Will Rate Increases Impact Home Prices?
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Mortgage Interest Payment

From May 3 to July 12th , interest rates really zoomed. Is it enough to stall the housing recovery? 

Fannie Mae’s Mark Palim says there is no historical precedent for knowing the impact on the housing market of an interest rate change, either up or down, because of a Federal Reserve policy of quantitative easing.

In studying the history of a correlation between rate increases and housing prices,  it suggests that while there is little correlation of rate changes with home prices, but rapid rate increases do contribute to a decrease in home purchase volume and an increase in the use of adjustable rate mortgages (ARMs).

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Impact of mortgage rates on housing payments
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The average 30 yr mortgage rate jumped to 4.51% for the seven-day period ending on July 10th.  That is an increase from 4.29% a week earlier and 3.98% for the second week in June.  The higher rates increased monthly principle and interest payments by roughly 6.5%.  OMG the rates for 10 yr loans are the same as what 30 year loans used to be just a short time ago.

 

Rates have climbed over a full point in recent weeks mostly on speculation about when the Federal Reserve will end its purchases Treasuries.  The 10 year treasury bond determines mortgage rates. 

Applications for purchase mortgages fell 3.1% last week from the last week in June, the second consecutive decline.  However, the impact on the refinance side was much stronger.

An increase in mortgage rates will impact affordability and cause some shoppers to think twice about buying. However,  rates are still low by historical standards.  Rates were well above 4.5% until mid-2011. I remember a loan in 2000 that was 8%.   The good part about climbing rates is that the decline in refinance activity will push lenders to search out more potential borrowers and ease credit standards, allowing access to credit for many borrowers who have been shut out in recent years and unable to take advantage of low rates.


What is a portfolio lender?
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Portfolio Lenders

Most banks initiate loans and then sell them off and merely remain as servicing agents.  A portfolio lender holds loans in its own portfolio.

The big bank boondoogle in the last few years was caused in part by the massive selling off of bad loans to unsuspecting agencies and pension funds. After all, if the bank did not have ownership anymore, what could go wrong?

The Federal reserve is trying to prevent another mess. It controls rules for what the banks hold and don’t hold. There are minimums of how much money they must retain in the form of assets. Recently they have increased the amount of capital banks must retain in proportion to money loaned out. These rules apply only to the biggest banks. It is forcing them to “portfolio” more loans. Maybe they will be more careful about who they loan to if they have to pay the piper.


Many homeowners are less underwater
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House in water
The federal reserve states that home equity has jumped nearly 500 billion during the last 3 months of 2012.

That means that less folks are underwater so now they can sell if they choose. This will help to cure the severe housing inventory situation. Zillow Real Estate Research says that nearly 2 million home owners no longer are upside down.

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More fed meddling
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In an effort to boost the housing market, the federal reserve has taken a new and unusual step. Instead of merely buying treasury bonds to lower mortgage rates, it is now going to buy mortgage backed securities. You know them- the toxic ones that caused the problem in the first place.

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