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Rob Chrisman's Corner: Rates - A Topic for Discussion

JMAC’s brokers have seen the election shake up financial markets. While stocks have rallied our brokers know that 2016’s wonderful rate environment has vanished. Clearly, the election was a catalyst, but why, exactly, are rates responding like this and what are the chances they can come back? Bond markets (which dictate rates) are worried about the uncertainty that has been created.

The Trump victory has left investors guessing what his actual policy path might look like and what the effects would be on the financial markets. Certainly, a Fed rate hike has become a 100% certainty at its meeting next week. This has pushed mortgage rates higher.

But there are other reasons for rates to move higher. Together with a unified GOP congress, Trump is expected to create inflation through increased infrastructure spending, protectionist trade policies, and lower taxes. (Lower taxes + higher spending = the need to print more Treasury debt, or plain old growth. Both would push rates higher. Protectionist policies could raise the cost of imports, which could add to inflation).

The infrastructure spending possibilities and potential tax cuts have boosted equities markets. Some investors think this is an opportunity to shift some funds out of bonds and into stocks. And many investors think the domestic situation makes December a perfect opportunity for Europe to announce that it will taper its asset purchases (thus decreasing overall demand in bond markets, which is bad for rates).

Trump did mention the possibility of "renegotiating" with America's creditors, which as our brokers know is never good for interest rates, and hopefully a hollow campaign promise. If Trump were to follow-through on mass-deportation goals, that could have an inflationary effect, as it implies an increase in the cost of labor.

JMAC’s brokers know that the theme of all this is more inflation, and inflation expectations have increased based on the potential changes in fiscal and monetary policy. And this rate spike is made worse by the level of uncertainty over the ultimate policy path: bond markets must account for a wider range of risks, and it's much safer for bond traders to be overly defensive of the worst-case scenarios until they can be ruled out. 

Rob Chrisman's Corner: Why the Big Move in Rates?

Donald Trump won the US Presidential Election and interest rates shot up. JMAC’s brokers and others have seen mortgage rates have been gradually moving higher since September, and at the end of last week, after nine post-election trading days, we find mortgage rates where they were in February, perhaps even late in 2015.

Markets, and people, don’t like uncertainty, and the stock and bond markets are trading off Mr. Trump’s previously stated economic policy proposals. It is believed that the new administration will be more business friendly with tax cuts, deregulation, and higher defense spending. But bonds are selling off (moving interest rates higher) because President-elect Trump has promised to impose tariffs and deliver a $1 trillion infrastructure spending package, both of which could increase the Federal deficit, and ultimately drive up inflation.

It is still expected that the Federal Reserve’s Open Market Committee will increase short-term rates in December. (In fact, the odds are nearly 100%.) But the interest rate movement that has occurred since the election represents the market’s belief that President-elect Trump’s policies will result in inflation.

This includes the $1 trillion infrastructure spending bill. Where will workers come from, given our current low unemployment, and where will the money come from to pay for the road and bridge work? Employers must pay higher wages to attract skilled workers which could lead to more inflation. And it is expected that taxes will increase.

The markets are focused on the prospect for inflation, and interest rates have increased. It’s worth noting that usually an unexpected event causes a “flight to safety” of government debt, pushing yields down. That the opposite occurred reflects fears that the deficit might balloon and inflation could become rampant. Until early January rumor and uncertainty will rule the markets.  And what could be more uncertain than guessing what policies a President who has never held an elected office?

JMAC is encouraging our brokers to keep things in perspective. The average interest rate on a 30-year loan over the past 38 years was approximately 7%. Today’s 30-year rates are in the high 3s or low 4s. It is still good!

Rob Chrisman's Corner: The Election is Over, Now What?

The election is over, and for Donald Trump and his transition team the work creating a new administration has begun. And the press is following every event. JMAC and our brokers are primarily focused on the regulatory and economic developments. As for economic policy, we will need to wait and see what is hammered out between the Trump Administration and the new Congress beginning in January. Expectations are for lower tax rates and unwinding some/many of the regulations put on various industries during the Obama Administration. Whether those will come to pass and their long-term effect on the economy will certainly impact mortgage rates, however there is tremendous lag time between initiating policy, getting anything through the legislative process, implementing the policy and then the impact that any policy changes may have on the economy.

Many were surprised by rates shooting higher in the days after the election. JMAC’s management was not. Markets, and people, don’t like uncertainty, and the stock and bond markets are trading off Mr. Trump’s previously stated economic policy proposals. Investors feel the new administration will be more business friendly with tax cuts, deregulation, and higher defense spending. But interest rates moved higher because President-elect Trump has promised to impose tariffs and deliver a $1 trillion infrastructure spending package, both of which could increase the Federal deficit, and ultimately drive up inflation.

Even with the bump in rates last week JMAC’s brokers know they are still extremely low and a bright spot for home buyers could be a lull in the market presenting some soft targets for sellers who are in a need to sell for whatever reason and suddenly seeing a reduction of buyers in the market. A borrower may pay a bit more in rate than a week ago but possibly could pay a bit less in home price.

Fannie Mae's New Software Widens Credit Opportunities

Wider credit opportunities are now available for mortgage shoppers as Fannie Mae announced the implementation of Desktop Underwriter (DU) Version 10.0, the newest version of the industry's leading automated underwriting system.

Desktop Underwriter 10.0 provides more simplicity and certainty to lenders through the use of trended credit data for enhanced credit risk assessment and new automated underwriting capabilities to serve borrowers with no traditional credit and for borrowers with multiple financed properties. Fannie Mae's use of trended credit data will be the first widespread use in the mortgage industry, and will benefit both consumers and lenders.

Brokers should note that in the new version the “trended” credit data will be used by the DU risk assessment to evaluate how the borrower manages his or her revolving credit card accounts. A borrower who uses revolving accounts conservatively (low revolving credit utilization and/or regular payoff of revolving balance) will be considered a lower risk. A borrower whose revolving credit utilization is high and/or who makes only the minimum monthly payment each month will be considered higher risk. So this will help our broker’s clients who pay their bills off every month.

Traditional DU is likely better if a client has a no-score approval because it goes off the actual credit scores. Non-traditional DU assumes the worst credit score bucket of 620-639, offering the most expensive pricing. And the credit data being added to residential mortgage credit report gives consideration to borrowers who pay their credit card balances off each month.

Desktop Underwriter 10.0 enhancements include:

Use of Trended Credit Data in Credit Risk Assessment

  • Considers the monthly payment amounts that a consumer has made on revolving accounts, such as credit cards, over the past two years.
  • Offers lenders more insight into how a borrower tends to pay off their revolving credit lines each month, providing a more comprehensive risk assessment.
  • Gives borrowers greater ability to control their credit evaluation, and benefits borrowers who regularly pay off, or pay more than the minimum required amount, of their revolving debt, increasing the likelihood that they will receive an "Approve" recommendation from DU.

Automated Underwriting for Borrowers with No Traditional Credit

  • Helps lenders more efficiently serve borrowers who do not have a traditional credit history.
  • Helps lenders reduce costs by automating and streamlining a previously manual and time-consuming underwriting process.
  • Requires verification of at least two nontraditional credit sources, one of which must be housing-related.

Automated Underwriting for Borrowers with Multiple Financed Properties

  • Provides lenders with a simplified multiple financed properties policy.
  • Simplifies the underwriting process for lenders and improves operational efficiency.
  • Helps ensure fewer eligibility overlays, automates remaining eligibility requirements, and determines required reserves for all financed properties.