Just when you thought that mortgage interest rates were as low as they could go, they drop even lower making those in the industry wonder just when we will actually see the bottom. According to the weekly mortgage survey conducted by Freddie Mac , interest rates on 30 year fixed-rate mortgages averaged 4.85% the week of March 26th. This is down from last weeks average of of 4.98%. Rates for 15 year mortgages were averaging 4.58%.
Many critics say that even this drop is not enough to stimulate sales of new homes in the current economy. Tighter credit restrictions and buyer insecurity mean that even at the current low rates, home sales are unlikely to improve. Could we see mortgage interest rates as low as 3% in the next year? It has already happened for some IndyMac borrowers after the FDIC took control of the failing bank. Indeed, the Fed has been actively encouraging banks to lower rates for distressed borrowers in an effort to stem the rising tide of US foreclosures. Whether lowering the rates will have any effect on those borrowers already verging on foreclosure remains to be seen, but there is no doubt that low interest rates will encourage refinancing and stimulate home sales. All of which is great for customers and the economy but not so great for banks unless the rate changes signicantly prevent additional foreclosures.
Countrywide Financial (CFC), the now infamous home mortgage division of Bank of America and at one time the largest lender of home loans in America, may launch the most aggressive plan yet to stem the tide of home mortgage foreclosures. The mortgage modification plan is the result of a multi-state lawsuit that charges that Countrywide duped first time mortgage buyers into taking on loans that were beyond their means.
The details of the plan call for a reduction of interest rates aimed at borrowers of sub prime and adjustable rate mortgages (ARM’s). Interest rates could be cut to as low as 2.5% for some borrowers, although the cuts would be temporary. The idea is to decrease mortgage payments so that the total payment does not exceed 34% of a borrowers income, which is the approximate percentage that reputable lenders use to determine a persons eligibility for a home loan. Had Countrywide and other sleazy lenders used this formula to begin with, the mortgage crisis would have never happened.
In addition to cutting interest rates for distressed home buyers, Countrywide will freeze foreclosures until borrowers mortgages can be evaluated and readjusted. All legal proceedings against Countrywide will be suspended until March 1, 2009 provided they meet the goal of adjusting 50,000 mortgages. The final objective is to reduce 395,000 loans in states hardest hit by the sub prime crisis including California, Illinois, and Florida.
This will be the most aggressive and possibly the most effective plan to address the mortgage crisis to date. Key lawmakers are putting the pressure on other lenders to adopt the program since recent efforts by the Bush administration have done little but reward the irresponsible behavior that created the problems in the first place.
This is a question being asked this week as we witness one of the most dramatic downturns in US economic history. But are we on the verge of another great depression? Economist Robert J. Samuelson says “œnot even close” in his column appearing in the October 13 issue of Newsweek.
Samuelson states that economic downturns hardly ever evolve into national tragedies. In fact, the US has been through 10 recessions since the late 40’s. While they did have a very real effect on the economy and of the people living through them, they actually only lasted for an average of 10 months. The two worst were from 73 to 75 and in 81 to 82. Both lasted 16 months and unemployment rates peaked at nearly 11%, well above the average for the other recessions of 7.5% and of the current rate of 6%.
Coinciding with the number of recessions over the last 60 years are the number of bear markets. Since WWII the number of bear markets has also been 10. A bear market is one in which the S&P Index declines at least 20% from the most recent peak. The average of all post war bears was just over 31% . The .com crash of the nineties witnessed a fall of over 50% and last week the market was down 30% from one year ago.
Compare all of this to the Great Depression, where the market lost a whopping 90% of its value resulting in nearly a decade of hard times. Most economist agree that this is not likely in today’s environment where the Federal Reserve is actively injecting funds into the finance sector, unlike the Federal Reserve of 1929 that did relatively nothing to prevent the collapse of the US economy.
The recent report from the U.S. Department of Commerce stated that overall construction spending in the US is down 0.6% month-over-month in July.
Residential construction fell by 2.1%, up slightly from June’s 1.3% decrease, while non-residential construction gained 0.2%, down slightly after rising 1.1% in the previous month. Overall, this is not surprising news. As home purchases continue to decrease in the tightening credit market making it unwise for contractors to take on large residential projects. More worrying is the notable decline in private construction.
There was a 1.4% decline in private construction and a 1.4% increase in public building, which came in at 0.2% and 0.4% in the month of June.
Before you settle on a new lender, you may want to check the Mortgage Lender Implode-O-Meter at ml-implode.com. The site proclaims a mission of transparency, education, and accountability for the mortgage industry. The site was started in January 2007 by blogger Aaron Krowne who realized that the housing market was critical to the success of the US economy and grew frustrated by the lack of coverage of the sub prime housing crisis by the mainstream media. Starting with a single page with only 6 lenders listed, ml-implode.com soon had dozens of lenders listed and began picking up national media coverage from Bloomberg and CNN. It is now consdered and authority on the current state of the mortgage crisis in the US and received over 100,000 visitors a day.
The site breaks down the large mortgage companies into 3 categories.
Although it is a community centric forum, the editorial staff requires that 2 out of 3 of the following criteria be met before a company makes it to the “implosion” or “ailing” list:
Over all the site has some great information and is organized in a consistent manner. I highly reccomend giving it a look or even subscribing to the feed if you want to stay up to speed on the latest mortgage implosions.
The FHA, or Federal Housing Authority, is a federal government agency that was created in the 1930’s. The US was just beginning to rebound from the Great Depression and the FHA was developed to help add stability to the mortgage market and improve housing conditions. In 1965 the FHA was joined with the Department of Housing and Urban Development (HUD) and together they have insured of 34 million mortgages.
Typically an FHA does not rely on a persons credit score as much as a traditional loan and they also do not require as much of a down payment, currently only 3%. Since the interest rate is not dependent on a credit score, the rate is the same for everyone. This is advantageous to someone with a lower credit score, but does not reward someone with a high credit score.
In order to qualify for an FHA loan there are several requirements you must meet. You must been employed by the same company for at least two years and maintained the same or more income throughout your employment with the company. If you have ever had a Bankruptcy, it must be at least two years old and you must have had at least two years of good credit since the bankruptcy. If you have had a Foreclosure, it must be at least three years old. You must also be in good standing with any of your lenders and not had more than two 30 day late payments in the past two years. Your mortgage payment will usually be based off of 30% of your total monthly income.
FHA loans were extremely popular in the late 30’s and early 40’s, but today it is estimated that they only account for 3% of all current home loans. If you have less than perfect credit, they may however be a great way for you to get a loan.