Jan
30
Ki Gray asked:
The M-LEC, as it is called, has been created in order to restore investor confidence in some areas of the economy that are neccesary for credit to maintain its liquidity, or ease of transference from one entity (a bank) to another. This loss of liquidity comes in the wake of the discovery of high-risk, sickly subprime mortages that have been sold off in pieces, often in the form of supposedly secure money market funds to thousands of investors. Over the past several years, those funds have changed hands so many times that their spread is difficult to chart for the average investor, who therefore loses confidence investing in a potentially tainted company or financial institution, which, over time, results in a credit crunch, which is a surefire recipe for recession.
In order to avoid such an outcome, this superfund aims to selectively buy large number of securites from what is called Structured Investment Vehicles- or SIV’s, which sell so-called “commercial paper” to finance themselves. Commercial paper is sold at most of what it is worth and matures quickly (over a period of months rather than years) which, although a risky investment (because it has a smaller percentage of the investment reserved in case of a drop in value), means it can quickly be converted into a more stable form, most often in a money market fund. Bond rating institutions rated the money market funds as being much safer than they actually were, because SIV’s transfer the securities through commercial paper before they make their way to the stable funds.
Since it became more apparent that these small conduits only appeared to be trustworthy investments, they have lost popularity and have few potential buyers. Although this is not inherently bad, it reflects two scenarios. The first possibility is that the market is functioning improperly due mostly to a loss of investment confidence, which depends on the perception of the average investor that the economy is stable and therefore worth investing in. The other possibility is that the economy is unstable due to real underlying debts that cannot be avoided, and therefore this new conduit is just a smokescreen for the big banks to pay lip service for making so many bad loans in the first place.
The second scenario is unfortunately the more likely one, which means a recession could be unavoidable. The reason the conduit functions ineffectively is twofold: because it depends on the bank’s promises that they will buy the SIV’s assets even if no one else will, thus placing an artificial incentive in place for investors, and because the bank’s guarantee is also dependent on their securities maintaining a certain amount of their value. This means that the financial institutions can take fees from the securities in exchange for an incomplete guarantee, thus justifying their purchase. The fund could theoretically have a positive impact, if willful suspension of disbelief takes hold of the globe, or if you view a slowdown in the US economy as a positive outcome.
BRENT
The M-LEC, as it is called, has been created in order to restore investor confidence in some areas of the economy that are neccesary for credit to maintain its liquidity, or ease of transference from one entity (a bank) to another. This loss of liquidity comes in the wake of the discovery of high-risk, sickly subprime mortages that have been sold off in pieces, often in the form of supposedly secure money market funds to thousands of investors. Over the past several years, those funds have changed hands so many times that their spread is difficult to chart for the average investor, who therefore loses confidence investing in a potentially tainted company or financial institution, which, over time, results in a credit crunch, which is a surefire recipe for recession.
In order to avoid such an outcome, this superfund aims to selectively buy large number of securites from what is called Structured Investment Vehicles- or SIV’s, which sell so-called “commercial paper” to finance themselves. Commercial paper is sold at most of what it is worth and matures quickly (over a period of months rather than years) which, although a risky investment (because it has a smaller percentage of the investment reserved in case of a drop in value), means it can quickly be converted into a more stable form, most often in a money market fund. Bond rating institutions rated the money market funds as being much safer than they actually were, because SIV’s transfer the securities through commercial paper before they make their way to the stable funds.
Since it became more apparent that these small conduits only appeared to be trustworthy investments, they have lost popularity and have few potential buyers. Although this is not inherently bad, it reflects two scenarios. The first possibility is that the market is functioning improperly due mostly to a loss of investment confidence, which depends on the perception of the average investor that the economy is stable and therefore worth investing in. The other possibility is that the economy is unstable due to real underlying debts that cannot be avoided, and therefore this new conduit is just a smokescreen for the big banks to pay lip service for making so many bad loans in the first place.
The second scenario is unfortunately the more likely one, which means a recession could be unavoidable. The reason the conduit functions ineffectively is twofold: because it depends on the bank’s promises that they will buy the SIV’s assets even if no one else will, thus placing an artificial incentive in place for investors, and because the bank’s guarantee is also dependent on their securities maintaining a certain amount of their value. This means that the financial institutions can take fees from the securities in exchange for an incomplete guarantee, thus justifying their purchase. The fund could theoretically have a positive impact, if willful suspension of disbelief takes hold of the globe, or if you view a slowdown in the US economy as a positive outcome.
BRENT
Dec
28
Tarun Jaswani asked:
Annual percentage rate (APR) is the simplified counterpart to the effective interest rate the borrower will pay on a loan. In many countries and jurisdictions, lenders (such as banks) are required to disclose the “cost” of borrowing in some standardized way as a form of consumer protection.
APR is intended to make it easier to compare lenders and loan options. The APR is likely to differ from the “note rate” or “headline rate” advertised by the lender, due to the addition of other fees that may need to be included in the APR. However the APR can be found simply by asking the lender, or reading the section about APR in your contract.
Lenders are required to disclose the APR before the loan (or credit application) is finalized (but note that the definition of APR is not the same in these two countries - see below). Credit card companies can advertise monthly interest rates, but they are required to clearly state the annual percentage rate before an agreement is signed.
APR is a term used with regard to deposit accounts as well. However, when dealing with deposit accounts, annual percentage yield (APY) or annual equivalent rate (AER) is the number to be quoted to consumers for comparison purposes.
This also explains why a 15 year mortgage and a 30 year mortgage with the same APR would have different monthly payments and a different total amount of interest paid. There are many more periods over which to spread the principal, which makes the payment smaller, but there are just as many periods over which to charge interest at the same rate, which makes the total amount of interest paid much greater. For example, $100,000 mortgaged (without fees, since they add into the calculation in a different way) over 15 years costs a total of $193,429.80 (interest is 93.430% of principal), but over 30 years, costs a total of $315,925.20 (interest is 215.925% of principal).
In addition the APR takes costs into account. Suppose for instance that $100,000 is borrowed with $1000 one-time fees paid in advance. If, in the second case, equal monthly payments are made of $946.01 against 9.569% compounded monthly then it takes 240 months to pay the loan back. If the $1000 one-time fees are taken into account then the yearly interest rate paid is effectively equal to 10.31%.
The APR concept can also be applied to savings accounts: imagine a savings account with 1% costs at each withdrawal and again 9.569% interest compounded monthly. Suppose that the complete amount including the interest is withdrawn after exactly one year. Then, taking this 1% fee into account, the savings effectively earned 8.9% interest that year.
Some classes of fees are deliberately not included in the calculation of APR. Because these fees are not included, some consumer advocates claim that the APR does not represent the total cost of borrowing. Excluded fees may include:
Routine one-time fees which are paid to someone other than the lender (such as a real estate attorney’s fee)
Penalties such as late fees or service reinstatement fees without regard for the size of the penalty or the likelihood that it will be imposed.
Lenders argue that the real estate attorney’s fee, for example, is a pass-through cost, not a cost of the lending. In effect, they are arguing that the attorney’s fee is a separate transaction and not a part of the loan. Consumer advocates argue that this would be true if the customer is free to select which attorney is used. If the lender insists on using a specific attorney however, then the cost should be looked at as a component of the total cost of doing business with that lender.
This area is made more complicated by the practice of contingency fees for example, when the lender receives money from the attorney and other agents to be the one used by the lender. Because of this, U.S. regulators require all lenders to produce an affiliated business disclosure form which shows the amounts paid between the lender and the appraisal firms, attorneys, etc.
TOBY
Annual percentage rate (APR) is the simplified counterpart to the effective interest rate the borrower will pay on a loan. In many countries and jurisdictions, lenders (such as banks) are required to disclose the “cost” of borrowing in some standardized way as a form of consumer protection.
APR is intended to make it easier to compare lenders and loan options. The APR is likely to differ from the “note rate” or “headline rate” advertised by the lender, due to the addition of other fees that may need to be included in the APR. However the APR can be found simply by asking the lender, or reading the section about APR in your contract.
Lenders are required to disclose the APR before the loan (or credit application) is finalized (but note that the definition of APR is not the same in these two countries - see below). Credit card companies can advertise monthly interest rates, but they are required to clearly state the annual percentage rate before an agreement is signed.
APR is a term used with regard to deposit accounts as well. However, when dealing with deposit accounts, annual percentage yield (APY) or annual equivalent rate (AER) is the number to be quoted to consumers for comparison purposes.
This also explains why a 15 year mortgage and a 30 year mortgage with the same APR would have different monthly payments and a different total amount of interest paid. There are many more periods over which to spread the principal, which makes the payment smaller, but there are just as many periods over which to charge interest at the same rate, which makes the total amount of interest paid much greater. For example, $100,000 mortgaged (without fees, since they add into the calculation in a different way) over 15 years costs a total of $193,429.80 (interest is 93.430% of principal), but over 30 years, costs a total of $315,925.20 (interest is 215.925% of principal).
In addition the APR takes costs into account. Suppose for instance that $100,000 is borrowed with $1000 one-time fees paid in advance. If, in the second case, equal monthly payments are made of $946.01 against 9.569% compounded monthly then it takes 240 months to pay the loan back. If the $1000 one-time fees are taken into account then the yearly interest rate paid is effectively equal to 10.31%.
The APR concept can also be applied to savings accounts: imagine a savings account with 1% costs at each withdrawal and again 9.569% interest compounded monthly. Suppose that the complete amount including the interest is withdrawn after exactly one year. Then, taking this 1% fee into account, the savings effectively earned 8.9% interest that year.
Some classes of fees are deliberately not included in the calculation of APR. Because these fees are not included, some consumer advocates claim that the APR does not represent the total cost of borrowing. Excluded fees may include:
Routine one-time fees which are paid to someone other than the lender (such as a real estate attorney’s fee)
Penalties such as late fees or service reinstatement fees without regard for the size of the penalty or the likelihood that it will be imposed.
Lenders argue that the real estate attorney’s fee, for example, is a pass-through cost, not a cost of the lending. In effect, they are arguing that the attorney’s fee is a separate transaction and not a part of the loan. Consumer advocates argue that this would be true if the customer is free to select which attorney is used. If the lender insists on using a specific attorney however, then the cost should be looked at as a component of the total cost of doing business with that lender.
This area is made more complicated by the practice of contingency fees for example, when the lender receives money from the attorney and other agents to be the one used by the lender. Because of this, U.S. regulators require all lenders to produce an affiliated business disclosure form which shows the amounts paid between the lender and the appraisal firms, attorneys, etc.
TOBY
Oct
30
Mortgage Interest Rates Fall Again
Filed Under Banking | Leave a Comment
Ki Gray asked:
For the second week in a row mortgage rates have fallen. For those that don’t read my updates regularly I wanted to give a short background on what rates have been doing. From the end of April to the beginning of June 30 year mortgage rates hovered around 6 percent. Then during the month of June 30 year mortgage interest rates rose peaking out at 6.45 at the end of June. But since then rates have fallen through the month of July ot 6.26. So we are not down to 6 but rates have come down quite a bit from their recent high. Its also interesting rates have fallen although the FED has cut the Fed Funds rate or the discount rate since April 30th. Below are mortage interest rates for the major mortgage products for the last 5 weeks.
July 17,2008
30-yr 6.26 15-yr 5.78 5-yr ARM 5.80 1-yr ARM 5.10
July 10,2008
30-yr 6.37 15-yr 5.91 5-yr ARM 5.82 1-yr ARM 5.17
July 3,2008
30-yr 6.35 15-yr 5.92 5-yr ARM 5.78 1-yr ARM 5.17
June 26,2008
30-yr 6.45 15-yr 6.04 5-yr ARM 5.99 1-yr ARM 5.27
June 19,2008
30-yr 6.42 15-yr 6.02 5-yr ARM 5.89 1-yr ARM 5.19
Mortgage rates are nice to look at but what do these mortgage rates flucatuations mean for a mortgage. Using our free mortgage calculator we can run the numbers and see how these mortgage rate changes would affect the mortgage on a 200k loan.
July 17th
30-yr $1232.73
15-yr $1664.03
5-yr ARM $1173.5
1-yr ARM $1085.89
June 26th
30-yr $1257.56
15-yr $1692.03
5-yr ARM $1197.81
1-yr ARM $1106.88
June 5th
30-yr $1210.69
15-yr $1650.11
5-yr ARM $1136.83
1-yr ARM $1080.98
For a 30 Year mortgage on June 5th the monthly mortgage payment would have been $1210.69. Three week later on June 26th a mortgage on the same amount would have risen 4% to $1257.56. Now another 3 weeks the mortgage payment has fallen 2% to $1232.73
The other major change occuring with mortgages is that banks are becoming more selective in giving out mortgages. We have noticed over the last month that more restrictions from lenders have been coming into play. So although mortgage rates are relatively low it has become more difficult to get a loan. Over the last few years lenders would give a loan to anyone that could walk in the door this has changed over the last year. This is why potential home buyers should start paying more attention to their credit scores. Also lenders are expecting larger downpayments. Lenders are also cracking down on investment loans. The biggest change has been that most lenders are not allowing borrowers to get more than 4 investment loans. This has essentially stopped many investors from purchasing new properties.
So what do we expect to happen in the future. The general feeling among mortgage brokers is that lenders are unlikely to return to the free wheeling style we saw in 2006. But at the same time its likely that the current extreme restrictions in lending might ease up some over the next six months.
Website content
For the second week in a row mortgage rates have fallen. For those that don’t read my updates regularly I wanted to give a short background on what rates have been doing. From the end of April to the beginning of June 30 year mortgage rates hovered around 6 percent. Then during the month of June 30 year mortgage interest rates rose peaking out at 6.45 at the end of June. But since then rates have fallen through the month of July ot 6.26. So we are not down to 6 but rates have come down quite a bit from their recent high. Its also interesting rates have fallen although the FED has cut the Fed Funds rate or the discount rate since April 30th. Below are mortage interest rates for the major mortgage products for the last 5 weeks.
July 17,2008
30-yr 6.26 15-yr 5.78 5-yr ARM 5.80 1-yr ARM 5.10
July 10,2008
30-yr 6.37 15-yr 5.91 5-yr ARM 5.82 1-yr ARM 5.17
July 3,2008
30-yr 6.35 15-yr 5.92 5-yr ARM 5.78 1-yr ARM 5.17
June 26,2008
30-yr 6.45 15-yr 6.04 5-yr ARM 5.99 1-yr ARM 5.27
June 19,2008
30-yr 6.42 15-yr 6.02 5-yr ARM 5.89 1-yr ARM 5.19
Mortgage rates are nice to look at but what do these mortgage rates flucatuations mean for a mortgage. Using our free mortgage calculator we can run the numbers and see how these mortgage rate changes would affect the mortgage on a 200k loan.
July 17th
30-yr $1232.73
15-yr $1664.03
5-yr ARM $1173.5
1-yr ARM $1085.89
June 26th
30-yr $1257.56
15-yr $1692.03
5-yr ARM $1197.81
1-yr ARM $1106.88
June 5th
30-yr $1210.69
15-yr $1650.11
5-yr ARM $1136.83
1-yr ARM $1080.98
For a 30 Year mortgage on June 5th the monthly mortgage payment would have been $1210.69. Three week later on June 26th a mortgage on the same amount would have risen 4% to $1257.56. Now another 3 weeks the mortgage payment has fallen 2% to $1232.73
The other major change occuring with mortgages is that banks are becoming more selective in giving out mortgages. We have noticed over the last month that more restrictions from lenders have been coming into play. So although mortgage rates are relatively low it has become more difficult to get a loan. Over the last few years lenders would give a loan to anyone that could walk in the door this has changed over the last year. This is why potential home buyers should start paying more attention to their credit scores. Also lenders are expecting larger downpayments. Lenders are also cracking down on investment loans. The biggest change has been that most lenders are not allowing borrowers to get more than 4 investment loans. This has essentially stopped many investors from purchasing new properties.
So what do we expect to happen in the future. The general feeling among mortgage brokers is that lenders are unlikely to return to the free wheeling style we saw in 2006. But at the same time its likely that the current extreme restrictions in lending might ease up some over the next six months.
Website content