Doing the Charleston!

The banking sector has given us a nice ray of sunshine - Wells Fargo reported that it expects first-quarter earnings of $3 billion.

Bank stocks have been affected by dour forecasts for most of 2009 based on the bad loans they carried on their balance sheets and other long-term woes. It appears those forecasts were perhaps overdone. Wells Fargo was ahead nearly 32% this past Thursday, many of its competitors followed the same path.

The fact that mortgage lending is pacing the banking recovery is encouraging. It demonstrates funds are readily available to a wide swath of the borrowing public. In addition, more funds should be available to an even wider swath of borrowers once President Obama's $275 billion plan to stabilize the housing market takes hold. One key component of the plan is to allow as many as five million homeowners to refinance their mortgages. The program is open to borrowers who are current on their payments, have loans owned or guaranteed by Fannie Mae or Freddie Mac, and owe between 80% and 105% of their home's current value.

The recent recovery in banks, along with the overall stock market, has economists rethinking the recession. Earlier in the year, many were saying the economy was unlikely to recover until well into 2010. Now, many economists are saying it could come about as soon as September.

The best mortgage rates, however, could be ending. Additional rate drops are going to be difficult to come by. Rates reversed course last week and moved slightly higher for most loan types and lock periodsand last week. It's not to say rates can't go lower, but I wouldn't bet the house on it. And, I mean that figuratively, and literally. All the buyers out there that have been sitting on the fence waiting for the nirvana of the lowest price, on the perfect house, and amortgage loan at the lowest interest rate, may miss the boat if they don't act in the very near future.

Here are the upcoming economic reports for this week:

The housing trend pendulum is changing course, and the housing market is improving.

Existing home sales numbers remained stable in March, while prices rose; a sign the housing market is improving overall. Economists noted that the sales level is hovering near the level it reached in November 2008 (the beginning of the upturn in many areas), and improving prices are giving Sellers a better night's sleep.  National Association of REALTORS® economist Lawrence Yun reported prices for home resales posted their biggest monthly gains since June 2005.

Purchases of new homes were higher than expected in March, as well, with inventories of unsold homes falling to a seven-year low. Federal Reserve efforts to bring mortgage rates down combined with tax credits for first-time buyers are expected to continue supporting new-home sales in coming months. Another positive note, Homebuilder confidence has risen to a six-month high in April.

Low mortgage rates continue to aid the housing recovery efforts, but change will likely occur in this market as well. Bankrate’s national survey has shown rates leveling, if not rising, in many markets. The Federal Reserve has exerted great effort to keep the benchmark 30-year fixed-rate mortgage under 5.5 percent, but how long that effort can be sustained is the big question.

But one of the parts of rate shopping has become predictable, and that is future change in mortgage approval guidelines.  In general, the more often homeowners default on mortgages, the harder it is for future mortgage applicants to be approved. This is why now may be the best time to apply for a FHA mortgage, if your circumstances will allow it.  Defaults are climbing, which suggests that FHA underwriting guidelines are about to tighten. The FHA has already implemented two major changes since last summer:

1. The minimum downpayment required has been raised by a half-percent to 3.5%
2. Cash out refinances are now limited to 85%, well below the 95% of the past.

These changes create entry barriers for potentially risky FHA borrowers, improving the overall quality of the FHA loan pool.  For a taxpayer-funded agency like FHA, loan performance is an important goal.  Therefore, as the number of defaults grows, expect FHA guidelines to get tighter.

It's hard to know exactly in what way the guidelines will be tightened; it could be in a variety of areas. Maybe FHA will raise its minimum FICO score requirement, or maybe it will get tougher on the amount of seller-paid closing costs allowed.  A hike in loan fees isn't out of the question, either -- that's the path Fannie Mae took.

Whatever the FHA does, fewer people will qualify for FHA mortgages once it's done.  So, if you're planning to buy a home and the money you have for downpayment is limited, or your credit scores are suspect, or there's some other "red flag" in your borrower profile, please consider moving up your timeframe to act. 

Interest rates for mortgages may rise or they may fall, but rates won't matter if other factors of the loan process change to the extent that you cannot be approved for a home loan.  And, for FHA mortgage applicants, tougher mortgage guidelines are only a matter of time. 

Information cited above is courtesy of Melissa Breeland with Rersidential Mortgage of SC

                Mortgage Interest Rates for Monday, April 13, 2009

LOAN PROGRAM	INTEREST RATE	APR
30 YR CONV FIXED	4.625%	4.724%
15 YR CONV FIXED	4.375%	4.472%
FHA/VA 30 YR FIXED	5.000%	5.097%
JUMBO 30 YR FIXED	7.500%	7.597%
RURAL HOUSING- USDA	5.500% (zero down no MI)	5.597%
SC STATE HOUSING (CATEGORY III AND DISABILITY PROGRAM)	5.750% $5,000 DPA Available on all 3 Categories now!!!	5.848%

*** Due to market fluctuations, interest rates are subject to change at any time and without notice. Interest rates are also subject to credit and property approval based on secondary market guidelines. The rates shown are based on average rates for the best qualified customers. Your individual rate may vary. The programs and rates listed here are the most popular, but many others are available. 

Above interest rates courtesy of Melissa Breeland of Residential Mortgage of SC

Many media types cited the change in accounting rules, which will allow banks to record certain securities (like lower-rated mortgage-backed securities) on their balance sheets at market value but not necessarily fire-sale value, for the most recent surge in stock prices. The new rule helps, to be sure, but it's really more cosmetic than economic, so it's unlikely to have been much of a catalyst. The real catalyst, the one under-reported in the press, is that more investors see an improving business, housing and lending environment.