to 5% annually over the next few years.

Getty Images

Goldman runs an exercise that shows just how affordable housing is, even if rates rise. They assume the typical homebuyer has an annual household income of $50,000, pays a 20% down payment, and obtains a 30-year fixed-rate mortgage. At an interest rate of 3.8%, the average homebuyer can afford a house worth $279,000, which is 45% above the current median sales price of previously owned homes. Even if interest rates rise to 6%, homes would still be affordable to this median borrower because prices are still so low.

Rising rates “will likely slow the strong house price appreciation observed over the past year, but the impact will likely be modest given the cushion provided by the high level of housing affordability at present,” the Goldman economists write.

A similar analysis from  Trulia Inc., the online real-estate site, shows that homeownership still beats renting even if interest rates are higher. In March, the cost of owning a home was 44% cheaper than renting assuming a 3.5% mortgage rate. Buying would be 39% cheaper than renting with rates at 4.5%, and owning would be 33% cheaper at a 5.5% rate.

One question some buyers (and many would-be refinancers) are asking: will rates make it back down to 3.5%? It’s impossible to predict the future, but if economic indicators this summer disappoint — Friday’s jobs report will be the next major gauge of the economy’s fitness — then bond yields could drop, leading to lower mortgage rates. If indicators suggest the economy is indeed on better footing, then rates could stay where they are or move higher in anticipation of a Fed pullback later this year.

Some analysts have also speculated that rising rates could boost housing demand in the immediate future. That seems less likely. True, rising rates could encourage people who were already looking for homes to pull the trigger now, rather than in a few months. But mortgage bankers say it’s unusual for truly undecided home shoppers to choose to purchase because of rising rates. “Rising rates induce anxiety,” says Lou Barnes, a mortgage banker in Boulder, Colo.

Still, there are few signs that the current uptick in rates has led to any pullback in demand. Barnes said that in the Denver metro area, buyers are unfazed. The rate increase is “just bouncing off everybody,” he said. Mortgage applications for purchases dipped by 2% last week from the prior week, but were 14% above last year’s levels, according to the Mortgage Bankers Association.

Mortgage Rates Hit New 14 Month Highs. More Volatility Ahead

Mortgage rates were moderately higher today, taking most lenders into slightly higher territory than yesterday or last Tuesday (the two worst days recently).  Last Tuesday was the game-changer for rates, and every day since then has been in 14-month high territory--today being the worst.   The best-execution rate for 30yr Fixed, Conventional loans is now likely moving into the 4.125 range, though buying down to 3.75% may make sense for some borrowers (paying extra upfront cost in exchange for a lower interest rate). 

These are the times that try the souls of anyone who began the mortgage process more than a week ago today.  That was the point at which things went from "right up there" in terms of losing streaks for rates to "the sharpest 5 week losses in over 10yrs."  Even before garnering that unpleasant distinction, the upward movement in rates was already nauseating.  There's always a temptation to think "surely, this has to stop some time," but we'd caution against such assumptions.

The problem with those assumptions is that they tend to actually be true!  That's why they're dangerous, because it's the less frequent instances where they're NOT true that the most damage is done.  Several instances of hitting recent multi-month highs in May have fallen into this category with the Friday the 21st being the worst. 

At this point, rates for the next few days will be heavily dependent on tomorrow morning's economic data, where the ADP Employment report has a tendency to cause volatile movement if it's far outside the range of expectations, even though Friday remains the most important day of the week (and one of the most important this year).  If both tomorrow and Friday are favorable for rates, we will likely recover a lot of lost ground, but if job creation is clearly stronger than expected, today's 14-month highs may look attractive by comparison.

Mortgage Rates Barely Budge Today Under High Volatility Pressure

Mortgage rates barely budged today, but only when comparing the most recent batch of rate sheets to Friday's latest.  Between now and then, there's been an exceptionally high level of volatility.  On the one hand, volatility has been and continues to be expected.  On the other, simply expecting volatility doesn't do much to mitigate its ill effects.  Particularly, the mortgage-backed-securities that most directly influence rates are sensitive to volatility, as are the rate sheets put out by mortgage lenders.  4.0% remains as the best-execution rate for 30yr Fixed, Conventional loans.  Lower rates are still available and paying additional upfront costs to move lower in rate may make sense for some borrowers.

Starting Today FHA Mortgage Insurance Cancellation Terms Change for the Worse

Starting today, FHA borrowers who put less than 10% down will not be able to cancel their monthly MI payment. Borrowers should compare that to "borrower-paid Monthly MI", where MI can be cancelled at the borrower's request when the loan reaches 80% LTV based on original or new appraised value or is automatically cancelled once it reaches 78% of original value.

Why Mortgage Rates Could Tip to 7% Very Soon?

Karl Hilzinger

BURDEN: Floating interest rates could top 7 per cent by the end of next year.

Home buyers and farmers appear likely to bear the brunt of new mortgage lending requirements which could start to take effect by the end of this year and potentially push mortgage interest rates above 7 per cent by the end of next year.

One of the ways the Reserve Bank is considering reining in what it sees as risky lending by banks is by introducing what it calls Sectoral Capital Overlays (SCRs). These would require banks to increase the amount of capital they hold, relative to the nature and scale of their lending into specific sectors of the economy.

Although the requirement could be applied to any economic sector, it is probably significant that the only sectors referred to as potential candidates for the treatment in the Reserve Bank's policy statement on the subject were agriculture and housing.

While the pace of growth in residential mortgage debt captures most of the headlines, the latest figures from the Reserve Bank show rural debt has been ballooning at an even faster pace.

They show that farm debt to banks and other financial institutions was $50.4 billion at the end of March and increasing at an annual rate of 5.2 per cent.

Although household debt, which is mostly made up of mortgage lending, was higher overall at $193.6b, it was growing at a slightly slower pace, 4.3 per cent a year.

By comparison, loans to businesses ($78.9b at the end of March) were growing at just 1.9 per cent a year and that rate of growth had been in decline since October last year.

The Reserve Bank's policy statement on SCRs said introducing them could make the targeted sectors, such as housing and farming, less attractive for the banks to lend to.

"Banks might decide to reduce their exposures to the sector if faced with a higher cost of funding. Alternatively, should banks pass on any increased funding cost, a rise in borrowing costs would help reduce demand for credit in the targeted sector," it said.

It may also moderate rising house or farm prices.

"Expectations of slower credit growth may flow through to asset price expectations, helping mitigate speculative demand," the statement said.

The likely implications for borrowers are that riskier loans, such as those where the borrower has a low amount of equity, will become harder to get and interest rates may start to rise.

While introducing SCRs is only one of the tools the Reserve Bank is looking at using to control residential mortgage lending in particular, there is a growing feeling that it will need to raise interest rates as well, to take some of the heat out of the housing market, and possibly the rural property market.

Mortgage interest rates are at their lowest level since 1964 (refer graph) so, given the cyclical nature of financial markets, it's likely they will start to rise. The big question is when.

Dr Ganesh Nana, chief economist at economic consultancy BERL, believes there is a case to be made for lowering interest rates further but conceded they are more likely to rise than fall.

In separate reports released last week, Institute of Economic Research principal economist Shamubeel Eaqub and BNZ chief economist Tony Alexander both picked that the Reserve Bank would start forcing up interest rates some time next year.

Eaqub believes that could happen as soon as January, and that the Reserve Bank will likely have raised interest rates by 1.25 per cent by the end of next year, which would push most mortgage interest rates to above 7 per cent.

But in doing that the Reserve Bank would be treading a fine line.

The effect higher interest rates would have on mortgage repayments can be seen in the accompanying table, but their overall effect would be broader than that.

According to the Reserve Bank, the household, business and agricultural sectors collectively owed banks and finance companies $322.8 billion at the end of March, and that mountain of debt grows higher each month.

Every 1 per cent rise in interest rates would add another $3.23b a year to the interest payments made by households, farms and businesses to service that debt.

On the other side of the coin, people have been pouring money into bank deposits in spite of the low interest rates they have been providing. At the end of March, banks and other savings account providers were sitting on $117.9b in depositors' funds.

So every 1 per cent rise in deposit rates would plough another $1.18b (before tax) back to those account holders.

If deposit and borrowing rates both increased by 1 per cent, the net cost to the economy would still be more than $2b a year, putting at risk the fragile economic recovery.

A bigger worry for the Reserve Bank would be that higher interest rates could push up the value of the New Zealand dollar at a time when the bank is trying to force it down. So it has the formidable task of trying to bring down the exchange rate while cooling the overheated housing and possibly the rural property market at the same time.

A lower exchange rate would boost export earnings, but also raise the cost of imported goods.

This means that heading into next year, anyone with a mortgage could be facing the twin perils of rising interest rates, which would force up their mortgage payments, and higher prices for imported goods, which would include everything from petrol to computers, clothing, tea and coffee.

While there is considerable uncertainty about the extent and timing of those events, one thing seems certain.

The currently favourable environment (for household borrowers) of low interest rates and the low cost of imported goods is unlikely to last much longer.

Anyone considering taking out a home loan or other form of debt should, therefore, leave themselves some wriggle room to cope with potentially higher costs hitting their household budget in the next year or so.