The Washington Post is alleging that Senator Obama received a special “discount” when he purchased his home in 2005. This is what is being reported:

He locked in an interest rate of 5.625 percent on the 30-year fixed-rate mortgage, below the average for such loans at the time in Chicago. The loan was unusually large, known in banker lingo as a “super super jumbo.” Obama paid no origination fee or discount points, as some consumers do to reduce their interest rates.

The article discloses the income of the Senator and the property type. Obviously this would have been a full documentation loan disclosing assets on a super-super Jumbo loan.

However, the article fails to mention one very important aspect of interest rates. The senators FICO score. This makes a big difference. The article states that the average loan rate for a similar program was 5.94 percent. So, supposedly he received a 30 basis point “discount”. Well considering the average credit score in Illinois is 684, if the Senators FICO score was well above 720+ then a 30 basis point difference is well within the range. So, I don’t understand why the Post is making such a big deal about a $300/month savings for a higher credit score borrower. They obviously don’t read my blog otherwise they would have read about the four corners of a mortgage.

Based on some of what I have read about the Senator, for example he has no revolving credit card debt and he’s lived frugally all his life, I have a hard time believing that he would have a below average credit score. This is pure speculation on my part and I have nothing to back it up. However, I am willing to give him the benefit of the doubt on this.

I will reveal one thing on what I think about Senator Obama. Even though I disagree with most of his political platform, I like him. I still admire him and have a lot of respect for him. He’s a decent man, and an all American success story.  I know he’s also a politician, but from what I have seen so far (especially after all these years of the Clinton and Bush slime machines) I believe when it comes to character he’s heads and shoulders above both of them.

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Tags: credit scores, Mortgages, senator obama
Categories: Credit Scores, Interest Rate, Mortgages
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Negative amortization was always controversial. Option ARMS (Pick-a-pay) always have had a negative amortization feature. In fact this loan has always been World Savings bread and butter. For the financially savvy person this loan makes complete sense. It has features which allows you to lower your taxable income, decrease your cost of funds over the long term and if used with a carefully calibrated investment strategy allows you to maximize returns to the max. Within this context negative amortization is a well accounted for risk and balanced by high returns. Even if on a short term basis you ended up with some negative amortization, over the long term, you would come out ahead.

The problem is the average consumer is not tremendously financially savvy. And therein lies the problem. When option arms were marketed to the average Joe as a financial vehicle, loan originators who themselves are not tremendously financially savvy saw an opportunity to sell more house for lower monthly payment. I’m not trying to put the onus solely on the originator here either. I am of the opinion that the head of every bank in the United States fully knew what they were selling to the average borrower.

I remember a borrower a few years ago who insisted beyond any reasonable persuasion that he wanted to be in such a loan. He said that the payment on the 5/1 ARM I was proposing was to high and he wouldn’t’ be able to afford the house after a few years. However, with the option ARM a different lender had proposed he would be “comfortable”, so if I didn’t give him a similar option he was going to go with the other lender.

This borrower had no business being in an option ARM. Not only was he relatively financially unstable, he was trying to live way beyond his means, counting on future income and future equity to compensate for the short term loss. This was never the market for the option ARM and these types of borrower had no business being in this type of loan. In fact I wrote a post back in 2005 warning borrowers about the dangers of the option ARM. I wanted to remind folks that despite how things were being advertised as a borrower you are still obligated to pay back the full loan amount with any accumulated interest.

And it is because of stories of such borrowers over the past few years that today we sit where we are. Today, Wachovia, one of the largest underwriters of option ARM’s pulled the plug on these negative amortization loans. Here is the news clip from Fortune magazine:

Wachovia (nyse: WB - news - people ) announced Monday that it is pulling the plug on it’s Pick-a-Pay program. The pay-what-you-will exotic loan offerings weren’t exactly subprime –the borrowers were a bit better-heeled Alt-A types– but the default rates on the loans have been much higher than expected and have been driving the lender’s losses.

The loans gave borrowers the option of paying several amounts each month, including low payments that led to an increase in the principal amount of the loans.

Not only did they stop the program they also have said they’ll waive the prepayment penalties on these loans as well. Most option ARM included three year hard pre-payment penalties. So whether you sold or refinanced the loan within the first three years you had to pay a prepayment penalty. With the fall in home prices adding to negative amortization more than they had figured things are not looking good that the banks can make money on these. So, Wachovoia took a long hard look and decided to cut their losses. According to Housing Wire:

Wachovia also said it will waive all prepayment fees for borrowers looking to refinance out of an option ARM, a clear indication of the stress borrowers in such loans are now facing; the bank recently hired Goldman Sachs Group Inc. (GS: 174.90, +0.19%) in an effort to help it figure out what it should do with the Option ARM loans on its books.

As you can tell it’s not just the consumer who is in pain here, Wachovia is hurting too.

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Categories: Arizona, Congress and Government, Humor and Fun, Interest Rate, Mortgage Roundup, Mortgages, Real Estate
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There is a scandal brewing in Washington involving members of the Senate Banking Committee and Countrywide. Apparently these guys were getting “special deals” from Countrywide and are now pleading ignorance. I guess the trick is when you’re getting special treatment the best thing to do is not ask questions. I’ll have to keep that in mind if I should ever become a politician.

Denial. Ignorance. Incompetence. Fill your word here __________ after you watch the Chairman of the Senate Banking Committee revealing to reporters that  he doesn’t know the interest rates these days. Geez. Why are you then spearheading one of the most important mortgage banking reforms of the modern era? Twitter me Senator, I’d be happy to send you hourly updates on mortgage rates:

More on the brewing scandal.

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Tags: interest rates, Mortgages, senate, senators
Categories: Congress and Government, Interest Rate, Mortgages
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We have a few clients who check up on us every few weeks asking about the current mortgage interest rate on both a 30 year fixed and 5/1 ARM. I figured it’s time to post a chart of how rates have been doing since the beginning of this year (2008):

Points on interest:

• The 30 Year Fixed reached a high of 6.24% the week ending February 28th and a low of 5.48% the week ending January 24th.
• The 5/1 ARM started on a high note of 5.78% the week ending January 3rd and reached a low of 5.13% the week ending January 24th.

The blue line is the 30 year fixed rate and green is for the 5/1 ARM. Data is from Freddie Mac.

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Tags: ARM, Fixed, Interest Rate, Mortgages
Categories: Interest Rate, Mortgages
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Not all mortgage interest rates are the same. The radio may blast away advertisements claiming low low low rates in the low 5.00% range, but alas how misleading these messages are. The truth of the matter is that while the 30 year mortgage rate remains at historic lows not everyone gets the same interest rate. Mortgage interest rates are determined by your credit score. The higher your score the better the rate you will receive. Consequently, if you have lower scores you will need to pay some fees to receive the same rate offered a higher credit score borrower.

During the credit boom lenders kept a pretty low barrier before slapping on additional charges for riskier borrowers. This has all changed and the thresholds are higher and there are additional layers . The table below is sample of what Fannie Mae/Freddie Mac have been charging lenders(and what lenders then pass on to you the borrower).

The example below is of the additional fees a borrower is charged in order to receive a 6.00% interest rate on a $200,000 mortgage:

In my opinion the numbers above provide ample reasons to work on improving your credit score and positioning yourself for a home purchase. To help you get started, below, I have provided additional links on credit score and credit report related posts on Arizona Mortgage Guru Blog:

• Test Your Credit Score Know-How
• Why Lenders Care About Credit Scores
• Forget The House, How Much is Your Credit Score Worth?
• Top Five Credit Score Misconceptions
• Bad Credit Can Cost You Your Next Job and Dream Promotion

photo credit: My Buffo

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Tags: fannie mae, freddie mac, mortgage interest rates
Categories: Interest Rate, Mortgages
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This is a very common question I get from people these days. Finally, I found a video which makes it very clear for people and it’s from none other than Suze Orman. Now, regular readers of this blog know that I don’t always agree with her, but this time she’s hard to disagree with:

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Tags: ARM, closing costs, interest rates, refinance
Categories: Interest Rate, Mortgages
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Mortgage rates have been falling over the past few weeks. Here is a brief snapshot of how rates have been since the beginning of this year (data source: Freddie Mac):

It’s rather interesting that the 5/1 ARM was hovering between the 30 year and 15 year rates earlier this year and has recently returned to a similar position. Here are the highs and lows for the different loan terms:

1. 30 Year Rate High: Week ending February 28th at 6.240%
2. 30 Year Rate Low: Week ending January 24th at 5.480%
3. 15 Year Rate High: Week ending February 28th at 5.72%
4. 15 Year Rate Low: Week ending January 24th at 5.130%
5. 5/1 ARM Rate High: Week ending January 3rd at 5.780%
6. 5/1 ARM Rate Low: Week ending January 24th at 4.950%

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Tags: 15 year, 30 year, 5/1 ARM, mortgage rates
Categories: Interest Rate, Mortgages
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Section of Fed statement below:

The Federal Open Market Committee decided today to lower its target for the federal funds rate 75 basis points to 2-1/4 percent.

Recent information indicates that the outlook for economic activity has weakened further. Growth in consumer spending has slowed and labor markets have softened. Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters.

Hillary doesn’t think these rate cuts are enough and says she wants freeze on sub prime mortgage rates. Go figure.

Paul Krugman raises the possibility of a liquidity trap: where rates are so low that the Fed’s monetary vehicle is powerless to effect the economy.

Bloomberg asks if the Fed is running out of ammunition - how soon before you can’t go any lower when your dropping at 0.75% every 8-10 weeks? October?

The Guru has decided to not go negative with this one - like Obama - he has decided to keep things positive no matter how much noise the skeleton in the closet makes!

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Tags: fed rate cut, Mortgages, prime rate
Categories: Congress and Government, Economics, Interest Rate
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What the market gives the market takes away. As you can see the 30 year mortgage rate is almost back to where it was earlier this year (2008). The ride back up has been very volatile, with two and on occasion three rate changes on any given day. Sometimes the changes have been in the opposite direction and has occurred within hours. Sign of the times.

Data source: Freddie Mac

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Tags: interest rates, mortgage
Categories: Interest Rate, Mortgages
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The Federal Reserve cut the key federal funds rate today by 0.50%. It is now 3.00% (which makes prime = 6.00%).  Here is a brief snippet of what the Fed said today:

Financial markets remain under considerable stress, and credit has tightened further for some businesses and households. Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labor markets.

The committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.

This cut in rates doesn’t mean mortgage interest rates are coming down. Quite to the contrary this move will inevitably move mortgage rates up. This is becuase the Fed move boosts stocks, taking money away from bonds. More importantly this move is inflationary. Inflation is the worst enemy for a long term paper like mortgages. Hence investors (people who buy) mortgage bonds will demand a higher return (hence increased interest rate).

Don’t believe me? Well, last week when the Fed lowered rates by 0.750%, I documented (on this blog) the rise in mortgage rates  the following Thursday. Also, Jay Thompson, at Phoenix Real Estate Guy has stasitical evidence which shows that changes to the federal funds rate by the Federal Reserve does not result in a coresponding change in mortgage interest rates:

In a nutshell, the Federal Reserve controls short term rates (such as the rate that was cut on Tuesday). Mortgage interest rates are not controlled by the Fed, they move up and down based on the trade in mortgage backed securities / the mortgage bond market.

I vaguely remember Dr. Duck (his real name), my undergraduate economics professor, saying something along the lines of the Fed primarily manipulates the Fed Funds rate to control inflationary pressure, provide liquidity to the financial markets and to try to balance employment rates, prices and economic growth.

Care to comment? I’d be happy to hear your thoughts.

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Categories: Congress and Government, Economics, Interest Rate
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