Mortgage Newsletter Winter 2024
Mortgage News and Updates – Winter 2024
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- Economy & Mortgages: Mortgage Rate Outlook - Gradual Normalizing Continues
- Is AI taking over mortgage lending yet?
- If the Fed is easing rates, why are mortgages not exactly following?
-Inheriting a house with a mortgage. What to consider.
-What’s Mortgage Protection Insurance and Do You Need It?
Economy & Mortgages: Mortgage Rate Outlook 2025 – Gradual Normalizing Continues
Is AI taking over mortgage lending yet?
The mortgage business has been automating steadily for years, and as Artificial Intelligence (AI) becomes more powerful, there exists a potential to help lenders achieve faster, more data-driven results. Already, our tools are able to collect and analyze your financial data, and can automate many routine underwriting steps, speeding up initial risk assessments and approval decisions, and reducing costs.
But AI falls short for now because mortgage scenarios can be amazingly complex, involving dozens of potential loan program solutions, unique borrowers, property valuations, and credit histories. It’s a heavy lift to develop the “training data” needed to build an effective AI solution. The industry is getting there, but for now, the human touch is still required for a good portion of the more nuanced work.
While AI will eventually take on larger roles within the mortgage business, for now, you’re in good hands with our expert team of humans!
If the Fed is easing rates, why are mortgages not exactly following?
I have been fielding calls over the last few months from clients who are wondering why, when the Fed has eased interest rates, mortgage rates have actually risen again after a brief dip over the summer. Great question!
To answer this, first know that the Federal Reserve (Fed) doesn't directly set mortgage rates. Its mission today is battling inflation and keeping the economy out of a recession.
Indeed, the Fed can influence mortgage market rates by expanding or shrinking its balance sheet, buying and selling huge batches of government securities in the open market, as it did during the financial meltdown / Great Recession 15 years ago.
While that's an example of how Fed actions can indirectly affect mortgage rates, clearly there must be other factors involved!
Federal Funds Rate:
The Fed sets the federal funds rate, which is the interest rate banks charge each other for very short-term (overnight) loans, as banks manage their daily cash flow. Mortgages, being longer-term debts, track more closely to the 10-year Treasury bond rates, which the Fed does not manage.
You can see this in the chart here - - note how mortgage rates track pretty closely to the long bond (10-year bond). Changes to the federal funds rate do make it more or less expensive for banks to borrow money. But it takes months for such changes to work through the financial markets and impact long-term bond rates.
Open Market Operations:
The Fed can buy or sell securities (like Treasury bonds) in the open market. You may recall “quantitative easing” being a part of the Fed’s response to the housing market crash around 2008. The Fed purchased over $1.5 Trillion of mortgage-backed securities, hugely expanding its own balance sheet.
By effecting massive demand for these securities, their price rose. In the inverted world of debt instruments, this lowered mortgage rates to help homeowners. Then it did so again in response to COVID-19, buying over $1T more! More recently the Fed has been trying to “unwind” its stuffed balance sheet by selling off debt, at lower prices, leading to (eek!) higher interest rates. Of course it has to try to do this carefully, or risk sending the economy into a recession. What a tightrope!
Mortgage rates have risen recently because other economic factors also have a powerful influence. Persistent inflation tends to devalue debt, since a dollar repaid in the future is worth less! That pushes down bond prices, and bond yields (interest rates) go up. Strong economic performance has the same effect. The bond market is focusing on these factors as they consider the prices they'll pay for long-term debt securities.
In sum, while the Fed strongly influences financial markets, its monetary policy actions only indirectly influence the markets for longer-term bonds that directly impact mortgage rates. Contact us for a more detailed discussion, and my thoughts about where rates may go from here!
[Data: Federal Reserve Bank of St. Louis]
Inheriting a house with a mortgage. What to consider.
Inheriting a house that’s not yet paid-in-full is becoming more common. Homes have become more expensive to start with, and mortgages are effectively outliving borrowers in many cases.
Additionally, many seniors have purposely tapped built-up equity for “aging in place” improvements that allow them to stay put longer, for medical expenses, and for other needs. This leaves them with mortgage debt -- all for very good reasons, of course!
Given the price of homes, keeping a house within the family as one generation passes can give the offspring a leg up in terms of continuing to build real estate wealth. It's not uncommon for children or grandchildren to get a start in real estate by inheriting a house.
If you find yourself inheriting a house, you have a few options:
-Sell the house: The first decision to make is whether to keep the house. If no one is planning to live in it, you could sell the house. This solves the mortgage problem. It would be paid off out of the sale proceeds, and you’re done. If the debt exceeds the value of the house, in many jurisdictions heirs are not responsible for a mortgage shortfall (speak with your mortgage attorney!).
-Move in / keep the mortgage: Many mortgages have a “due on sale” clause, and if you don’t occupy the home, it gets triggered when the title is transferred. If the borrower dies and you inherit the home and plan to occupy it, you cannot be forced to pay off the mortgage. You’d “assume” the existing mortgage, supplying the mortgage company a with a certified copy the death certificate and a copy of the deed to the home showing you as the new owner, replacing the original borrower and continuing to make the original payments.
Since you’re technically making payments for the person who is deceased (who's on the mortgage), those payments do not go on your credit report. And if the terms of the old mortgage are better than what you can qualify for today, that may not be an issue.
Move in / replace the mortgage: If you move in and the characteristics of the mortgage don’t fit with your own financial situation, we can help you attempt to finance the home with something more appropriate.
Keep in mind that this is not a “re-finance” since you aren’t on the original mortgage. You’d have to qualify as normal for a new mortgage. Overall, the first step is to contact us. We have handled these situations over the years, and we can help you make the right moves!
What is Mortgage Protection Insurance and Do You Need It
Mortgage Protection Insurance (aka Mortgage Life Insurance) pays off your mortgage upon your death. It is a legitimate product, but do you need it? When you die, your survivors inherit your mortgage debt along with the house (see article inside about inheriting a mortgage). Mortgage protection insurance pays some or all of the loan off, leaving inheritors with less mortgage debt (or none).
Mortgage Protection Insurance has some advantages versus traditional life insurance. Many offerings are “guaranteed acceptance” policies, which helps if health conditions prevent you from getting affordable life insurance coverage. The insurance payment goes directly to the lender. Your inheritors don’t need to handle that payoff, and your heirs inherit a fully paid-off home, or at least a smaller mortgage.
However, traditional life insurance generally offers greater flexibility for those you leave behind. Traditional life insurance pays the funds to the beneficiaries, not the lender. They can use the funds to pay off debts first, or use them in other ways, if they assume or replace the inherited mortgage.
If your current insurance portfolio offers sufficient coverage, I would not recommend adding mortgage protection insurance. If you don’t have life insurance, we can help you explore this option.
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