Let's all stop riding the roller coaster freak-out. As consumers and as a country, we all seem to be locked into a periodical cycle of anxiety over interest rates. Every quarter, we rush around like a flock of hens spooked by the shadow of a falcon. Will the prime rate go up? Will the prime rate go down? Inflamed by the commentary of financial prognosticators, the great prime-rate freak-out hits us every three months. You can set your calendar by it.
I say, relax. Check out the history of the prime rate for today’s lesson on why you shouldn’t believe the hype about the high cost of money. My advice is to get a grip and realize that we are all in a very good place right now if you want to get a mortgage or sell a home.
Let’s look at the how the prime rate affects the mortgage rate. Fluctuations in mortgage rates are directly tied with the fluctuations of other interest rates: The Prime Rate, Treasury Bill Rate, Treasury Notes, Treasury Bonds, Federal Funds Rate, Federal Discount Rate, Libor 6-month CD Rate, 11th District Cost of Funds, Fannie Mae-Backed Security Rates, Ginnie Mae-Backed Security Rates.
When Fed chairman Bernanke isn’t being undermined by the loose-cannon comments of former chairman Greenspan, he has been cautiously raising rates to deal with mild economic growth and mild inflation. “Mild” is the operative word here. It has all been mild, mellow, and moderate behavior since Bernanke took the chair in summer 2006.
The Federal Reserve is simply changing the discount rate (yesterday left unchanged at 5.25), which is the rate paid by a bank to borrow short-term funds from the Federal Reserve. The discount rate and the federal funds rate are the interest rates that mortgage rates are based on; the modulating economic cycles therefore influence financing a purchasing a home.
There is a glut of homes for sale out there, but that is mainly because owners have overpriced them, not because of foreclosure or high interest rates. History can hold our hand and calm our worry. The fact is, if we track the cost of money over the last six decades, the prime rate remains under the median.
As of June 29, 2007 the prime rate is 8.25, which is what it was exactly one year ago in 2006.
Pop open this window link below to see the history of the prime since 1947.
PRIME RATE HISTORY - 1947-PRESENT
The evidence shows our prime rate is still under the most frequent prime rate throughout history – 8.5. The median rate for the last 60 years has been 9.0--that’s our benchmark, that’s how we should measure ourselves. Don’t listen to the pundits, don’t listen to the clucking hens, don’t freak out every three months over whether the rate is going up or down.
Relax. And if you are waiting for rates to go down before you buy or sell property, don't. According to current pricing on futures contracts, heavy-hitter investors who trade in Fed Funds Futures proffer odds of just fifteen percent that the prime rate will be lower by the end of the year -- characterized as "very unlikely."
Bottom line: rates are historically low right now, and they are unlikely to go lower in the near future. The prime-rate freak-out hurts consumers, hurts the economy and hurts anyone who is looking to buy or sell a home. Avoiding it represents an opportunity for clear thought and wealth-building.
LENDING COME-ONS THAT ARE TOO GOOD TO BE TRUE
Predatory lending is back (did it ever go away?)
Recently, a client I’ve been working with on refinancing walked into my office with a mailer from a mortgage company. My client wanted me to beat the rate that the company was offering:
“Dear Borrower”
Regarding your existing home loan with us, we are currently offering an exclusive program to refinance your existing loan. Features of this program offer significant savings and can assist you in the changing mortgage market.
•NO Costs
•NO Points
•NO asset verification
•NO Application fee
•NO Credit repots
•NO No third party fees
•NO title, no escrow, or reporting fees
•ABSOLUTELY NO CLOSING COSTS.
“Smells as fishy as twelfth-century Denmark in August,” I said to my I-want-to-believe-in-a-free-lunch client.
“Well, this is from a good bank,” he said.
“Stay right there,” I said.
With my client still sitting in my office, I dialed and got an agent on speakerphone. I pretended I was the wife of my client and asked about the mailer rate. When I started asking what the bank’s YSP (Yield Spread Premium) was, and what his bank margin rate is, the agent started to back-peddle. He got awful mealy-mouthed awful quick.
The actual loan being offered to back up the mailer certainly was NOT a thirty year or even a fifteen-year mortgage. It was an ARM (Adjustable Rate Mortgage). Essentially, what the mailer offered was a disguised piece of lending, a wolf in sheep’s clothing.
It is now June 2007. The sub-prime crisis is supposed to be over, but still consumers receive these come-ons. People wind up in ridiculous loans for which they are overpaying on the back end. Lenders are supposed to be tightening up their practices. Ha!
Our federal and state agencies promote consumer education as the key to obtaining best rates on a home loan. That mailer should come with a consumer warning, but it doesn't. Here's one that I would append: "There's no such thing as a free lunch! No fees? No costs? Every single penny of those fees and those costs will be rolled up into your loan, so you'll be paying a high rate to finance them!"
Regrettably, the public – my client, for example – still wants to believe such too-good-to-be-true offers are the answer to refinancing.
ALSO: the buzz is out that fly-by-night mortgage companies continue to outsource their administrative jobs to India. Staffers say that If you call the internal help line for Human Resources, you’ll be talking (more like translating) with someone in India. And how would you feel if you did a refi and all your confidential customer information is on-line over there in Mumbai?
You will find that shady mortgage companies are constantly looking for new underwriters. Whenever you go to any job-searching engine, see their pleas for folks who will write bad paper. The sheep disguise can’t hide the big bad wolf’s fangs.
Recently, a client I’ve been working with on refinancing walked into my office with a mailer from a mortgage company. My client wanted me to beat the rate that the company was offering:
“Dear Borrower”
Regarding your existing home loan with us, we are currently offering an exclusive program to refinance your existing loan. Features of this program offer significant savings and can assist you in the changing mortgage market.
•NO Costs
•NO Points
•NO asset verification
•NO Application fee
•NO Credit repots
•NO No third party fees
•NO title, no escrow, or reporting fees
•ABSOLUTELY NO CLOSING COSTS.
“Smells as fishy as twelfth-century Denmark in August,” I said to my I-want-to-believe-in-a-free-lunch client.
“Well, this is from a good bank,” he said.
“Stay right there,” I said.
With my client still sitting in my office, I dialed and got an agent on speakerphone. I pretended I was the wife of my client and asked about the mailer rate. When I started asking what the bank’s YSP (Yield Spread Premium) was, and what his bank margin rate is, the agent started to back-peddle. He got awful mealy-mouthed awful quick.
The actual loan being offered to back up the mailer certainly was NOT a thirty year or even a fifteen-year mortgage. It was an ARM (Adjustable Rate Mortgage). Essentially, what the mailer offered was a disguised piece of lending, a wolf in sheep’s clothing.
It is now June 2007. The sub-prime crisis is supposed to be over, but still consumers receive these come-ons. People wind up in ridiculous loans for which they are overpaying on the back end. Lenders are supposed to be tightening up their practices. Ha!
Our federal and state agencies promote consumer education as the key to obtaining best rates on a home loan. That mailer should come with a consumer warning, but it doesn't. Here's one that I would append: "There's no such thing as a free lunch! No fees? No costs? Every single penny of those fees and those costs will be rolled up into your loan, so you'll be paying a high rate to finance them!"
Regrettably, the public – my client, for example – still wants to believe such too-good-to-be-true offers are the answer to refinancing.
ALSO: the buzz is out that fly-by-night mortgage companies continue to outsource their administrative jobs to India. Staffers say that If you call the internal help line for Human Resources, you’ll be talking (more like translating) with someone in India. And how would you feel if you did a refi and all your confidential customer information is on-line over there in Mumbai?
You will find that shady mortgage companies are constantly looking for new underwriters. Whenever you go to any job-searching engine, see their pleas for folks who will write bad paper. The sheep disguise can’t hide the big bad wolf’s fangs.
STICKING IT TO WOMEN
Hey, ladies! What’s up with women as mortgage borrowers?
There’s a new study by the Consumer Federation of America CFA (a nonprofit advocacy org.) that found a third of women in the boom year of 2005 got mortgages with interest rates over 7.66 percent (well above the average prime mortgage rate of 5.87 percent). Whoa! How is it that women typically have better credit scores than men and yet still pay a whole heck of a lot more for mortgages than their y-chromosome brethren? Thousands upon thousands of dollars more, over the course of a loan – that’s the penalty for womanhood.
And a real Prada-boot-kick to this not-too-surprising revelation about women is that wealthier women are victimized the most: fifty percent more likely to be saddled with more expensive loans than their male equivalents. Women wound up paying as much as between 7.5 percent to 9.5 percent interest rates on home loans. You can’t build wealth from home ownership with those kinds of numbers.
Women get stuck into sub-prime and high-cost loan ghettos while at the same time the guys, some with lower credit scores, get good rates and aren’t jammed with the junk.
Allen Fishbein of CFA noted in his “Women Prime Targets” study: “Women are significantly over-represented in the pool of subprime mortgages. Although women make up 30.0 percent of borrowers for mortgages of all types, they make up 38.8 percent of subprime borrowers – a 29.1 percent over-representation. This over-representation of women in the subprime mortgage pool exists for all types of mortgages but is especially true of refinance and home improvement loans which are more likely to be sub-prime and predatory mortgages.”
And Allen’s colleague, Nancy Register, Associate Director of Consumer Federation of America says: “The high levels of sub-prime lending among women compromise their ability to steadily accrue equity by paying off their mortgage – one of the easiest and most effective pathways to building wealth in America.”
As you know, creating wealth from your mortgage is what I am all about. These kind of statistics really put a frown on me.
But, it gets worse: The study shows that women of color, women who are African-American and Latino, have the highest incidence of sub-prime jamming.
Allen Fishbein of CFA noted in the study, “African American women earning double the area median income were nearly five times more likely to receive sub-prime home purchase mortgages than white men with similar incomes and Latino women earning twice the area median income were about four times more likely to receive sub-prime purchase mortgages than white men with similar earnings. African American women make up half the African American purchase mortgage borrowers and Latino women make up nearly a third of Latino home purchase mortgage borrowers.”
And this sucks because women are in the driver’s seat in the Latino and African-American surge in home ownership.
Girls, this really gets me mad. This sexist and racist home lending practice doesn’t have to be. Hey, I certainly don’t do it at my desk. And you don’t have to take it when you are sitting at any lender’s desk. So, you ladies need to be informed and stop taking the crap. You don’t need to be hooked up with a guy to get a good mortgage. Forget the ball and chain. You just need to get smart and get tough on this. If the home-finance world sucks then it’s the borrower’s job, that means you, to make sure it doesn’t suck. I sincerely believe that. The borrower has to do some hard work too to get out of this sexist bind. She has to familiarize herself with what exactly they are doing at the underwriter’s desk. We all have to get the best intel on lending practices and procedures and act as our own best advocate. The borrower needs to shop around and get tough with the lender to get the best rate.
Right now, the real news is that CFA’s findings raise important public-policy concerns, since adjustable rate mortgage rates are on the rise and monthly payments reset upward this year and next. And adjustable rate mortgages were the predominant product in the sub-prime market. With all the panic as borrowers foreclose, and as bankrupt lenders close up shop, it will be ever more difficult for the ladies to get themselves out of the sub-prime market. Sustainable terms of a prime loan will be more rare than ever. With the new lending guidelines now being implemented, and the new scrutiny by brokers, there’s a lender backlash that is going to make underwriters like me have to do some fancy foot work in the days ahead to get women and even men out of the sub-primes so that they can hold on to their homes.
There’s a new study by the Consumer Federation of America CFA (a nonprofit advocacy org.) that found a third of women in the boom year of 2005 got mortgages with interest rates over 7.66 percent (well above the average prime mortgage rate of 5.87 percent). Whoa! How is it that women typically have better credit scores than men and yet still pay a whole heck of a lot more for mortgages than their y-chromosome brethren? Thousands upon thousands of dollars more, over the course of a loan – that’s the penalty for womanhood.
And a real Prada-boot-kick to this not-too-surprising revelation about women is that wealthier women are victimized the most: fifty percent more likely to be saddled with more expensive loans than their male equivalents. Women wound up paying as much as between 7.5 percent to 9.5 percent interest rates on home loans. You can’t build wealth from home ownership with those kinds of numbers.
Women get stuck into sub-prime and high-cost loan ghettos while at the same time the guys, some with lower credit scores, get good rates and aren’t jammed with the junk.
Allen Fishbein of CFA noted in his “Women Prime Targets” study: “Women are significantly over-represented in the pool of subprime mortgages. Although women make up 30.0 percent of borrowers for mortgages of all types, they make up 38.8 percent of subprime borrowers – a 29.1 percent over-representation. This over-representation of women in the subprime mortgage pool exists for all types of mortgages but is especially true of refinance and home improvement loans which are more likely to be sub-prime and predatory mortgages.”
And Allen’s colleague, Nancy Register, Associate Director of Consumer Federation of America says: “The high levels of sub-prime lending among women compromise their ability to steadily accrue equity by paying off their mortgage – one of the easiest and most effective pathways to building wealth in America.”
As you know, creating wealth from your mortgage is what I am all about. These kind of statistics really put a frown on me.
But, it gets worse: The study shows that women of color, women who are African-American and Latino, have the highest incidence of sub-prime jamming.
Allen Fishbein of CFA noted in the study, “African American women earning double the area median income were nearly five times more likely to receive sub-prime home purchase mortgages than white men with similar incomes and Latino women earning twice the area median income were about four times more likely to receive sub-prime purchase mortgages than white men with similar earnings. African American women make up half the African American purchase mortgage borrowers and Latino women make up nearly a third of Latino home purchase mortgage borrowers.”
And this sucks because women are in the driver’s seat in the Latino and African-American surge in home ownership.
Girls, this really gets me mad. This sexist and racist home lending practice doesn’t have to be. Hey, I certainly don’t do it at my desk. And you don’t have to take it when you are sitting at any lender’s desk. So, you ladies need to be informed and stop taking the crap. You don’t need to be hooked up with a guy to get a good mortgage. Forget the ball and chain. You just need to get smart and get tough on this. If the home-finance world sucks then it’s the borrower’s job, that means you, to make sure it doesn’t suck. I sincerely believe that. The borrower has to do some hard work too to get out of this sexist bind. She has to familiarize herself with what exactly they are doing at the underwriter’s desk. We all have to get the best intel on lending practices and procedures and act as our own best advocate. The borrower needs to shop around and get tough with the lender to get the best rate.
Right now, the real news is that CFA’s findings raise important public-policy concerns, since adjustable rate mortgage rates are on the rise and monthly payments reset upward this year and next. And adjustable rate mortgages were the predominant product in the sub-prime market. With all the panic as borrowers foreclose, and as bankrupt lenders close up shop, it will be ever more difficult for the ladies to get themselves out of the sub-prime market. Sustainable terms of a prime loan will be more rare than ever. With the new lending guidelines now being implemented, and the new scrutiny by brokers, there’s a lender backlash that is going to make underwriters like me have to do some fancy foot work in the days ahead to get women and even men out of the sub-primes so that they can hold on to their homes.
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