Michael Creed's Blog

As you probably know, historically speaking, the mortgage rates are still very low.   What you may not know is that they are this low due to government subsidies that are about to stop.  This means that you need to get into the right mortgage now, before your purchasing power is decreased by higher rates. 

Here’s the Situation

At the end of 2008, the Fed started purchasing mortgage backed securities (MBS) from Fannie Mae & Freddie Mac.  To date, they have spent about $1.25 Trillion doing so.  In other words, the Fed has created an artificial demand (which drives up the price of anything – higher demand = higher prices) to subsidize the mortgage rates.

This graph shows the big spike in prices of the MBS back in late 2008:

The Fed has said on several occasions that the MBS purchase program will stop in the first quarter of 2010. 

Just like we saw in the graph above, with the added demand, we will have an immediate and opposite change in prices for the MBS when that artificial demand goes away. This will, in turn, create an immediate and opposite change in mortgage rates as well.

Some would even argue that it could be an even worse swing in the opposite direction because, just like they have created artificial demand, they will eventually have to sell those securities, creating an artificial supply.

Why Lower Prices = Higher Rates

The reason that the mortgage rates go down when the MBS price goes up is because these are fixed-coupon securities.  Meaning that no matter what price one pays for the investment, when it matures, it’s face value will be the same. 

Naturally, if one pays a lower price for the $1,000-face-value-investment (say $900), they would have a better return on their investment at maturity (i.e. a higher rate of return) than they would if they paid $950 for the same $1,000-at-maturity investment at the same time.

Therefore, as an investor, they want to get the MBS at the lowest price, yielding the highest rate.   

Keep in mind that, unless you are the investor in the MBS, you don’t like to see lower prices and higher rates.  When you are the borrower, you like to see the investments sold at higher prices so as to yield lower rates for your specific home loan. 

This is complicated stuff; if you have more questions, please contact me.

From time to time, I get asked the following question by those inquiring about a new home loan:

"Why are you the only lender asking me to send over my income documentation prior to issuing me a good faith estimate (GFE)?"

First off, in today’s market, where many lenders/brokers are willing to loosely fire-off half-guessed estimates, I think that is a great question! I also think I have an answer that will make sense to you; read on.

Before I get into that, however, I need to re-explain what a GFE is.  The GFE, by definition, is an estimate – one that you are able to confidently rely on in ‘good faith’ – that contains all of the details surrounding the home loan being offered to you by a lender/broker. Oftentimes, people think the opposite; that it’s an estimate based on the lender’s ‘good faith’ reliance in the few details given over the phone to make the estimate. That’s simply not true.  If it was true, the federal government would require it to be provided prior to application [the government defines ‘application’ as the date the credit is pulled] instead of within three days after the application.

Secondly, would you really want an estimate where the lender didn’t exercise due diligence prior to providing the estimate?  If you follow that road, you are making a decision – one that pertains to one of the largest transactions of your lifetime – based on half-truths and laziness. That might sound like a bold statement, but the reality is that the law allows a lender/broker to change any aspect of the GFE as long as they tell you the ‘real’ numbers no less than three days before the closing. 

Being in writing, doesn’t necessarily mean a thing!

If you went into an auto service station complaining of a sputtering engine, would you really believe any quote that the shop offered-up, off the cuff, without them first looking under the hood and listening to the troubled engine? I don’t presume to know what you would do in this situation, but I sure know that I would want them to look at it, listen to it, and maybe even drive it before I would seriously consider their estimate to be accurate.

…and that’s just for a car repair quote!

Wouldn’t it be wise to want the same done for one of the largest transactions of your life?

Consider This

We are not asking that you pay any sort of fee to have us do the work that is needed to get you a solid, reliable, honest and personalized quote. Not a cent!

Isn’t that what you want? A mortgage company that isn’t just about telling you one thing to get you buried in the process, only to show you their true colors (i.e. real numbers) later on?  Because of this honesty-policy, we have an A+ rating with the Better Business Bureau.

We think honesty rocks!

If you agree, contact me today to get your free-quote started.