A lot of rumors have been circulating in the media and emails about more government action to help troubled homeowners and lower interest rates for everyone. I thought it would be beneficial to address a few questions I have been asked over and over in the last few days and give you the best answers to pass on to your clients:

“Rates are great now, but I heard on the news that they will drop to 4.5% … is this true? When will this happen? Should I wait to refinance or buy?”

The answer really depends on your level of motivation, and also how much you like to gamble. Could rates go down? YES. Could rates go up? YES. Seems you have about as much of a guarantee as if you picked a lock-in date and threw the dice. Let me break it down further …

The government does not set interest rates, lenders do. Rates depend on market conditions and can be as volatile as the stock market at times, as well as change hourly. On Tuesday, Nov 25th, the Federal Reserve announced a plan to purchase $500B of existing mortgage-backed securities issued by Fannie & Freddie. This immediately put more funds in the market and caused the largest single-day rate drop we’ve seen in some time. Those low rates are still holding today (low 5’s). Market “stimulation” caused the lower rates and market indicators/liquidity will determine how long it will last.

Moving forward, the Treasury is considering a similar plan to buy newly-issued securities, provided that participating lenders set exceptionally low interest rates, ie … 4.5%. This is for home-purchases and not refinances and would last only as long as needed to stimulate the housing market. However, it’s not a done deal nor guaranteed. The goal is to shrink the large inventory of active listings which would help prices start to improve. I’ll let you know when we have further details. Click the following links for a couple media stories on this topic:

http://money.cnn.com/2008/12/03/news/economy/treasury_mortgage_rates/index.htm <http://money.cnn.com/2008/12/03/news/economy/treasury_mortgage_rates/index.htm> http://www.washingtonpost.com/wp-dyn/content/article/2008/12/03/AR2008120302889.html?hpid=topnews <http://www.washingtonpost.com/wp-dyn/content/article/2008/12/03/AR2008120302889.html?hpid=topnews> So what do you tell clients? Tell them to move forward NOW with these historically low rates. No guarantee how long or short of a time we’ll still have them. If rates do indeed dip in the future, we can look at doing a true no-cost refinance to reduce the rate for that client. Win-win for everyone this way, and the best solution for you and your clients to score in this game of chance. Why wouldn’t you act if you knew you could get a great rate and have that rate reduced further if the market continues to drop? Not many lenders will do this for clients.

“What if I lock a rate now, and the rates go lower?”

Once we’re in a position to lock for a client, we will watch the market for the best opportunity. We’ll lock when we believe we have found the best deal and the market is at its lowest point for that client’s scenario. This at least guarantees a worse-case rate for the client. Now, if rates drop the next day or week after locking, while we’re still processing the loan, we will do one of two things: Either we will re-negotiate with the investor we locked with, or we will move the file to another investor offering a better deal. Really a win-win for your client, as they can be confident they will have the best rate/program when they close.

Now, if we do indeed see a major drop in refinance interest rates in the Spring … as long as the loan has been in place for 120 days, we will do a true no-cost refinance to get our client the lower rate. In other words, there’s nothing to lose by moving ahead now. That’s part of our commitment to our clients.

“My current bank says they will do a refi with no upfront cost … is this for real, and can you match it?”

As you may expect, there is usually a catch. The big banks offer a “no point” or “no fee” loan, but in reality, you always end up with a higher interest rate than if you had paid standard closing costs. Basically, you are financing costs in your rate. We can do the same, and if comparing apples to apples, our rates will beat the big banks most of the time.

Here’s a good rule of thumb. If you plan to stay in your house or loan for more than two years, then you should pay standard closing costs and go for the lowest rate possible (PAR pricing – no markup or kickback). If you will refi or sell within two years, then go for the lowest cost, and rate isn’t as important. Call me with your scenario and I’ll show you what your “break even” point is.“Is the government going to bail out people in foreclosure or behind on their mortgages?”

As a whole … NO. This would cause absolute chaos in our society. If they did, then why should you and I keep paying our mortgages? I think you understand my point. Now, there are a few solutions that work for some people:

1) FHA Secure - this allows a lender to write off the balance down to 90%LTV and then the borrower could refinance into an FHA 30yr loan. Lender has to be willing (voluntary program) and client still has to qualify for the new loan. Works well for those who fell behind due to an ARM adjusting, medical, job-loss, etc. One negative – HUD will recapture 50-90% of the equity when the home is sold or refinanced in the future.2) Help-4-Homeowners - very similar program to the FHA Secure - includes a recapture clause, and the rates are higher.

3) Loan Modification - with this, a borrower can have their rate reduced, balance lowered (few cases), or a possible deferment or forbearance put into effect. Borrowers can do this alone, but success rate is lower. You only get one shot, so best to hire a pro to complete this for you. My company Summit is now helping clients with modifications. Call for details.

There may be additional programs or adjustments to existing programs in the future. Keep in mind you normally need to be behind on your payments for a modification to be successful. They have no incentive to modify if you are paying on time. 

Thanks Eric Newman, Summit Mortgage

West Linn, Lake Oswego, Tualatin, Wilsonville, Tigard