Eric's Blog

Posted by Eric Grathwol on 07/30/2010 03:25 PM

Your Interest Rate Update

June 8, 2010

What happens when PIIGS fly?

When the PIIGS are Portugal, Italy, Ireland, Greece and Spain, and they're flying away from their debt, maybe the world slows down.

I touched on the troubles Greece was facing back in my February newsletter.

As I pointed out, the Greek and European debt crisis could bode well for our mortgage rates for a while. This seems to be happening. In fact, since the European debt crises came to a head a few weeks ago, rates have been hovering around their historic lows (mid 4% for conventional 30yr fixed, under 5% for high balance and just over 5% for true Jumbo loans). As a result, I've been slammed, which is one reason I've not written an update lately. But I digress...

The trouble with Greece is that they're racing rapidly towards an insurmountable wall of maturing debt. That's not a problem, if your creditors believe you'll pay them back. But, Greece has defaulted five times in the last two hundred years, and are notorious for playing games with their country's finances. Although Portugal, Spain and the others may not be that bad, there was reasonable concern that the debt crisis would spread, leading to another seizure of the credit markets.

So, the European Union and the International Monetary Fund stepped in with a $1Trillion dollar bailout plan for the Eurozone. Although this covers the PIIGS refinancing needs for the next three years, it really doesn't do anything to address and solve the underlying problem of spending more than you make.

Just like the financial crisis and ensuing bailout here in the US, the EU/IMF move just buys some time. In the mean time, there's a lot of nervousness about who you can lend money to, and when (or if) you'll get it back with a decent return. In that environment, money tends to flow to relatively safe and predictable investment vehicles. Right now, that's making US Treasuries and Mortgage Backed Securities look pretty attractive.

Beyond that, in the world's ongoing debt crisis and ensuing deleveraging cycle, the real solution is balance sheet repair, which is a process that might be painful and will probably take years to work through, not months. Revenues must increase and expenses must decrease. And it's not just the PIIGS. The United States has some reckoning to do at the Federal level. And it doesn't stop there.

Most of the States in the Union, California being the most prominent, are facing massive deficits forcing significant cuts and/or higher taxes. On a nightly basis the news tells us of municipalities cutting services. Marysville, California, which during the height of the real estate boom was becoming a bedroom community for Sacramento, has gone so far as to turn off some of their street lights to help cut a $700,000 budget deficit. Let's face it. We're seeing cuts in public services and employees every day.

Cuts, whether public or private, aren't necessarily a bad thing, if they lead to better efficencies, which I think they will. But, during the transition period it's not fun. Particularly when organic private sector job growth, although turning positive, is not likely to pick up enough to fill the void and pull us out of an economic malaise.

Yes, our economy is recovering, and it will continue to do so. Yes, there are still tons of people making tons of money. There are new businesses opening every day with great new ideas and products to bring to market. Opportunities abound for those ready to grab them. But, there are also unprecedented numbers of people working less than they'd like, or not at all.

In that environment, while people cut back their spending, it's likely corporate earnings will lag.

On top of the reduction of the expense side of the ledger, the income side has to rise too. Higher taxes of one type or another are inevitable. The size and timing are the question. And, if too high too soon, they'll likely create further economic headwinds, that could further slow our economic recovery.

With fewer people buying your stuff, on one hand, and higher taxes on another companies (and individuals) are getting squeezed from both ends. And if, as a result, equities aren't delivering a steady risk-adjusted return, there may be better places for funds to go. That's a big part of why US Treasuries and Mortgage Backed Securities have rallied lately. And, that could continue for some time still. Although there's huge supply of US Treasuries, the demand for them is there. Meanwhile, mortgage backed security volume is actually down, while demand remains relatively strong, too.

That's the supply and demand picture. Of course there will be peaks and valleys in that supply and demand curve, which we see in our heightened market volatility lately, but for the near term, the trends seem to favor low interest rates for a while.

As we know, the other driver for Mortgage Backed Security pricing (or really any fixed return investment) is inflation, or lack thereof. And, although we may face some serious inflationary pressures down the road, again, I believe that's years, not months away.

When Walmart is discounting more items than are contained in our entire Consumer Price Index, that's one signal. More importantly, however, the most important driver to any inflation, wages, is stagnant. And, when the average unemployed person hasn't had a job in 2 years, it's fair to say they may come back to the work force for less than they were making before. Without wage pressure, there can't be inflationary pressure.

So... the silver lining is that we may be seeing 30yr fixed mortgage rates in and below the 5% range for another year or so. If you're in a position to take advantage of that opportunity, work on lining your ducks in a row. We do know interest rates will rise. We just don't know when. In the mean time, as always, I'll do my best to keep you posted.

With that, here are your rates for this week. Please don't hesitate to call or email if you, your friends, or family have questions about financing residential or commercial real estate. Cheers! E

Conforming	Rates	Points	APR	Loan Amt	Payment
30 yr fixed mortgage	4.875%	1	5.075%	$300,000.00	$ 1,588
15 yr fixed mortgage	4.250%	1	4.450%	$300,000.00	$ 2,257
3/1 ARM	3.375%	1	3.565%	$300,000.00	$ 1,326
5/1 ARM	3.500%	1	3.710%	$300,000.00	$ 1,347
Interest only discontinued for conforming loans, as of 4/30/10
Jumbo (ask me about Super Conforming limit, per your zip code)
30 yr fixed mortgage	6.000%	1	6.126%	$550,000.00	$ 3,298
15 yr fixed mortgage	5.500%	1	5.755%	$550,000.00	$ 4,494
3/1 ARM	3.625%	1	3.805%	$550,000.00	$ 2,508
5/1 ARM	4.500%	1	4.720%	$550,000.00	$ 2,787
5/1 ARM Int Only	4.750%	1	5.000%	$550,000.00	$ 2,177

Rates subject to change without notice.
Please keep in mind, these rates and statistics are for informational purposes only to give you a sense of market movement and my opinion as to why. Although these rates exist today, based on certain qualifying characteristics, your scenario may allow for lower or higher interest rates. Licensed by the CA Dept of Real Estate, #01760965. Equal Opportunity Housing Lender. If you'd like to be removed from this list, please reply with REMOVE in the subject line. You can also use this link, mailto:egrathwol@priority1stmortgage.com and add REMOVE to the subject line. To add someone who would appreciate this information, send me their email with SUBSCRIBE as subject.

Eric Grathwol

Loan Officer

Priority 1st Mortgage

3300 Douglas Blvd. Ste. 270

Roseville, CA 95661

direct: 916-223-4235

office: 866-771-9000

fax: 916-771-9099

Posted by Eric Grathwol on 06/09/2010 02:58 PM

Your Interest Rate Update

April 26, 2010

To be (sustainable) or not to be (sustainable)? That is the question. Didn't Shakespeare say that?...

It's a fair (and ongoing) question for our economic recovery. I think our recovery is sustainable, but what I'm trying to figure out is, at what level? Economic boom and bust cycles have existed forever, think of the Dutch Tulip craze/crisis in the 1600s.

Yet, across the globe in broad general terms, peoples' standard of living and quality of life have continued to improve over time.

What I'm trying to grasp is how US Consumer Confidence is so low (as measured by either the Conference Board or the University of Michigan indices), but personal consumption and retail sales are up. Despite those poor consumer confidence readings, consumer spending is up, so retailers are feeling giddy that the mighty US Consumer is baaaaack.

I've written before that the US Consumer is an amazing "animal" fearless of spending, and willing to extend - or over extend - itself in return for instant gratification. But, is the renewed trend in personal consumption sustainable when consumer credit is shrinking at an unprecedented clip, and wages/hours worked are depressed? Where is the cash to spend coming from?

Maybe it's the eight in ten people who haven't been laid off, furloughed or otherwise seen their hours cut who are now thinking "hey, I'm still ok, I've deprived myself and my family for the last year or two, I'm still working, things seem to be turning around, I'm going to go buy some stuff."? It sure could be.

Maybe it's those same people who brought their savings up to recent highs over the last 2 years, who have ridden the stock market rally, seeing their 401ks and investment portfolios recover a chunk of their losses, who are now tapping those savings to treat themselves?

I mean, after a steady decline in personal savings, which ranged from 8%-10% for most of the 1960s through the early-1980s, then slid to a 5%-7% range from the mid-80s to mid-90s, only to drop to 0%-2% from the mid-90s to finally bottom as our Era of Consumption came to a close (maybe?) with the recent bubble bursting, wouldn't a 2-year period with savings rates back in the 4%-6% range be enough to right that personal balance sheet?

Savings be damned! It's time to spend again.

Maybe...

On the other hand, what if the increase in personal consumption we're now seeing stems from people draining their savings because they have to, unless they want to change their "quality of life?"

What if the tax cuts to the poor and middle class via the Economic Stimulus package are temporarily putting tens of billions of dollars into people's pockets, fueling a spring buying binge?

What if the unprecedented Homebuyer Tax Credits, at both the Federal and State levels, are giving people extra-large refunds to go shopping?

What if people are spending more because they're living under the debt protection of a bankruptcy filing? BK filings hit roughly 6900/day in March, up about 20% from year ago levels when the perception was that the US economy may plunge into Great Depression 2.0. (Duff Wilson, NY Times, 4/1/10)

What about the impact of mortgage defaults? If you're not paying your mortgage, and you're not paying rent to stay in that home (it's not uncommon for people to live in their homes for a year or two before they're foreclosed, in this era). I did some "napkin math." Figuring the national average monthly mortgage payment is $1200, and 50 million mortgagees, with a 10% delinquency rate equals 5 million people not paying their mortgages, or $6 Billion per month. On top of that, there's another 4.5% of mortagees who are in the foreclosure process already (Mortgage Bankers' Association). That's another $3 billion per month, or adding them up and annualizing them, we're talking about $100 billion dollars of "free money" to be spent in places other than one's housing expense. Other estimates I've seen have that number pushing $180 billion, on an annualized basis.

Add all that up in a $14 Trillion economy, that's a boost of 1.4% (probably more) to what "could" be personal consumption from mortgage defaults, tax rebates from the Economic Stimulus plan, the Homebuyer Tax Credits, plus the deleveraging impact that bankruptcy delivers, and...Voila! No wonder consumer spending and retail sales are up.

The question still remains - at least in my mind - is that sustainable?

It might be, if our economy gets back to adding hundreds of thousands of jobs every month.

Either way, in an economy where 70% of our growth is driven by personal consumption, whether or not this is a sustainable trend will certainly play a role in what happens to our recovery, and thus to mortgage rates.

There's no doubt that mortgage rates are going to rise. That's an easy call to make. And, as our economy mends, rates will likely increase. But timing that call is where the rubber hits the road. I certainly don't know when that will be. But, I do believe it's further out than many analysts think. There are some who'd say I'm whistling past the graveyard, and that the current low-rate environment will quickly become a thing of the past. Although they could be right, we're still waiting, nearly a month after the Fed ceased their MBS and Treasury purchase programs, for rates to rise appreciably.

It will be interesting to hear the FOMC's (Federal Open Market Committee) take on the economy and their monetary policy when they issue their statement on Wednesday. I believe the language "exceptionally low rates for an extended period" will remain. They see we're turning the economic corner, but they also acknowledge that we're not out of the woods yet, and will maintain their current stance until this winter, or beyond.

Keeping rates "exceptionally low for an extended period" however, could be bad news - in the short term - for mortgage rates, as fears of inflationary pressures may percolate. As that happens, even if those fears are unfounded, rates will rise. Additionally, easy money is good for corporate returns because their borrowing costs are low, offering the opportunity to invest and grow using cheap money, theoretically boosting profits.

If inflationary expectations become unanchored and funds flow into riskier asset classes seeking greater returns, mortgage backed security pricing, as well as treasuries and other bonds, may have to sweeten their yields to entice buyers.

On the other hand, who's soaking up all the Treasury supply since the Fed stopped buying a month ago? None other than the banks who aren't lending their capital to "we the people."

Is it a quid pro quo (hey, we bailed you out, so help us out) keeping the Fed's borrowing costs low (remember, they're financing our debt with Treasury issues)? Or, are the banks really fearful of lending out their capital, knowing they still have years of credit losses to wade through? Or, maybe it's some combination of both? Probably the latter. I wrote before that MBS and Treasury purchases by our financial institutions would pick up as the Fed wound down their program. So far, they have.

Yes, the volatility in the market place has increased without the Fed's steady buying, but...we have yet to see the 10-yr Treasury break convincingly above 4%, and mortgage rates are still hovering around 5%. Go figure.

I'll keep whistling...

In the mean time, if you are well positioned and have your ducks lined up to buy or refinance your mortgage, why wait? We know rates are basically as low as they've ever been and probably as low as they'll go. Meanwhile, home prices are relatively affordable, too. As I said, the one thing that is certain is that our economy is recovering, and interest rates (and probably home prices too) will rise. We just don't know exactly when those things will swing into a new cycle of growth and accompanying higher interest rates.

But, if you're not quite in position to refinance or buy, for whatever reason, don't rush it based on what could be a false pretense of "imminent" interest rate or home price increases. Same goes for the tax incentives. It's a bit like Macy's "One Day" sale. It's usually not the last opportunity to buy what you want for a good value.

It will be interesting, to say the least, to see how the rest of this year unfolds. I'm very focused on the housing sector, once the tax credits expire this week. We're seeing the largest monthly increase in new and existing home sales in some time, as people try to get into contract before April 30.

Although I don't think we'll see another big down leg in home prices here in California, homebuyer demand is still below year-ago levels, despite seeing a pick up in activity month to month. We could bounce around this bottom for some time. Time will tell.

With that, here are your rates for this week. Please don't hesitate to call or email if you, your friends, or family have questions about financing residential or commercial real estate. Cheers! E

Conforming	Rates	Points	APR	Loan Amt	Payment
30 yr fixed mortgage	4.875%	1	5.075%	$300,000.00	$ 1,588
15 yr fixed mortgage	4.250%	1	4.450%	$300,000.00	$ 2,257
3/1 ARM	3.375%	1	3.565%	$300,000.00	$ 1,326
5/1 ARM	3.500%	1	3.710%	$300,000.00	$ 1,347
Interest only discontinued for conforming loans, as of 4/30/10
Jumbo (ask me about Super Conforming limit, per your zip code)
30 yr fixed mortgage	6.000%	1	6.126%	$550,000.00	$ 3,298
15 yr fixed mortgage	5.500%	1	5.755%	$550,000.00	$ 4,494
3/1 ARM	3.625%	1	3.805%	$550,000.00	$ 2,508
5/1 ARM	4.500%	1	4.720%	$550,000.00	$ 2,787
5/1 ARM Int Only	4.750%	1	5.000%	$550,000.00	$ 2,177

Rates subject to change without notice.
Please keep in mind, these rates and statistics are for informational purposes only to give you a sense of market movement and my opinion as to why. Although these rates exist today, based on certain qualifying characteristics, your scenario may allow for lower or higher interest rates. Licensed by the CA Dept of Real Estate, #01760965. Equal Opportunity Housing Lender. If you'd like to be removed from this list, please reply with REMOVE in the subject line. You can also use this link, mailto:egrathwol@priority1stmortgage.com and add REMOVE to the subject line. To add someone who would appreciate this information, send me their email with SUBSCRIBE as subject.

Eric Grathwol

Loan Officer

Priority 1st Mortgage

3300 Douglas Blvd. Ste. 270

Roseville, CA 95661

direct: 916-223-4235

office: 866-771-9000

fax: 916-771-9099

Posted by Eric Grathwol on 04/28/2010 10:03 AM

Your Interest Rate Update

(Sorry, I had a busy start to the week, and forgot to post this when I wrote and emailed it to my subscribers Sunday night. If you'd like to be on my distribution list, send me an email).

March 14, 2010

Beware the Ides of March...

Ok, maybe not the Ides (March 15^th, that is forever tied to the assassination of Julius Caesar) but our Federal Open Market Committee (FOMC) meets on March 16th.

It's just a one-day meeting, and I'm not sure how much there is to really beware of, but... their policy statement will be closely scoured, for sure, since the markets, businesses and people in general are trying to gauge where we are in the process of economic recovery.

We think we know the FOMC language "exceptionally low interest rates, for an extended period" means that the easy monetary policy of a 0-.25% Federal Funds target rate will be in place for at least another 6 months. That terminology has been present in every FOMC policy statement for some time (an extended period?). But, the voices of the dissenters in the Committee, those who are more concerned about inflationary pressures and expectations of inflation resulting from their easy monetary policy, are growing louder. It will be interesting - to me at least - to see whether there is a shift in their positioning.

Beyond how the FOMC telegraphs their stance on the Federal Funds rate, expect them to continue addressing their steady and thoughtful withdrawal of the extraordinary measures, and policy tools that helped buoy the economy during the height of its turmoil.

I'm most focused on their winding down of the Mortgage Backed Securities (MBS) purchase program. And their plan to pay interest on reserves deposited with the Fed.

So far, they've said they'll close their MBS purchase program at the end of March. I believe they'll stick to that decision.

Most analysts have been saying cessation of that program will cause an increase in mortgage rates. Their predictions range from an instantaneous spike to 6% for 30yr fixed rates, to a gradual rise reaching 6% by mid-year, to a more tepid climb back to 6% by year's end. Here we are, two weeks before the expiry of that program, and rates are still hovering near their lows. Although they could rise, I'll be surprised if 30yr fixed mortgage rates are at 6% by the end of this year

I'm also curious if the FOMC comments on what appears to be a slight comeback in consumer spending. Typically, an increase in consumer spending would be a good sign that people are feeling better about their jobs, their income and their overall stability. But, with unemployment at 9.7% (we just hit a new cycle high in California over 13%), and under-employment around 17%, and with 25% of mortgage holders under water (owing more than their homes are worth) I wonder if these marginal increases in consumer spending are driven more by debtors who are walking away from debts, freeing up cash for other purchasing, rather than any really healthy, underlying economic stability.

So, I am cautious and I still don't understand how the stock market has risen 70% in the last year, when we've shed some 3 million jobs at the same time. That's unprecedented. I'm thinking either the underlying economic realities will continue improving, and catch up to the stock market, or....the stock market will fall back in line with the still very fragile economic realities, or...things will mesh somewhere in between.

Sure, corporate earnings have remained respectable, but...that's primarily because of the job shedding. In most cases, top line sales haven't increased markedly. And, there's only so much fat you can cut before you're down to the bone.

In the same breath, there's a lot of money floating around out there looking for good returns. This dynamic - the flow of funds looking for returns, supply/demand etc. - will play an important role in driving interest rates for the remainder of this year, and probably into next. Without any inflationary pressures (and I certainly don't see any on the horizon in the next 12 months with so much slack in employment and capacity utilization) I think mortgage rates will be driven primarily by supply/demand (the flow of funds into, and out of risk assets like equities, corporate debt, etc.).

On the liquidity front, according to David Rosenberg of Gluskin Sheff, corporate cash positions are rock solid, with a $1.8 trillion stash of cash, which is a 54-year high. On top of that, the Fed's balance sheet is bloated because from financing the liquidity they've pumped into the system.

And, it's that money - that if deployed into the economy and spent, and re-spent, and re-spent, and re-spent increasing the velocity of money - that "could" lead to inflationary pressures down the road.

That's the balancing act the Fed faces right now. They have to balance the fact that there is tremendous slack in employment and capacity utilization, while at the same time they can see massive volumes of capital available within our economy. Currently, despite those massive volumes of available capital, the actual velocity of money is slow. Basically, people and businesses are sitting on their reserves. But, as that starts to shift and those funds start being put to work and flowing through the economy, the Fed will move judiciously to sop up the extra supply.

This is exactly why they're trying to communicate their newly acquired ability to pay reserves on deposits. By doing so, they can incentivize financial institutions to park their funds at the Fed, making a decent return, with absolutely no risk. This "should" help keep a lid on the velocity of money, and thus keep inflationary pressures and inflationary expectations anchored allowing the Fed to continue their stance of "exceptionally low rates for an extended period" at least through their meeting on Tuesday, if not further into this year.

What they do, and how the markets react to the Fed's statement will be interesting. Whether their statement and the markets' reaction are something to "beware" or not, we'll know over time.

With that, here are your rates for this week. Please don't hesitate to call or email if you, your friends, or family have questions about financing residential or commercial real estate. Cheers! E

Conforming	Rates	Points	APR	Loan Amt	Payment
30 yr fixed mortgage	4.750%	1	4.950%	$300,000.00	$ 1,565
15 yr fixed mortgage	4.250%	1	4.450%	$300,000.00	$ 2,257
3/1 ARM	3.500%	1	3.690%	$300,000.00	$ 1,347
5/1 ARM	3.625%	1	3.835%	$300,000.00	$ 1,368
5/1 ARM Int Only	3.625%	1	3.885%	$300,000.00	$ 906
Jumbo (ask me about Super Conforming limit, per your zip code)
30 yr fixed mortgage	6.000%	1	6.126%	$550,000.00	$ 3,298
15 yr fixed mortgage	5.500%	1	5.755%	$550,000.00	$ 4,494
3/1 ARM	3.875%	1	4.055%	$550,000.00	$ 2,586
5/1 ARM	4.875%	1	5.095%	$550,000.00	$ 2,911
5/1 ARM Int Only	5.000%	1	5.250%	$550,000.00	$ 2,292

Rates subject to change without notice.
Please keep in mind, these rates and statistics are for informational purposes only to give you a sense of market movement and my opinion as to why. Although these rates exist today, based on certain qualifying characteristics, your scenario may allow for lower or higher interest rates. Licensed by the CA Dept of Real Estate, #01760965. Equal Opportunity Housing Lender. If you'd like to be removed from this list, please reply with REMOVE in the subject line. You can also use this link, mailto:egrathwol@priority1stmortgage.com and add REMOVE to the subject line. To add someone who would appreciate this information, send me their email with SUBSCRIBE as subject.

Eric Grathwol

Loan Officer

Priority 1st Mortgage

3300 Douglas Blvd. Ste. 270

Roseville, CA 95661

direct: 916-223-4235

office: 866-771-9000

fax: 916-771-9099

Posted by Eric Grathwol on 03/18/2010 01:52 PM

Your Interest Rate Update

February 11, 2010

"Greece is the word." Oh wait, I think it was "grease is the word..."

Either way, it's appropriate for today's economic environment to discuss Greece, and what it might mean to you and me, and the rates we pay for financing.

As you may have heard, Greece might be hitting the financial wall, as the country is finding it increasingly hard to refinance its massive debt. As a result, Greek bond yields have risen to over 6.75%-7% in recent weeks, and are about 3.5% higher than similar German bonds. As those debt service costs rise, it perpetuates and exacerbates the problem.

Beyond that, as a member of the EU, Greece is "required" (I put that in parentheses, because that has yet to be enforced) to maintain strict budgetary balances, which are currently way out of whack. And, those imbalances can't be cured by Greece alone without significant economic pain. It'll take either massive cuts to their deficit spending (which will plunge the country into a deep recession or possibly depression, fomenting public discontent) and/or...they need to get a bail out, whether by a cash infusion, or debt restructuring.

And, this matters to you and me because...doesn't it sound familiar?

Consider Greece, Italy, Ireland, Portugal and Spain the "subprime borrower" of the sovereign debt world. They spend more than they make, and they're basically upside down on their "house." Just like subprime borrowers defaulting on their mortgages, if Greece were to default on its debt, that would start a very unsettling ripple effect, and could cripple the credit markets again. According to John Mauldin, an analyst I enjoy reading, "the results of a Greek default would be financial turmoil. 250 billion euros (and maybe 300!) of Greek debt is in international bond funds, pension and insurance companies, and above all at banks."

That's about $350 billion to $420 billion US, or about half the dollars of our entire stimulus package, in one fell swoop. Plus, that doesn't account for any leverage on that debt (credit default swaps/insurance against that debt going bad, etc.). And Greece isn't alone. Dubai needed a bail out a short time ago. Greece could be the guinea pig, or canary in the coal mine for Italy, Ireland, Portugal and Spain who are also facing harsh economic realities and strict "requirements" within their EU member nation charters.

How the EU members (as well as financial institutions across the globe) handle Greece's troubles will set the stage for handling whichever country comes into trouble next.

And, the more investment risk there is perceived to be, the better US Treasuries, and possibly newly issued Mortgage Backed Securities are likely to perform.

That's probably why, despite several runs toward a 4% yield on 10-year Treasuries, amid unprecedented supply, prices have remained stable in the mid 3% range (it rose to 3.69% today).

And, in turn, Mortgage Backed Securities, which compete with Treasuries for investment dollars, continue to hover around historic lows of 4.75%-5%, even as we approach the Fed's stated end of their MBS purchase program.

As I've written before, I'm not sure whether mortgage rates are staying low because demand for new mortgages has subsided, so the Fed's diminished purchases are still enough to buoy prices (which keeps rates down); or whether there was a back room deal of sorts, and the likes of Goldman Sachs, JP Morgan Chase, etc. are quietly picking up the Fed's slack in the MBS market, or... if other investors are slowly stepping back into the MBS market due to the relative safety of that investment. After all, with the now explicit backing of the United States' Full Faith and Credit, Mortgage Backed Securities issued by Fannie Mae and Freddie Mac are pretty safe bets.

On that note, Fannie Mae and Freddie Mac just announced they'll be buying back a portion of their issued securities because that's a cheaper solution than making their guarantee payments. According to Nightly Business Report, Fannie and Freddie guarantee about $200 billion in delinquent mortgage securities. Good thing the US Treasury gave them that Christmas gift of unlimited credit lines.

So, from a demand side US Treasuries and mortgage backed securities may not look too bad.

The other major driver of interest rates, inflation, is basically non-existent, and deflation is still a concern. That's one reason the Fed continues to say our economy remains in a fragile state, and the extraordinary measures they've taken to help drive sustainable growth, without massive government intervention, are likely to remain in place for an "extended period."

At least now we know what an "extended period" means. It's taken to be at least 6 months. In a January 13 interview on Nightly Business Report, Bill Dudley, New York Federal Reserve President, said "So what I want to stress is extended means at least six months. It could be a year from now, two years from now. It's going to depend on how the economy develops."

The next Fed meeting will be held March 17-18. If the language in the FOMC statement still uses "extended period" we could anticipate there would be no change to the Federal Funds Target Rate until at least September (barring a sharp return to sustainable economic growth) in the interim.

At the same time, Bernanke and other Fed Board Members are out talking about the tools they have at their disposal to help reduce the money supply, which they reckon will be a more effective means of staving off inflation in the near term than raising the Federal Funds Rate. They're doing all this talking to directly telegraph their intentions, as well as their awareness of potential pit falls as they attempt to spur growth and anchor inflation expectations.

Although the Fed Funds Rate does not directly impact mortgage rates, if the Fed begins to raise their target, it's because they believe the economy is gaining traction. As the economy recovers that could (and at this point we hope does, at least a little) lead to inflationary pressures. Since inflation erodes the long term return of a fixed investment...mortgage rates would rise in fear of any pending inflation.

If the Fed's activities to tighten the money supply without raising the Fed Funds Rate directly are effective in staving off inflation, which I think they will be, we could see more than an "extended period" of this extraordinarily accommodative policy.

But wait, there's more! There are large numbers of adjustable rate mortgages which will be rolling out of their fixed terms over the next 12-24 months. With interest rates at today's levels, the underlying indices for those ARMs are very low (the 12-month LIBOR for example is around 1%, the Monthly Treasury Average is about .5%) so...ARMs that are adjusting right now, are actually providing payment relief or faster principal reduction for those who have them.

Perhaps more importantly, commercial financing relies on these same underlying indices. I'm sure the analysts at the Fed and central banks across the globe see this too. So, it would follow that they would do what they can to keep those underlying indices low, so there is less pain - and even benefit - for loans that roll out of their fixed terms into their adjustments.

Those are the main reasons why I think we might see today's level of low interest rates remain for some time. And, any further credit crisis, or even a "double dip recession" for the US or other countries could prolong our low interest rate environment.

Finally, putting further strain on our recovery is the massive volume of unsold homes. Any sharp increase in mortgage rates could slow down buyers entering the market, allowing that excess supply to sit idle for longer.

On top of that, there's the big variable of how many people who can afford to make their payments, but are upside down, will just walk from their mortgages, which would add to the over supply of vacant homes.

I saw in a New York Times story by David Streitfield that: "Using credit bureau data, consultants at Oliver Wyman calculated how many borrowers went straight from being current on their mortgage to default, rather than making spotty payments. They also weeded out owners having trouble paying other bills. Their estimate was that about 17 percent of owners defaulting in 2008, or 588,000 people, chose that option as a strategic calculation. It would cost about $745 billion, slightly more than the size of the original 2008 bank bailout, to restore all underwater borrowers to the point where they were breaking even, according to First American."

Can you smell the principal reduction?

All that said, I'm definitely in the minority thinking rates will remain low longer than the next 6 weeks. And, for each argument I outlined above, there are counter arguments as to why mortgage rates will rise sooner, rather than later. The most powerful of which is the Fed's planned termination to their mortgage backed security purchases, at the end of March.

Bottom line, what we know is that mortgage rates are as low as they've ever been. They're not likely to get lower. They will go up. It's not a matter of IF, but rather WHEN.

If you're in a position to capitalize on this cheap money - whether to buy or refinance - now is a great time to review the math behind your options.

Getting a 1% lower rate (say from 6% to 5%) on a 30yr fixed mortgage of $417,000 can save you around $100,000, over the life of that loan.

That's real money.

With that, here are your rates for this week. Please don't hesitate to call or email if you, your friends, or family have questions about financing residential or commercial real estate. Cheers! E

Conforming	Rates	Points	APR	Loan Amt	Payment
30 yr fixed mortgage	4.750%	1	4.950%	$300,000.00	$ 1,565
15 yr fixed mortgage	4.250%	1	4.450%	$300,000.00	$ 2,257
3/1 ARM	3.500%	1	3.690%	$300,000.00	$ 1,347
5/1 ARM	3.625%	1	3.835%	$300,000.00	$ 1,368
5/1 ARM Int Only	3.625%	1	3.885%	$300,000.00	$ 906
Jumbo (ask me about Super Conforming limit, per your zip code)
30 yr fixed mortgage	6.000%	1	6.126%	$550,000.00	$ 3,298
15 yr fixed mortgage	5.500%	1	5.755%	$550,000.00	$ 4,494
3/1 ARM	3.875%	1	4.055%	$550,000.00	$ 2,586
5/1 ARM	4.875%	1	5.095%	$550,000.00	$ 2,911
5/1 ARM Int Only	5.000%	1	5.250%	$550,000.00	$ 2,292

Rates subject to change without notice.
Please keep in mind, these rates and statistics are for informational purposes only to give you a sense of market movement and my opinion as to why. Although these rates exist today, based on certain qualifying characteristics, your scenario may allow for lower or higher interest rates. Licensed by the CA Dept of Real Estate, #01760965. Equal Opportunity Housing Lender. If you'd like to be removed from this list, please reply with REMOVE in the subject line. You can also use this link, mailto:egrathwol@priority1stmortgage.com and add REMOVE to the subject line. To add someone who would appreciate this information, send me their email with SUBSCRIBE as subject.

Eric Grathwol

Loan Officer

Priority 1st Mortgage

3300 Douglas Blvd. Ste. 270

Roseville, CA 95661

direct: 916-223-4235

office: 866-771-9000

fax: 916-771-9099

Posted by Eric Grathwol on 02/11/2010 10:18 AM

Your Interest Rate Update

January 4, 2010

Best wishes for a happy, healthy and prosperous New Year to you and yours.

As I've been pondering the direction that mortgage rates, the housing market, and our economy as a whole might take for 2010, a few things occurred to me:

•1) My financial advisor, good friend and reader of my newsletters, pointed out that I'm pretty glib with my annual predictions and resulting scorecard. Although he was poking fun, knows where I'm coming from and understands that "better than 50%" is winning with economic forecasts, he made me realize that I may need to clarify that for some of my readers, who may not know me as well.

•2) Forecasting macro economic trends is kind of like forecasting the weather, but with a lot more variance in the possible outcomes. There is a lot of science and math involved with economic forecasting, but... there are also so many variables (not the least of which are human behavioral patterns), making it pretty hard to get the calls spot on. In fact, it's entirely possible to predict the right result, but... have missed the reasons for that result by a wide margin.

•3) I'm not an economist. I'm a real estate finance professional. I work at educating myself, being a sponge for all things economic, trying to digest as much information as I can (whether from bears, bulls, or analysts in the middle) to distill it and put it to use for you in the context of its impact on real estate financing. As such, my economic predictions are primarily meant to make us think about possible outcomes, so we can make educated decisions, with the facts we have at hand. And...

•4) I like to see how close I come to being right (my competitive nature, I guess) compared to those who make a living forecasting economic trends.

So, I hope that helps frame the context of my predictions (and my year-end results) as we roll into a new decade. I'm happy to say, that in the three or four years that I've been writing my updates, I'm doing pretty well, particularly on the interest rate and housing market predictions.

2010 is sure to be a very interesting year. Not only are the US and global economies trying to claw back to sustainable growth, while working to repair our respective balance sheets (at least in the US - excepting our government, so far) but...in the US it's an election year. That could spur a lot of vote buying, instead of prudent fiscal policy.

Current economic forecasts for US GDP growth for the year range from the low 2%'s to the mid-to-high 5%'s. In a $13Trillion economy, that's a swing of $260Billion to $650Billion in economic growth. That level of disparity in predictions and possible outcomes is unprecedented.

That being said, here are my predictions centered around some themes that I expect to run through this year:

1) 30 year fixed mortgage rates for conforming loans (up to $417,000) will hover around 5%-5.5% for most of the year w/ occasional peaks and valleys higher and lower - they will not, as many fear, rise back and remain above the 6%+ range. I'm definitely in the minority on making this call. Even one of my most trusted resources - Barry Habib founder of Mortgage Market Guide - is counting on mortgage rates rising significantly from current lows. The reason? The Fed is on track to stop buying Mortgage Backed Securities (MBS) at the end of March. However, I think one of a few things is likely to keep rates down: A) The Fed will extend their MBS purchase program, if the market for them has not returned by that time. B) Whether by choice, or by government "request" JP Morgan Chase, Goldman Sachs, et al who've reaped HUGE profits after taking their fill of our tax dollars/gov't bail out will step to the plate and buy MBS at the volume needed for rates to remain in that range. C) I still think deflation, rather than inflation, is the near-term threat. As such, 10-Yr Treasury yields could hover in the 3.5% range - possibly lower. And, although we know fixed mortgage rates and Treasury yields are not directly linked, there's approximately a 1.5% spread between the two, meaning mortgage rates could comfortably hover in the 5% range, providing a reasonable risk premium relative to Treasuries.

2) The Fed will not raise the federal funds target rate from .25% until Q4 of 2010 or even into 2011. Ben Bernanke, aka Helicopter Ben, is arguably one of the foremost students on the Great Depression. He's fully aware that the early removal of loose monetary policy and federal support during the Great Depression led to a relapse into another recession. He and the FOMC Board Members are committed to preventing that this time around. They will err to the side of risking an overheated economic recovery and potential inflationary pressures, rather than sliding back into recession and a deflationary spiral that could last decades (like Japan's).

3) Home prices will remain basically flat for the year. Again, the range of possibilities here are very broad. Home prices could in fact already have bottomed, and be heading higher. On the other hand, if real estate prices are "mean reverting" meaning they'll follow a steady trend over time, the spike we saw in the first half of the last decade would need to be followed by an equally dramatic drop, well below the mean, for us to revert to the mean of say 3% annual appreciation. And, so far in the this cycle, we've not over corrected to the down side yet, but have rather hit the price point of roughly where we'd have been without the dramatic increases we saw in home values from 2002-2006. But, my gut says that rather than seeing another precipitous decline, we'll simply spend longer at this lower plateau than we otherwise might. Foreclosures and the inventory of homes for sale are still rising, albeit more slowly. And, banks have gotten smarter, so they're managing the release of REO (real estate owned) listings to avoid flooding the market, precipitating another drastic dip in home prices.

4) The foundation to turn Fannie Mae and Freddie Mac into full fledged government agencies will be set. Home ownership for everyone as a policy choice continues. This policy was formalized in the Clinton era. Perpetuated by the Bush administration (those drawing attention to the flaws of Fannie and Freddie's finances were summarily dismissed), and...is now being perpetuated by the Obama administration. Although housing is definitely a cornerstone of the American economy, it's my opinion that home ownership is not for everyone. Regardless of whether you can afford to own a home or not, just as there are benefits to home ownership, there are very distinct benefits to renting, both for individuals that rent, and those that own the rentals. The simple fact is that Fannie and Freddie, as they're run now, cannot be private enterprises. The hybrid status they enjoy is tenuous, at best, and outright ludicrous at its core. Rather than breaking them up, fully privatizing and making Fannie and Freddie self-sustaining businesses, it's my belief they will be brought fully into the government fold, and this multi-year process begins in earnest in 2010 (at least publicly). On December 24 of 2009 (when most people were enjoying their Holidays, and may not have noticed) the Treasury Department announced an update to Fannie and Freddie's conservatorship by which they will "allow the cap on Treasury's funding commitment under these agreements to increase as necessary to accommodate any cumulative reduction in net worth over the next three years." They go on to state that the initial limit of $200Billion in Treasury guarantees for each GSE has only been drawn to $51Billion and $60Billion for Freddie and Fannie, respectively. Setting the stage, indeed.

5) FHA will continue to grow its market share of mortgage originations, currently at about 30% of all originations, but delinquencies will rise too. They will need a bail-out of sorts to cover their losses. There will be heavy debate about whether guidelines should be tightened or kept where they are. This ties directly into Homeownership as Public Policy. FHA is today's sub prime, but instead of private risk, it's our tax dollars. FHA currently insures roughly $685Billion in mortgages. Of those, roughly 20% are delinquent. But, it gets better. FHA holds just $3.6Billion in reserves. So, if 20% of $685Billion is delinquent, that means that if all of those delinquencies defaulted into foreclosure, FHA's exposure would total $130Billion or so. Ooops! Looking from the other side, FHA only has reserves enough to cover about a half-percent foreclosure rate for the loans they insure. That's less than the historic default rate, before the whole mortgage market and economic meltdown. As most defaults are now driven by job losses and/or income reductions, it's tough to see how FHA can operate without direct assistance.

6) Unemployment will remain close to, if not above 10% for the year (and 12% in CA). Now we're getting outside my wheelhouse, for sure. But, since there are as many jobs available now as there were in 1999 with 12 million more workers (David Rosenberg, Gluskin Sheff). And we're coming off an era of unprecedented consumption, thought to continue indefinitely, so we built stores, malls and offices to support that level of demand, we have a ton of overcapacity that needs to be soaked up. I think that's a multi-year, not a multi-month, process.

7) The commercial real estate meltdown will heat up and continue inhibiting the free flow of credit as banks build reserves to handle losses. I've been searching for solid data to quantify the impact of commercial defaults on our banking sector and overall economy for a few weeks now. I've checked the FDIC, the Fed, and a myriad other public and private research sites, but either I'm missing something, I'm not smart enough, or...something. But, the best data I found from the California Association of Realtors states that as of June 2009 there was roughly $115Billion of distressed commercial real estate (including those in BK, forbearance, foreclosure, or REO), up from $56Billion in January of 2009, and $15Billion in January 2008. Moreover, they figure there is roughly $2.6Trillion of Commercial Debt due to mature between 2010 and 2013 of the 3.5Trillion or so outstanding. On top of that, the Fed in their "stress tests" figured an 8%-10% Commercial Real Estate default rate with their "worst case" 8% unemployment rate. Well, as we know, we're above 10% unemployment now. So...back of the napkin math says we could see roughly $260Billion of Commercial loans default in the next year or two. Again, from David Rosenberg, US bank assets total $7.4Trillion. They have $346Billion of "tier 3" illiquid assets. That totals their entire core capital. I wonder if that debt was leveraged. And...I wonder who has the cash on hand to cover those losses? I bet Uncle Sam does...TALF won't go away any time soon. It will be tapped to cushion the blow of the ongoing commercial real estate meltdown.

8) Principal balance reductions will continue to increase on both residential and commercial real estate loans. The big variable is how many people will make a decision to walk from their loan obligations because of their negative equity, regardless of their ability to repay. The only solution, should that number rise enough, seems to be permanent principal balance reduction, no matter how bad that tastes. Brent T White, a University of Arizona Law Professor, in a recent paper covered by the LA Times espoused that homeowners who owe more than their homes are worth should walk away, and not feel morally obliged to repay. I can't say I agree with that take, but... if that happens en masse, look out. And, with roughly 40% of those who had their loans modified falling back into default, it's a big variable (the human behavioral pattern) that could have massive ripple effects throughout our economy. Principal balance reduction could then become a much more attractive option than another massive wave of foreclosures.

So, those are the themes and predictions I see having an impact on the mortgage and housing markets and the economy as a whole as we enter this next decade.

Despite some trying times, I still see opportunities all over the place, for those positioned to seize them. And, it's often the hard times that generate the breakthrough moments in life that lead to the next big thing, whatever that happens to be.

Whatever that next big thing is for you, I hope you find it!

In the mean time, here are your rates for this week. Please don't hesitate to call or email if you, your friends, or family have questions about residential or commercial real estate financing. Cheers! E

Conforming	Rates	Points	APR	Loan Amt	Payment
30 yr fixed mortgage	4.875%	1	5.075%	$300,000.00	$ 1,588
15 yr fixed mortgage	4.375%	1	4.575%	$300,000.00	$ 2,276
3/1 ARM	3.625%	1	3.815%	$300,000.00	$ 1,368
5/1 ARM	3.875%	1	4.085%	$300,000.00	$ 1,411
5/1 ARM Int Only	4.125%	1	4.385%	$300,000.00	$ 1,031
Jumbo (ask me about Super Conforming limit, per your zip code)
30 yr fixed mortgage	6.625%	1	6.751%	$550,000.00	$ 3,522
15 yr fixed mortgage	6.250%	1	6.505%	$550,000.00	$ 4,716
3/1 ARM	4.375%	1	4.555%	$550,000.00	$ 2,746
5/1 ARM	5.125%	1	5.345%	$550,000.00	$ 2,995
5/1 ARM Int Only	5.375%	1	5.625%	$550,000.00	$ 2,464

Rates subject to change without notice.
Please keep in mind, these rates and statistics are for informational purposes only to give you a sense of market movement and my opinion as to why. Although these rates exist today, based on certain qualifying characteristics, your scenario may allow for lower or higher interest rates. Licensed by the CA Dept of Real Estate, #01760965. Equal Opportunity Housing Lender. If you'd like to be removed from this list, please reply with REMOVE in the subject line. You can also use this link, mailto:egrathwol@priority1stmortgage.com and add REMOVE to the subject line. To add someone who would appreciate this information, send me their email with SUBSCRIBE as subject.

Eric Grathwol

Loan Officer

Priority 1st Mortgage

3300 Douglas Blvd. Ste. 270

Roseville, CA 95661

direct: 916-223-4235

office: 866-771-9000

fax: 916-771-9099

Posted by Eric Grathwol on 01/05/2010 12:34 AM

Comments (3)

Your Interest Rate Update

December 22, 2009

Merry Christmas and Happy New Year!

As we wrap up - Get it? Wrap up? - another year, let's have some fun and see how my 2009 predictions panned out. I'll save you some time, if you don't want to read the whole letter. I got 2.5 of six right, by my count. Not bad, for an educated guesser...

But, my first and most important prediction - where mortgage rates would hover - was spot-on.

Prediction 1: I said "Mortgage rates will hover around the 5% range for 30yr fixed conforming loans (those under $417,000) for most of the year. Yes, this is a change from my thoughts prior to Thanksgiving, before the Fed formally announced they'd purchase Mortgage Backed Securities (MBS) and other securitized debt."

In fact, 30yr fixed rates for conforming loans held that line very well all year long at 5%. We saw three distinct moves to lower rates, bottoming at 4.625%, and two dramatic spikes in rates where they touched 5.5%. Nevertheless, it's an amazing thing in itself that I'm saying "rates spiked to 5.5%." I'll share my thoughts on the rate outlook for 2010 when I make my best guesses for the year in January.

Prediction 2: The Housing Market: I wrote, "I've felt like a bottom is forming in California for much of 2008. I still feel that way. I'm going to call a bottom some time in late 2009 (and that might slip into early 2010)."

It's too early to say for sure, but it looks as if we are indeed forming a bottom, if not even coming up slightly. So far in the cycle, California home values have dipped between 30% to 60%, depending on where you live. According to the California Association of Realtors, the median home price dropped by "just" 3.2%, from $307,210 in October 2008, to $297,500 in October of 2009. And, there was a slight increase from Sept. '09 to Oct. ‘09. If you're curious about your area, MDA DataQuick, a real estate information service, has an interesting city and county year to year comparison that you can see at http://www.dqnews.com/Charts/Monthly-Charts/CA-City-Charts/ZIPCAR.aspx.

So, hopefully, having dropped 30%-60% we've seen most - if not all - of the home price correction. But, there are scenarios that could see us sliding a bit further. Although I don't think they're too likely, I'll touch on them in my 2010 forecast.

Prediction 3: Word of the Year: I thought we'd hear about stagdeflation, and quantitative easing in the main stream. What the hell was I doing writing about "words of the year?" I guess the economic and scrabble dork took over. Quantitative easing is printing money. We're hearing a lot about it in the context of our deficit, funding it by selling treasuries and our Fed's balance sheet growing, but...nobody says quantitative easing except economists. Stagdeflation? That could come around if we see our economy slow again, GDP pulls back and deflationary pressure continue, but... hopefully that's been averted. Although...third quarter GDP was just revised down again to a 2.2% print, down from 3.5% at the initial reading and 2.8% from the first revision.

Prediction 4: I may have missed the mark on this one. I worried that the fiscal stimulus from Congress, steered by the White House, would be a lot more contentious and yield much murkier results than it has so far. But, we can definitely see that programs like Cash for Clunkers and the Homebuyer Tax Credits have spurred activity in the auto and housing sectors. And, we saw GDP growth in the third quarter, which was predominantly driven by that fiscal stimulus. However, it's not like there's no debate. That debate is just more focused on whether the costs will be worth the results; whether the results will be fleeting or can lead to sustained private sector growth, rather than the complete boondoggle I'd worried about. Not to say that they haven't wasted some arrows, or missed some targets...

Prediction 5: Principal mortgage balance reductions aren't as prevalent as I thought they would be by now. They're happening, but, only in a very small percentage of outstanding loans, although some lenders and servicers are being pretty aggressive within their portfolios. Ocwen Financial, for example had used principal balance reduction on about 20% of their loan modifications through Q1 2009. And, as of their press release on December 10, Ocwen had converted 74% of their loan modifications under the Home Affordable Modification Program (HAMP) from temporary to permanent status. And, they boast one of the lowest re-default rates in the industry, too. The bummer is that they only service about 2% of all HAMP eligible loans. But, it's possible more lenders will begin following their model.

Prediction 6: The Commercial Real Estate collapse. It's happening. I've felt the pain personally. But the meltdown is not moving as quickly as I'd thought. I think 2010 will see a lot more carnage on this front than 2009.

So, all said and done, I hit the first two - specific to the niche in which I work - pretty squarely. I'm giving myself another ½-point for touching on components and maybe being a little early on the other three.

I wonder what 2010 will deliver? I'll toss out my thoughts on that after the New Year.

In the mean time, as always, call or email if you or anyone you know has questions about financing residential or commercial real estate. Here are your rates for this week. Happy Holidays! E

Conforming	Rates	Points	APR	Loan Amt	Payment
30 yr fixed mortgage	4.875%	1	5.075%	$300,000.00	$ 1,588
15 yr fixed mortgage	4.375%	1	4.575%	$300,000.00	$ 2,276
3/1 ARM	3.500%	1	3.690%	$300,000.00	$ 1,347
5/1 ARM	3.875%	1	4.085%	$300,000.00	$ 1,411
5/1 ARM Int Only	4.125%	1	4.385%	$300,000.00	$ 1,031
Jumbo (ask me about Super Conforming limit, per your zip code)
30 yr fixed mortgage	6.625%	1	6.751%	$550,000.00	$ 3,522
15 yr fixed mortgage	6.125%	1	6.380%	$550,000.00	$ 4,678
3/1 ARM	4.125%	1	4.305%	$550,000.00	$ 2,666
5/1 ARM	5.125%	1	5.345%	$550,000.00	$ 2,995
5/1 ARM Int Only	5.375%	1	5.625%	$550,000.00	$ 2,464

Rates subject to change without notice.
Please keep in mind, these rates and statistics are for informational purposes only to give you a sense of market movement and my opinion as to why. Although these rates exist today, based on certain qualifying characteristics, your scenario may allow for lower or higher interest rates. Licensed by the CA Dept of Real Estate, #01760965. Equal Opportunity Housing Lender. If you'd like to be removed from this list, please reply with REMOVE in the subject line. You can also use this link, mailto:egrathwol@priority1stmortgage.com and add REMOVE to the subject line. To add someone who would appreciate this information, send me their email with SUBSCRIBE as subject.

Eric Grathwol

Loan Officer

Priority 1st Mortgage

3300 Douglas Blvd. Ste. 270

Roseville, CA 95661

direct: 916-223-4235

office: 866-771-9000

fax: 916-771-9099

Posted by Eric Grathwol on 12/22/2009 01:24 PM

Your Interest Rate Update

October 16, 2009

Happy Halloween! Trick or Treat?

That's one way to look at the US economy during the third quarter where GDP growth beat most analysts expectations with a 3.5% annualized growth rate. Was it a trick, or some kind of economic treat? It sort of depends on how you look at it, but either way, we probably won't know for sure for another quarter or two.

You can already hear one side touting it as a huge treat. The government stepped in when consumers and businesses were reeling most, and spurred some spending. Those in the trick camp will tell you that we just got an injection of government steroids, and once those shots stop, so will the economic growth.

There's no doubt that the government stimulus drove the economic engine in the third quarter. Of the $787 billion stimulus plan, about $207 billion has been spent (www.recovery.gov). And, of the 3.5% GDP number for Q3, most of the boost came from housing (driven by the tax incentive) and autos (due to cash for clunkers). Without that, it's very likely GDP would have been flat, or maybe even negative.

The question is, was it worth it? I tend to think so. Without the intervention, both economic momentum and psychology would have continued their downward trend, making recovery even harder.

As we move into Q4, it'll be interesting to see if the increased consumption fueled by government stimulus can continue. Personally, I'm skeptical, but at least the monetary and fiscal policies have put a floor under our economic slide. But, with unemployment likely rising further, I don't see how we can expect a strong consumer to come back that soon.

That's partially why we saw the stock market give up all of Thursday's gains yesterday. The hot GDP report got everyone fired up on Thursday, only to be dashed on Friday by the weak consumer spending number that posted a -.5%, dip, meeting analysts' expectations, but sliding back about 2% from the month prior's 1.4% mark, which was fueled by cash for clunkers and homebuyer tax credits.

This realization helped fuel a rally in bonds and mortgage backed securities, which is interesting because the waves of unprecedented supply continue to roll in. Yet rates on mortgages and yields on treasuries remain very low because the appetite to soak them up seems to be strong. Is money moving back into safety and income generation? Is it a story of supply creating demand? Or....are bonds, treasuries and mortgage backed securities over bought, meaning we could see a correction in the other direction in those markets?

As always, there are a lot more questions, than answers.

So, what will drive economic growth going forward? I think we'll continue plodding along. I don't put the recent GDP print as either a trick, nor a treat. It was the result of the necessary evil of massive government intervention.

The real trick is going to come as we try to wean off this government crutch, live within our means, and increase revenue without imposing crushing tax increases on businesses and individuals that could risk pushing a fragile economy back into recession.

I'm glad I'm not faced with making those choices. I'll just continue giving you my thoughts on how they may impact you and your finances. As much pain and discomfort this economic cycle has created, there are valuable lessons to learn, and some terrific opportunities to sieze.

As always, if you, your family, or friends have any questions about financing residential or commercial real estate, please call or email me. If you're in the market for a Jumbo ARM, the rates are screaming!! Happy Halloween! E

Conforming	Rates	Points	APR	Loan Amt	Payment
30 yr fixed mortgage	4.875%	1	5.075%	$300,000.00	$ 1,588
15 yr fixed mortgage	4.375%	1	4.575%	$300,000.00	$ 2,276
3/1 ARM	4.000%	1	4.190%	$300,000.00	$ 1,432
5/1 ARM	4.000%	1	4.210%	$300,000.00	$ 1,432
5/1 ARM Int Only	4.125%	1	4.385%	$300,000.00	$ 1,031
Jumbo (ask me about the new limit, per your zip code)
30 yr fixed mortgage	6.625%	1	6.751%	$550,000.00	$ 3,522
15 yr fixed mortgage	5.250%	1	5.505%	$550,000.00	$ 4,421
3/1 ARM	3.875%	1	4.055%	$550,000.00	$ 2,586
5/1 ARM	4.875%	1	5.095%	$550,000.00	$ 2,911
5/1 ARM Int Only	5.000%	1	5.250%	$550,000.00	$ 2,292
Rates subject to change without notice.
These rates and statistics are for informational purposes only to give you a sense of market movement and my opinion as to why. Although these rates exist today, based on certain qualifying characteristics, your scenario may allow for lower or higher interest rates. Licensed by the CA Dept of Real Estate, #01760965. Equal Opportunity Housing Lender. If you'd like to be removed from this list, please reply with REMOVE in the subject line. You can also use this link, mailto:egrathwol@priority1stmortgage.com and add REMOVE to the subject line. To add someone who would appreciate this information, send me their email with SUBSCRIBE as subject.

Eric Grathwol

Loan Officer

Priority 1st Mortgage

3300 Douglas Blvd. Ste. 270

Roseville, CA 95661

direct: 916-223-4235

office: 866-771-9000

fax: 916-771-9099

Posted by Eric Grathwol on 10/31/2009 06:46 PM

Your Interest Rate Update

October 16, 2009

Wow. It's amazing what the expiration - or perceived expiration - of a government hand-out (errr...tax incentive) will do to boost sales.

Cash For Clunkers created a spike in car sales in August - which promptly receded upon the program's expiration.

I think the Homebuyer Tax Credits will do the same thing. Looking at home sales for the four-county Sacramento Metro area, we've seen a huge spike in pending sales during September, in both month over month and year over year comparisons. I imagine this trend will continue through October, since the program is currently set to expire for closings after November 30, 2009.

As I write this letter, pending sales and closed sales for October are only about 1/3 of September's levels, across the board, although we're half-way through the month. But, that's not unusual, since most closings are scheduled for the last week of the month. We'll see how it pans out. I expect similar final #'s to September's.

In September, for pending sales in the price range of $150k-$200k we saw a 67% m/m spike and a 58% y/y increase. In the $201k-$300k range pending sales rose 68% m/m and 48% y/y. From $301k-$400k pending sales increased by 53% m/m and 38% y/y. The $401k-$600k range saw increases of 63% m/m, but only 5% y/y. And, even the higher end of $601k-$1mill saw pending sales - which to this point had been mostly down both m/m and y/y - increase by 115% m/m and 21% y/y.

That's pretty interesting to me, particularly since in most cases for our market, although we're seeing some month to month increases in sales, the year over year comparisons are basically flat, or down, across the board since the spring, when interest rates first hit their historic low of 4.625%.

And, ordinarily I'd expect that with low interest rates (a good 1% lower on average than 2008), lower home prices (down roughly 10% from 2008) AND the buyer tax incentives, sponsored by our tax dollars (well, really our borrowed tax dollars) that sales would be UP year over year from 2008. But, that's not been the case. It appears that it takes the expiration of a tax credit to move folks to buy homes.

So, that begs a few questions:

Why were people not buying homes in droves up to this point, given that rates are lower, prices are lower, and Uncle Sam was doling out cash?
Is this spike in sales simply pulling sales forward w/ folks looking to capitalize on the tax credit, who would have bought a home anyway?
Is this tax incentive creating any new demand from home buyers who would otherwise not be buying?
Will the home buyer tax incentive actually expire or will it be extended?
And, what will happen to home sales when that tax credit is finally closed, whether Nov. 30th of 2009, or some future date?

If you listened to the main stream media, you might think that the reason people aren't buying is because guidelines are too strict, and it's hard to get financing.

Although guidelines are definitely tighter, they're basically back to where they were 10 years ago. You have to have a job, be able to verify your income, have some savings and have decent credit to get a loan. But, if those things all line up, financing has never been cheaper.

Rather, I think that in California, and most of the country, people aren't buying in droves because... they're not working too much. In California, unemployment is in the 12% range. If we look at the under-employed, and those who've quit looking for work (which is around 16% on the national level) I'd think we'd see true unemployment pushing 20% here in California. And, the Sacramento area is particularly loaded with government employees, many of whom are furloughed. It's tough to go buy stuff, particularly a home, when you're not working or making less than you're used to making.

As for the impact of the tax incentive, I see that as icing on the cake for buyers. I don't believe it drove a significant amount of fresh demand from buyers who would otherwise not have bought. I think many of them have been diligently shopping for homes, hoping to find one that fits their needs so they can use the tax incentive. I wonder how many of them compromised on the home they wanted, just to get in contract and close within the current deadline? To me, a few grand is nothing, compared to being happy in your home for 10+ years. But, maybe some don't see it that way.

I expect home sales, for the most part, are being pulled forward, that would have occurred anyway. I have no way of knowing hard data on buyer's intent and timing, but I don't think the incentive pushed people who were otherwise planning to keep renting to go buy a home.

I do think the tax credit will be extended, and possibly even expanded. It's not in the news much, but there is a bill currently moving through Congress with growing support that will extend, and possibly expand, the homebuyer tax credit. There's certainly a lot of lobbying force pushing Congress down that path.

So, what will happen when the free money is cut off? Will we see a similar decline in home sales that we saw in car sales upon the expiration of the Cash For Clunkers program? I think it's likely that the pattern will repeat. What will the talking heads say to that, as they point to the recent sales spike as further evidence of a turnaround in real estate?

There are just so many homes (like three million) that still need to move through the system that I don't see a clear, sustainable upswing in sales just yet. You can't make people buy things they can't afford. If I recall, that's part of how we got here in the first place.

But, in the same breath, I do think we're finding a bottom to the home pricing correction. Data points to slight month over month price increases - whether those are sustainable or not, or driven by the spike in sales, is another question. But, things do appear to be firming, however slowly.

Meanwhile, we're seeing pretty much every other asset class rising, too. The Dow Jones Industrial Average just closed above 10,000 the other day for the first time in a year (and the 26th time in history) and the media is celebrating, despite the fact that it first did so 10 years ago. Bonds and Mortgage Backed Securities have also been rallying, pushing down yields and rates. Commodities continue to advance. And, that brings me to another question: When in history do we see all these things moving higher at the same time? Not too often, and typically, Mr. Bond Market tends to be making the correct call vs. Mr. Stock Market about the overall direction of our economy. Whether it is this time, or if we are entering some new paradigm where jobs are lost, people spend less, but corporate profits rise, our economy still grows, and inflation picks up, only time will tell. I'm certainly not betting on that new paradigm coming to pass.

Although I think the worst shocks are behind us - we still have a lot of debt out there to either pay down, or....just write off. That won't be a pretty process, and it will take years, not months. The commercial losses are just now really hitting the fan in full force. Those will dwarf the residential loan losses. It's going to be interesting to watch it all unfold. Retailers have closed 8300+ stores so far in 2009, two thousand more than closed during all of 2008. I could go on. The era of excess is unwinding in the US, as it should. Then, we have to rein in our government spending. As you may have seen, the projected deficits continue to increase from already staggering amounts.

We will return to growth. We will return to full employment (roughly 5% unemployment rate) and, home prices will rise over time, but...again, that will all take years, not months to turn the corner.

In the mean time, we know that home prices are back to where they were in about 2002-2003. Interest rates are at historic lows and...it's a great time to buy, for those who are well positioned to do so. And, there are some very viable ideas out there that are free to us taxpayers that could do a lot to firm up our housing market. Hopefully, they will gain traction in Congress. More on those ideas in another letter.

As always, if you, your family, or friends have any questions about financing residential or commercial real estate, please call or email me. Here are today's rates. If you're in the market for a Jumbo ARM, the rates are screaming!! Cheers! E

Conforming	Rates	Points	APR	Loan Amt	Payment
30 yr fixed mortgage	4.875%	1	5.075%	$300,000.00	$ 1,588
15 yr fixed mortgage	4.375%	1	4.575%	$300,000.00	$ 2,276
3/1 ARM	4.000%	1	4.190%	$300,000.00	$ 1,432
5/1 ARM	4.000%	1	4.210%	$300,000.00	$ 1,432
5/1 ARM Int Only	4.125%	1	4.385%	$300,000.00	$ 1,031
Jumbo (ask me about the new limit, per your zip code)
30 yr fixed mortgage	6.625%	1	6.751%	$550,000.00	$ 3,522
15 yr fixed mortgage	5.250%	1	5.505%	$550,000.00	$ 4,421
3/1 ARM	3.875%	1	4.055%	$550,000.00	$ 2,586
5/1 ARM	4.875%	1	5.095%	$550,000.00	$ 2,911
5/1 ARM Int Only	5.000%	1	5.250%	$550,000.00	$ 2,292
Rates subject to change without notice.
These rates and statistics are for informational purposes only to give you a sense of market movement and my opinion as to why. Although these rates exist today, based on certain qualifying characteristics, your scenario may allow for lower or higher interest rates. Licensed by the CA Dept of Real Estate, #01760965. Equal Opportunity Housing Lender. If you'd like to be removed from this list, please reply with REMOVE in the subject line. You can also use this link, mailto:egrathwol@priority1stmortgage.com and add REMOVE to the subject line. To add someone who would appreciate this information, send me their email with SUBSCRIBE as subject.

Eric Grathwol

Loan Officer

Priority 1st Mortgage

3300 Douglas Blvd. Ste. 270

Roseville, CA 95661

direct: 916-223-4235

office: 866-771-9000

fax: 916-771-9099

Posted by Eric Grathwol on 10/16/2009 10:37 PM

Comments (1)

Your Interest Rate Update

August 25, 2009

What will happen to fixed mortgage rates when the Federal Reserve stops buying Mortgage Backed Securities later this year?

Here's my prediction: Not a lot.

Some people fear fixed mortgage rates will skyrocket. I'm not one of them. Worst-case, I think we return to the 6% range, where we were before the Fed's intervention a year ago. But, I actually think they'll hover in the current trading range around 5% to 5.5% for some time.

The Fed definitely stepped in and created a market when it was dying on the vine in the Fall of 2008. Last year, prior to the Fed's November 25th announcement that they'd buy up to $500 Billion of Fannie Mae and Freddie Mac's mortgage backed securities (subsequently expanded to $1.25 Trillion in the Spring of '09) 30 year fixed interest rates were hovering around 6%-6.5%.

We'd seen two or three windows of opportunity in 2008 where rates hit 5.5%, but it wasn't until the Fed's November announcement that rates dipped below that mark, and hit as low as 4.5%-4.625% for a short time.

The Fed's expansion of that program in the Spring of 2009 helped mortgage rates dip again, and hover between 4.625% and 5% until May, even as the stock market was rallying off the March lows. That's important, because usually when stocks advance, that's shifting the supply/demand equation, pulling money out of the relative safety of bonds and mortgage backed securities, moving it into higher risk/reward equities. But the Fed's purchase program undoubtedly picked up much of that slack.

Additionally, the stock market rally was (and still is) fairly low volume, which could mean that a lot of money still needs to be placed where it's relatively safe, but earning more than zero. On that note, 3-month Treasuries are paying just 13 basis points above zero (a basis point is 1/100th of 1%, and as the stock rally continues to have legs, the yield on the 10-yr Treasury is coming down, very close to breaking below a key level of 3.4%. Under "normal" circumstances, we'd expect the yield on Treasuries to rise, when the stock market rallies. (As an aside, the 10yr Treasury yield actually closed at 3.398% today).

From May into August, mortgage rates came off their floor and were hovering in the 5% to 5.5% range again. Still terrific fixed interest rates, but...we get spoiled easily, don't we?

Then, as the second quarter came to a close, and economic "green shoots" began turning brown, money found its way back into the MBS market, bringing 30-yr fixed rates back below 5% to 4.875%, just .25% above their historic floor.

Enter 3rd Quarter. We had "cash for clunkers," ongoing incentives for first-time homebuyers, and consumers benefited from a slight tax reprieve via the economic stimulus plan enacted after Obama took office. As a result, Q3 GDP is expected to show about a 3.5% growth rate. Meanwhile Q2 GDP was revised to a better than expected -1%. But, how much of that was due to government intervention, rather than organic growth? Quite a lot. Moreover, will this improvement continue into, and through Q4? We'll see.

I do believe the worst is behind us, economically. But, we're just now beginning to see the first wave of commercial defaults start to rise. That poses significant risks for our banking/financial sector. Unemployment is pegged to rise through much of next year. And companies, for the most part, are still seeing their top line sales decline.

The government stimulus should continue to keep the wheels on the car, for now, but in this tough environment, I think it's likely that the stock market will start to retrace some of its recent gains - as it becomes clear that the recent growth is not fundamentally sustainable without continued government intervention, which of course breeds another set of challenges. The timing of this realization is likely to occur around the tail end of Q4 2009 or Q1 2010, basically coinciding with the Fed's unwinding their MBS purchase program.

And, since many investors have ridden this stock market wave, posting significant gains, it may be time for some profit taking, where they'll cash out and park funds in less risky, yet still substantial returns of MBS, treasuries and corporate bonds.

They can choose US Treasuries - little return, and virtually no risk. Or, they can assume slightly higher risk, and buy up Mortgage Backed Securities, municipal bonds (there was a recent spike in that market, too) corporate bonds, etc.

If you're buying recent vintage MBS, from 2008 and 2009, unless the seller is stuffing their bundle with older vintage loans, you're getting mortgages with at least 20% equity cushions (and much more in many cases) backed by borrowers with stable and verifiable income, assets, and solid credit histories. Even accounting for some incremental job losses, and another down leg in home values, "most" of those newly minted loans should perform within historic ranges, with defaults in the 1% range.

And, if I can get a return of 5.5% on my money - in what I would term a pretty safe environment - that's not a bad deal. Particularly if we do find ourselves in a deflationary environment. Then, my actual returns could be 6.5% to 7.5%. Not bad! 8% annualized returns are what the Stock Market Gurus sold us as standard for years - despite the fact that the major indices (Dow, S&P and NASDAQ) are basically in the same place now, as they were 10 years ago.

On top of those factors, since the Baby Boomers have seen their net worth plummet through declines in asset values (both in stocks and real estate) they may shift much of their portfolios to income generation, rather than equity appreciation. This could further fuel demand for MBS and other income driving investments.

Sure, there were and continue to be some great runs and huge opportunities to make money in stocks - as long as you or your financial planner/broker buy the right stocks and move in and out of the market at the right times, but...as we know, that's easier said than done.

Investors may decide that's not worth the risk - in the near term - when they can park their funds in safer investment vehicles, and still net some handsome returns.

That's why I think mortgage rates will not see much of a jump - if any - as the Fed winds down their purchase program. And, if The Fed believes otherwise, I'm fairly confident they'll extend the program accordingly. They're going to do everything they can to reflate our economy. And higher borrowing costs for consumers would add pressure to what may already be a pretty weak and tenuous recovery.

But, as always, time will tell. Maybe we will indeed see a V-shaped economic recovery. That's certainly what the stock market is anticipating. Just because I don't see it playing out that way doesn't mean it won't happen. We'll see as we continue moving through this cycle, and I'll do my best to keep you posted.

In the mean time, if you, your family, or friends have any questions about financing residential or commercial real estate, please call or email me. Here are today's rates. If you're in the market for a Jumbo ARM, the rates are screaming!! Cheers! E

Conforming	Rates	Points	APR	Loan Amt	Payment
30 yr fixed mortgage	4.875%	1	5.075%	$300,000.00	$ 1,588
15 yr fixed mortgage	4.375%	1	4.575%	$300,000.00	$ 2,276
3/1 ARM	4.000%	1	4.190%	$300,000.00	$ 1,432
5/1 ARM	4.000%	1	4.210%	$300,000.00	$ 1,432
5/1 ARM Int Only	4.125%	1	4.385%	$300,000.00	$ 1,031
Jumbo (ask me about the new limit, per your zip code)
30 yr fixed mortgage	6.625%	1	6.751%	$550,000.00	$ 3,522
15 yr fixed mortgage	5.250%	1	5.505%	$550,000.00	$ 4,421
3/1 ARM	3.875%	1	4.055%	$550,000.00	$ 2,586
5/1 ARM	4.875%	1	5.095%	$550,000.00	$ 2,911
5/1 ARM Int Only	5.000%	1	5.250%	$550,000.00	$ 2,292
Rates subject to change without notice.
These rates and statistics are for informational purposes only to give you a sense of market movement and my opinion as to why. Although these rates exist today, based on certain qualifying characteristics, your scenario may allow for lower or higher interest rates. Licensed by the CA Dept of Real Estate, #01760965. Equal Opportunity Housing Lender. If you'd like to be removed from this list, please reply with REMOVE in the subject line. You can also use this link, mailto:egrathwol@priority1stmortgage.com and add REMOVE to the subject line. To add someone who would appreciate this information, send me their email with SUBSCRIBE as subject.

Eric Grathwol

Loan Officer

Priority 1st Mortgage

3300 Douglas Blvd. Ste. 270

Roseville, CA 95661

direct: 916-223-4235

office: 866-771-9000

fax: 916-771-9099

Posted by Eric Grathwol on 09/17/2009 11:06 PM

Comments (3)