Interest Rate Interest Rate TrendsTrends

What History Tells Us About What History Tells Us About

Real Estate LoansReal Estate Loans

Is there a correlation Is there a correlation between the Prime Rate between the Prime Rate and Mortgage Rates?and Mortgage Rates?

Lets look at historyLets look at history

Prime Rate HistoryPrime Rate History1949 to 19991949 to 1999

Prime Rate History Prime Rate History 1995 to 20051995 to 2005

Conforming Fixed Rate Conforming Fixed Rate Mortgages 1992 to 2005Mortgages 1992 to 2005

Rate ComparisonsRate Comparisons

Prime RatePrime Rate 30 year Fixed30 year Fixed 1982-18.5%1982-18.5% 1982-12.75%1982-12.75% 1995-8.5%1995-8.5% 1995-7.5%1995-7.5% 2001-8.75%2001-8.75% 2001-6.75%2001-6.75% Today-6.00%Today-6.00% Today-5.875%Today-5.875%

Will they rise?Will they rise? Most likelyMost likely How much? (any ones guess)How much? (any ones guess) However:However: New home construction is the heart of New home construction is the heart of

the economic recoverythe economic recovery Prices are beginning to exceed average Prices are beginning to exceed average

buyer capabilitybuyer capability Demand still exceeds supply in desirable Demand still exceeds supply in desirable

locationslocations

Is Credit TighteningIs Credit Tightening

Yes and NoYes and No

2002 major push of option ARM allowing borrowers to pay interest 2002 major push of option ARM allowing borrowers to pay interest only paymentsonly payments

2004 3/1;5/1,7/1 & 10/1 interest only fixed rate loans expand in 2004 3/1;5/1,7/1 & 10/1 interest only fixed rate loans expand in market placemarket place

2005 CalHFA introduces interest only loan for first-time home 2005 CalHFA introduces interest only loan for first-time home buyersbuyers

April 2005 major banks decide to increase minimum payments on April 2005 major banks decide to increase minimum payments on consumer revolving debt from 2% to 4%consumer revolving debt from 2% to 4%

Interest Only verses P&IInterest Only verses P&I

Loan Amount = $300,000Loan Amount = $300,000 Interest Rate = 6.00Interest Rate = 6.00 30 Year P & I = $1798.6530 Year P & I = $1798.65 Interest Only = $1500.00Interest Only = $1500.00 Borrower Leverage:Borrower Leverage: Borrower additional $59,000 for same Borrower additional $59,000 for same

PaymentPayment

Borrower QualificationBorrower Qualification

Old Rule:Old Rule: 28/36 debt ratio’s28/36 debt ratio’s 5% of revolving debt included in ratio5% of revolving debt included in ratio New Rule: New Rule: FICO SCORE; FICO SCORE; FICO SCOREFICO SCORE; FICO SCORE; FICO SCORE Automated UnderwritingAutomated Underwriting Some times you might qualify with a 50% debt Some times you might qualify with a 50% debt

ratioratio

Outlook for Mortgage Outlook for Mortgage IndustryIndustry

As rates rise they will meet the challenge As rates rise they will meet the challenge of creating programs to help borrowers of creating programs to help borrowers to qualify and keep houses sellingto qualify and keep houses selling

Just remember:Just remember: When you bought your first house was When you bought your first house was

there 100% financing available other than there 100% financing available other than a government subsidized programa government subsidized program

Last builder ConversationLast builder Conversation