Mortgage rates were mixed this week, according to data compiled by Bankrate. See below for a breakdown of how each loan term moved.
After increasing interest rates at 10 consecutive meetings in 2022 and 2023, the Federal Reserve finally paused at its June 14 meeting — only to resume July 26, with a quarter-point increase.
Official inflation has fallen to 3 percent, near the Fed’s official goal of 2 percent, and housing economists say the end is near for the central bank’s intense fight against inflation.
“We do expect mortgage rates to trend down once the [Federal Open Market Committee] clearly signals that they have reached the peak for this cycle, as the reduction in uncertainty with respect to the direction of rates should narrow the spread of mortgage rates relative to Treasury benchmarks,” says Mike Fratantoni, chief economist at the Mortgage Bankers Association.
Rates accurate as of September 6, 2023.
The rates listed here are marketplace averages based on the assumptions indicated here. Actual rates listed across the site may vary. This story has been reviewed by Suzanne De Vita. All rate data accurate as of Wednesday, September 6th, 2023 at 7:30 a.m.
>>Check out historical mortgage interest rate trends
You can save thousands of dollars over the life of your mortgage by getting multiple offers. Comparing mortgage offers from multiple lenders is always a smart move, but shopping around grew especially critical during the interest rate run-up of 2022, according to research by mortgage giant Freddie Mac. It found the payoff for bargain-huntng borrowers doubled last year.
“All too often, some homeowners take the path of least resistance when seeking a mortgage, in part because the process of buying a home can be stressful, complicated and time-consuming,” says Mark Hamrick, senior economic analyst for Bankrate. “But when we’re talking about the potential of saving a lot of money, seeking the best deal on a mortgage has an excellent return on investment. Why leave that money on the table when all it takes is a bit more effort to shop around for the best rate, or lowest cost, on a mortgage?”
Mortgage rates for home purchase
30-year mortgage moves upward, +0.06%
The average rate for the benchmark 30-year fixed mortgage is 7.59 percent, an increase of 6 basis points from a week ago. This time a month ago, the average rate on a 30-year fixed mortgage was lower, at 7.40 percent.
At the current average rate, you’ll pay principal and interest of $705.39 for every $100k you borrow. That’s an increase of $4.12 over what you would have paid last week.
When to consider a 30-year fixed mortgage
Choosing the right home loan is an important step in the homebuying process, and you have a lot of options. You need to take several factors into consideration, including your credit score, income, down payment amount, budget, and financial goals.
15-year mortgage rate moves lower,-0.02%
The average 15-year fixed-mortgage rate is 6.79 percent, down 2 basis points from a week ago.
Monthly payments on a 15-year fixed mortgage at that rate will cost $887 per $100,000 borrowed. That may squeeze your monthly budget than a 30-year mortgage would, but it comes with some big advantages: You’ll come out several thousand dollars ahead over the life of the loan in total interest paid and build equity much more rapidly.
5/1 ARM rate retreats, -0.01%
The average rate on a 5/1 ARM is 6.54 percent, ticking down 1 basis point since the same time last week.
Adjustable-rate mortgages, or ARMs, are mortgage terms that come with a floating interest rate. In other words, the interest rate can change periodically throughout the life of the loan, unlike fixed-rate loans. These types of loans are best for people who expect to sell or refinance before the first or second adjustment. Rates could be materially higher when the loan first adjusts, and thereafter.
While borrowers shunned ARMs during the pandemic days of super-low rates, this type of loan has made a comeback as mortgage rates have risen.
Monthly payments on a 5/1 ARM at 6.54 percent would cost about $635 for each $100,000 borrowed over the initial five years, but could climb hundreds of dollars higher afterward, depending on the loan’s terms.
Jumbo mortgage moves up, +0.10%
Today’s average rate for jumbo mortgages is 7.63 percent, up 10 basis points over the last week. This time a month ago, the average rate on a jumbo mortgage was below that, at 7.43 percent.
At the current average rate, you’ll pay $708.14 per month in principal and interest for every $100,000 you borrow. That’s an extra $6.87 compared with last week.
Rate review: How mortgage rates have shifted over the past week
30-year fixed mortgage rate: 7.59%, up from 7.53% last week, +0.06
15-year fixed mortgage rate: 6.79%, down from 6.81% last week, -0.02
5/1 ARM mortgage rate: 6.54%, down from 6.55% last week, -0.01
Jumbo mortgage rate: 7.63%, up from 7.53% last week, +0.10
Interested in refinancing? See mortgage refinance rates
30-year mortgage refinance moves higher, +0.09%
The average 30-year fixed-refinance rate is 7.75 percent, up 9 basis points compared with a week ago. A month ago, the average rate on a 30-year fixed refinance was lower, at 7.46 percent.
At the current average rate, you’ll pay $716.41 per month in principal and interest for every $100,000 you borrow. That’s an additional $6.21 per $100,000 compared with last week.
Where are mortgage rates headed?
The days of sub-3 percent mortgage interest on the 30-year fixed are behind us, and rates have so far risen beyond 7 percent in 2022.
“Low interest rates were the medicine for economic recovery following the financial crisis, but it was a slow recovery so rates never went up very far,” says McBride. “The rebound in the economy, and especially inflation, in the late pandemic stages has been very pronounced, and we now have a backdrop of mortgage rates rising at the fastest pace in decades.”
Comparing different mortgage terms
The 30-year fixed-rate mortgage is the most popular option for homeowners, and this type of loan has a number of advantages, including:
Lower monthly payment: Compared to a shorter term, such as 15 years, the 30-year mortgage offers lower payments spread over time.
Stability: With a 30-year mortgage, you lock in a consistent principal and interest payment. Because of the predictability, you can plan your housing expenses for the long term. Remember: Your monthly housing payment can change if your homeowners insurance and property taxes go up or, less likely, down.
Buying power: With lower payments, you can qualify for a larger loan amount and a more expensive home.
Flexibility: Lower monthly payments can free up some of your monthly budget for other goals, like saving for emergencies, retirement, college tuition or home repairs and maintenance.
Strategic use of debt: Some argue that Americans focus too much on paying down their mortgages rather than adding to their retirement accounts. A 30-year fixed mortgage with a smaller monthly payment can allow you to save more for retirement.
That said, shorter-term loans have gained popularity as rates have been historically low. Although they have higher monthly payments compared to 30-year mortgages, there are some big benefits if you can afford the upfront costs. Shorter-term loans can help you achieve:
Greatly reduced interest costs: Because you pay off the loan faster, you’ll be able to pay less interest overall.
Lower interest rate: On top of less time for that interest to compound, most lenders price shorter-term mortgages with lower rates.
Build equity faster: The faster you pay off your mortgage, the faster you’ll own value in your home outright. That’s especially handy if you want to borrow against your property to fund other spending.
Debt-free sooner: A shorter-term mortgage means you’ll own your house free and clear sooner than you would with a longer-term loan.
Foreclosure filings fell 12 percent in September from a month earlier, but still increased 21 percent from the same period a year earlier, RealtyTrac reported today.
Default notices, auction sale notices, and bank repossessions were reported on 265,968 properties during the month, putting one in every 475 U.S. households in some stage of foreclosure.
RealtyTrac chief James J. Saccacio attributed much of the month-to-month decrease to new state laws that extend the time mortgage lenders must wait before serving foreclosure papers.
“Most significantly, SB 1137 in California took effect in early September and requires lenders to make contact with borrowers at least 30 days before filing a Notice of Default (NOD),” he said, in a release.
“In September we saw California NODs drop 51 percent from the previous month, and that drop had a significant impact on the national numbers given that California accounts for close to one-third of the nation’s foreclosure activity each month.”
At the same time, he noted that a 90-day right-to-cure notice in Massachusetts had slowed foreclosure filings during the summer, but seemed to just delay the inevitable.
“On the other hand, initial foreclosure filings in Massachusetts jumped 465 percent from August to September after being much lower than normal in June, July and August,” Saccacio said.
“That temporary lull happened after a new law took effect in May requiring lenders to give homeowners a 90-day right to cure notice before initiating foreclosure. But in September, about 90 days after the law took effect, initial foreclosure notices jumped back up close to the level we were seeing earlier in the year.”
That’s certainly not good news for those who support foreclosure moratoriums, as it seems to have simply extended the mortgage crisis without providing meaningful assistance to at-risk homeowners.
Six states (California, Florida, Arizona, Ohio, Michigan, and Nevada) accounted for 60 percent of total foreclosure activity during the third quarter, with California responsible for a whopping 27 percent.
Well, it took 79 years, but the FHA’s squeaky-clean track record is over.
FHA Commissioner Carol Galante wrote a letter to Congress formally requesting a bailout from the Treasury, the first time the agency has ever had to go down that road.
And it’s no small number either – the government housing agency needs a staggering $1.7 billion to meet the capital requirements of its depleted Mutual Mortgage Insurance Fund.
However, Galante stressed that the money wasn’t necessary to handle claims activity, and that the agency has “more than sufficient resources.”
In other words, the money is only necessary to keep the capital reserve ratio above two percent, with the money being transferred before the fiscal year ends on Monday September 30th.
Of course, just like any other company that insures mortgages, the last five or so years have been rough.
High-Risk Loans Crushed the FHA
The agency originally lost its shirt on seller-paid down payment assistance loans, which allowed borrowers to purchase homes with absolutely nothing down.
As we all know, those who had nothing to lose eventually walked away from their homes when values went south.
And more recently the FHA registered $5 billion in losses through its troubled reverse mortgage program, in which seniors took huge draws and eventually defaulted on the mortgages tied to homes worth considerably less.
Still, the worst seems to be over, as indicated in testimony before the Senate Committee on Banking in late July of this year.
At that time, Galante said serious delinquencies on FHA loans fell from 9.59% in December 2012 to 8.27% in May 2013, and noted that cures (where bad loans get back on track) began surpassing new serious delinquencies in April of this year.
So it’s more about playing catch-up to meet a Congressionally-mandated rule related to old data, not so much a sign of the times.
FHA Loans Are More Expensive Because of the Mess
The FHA has already made a ton of changes to bolster reserves, namely charging new borrowers a lot more than they used to.
This includes more expensive upfront and annual mortgage insurance premiums, and insurance that stays in force a lot longer.
The UFMIP was increased from 1% to 1.75% in 2012, and annual premiums have increased several times over the past few years.
And the latest change requires many FHA borrowers to pay mortgage insurance premiums for the full term of the loan, even if the LTV ratio drops to 78%.
A couple of years ago the agency also introduced a minimum credit score of 500, and upped the credit score requirement for its signature 3.5% down loan program to 580.
In short, today’s FHA borrower is paying the price for the mistakes made leading up to the housing crisis, which while seemingly unfair, is the only move the agency can make at this point.
Unfortunately, FHA lending has gotten a lot less popular due to these changes, which is a bit of a catch-22 for the agency.
Galante blamed higher mortgage rates for the recent reduction in loan volume, which apparently led to the request for the bailout. But let’s be honest, conventional loans make a lot more sense for borrowers these days in light of all those premium hikes.
Wait, the FHA Still Doesn’t Get It?
In spite of all this, the FHA is still engaging in highly questionable lending practices today.
Their latest grand idea revolves around those who recently sold short, got foreclosed on, or filed for bankruptcy.
Many of these borrowers will be able to apply for FHA loans just one year after such a massive event, so long as they can jump through a few underwriting hoops.
This has bad idea written all over it, but the FHA is moving forward with the initiative. The question remains whether lenders will play ball, or simply throw overlays on top of it.
It’s clearly irresponsible, but I suppose we don’t know if the FHA is getting pressured to keep the spigot open for less creditworthy borrowers, which after all, is their original mission.
Running an Airbnb in L.A. has never been more profitable.
As the city tries to crack down on illegal listings, and advocacy groups complain about the company’s effect on L.A.’s housing crisis, hosts are charging higher rates than ever while raking in bigger and bigger payouts.
But don’t expect them to talk about it.
Data show that a vast number of homes are operating without an active registration, which is required by the city to operate a short-term rental. Several such hosts spoke to The Times anonymously for fear of being fined by the city or, worse, getting their listing shut down by Airbnb.
“This is my primary source of income,” said one host who operates three different listings. “I’m finally making a decent living off of this. One listing alone wouldn’t cut it.”
Advertisement
Since 2020, revenues for hosts have steadily risen far beyond pre-pandemic levels. The average revenue climbed to $17,654 in 2022, up more than $4,000 year-over-year, and the numbers are at a similar pace for 2023, according to data from short-term rental analytics company AllTheRooms.
In total, L.A. hosts earned a combined $375 million last year, a spokesperson for Airbnb said.
A few factors contribute to the rise. For one, daily rates for Airbnb rentals have spiked over the last four years, swelling from $152 in 2019 to $244 in 2023. It’s a trend that’s happening across the short-term rental industry, as hotel and VRBO rates have steadily risen since the COVID-19 pandemic as well.
Basic supply and demand is another factor. Save for a drop during the first few months of the pandemic, Airbnb occupancy rates have largely stayed consistent, with the average rental occupied more than 40% of the time. But the amount of listings has dropped dramatically.
In August 2019, there were 16,973 Airbnb listings in L.A. Currently, there are 7,360.
Supply is down for now, but advocates worry that if revenues continue to rise, more homeowners will convert properties into Airbnbs.
Advertisement
Much of the drop was due to the pandemic, but the supply hasn’t risen since 2020 partly due to the city’s enforcement of its Home-Sharing Ordinance, a law that went into effect in 2019 that limits Angelenos to hosting only short-term rentals in their primary residence — homes where they can prove they live at least six months per year.
L.A. and Airbnb have worked in tandem over the years to enforce the law, launching a system in 2020 that streamlines the process of identifying and taking down illegal short-term rental listings.
It has been effective; the number of listings for short-term rental units across all home-sharing sites has dropped more than 70% over the last four years, going from roughly 36,600 in November 2019 to just under 10,000 in June 2023, according to the city planning department.
But plenty remain.
The Times previously reported that thousands of listings violate the law, and last year, a report claimed that 22% of L.A. listings host guests for more than 180 days a year.
“I can’t afford to rent out my place for only six months a year. I’d lose half my revenue,” said one host who rents a two-bedroom apartment in Hollywood on Airbnb.
Two other Airbnb hosts hung up the phone mid-interview when asked about whether their listing was their primary residence, or whether their registration number was valid.
“It’s a don’t ask, don’t tell system. I can’t afford to have my business threatened over a registration number,” one said.
As of August, there are 4,293 active home-sharing registrations, according to the city’s planning department. But on Airbnb alone, there are currently 7,360 listings up for rent.
“L.A. has a big enough rent problem on its own, and then you have a rogue industry that swoops into the city and starts taking rental properties off the market,” said Peter Dreier, a professor at Occidental College.
Dreier worked with the team that drafted Measure ULA, a new tax that funnels money toward affordable housing initiatives, and said that the short-term rental industry is contributing to both the housing crisis and homelessness crisis.
“When you take units off the market and rent them to tourists, one consequence is that it leads to more people fighting over fewer units. And that leads to higher rents,” he said.
The planning department is preparing a report with other departments analyzing enforcement of the Home-Sharing Ordinance. It will provide recommendations to the City Council on how to improve the program.
In the meantime, more listings bring more tax dollars. L.A. charges a 14% transient occupancy tax, often called a “bed tax,” paid by guests in a hotel or a short-term rental such as an Airbnb.
In the 2021-22 fiscal year, the city collected $33.88 million in transient occupancy taxes, according to the planning department.
It’s a hefty amount, but a report from McGill University urban planning professor David Wachsmuth suggests that the city could be raking in even more by fining illegal short-term rental listings.
The study claimed that 45% of all short-term rental listings are illegal in one way or another, and that the city could have levied between $56.8 million and $302.2 million in fines in 2022.
“I’ve never paid a fine, but my guests pay the tax. As long as the city’s getting money from somewhere, they’ll be fine,” said the Hollywood Airbnb host.
Randy Renick, an attorney with Hadsell Stormer Renick & Dai LLP, serves as executive director of Better Neighbors LA, a coalition that includes hotel employees, renters’ rights groups and housing advocates. He co-founded the group in 2019 as a public education campaign to emphasize the impact that short-term rentals have on communities.
He said rental hosts bend the rules in a few ways. One strategy is the bait-and-switch, where a host will advertise that a property is somewhere near the border of Los Angeles, such as West Hollywood, and thus not subject to L.A.’s stringent rules. But when renters show up, the property is actually in L.A.
Others give false registration numbers — some more cleverly than others.
“1234567 was popular for a while,” Renick said.
Some simply use expired registration numbers, and others used an active registration number but for several properties.
The organization’s website keeps a hotline for Angelenos to call and report illegal listings in their neighborhood, and Renick said they receive multiple calls per week.
From there, they urge the city to take action for matters both small and large. Sometimes it’s a call asking to enforce a fine on a certain property, and sometimes it’s a campaign on how short-term rentals can drive up long-term rent in an area by taking homes off the market and renting them to tourists.
“We try to show the impact of short-term renting and how it’s contributing to the housing and homelessness crisis,” Renick said. “Robust enforcement will result in returning thousands of units back to long-term rental.”
He pointed to Santa Monica and New York City as two cities that L.A. could model itself after. Santa Monica has a robust enforcement system, including multiple full-time staff focused on interviewing owners and issuing fines to illegal listings.
The coastal city allows only short-term rentals (less than 30 days) if the host lives on the property throughout the visitor’s stay. New York City adopted a similar rule last year, and the enforcement begins on Tuesday.
Though it has a long way to go, Renick said L.A. has raised the bar on proof required to show that a listing is the host’s primary residence.
Frank Tai, the owner of a luxury beachfront rental in Playa del Rey, has seen that process firsthand. He has only one listing and makes sure to renew his license every year, but the process has gotten more laborious over the years as both the city and Airbnb look to catch illegal listings.
“I’m in compliance, but it’s a lot of work. I fill out a 40-page application every year and send in property tax statements, utility bills and other documents,” he said. “Every year, something gets kicked back. They’re trying to stay on top of things.”
Tai said the process is well worth it. His rental is very profitable; it’s booked throughout the entire summer, and nightly rates double during vacation season. He didn’t even experience a slowdown during the pandemic, simply a switch from out-of-town customers to L.A. locals looking for a staycation.
“I don’t sneak around the system, but I’m guessing people do because it’s so profitable,” he said.
A key indicator of excess liquidity in the financial system has been falling since May, a development that holds promise for banks but raises questions for financial stability.
The Federal Reserve’s overnight reverse repurchase agreement, or ON RRP, facility has seen usage decline from nearly $2.3 trillion this spring to less than $1.7 trillion through the end of August, its lowest level since the central bank began raising interest rates in March 2022.
For banks, this was a desired outcome of the Fed’s effort to shrink its balance sheet. As the central bank allows assets — namely Treasuries and mortgage-backed securities — to roll off its books, its liabilities must decline commensurately. The more of that liability reduction that comes from ON RRP borrowing, the less has to come out of reserves, which banks use to settle transactions and meet regulatory obligations.
“What we’ve seen is the decline in the Fed holding has mostly come through on the liability side in terms of a decline in reverse repos, rather than reserves,” Derek Tang, co-founder of Monetary Policy Analytics, said. “This is, of course, welcome news to the Fed, because the Fed wants to make sure that there are enough reserve balances in the banking system to operate smoothly. So that’s good news.”
Yet, as participation in the ON RRP — through which nonbank financial firms buy assets from the Fed with an agreement to sell them back to the central bank at a higher price the next day — shrinks, some in and around the financial sector worry that funds are being redirected to riskier activities.
Darin Tuttle, a California-based investment manager and former Goldman Sachs analyst, said the decline in ON RRP usage has coincided with an uptick in stock market activity. His concern is that as firms seek higher returns, they are inflating asset prices through leveraged investments.
“I tracked the drawdown of the reverse repo from April when it started until about the beginning of August. The same time that $600 billion was pumped back into the markets is when markets really took off and exploded,” Tuttle said. “There’s some similarities there in drawing down the reverse repo and liquidity increasing in the markets to take on excessive risk.”
The Fed established the ON RRP facility in September 2014 ahead of its push to normalize monetary policy after the financial crisis of 2007 and 2008. The Fed intended the program to be a temporary tool for conveying monetary policy changes to the nonbank sector by allowing approved counterparties to get a return on unused funds by keeping them at the central bank overnight. The facility sets a floor for interest rates, with the rate it pays representing the first part of the Fed’s target range for its funds rate, which now sits at 5.25% to 5.5%.
For the first few years of its existence, the facility’s use typically ranged from $100 billion to $200 billion on a given night, according to data maintained by the Federal Reserve Bank of New York, which handle’s the Fed’s open market operations. From 2018 to early 2021, the usage was negligible, often totaling a few billion dollars or less.
In March 2021, ON RRP use began to climb steadily. It eclipsed $2 trillion in June 2022 and remained above that level for the next 12 months. Uptake peaked at $2.55 trillion on December 30 of last year, though that was partially the result of firms seeking to balance their year-end books.
While it is difficult to pinpoint why exactly ON RRP use has skyrocketed, most observers attribute it to a combination of factors arising from the government’s response to the COVID-19 pandemic, including the Fed’s asset purchases as well as government stimulus, which depleted another liability item on the Fed’s balance sheet: the Treasury General Account, or TGA.
Regardless of how it grew so large, few expected the ON RRP to ever reach such heights when it was first rolled out. Michael Redmond, an economist with Medley Advisors who previously worked at Federal Reserve Bank of Kansas City and the Treasury Department, said the situation raises questions about whether the Fed’s engagement with the nonbank sector through the facility ultimately does more harm than good.
“The ON RRP, when it was initially envisioned as a facility, was not expected to be this actively used. The Fed definitely has increased its footprint in the financial system, outside of the usual set of counterparties with it,” Redmond said. “The debate is whether that increases financial instability, because obviously it is nice to have the stabilizing force of the Fed’s balance sheet there, but it also potentially leads to counterproductive pressures on private entities that need to essentially compete with the Fed for reserves.”
Fed officials have maintained that the soaring use of the facility should not be a cause for concern. In a June 2021 press conference, as ON RRP borrowing was nearing $1 trillion, Fed Chair Jerome Powell said the facility was “doing what it’s supposed to do, which is to provide a floor under money market rates and keep the federal funds rate well within its — well, within its range.”
Fed Gov. Christopher Waller, in public remarks, has described the swollen ON RRP as a representation of excess liquidity in the financial system, arguing that counterparties place funds in it because they cannot put them to a higher and better use.
“Everyday firms are handing us over $2 trillion in liquidity they don’t need. They give us reserves, we give them securities. They don’t need the cash,” Waller said during an event hosted by the Council on Foreign Relations in January. “It sounds like you should be able to take $2 trillion out and nobody will miss it, because they’re already trying to give it back and get rid of it.”
But not all were quite so confident that the ON RRP would absorb the Fed’s balance sheet reductions. Tang said there have been concerns about bank reserves becoming scarce ever since the Fed began shrinking its balance sheet last fall, but those fears peaked this past spring, after the debt ceiling was lifted and Treasury was able to replenish its depleted general account.
“If the Treasury is increasing its cash holdings, then other parts of the Fed’s balance sheet, other liabilities have to decline and there was a big worry that reserves could start declining very quickly,” Tang said. “The Treasury was going from $100 billion to $700 billion, so if that $600 billion came out of reserves, we could have been in trouble.”
Instead, the bulk of the liabilities have come out of the ON RRP, a result Tang attributes to money market funds moving their resources away from the facility to instead purchase newly issued Treasury bills.
The question now is whether that trend will continue and for how long. While Fed officials say the ON RRP facility can fall all the way to zero without adverse impacts on the financial sector, it is unclear whether it will actually reach that level without intervention from the Fed, such as a lowering of the program’s offering rate or lowering the counterparty cap below $160 billion.
A New York Fed survey of primary dealers in July found that most expected use of the ON RRP to continue falling over the next year. The median estimate was that the facility would close the year at less than $1.6 trillion and continue falling to $1.1 trillion by the end of next year.
Those same respondents also expect reserves to continue dwindling as well, with the median expectation being less than $2.9 trillion by year end and roughly $2.6 trillion by the end of this year. As of Aug. 31, there were just shy of $3.2 trillion reserves at the Fed.
“The Fed’s view is that there are two types of entities with reserves, the banks that have more than enough and they don’t know what to do with, and the ones that are having some problems and need to pay up to attract deposits, which ultimately are reserves,” Redmond said. “When there are fluctuations in reserves, it’s hard to tell how much of that is shedding of excess reserves by banks that are flush with them, and how much is a sign that this is going to be a tougher funding environment for banks.”
Tuttle said a balance-sheet reduction strategy that relies on a shrinking ON RRP is not inherently risky, but he would like to hear more from the Fed about how it sees this playing out in the months ahead.
“We have gotten zero guidance on the drawdown of reverse repo,” he said. “Everything is just happening in the shadows.”
California Governor Arnold Schwarzenegger has proposed another plan aimed at tackling the foreclosure crisis in the state, this time calling for a 90-day stay of the foreclosure process for each owner-occupied home on which a Notice of Default has been filed.
At the same time, Schwarzenegger will allow a “Safe Harbor” in which mortgage lenders will be able to exempt themselves from the rule if they provide evidence to a state official that they have an “aggressive modification program” in place.
An “aggressive modification program” has been defined as one designed to keep borrowers in their homes when doing so will bring investors a better return than foreclosing and selling at a loss.
The loan modification model will be similar to the one launched at Indymac Federal, based on a debt-to-income ratio of 38 percent to ensure the new loan is sustainable over the long-term.
Lenders will be encouraged to reduce the interest rate to as low as three percent, increase the amortization to 40 years, or defer some amount of the unpaid principal balance to the end of the loan term to make payments more affordable.
The Governor has also proposed a number of other measures to prevent a mortgage crisis in the future, including increased/standardized licensing for mortgage originators, pre-counseling for borrowers entering into risky mortgages, and expanding fiduciary duties for mortgage brokers.
Additionally, the plan would allow the Department of Real Estate and the Department of Corporations to enforce federal laws and regulations such as the Truth in Lending Act to discipline violators.
But perhaps the most interesting part of the plan is urging the federal government to require loan originators retain a portion of the risk to promote sound loan underwriting, countering the ever-popular originate-to-distribute model.
Whoa, have you seen what just happened to interest rates!?
Suddenly, after at least fourteen years of our financial world being mostly the same, somebody flipped over the table and now things are quite different.
Interest rates, which have been gliding along at close to zero since before the Dawn of Mustachianism in 2011, have suddenly shot back up to 20-year highs.
–
Which brings up a few questions about whether we need to worry, or do anything about this new development.
Is the stock market (index funds, of course) still the right place for my money?
What if I want to buy a house?
What about my current house – should I hang onto it forever because of the solid-gold 3% mortgage I have locked in for the next 30 years?
Will interest rates keep going up?
And will they ever go back down?
These questions are on everybody’s mind these days, and I’ve been ruminating on them myself. But while I’ve seen a lot of play-by-play stories about each little interest rate increase in the financial newspapers, none of them seem to get into the important part, which is,
“Yeah, interest rates are way up, butwhat should I do about it?”
So let’s talk about strategy.
Why Is This Happening, and What Got Us Here?
Interest rates are like a giant gas pedal that revs the engine of our economy, with the polished black dress shoe of Federal Reserve Chairman Jerome Powell pressed upon it.
For most of the past two decades, Jerome’s team and their predecessors have kept the pedal to the metal, firing a highly combustible stream of easy money into the system in the form of near-zero rates. This made mortgages more affordable, so everyone stretched to buy houses, which drove demand for new construction.
It also had a similar effect on business investment: borrowed money and venture capital was cheap, so lots of entrepreneurs borrowed lots of money and started new companies. These companies then rented offices and built factories and hired employees – who circled back to buy more houses, cars, fridges, iPhones, and all the other luxurious amenities of modern life.
This was a great party and it led to lots of good things, because we had two decades of prosperity, growth, raising our children, inventing new things and all the other good things that happen in a successful rich country economy.
Until it went too far and we ended up with too much money chasing too few goods – especially houses. That led to a trend of unacceptably fast Inflation, which we already covered in a recent article.
–
So eventually, Jay-P noticed this and eased his foot back off of the Easy Money Gas Pedal. And of course when interest rates get jacked up, almost everything else in the economy slows down.
And that’s what is happening right now: mortgages are suddenly way more expensive, so people are putting off their plans to buy houses. Companies find that borrowing money is costly, so they are scaling back their plans to build new factories, and cutting back on their hiring. Facebook laid off 10,000 people and Amazon shed 27,000.
We even had a miniature banking crisis where some significant mid-sized banks folded and gave the financial world fears that a much bigger set of dominoes would fall.
All of these things sound kinda bad, and if you make the mistake of checking the news, you’ll see there is a big dumb battle raging as usual on every media outlet. Leftists, Right-wingers, and anarchists all have a different take on it:
It’s the President’s fault for printing all that money and running up the debt! We should have Fiscal Discipline!
No, it’s the opposite! The Fed is ruining the economy with all these rate rises, we need to drop them back down because our poor middle class is suffering!
What are you two sheeple talking about? The whole system is a bunch of corrupt cronies and we shouldn’t even have a central bank. All hail the true world currency of Bitcoin!!!
The one thing all sides seem to agree on is that we are “experiencing hard economic times” and that “the country is headed in the wrong way”.
Which, ironically, is completely wrong as well – our unemployment rate has dropped to 50-year lows and the economy is at the absolute best it has ever been, a surprise to even the most grounded economists.
The reality? We’re just putting the lid back onto the ice cream carton until the economy can digest all the sugar it just wolfed down. This is normal, it happens every decade or two and it’s no big deal.
Okay, but should I take my money out of the stock market because it’s going to crash?
This answer never changes, so you’ll see it every time we talk about stock investing: Holy Shit NO!!!
The stock market always goes up in the long run, although with plenty of unpredictable bumps along the way. Since you can’t predict those bumps until after they happen, there is no point in trying to dance in and out of it.
But since we do have the benefit of hindsight, there are a few things that have changed slightly: From its peak at the beginning of 2022 until right now (August 2023 as I write this), the overall US market is down about 10%. Or to view it another way, it is roughly flat since June 2021, so we’ve seen two years with no gains aside from total dividends of about 3%.
Since the future is always the same, unknowable thing, this means I am about 10% more excited about buying my monthly slice of index funds today than it was at the peak.
Should I start putting money into savings accounts instead because they are paying 4.5%?
This is a slightly trickier question, because in theory we should invest in a logical, unbiased way into the thing with the highest expected return over time.
When interest rates were under 1%, this was an easy decision: stocks will always return far more than 1% over time – consider the fact that the annual dividend payments alone are 1.5%!
But there has to be some interest rate at which you’d be willing to stop buying stocks and prefer to just stash it into the stable, rewarding environment of a money market fund or long-term bonds or something else similar. Right now, if a reputable bank offered me, say, 12% I would probably just start loading up.
But remember that the stock market is also currently running a 10% off sale. When the market eventually reawakens and starts setting new highs (which it will someday), any shares I buy right now will be worth 10% more. And then will continue going up from there. Which quickly becomes an even bigger number than 12%.
In other words, the cheaper the stocks get, the more excited we should be about buying them rather than chasing high interest rates.
As you can see, there is no easy answer here, but I have taken a middle ground:
I’m holding onto all the stocks I already own, of course
BUT since I currently have an outstanding margin loan balance for a house I helped to buy with several friends (yes this is #3 in the last few years!), I am paying over 6% on that balance. So I am directing all new income towards paying down that balance for now, just for peace of mind and because 6% is a reasonable guaranteed return.
Technically, I know I would probably make a bit more if I let the balance just stay outstanding, kept putting more money into index funds, and paid the interest forever, but this feels like a nice compromise to me
What if I want to Buy a House?
–
For most of us, the biggest thing that interest rates affect is our decisions around buying and selling houses. Financing a home with a mortgage is suddenly way more expensive, any potential rental house investments are suddenly far less profitable, and keeping our old house with a locked-in 3% mortgage is suddenly far more tempting.
Consider these shocking changes just over the past two years as typical rates have gone from about 3% to 7.5%.
Assuming a buyer comes up with the average 10% down payment:
The monthly mortgage payment on a $400k house has gone from about $1500 at the beginning of 2022 last year to roughly $2500 today. Even scarier, the interest portion of that monthly bill has more than doubled, from $900 to $2250!
For a home buyer with a monthly mortgage budget of $2000, their old maximum house price was about $500,000. With today’s interest rates however, that figure has dropped to about $325,000
Similarly, as a landlord in 2022 you might have been willing to pay $500k for a duplex which brought in $4000 per month of gross rent. Today, you’d need to get that same property for $325,000 to have a similar net cash flow (or try to rent each unit for a $500 more per month) because the interest cost is so much higher.
And finally, if you’re already living in a $400k house with a 3% mortgage locked in, you are effectively being subsidized to the tune of $1000 per month by that good fortune. In other words, you now have a $12,000 per year disincentive to ever sell that house if you’ll need to borrow money to buy a new one. And you have a potential goldmine rental property, because your carrying costs remain low while rents keep going up.
This all sounds kind of bleak, but unfortunately it’s the way things are supposed to work – the tough medicine of higher interest rates is supposed to make the following things happen:
House buyers will end up placing lower bids which fit within their budgets.
Landlords will have to be more discerning about which properties to buy up as rentals, lowering their own bids as well.
Meanwhile, the current still-sky-high prices of housing should continue to entice more builders to create new homes and redevelop and upgrade old buildings and underused land, because high prices mean good profits. Then they’ll have to compete for a thinner supply of home buyers.
The net effect of all this is that prices should stop going up, and ideally fall back down in many areas.
When Will House Prices Go Back Down?
This is a tricky one because the real “value” of a house depends entirely on supply and demand. The right price is whatever you can sell it for. However, there are a few fundamentals which influence this price over the long run because they determine the supply of housing.
The actual cost of building a house (materials plus labor), which tends to just stay pretty flat – it might not even keep up with inflation.
The value of the underlying land, which should also follow inflation on average, although with hot and cold spots depending on which cities are popular at the time.
The amount of bullshit which residents and their city councils impose upon house builders, preventing them from producing the new housing that people want to buy.
The first item (construction cost) is pretty interesting because it is subject to the magic of technological progress. Just as TVs and computers get cheaper over time, house components get cheaper too as things like computerized manufacturing and global trade make us more efficient. I remember paying $600 for a fancy-at-the-time undermount sink and $400 for a faucet for my first kitchen remodel in the year 2001. Today, you can get a nicer sink on Amazon for about $250 and the faucet is a flat hundred. Similarly, nailguns and cordless tools and easy-to-install PEX plumbing make the process of building faster and easier than ever.
On the other hand, the last item (bullshit restrictions) has been very inflationary in recent times. I’ve noticed that every year another layer of red tape and complicated codes and onerous zoning and approval processes gets layered into the local book of rules, and as a result I just gave up on building new houses because it wasn’t worth the hassle. Other builders with more patience will continue to plow through the murk, but they will have less competition, fewer permits will be granted, and thus the shortage of housing will continue to grow, which raises prices on average.
Thankfully, every city is different and some have chosen to make it easier to build new houses rather than more difficult. Even better, places like Tempe Arizona are allowing good housing to be built around people rather than cars, which is even more affordable to construct.
But overall, since overall US house prices adjusted for inflation are just about at an all-time high, I think there’s a chance that they might ease back down another 25% (to 2020 levels). But who knows: my guess could prove totally wrong, or the “fall” could just come in the form of flat prices for a decade that don’t keep up with inflation, meaning that they just feel 25% cheaper relative to our higher future salaries.
–
When Will Interest Rates Go Back Down?
The funny part about our current “high” interest rates is that they are not actually high at all. They’re right around average.So they might not go down at all for a long time.
Remember that graph at the beginning of this article? I deliberately cropped it to show only the years since 2009 – the long recent period of low interest rates. But if you zoom out to cover the last seventy years instead, you can see that we’re still in a very normal range.
–
But a better answer is this one: Interest rates will go down whenever Jerome Powell or one of his successors determines that our economy is slowing down too much and needs another hit from the gas pedal. In other words, whenever we start to slip into a genuine recession.
In order to do that however, we need to see low inflation, growing unemployment, and other signs of an economy that’s not too hot. And right now, those things keep not showing up in the weekly economic data.
You can get one reasonable prediction of the future of interest rates by looking at something called the US Treasury Yield Curve. It typically looks like this:
–
What the graph is telling you is that as a lender you get a bigger reward in exchange for locking up your money for a longer time period. And way back in 2018, the people who make these loans expected that interest rates would average about 3.0 percent over the next 30 years.
Today, we have a very strange opposite yield curve:
–
If you want to lend money for a year or less, you’ll be rewarded with a juicy 5.4 percent interest rate. But for two years, the rate drops to 4.92%. And then ten-year bond pays only 4.05 percent.
This situation is weird, and it’s called an inverted yield curve. And what it means is that the buyers of bonds currently believe that interest rates will almost certainly drop in the future – starting a little over a year from now.
And if you recall our earlier discussion about why interest rates drop, this means that investors are forecasting an economic slowdown in the fairly near future. And their intuition in this department has been pretty good: an inverted yield curve like this has only happened 11 times in the past 75 years, and in ten of those cases it accurately predicted a recession.
So the short answer is: nobody really knows, but we’ll probably see interest rates start to drop within 18-24 months, and the event may be accompanied by some sort of recession as well.
The Ultimate Interest Rate Strategy Hack
–
I like to read and write about all this stuff because I’m still a finance nerd at heart. But when it comes down to it, interest rates don’t really affect long-retired people like many of us MMM readers, because we are mostly done with borrowing. I like the simplicity of owning just one house and one car, mortgage-free.
With the current overheated housing market here in Colorado, I’m not tempted to even look at other properties, but someday that may change. And the great thing about having actual savings rather than just a high income that lets you qualify for a loan, is that you can be ready to pounce on a good deal on short notice.
Maybe the entire housing market will go on sale as we saw in the early 2010s, or perhaps just one perfect property in the mountains will come up at the right time. The point is that when you have enough cash to buy the thing you want, the interest rates that other people are charging don’t matter. It’s a nice position of strength instead of stress. And you can still decide to take out a mortgage if you do find the rates are worthwhile for your own goals.
So to tie a bow on this whole lesson: keep your lifestyle lean and happy and don’t lose too much sweat over today’s interest rates or house prices. They will probably both come down over time, but those things aren’t in your control. Much more important are your own choices about earning, saving, healthy living and where you choose to live.
With these big sails of your life properly in place and pulling you ahead, the smaller issues of interest rates and whatever else they write about in the financial news will gradually shrink down to become just ripples on the surface of the lake.
In the comments:what have you been thinking about interest rates recently? Have they changed your decisions, increased, or perhaps even decreased your stress levels around money and housing?
—
* Photo credit: Mr. Money Mustache, and Rustoleum Ultra Cover semi gloss black spraypaint. I originally polled some local friends to see if anyone owned dress shoes and a suit so I could get this picture, with no luck. So I painted up my old semi-dressy shoes and found some clean-ish black socks and pants and vacuumed out my car a bit before taking this picture. I’m kinda proud of the results and it saved me from hiring Jerome Powell himself for the shoot.
The California Association of Realtors released its “2014 California Housing Market Forecast” today, which revealed that home prices are on fire in the Golden State.
However, despite mind-blowing gains projected for 2013, next year is expected to be a bit of a different story.
The median home price in California is slated to rise to $408,600 this year, a whopping 28% gain from the $319,300 price tag seen in 2012.
You can partially thank the changing composition of home sales, with only one in five recent sales distressed, compared to one in three a year ago.
With higher prices come fewer short sales and foreclosures. Investors have also had quite the appetite for much of the year.
But it looks as if 2013 is an anomaly, with home prices only forecast to rise six percent in 2014, which historically still isn’t too shabby.
Median Home Price Will Rise to $432,800 in 2014
Assuming property values rise according to forecast, the median home price for 2014 will be $432,800.
That’s more than 57% above the bottom seen during the latest housing crisis, when prices hit $275,000 back in 2009.
At the same time, home prices are roughly 23% off their bubble highs of $560,300 seen in 2007.
So if prices do eventually get back to those levels, there’s still quite a bit of upside left, even for those who buy next year. And for those unfortunate souls who purchased during the bubble years.
But C.A.R. Vice President and Chief Economist Leslie Appleton-Young expects many previously underwater homeowners to list their properties next year, which will ease inventory constraints, while also keeping price gains in check.
It’s pretty much been a seller’s market all year, with most properties receiving multiple bids in a matter of days, often accompanied by all-cash offers over list price.
However, that will change thanks to higher home prices, higher mortgage rates, less investor participation, and more inventory.
I don’t know if we’ll be able to call it a buyer’s market just yet, but it will certainly begin to shift that way over time.
30-Year Fixed Rates Seen Rising Above Five Percent
Speaking of rates, C.A.R. expects the 30-year fixed mortgage to rise to 5.3% in 2014, up from 4.1% this year and 3.7% in 2012.
For the record, it averaged 6.3% when home prices peaked in 2006, meaning affordability will remain much better than it once was, even if prices climb back to those previous bubble highs.
The out-of-favor 1-year ARM is expected to rise to 3.1% from 2.7% this year.
All said, the future is looking pretty bright for existing homeowners and those still looking for a home, assuming nothing unexpected gets in the way.
Unfortunately, there are quite a few unknowns at the moment, including the ongoing government shutdown, which is already slowing down the mortgage market, along with the looming debt ceiling.
Next year, new lending standards will go live, such as the Qualified Mortgage definition.
Additionally, housing policy changes related to the mortgage interest deduction and the conforming loan limit could be a factor as well. There’s also the uncertainty related to the Fed unwinding its mortgage purchases.
So still plenty to worry about, but perhaps we haven’t seen the last of the home price gains just yet.
We had a crazy jobs week last week, with tons of data that the Federal Reserve was happy to see, but did those labor reports mean we’ve hit peak mortgage rates for 2023? Mortgage rates did fall, purchase application data rose and new listings data came back to trend.
Weekly active listings rose by only 5,654
Mortgage rates went from 7.37% and ended the week at 7.08%
Purchase apps rose 2% week to week
Mortgage rates and the bond market
The 10-year yield and mortgage rates were wild last week. Mortgage rates fell from 7.37% to a low of 7.07% and didn’t budge even though the 10-year yield rose on Friday after the jobs report came in. The reason Friday’s pricing was so reasonable was that the spreads between the 10-year yield and mortgage rates were good for a change. So, even though the 10-year yield shot up Friday, mortgage rates only ended up rising 0.01% to 7.08%.
For my 2023 forecast, I had a range of 4.25%-3.21% for the 10-year yield, meaning that rates would be between 5.75%-7.25%. One huge variable change in 2023 was that after the banking crisis started on Feb. 9, the spreads got worse, pushing mortgage rates higher than normal versus the 10-year yield. That, to me, is the big story of 2023, but as we saw Friday, spreads can be a positive story in the future.
Now, after the jobs week, one thing is sure: the labor market isn’t as tight as it used to be. I wrote about this last week as this is a big deal for the Federal Reserve. Since my bond market channel is based on the labor market and the economy, it’s also a big deal for me. Student loan debt payments will hit the economy soon, credit card delinquencies are rising and we no longer have Taylor Swift or Barbie to boost GDP so the economy is slowing down enough to get the labor market even softer.
Weekly housing inventory
Last week I got a big scare as new listing data fell week to week. We saw a noticeable decline right when mortgage rates rose to their highest point in 23 years, which I talked about on CNBC. However, I only put a little weight on one week’s data, especially near a holiday weekend. Even so, I’m glad we saw a rebound in new listings data last week.
We are still negative year over year and trending at the lowest levels ever for over 12 months. However, we haven’t started a new leg lower in this data line, so we should see flat to positive new listings data soon. New listing data over the past several weeks:
Aug. 18: 60,295
Aug. 25: 55,291
Sept. 1: 60,004
I had hoped for more inventory growth this year, but we haven’t achieved the weekly active listing growth needed for my taste. And we are late in the year as seasonality for active listings traditionally would start its slowdown right now. With that reality, any active listing growth from now on will be a plus in my mind as we start the process for spring 2024.
Weekly inventory change: (Aug. 25-Sept. 1): Inventory rose from 503,159 to 508,813
Same week last year (Aug. 26-Sept. 2): Inventory fell from 554,748 to 552,536
The inventory bottom for 2022 was 240,194
The inventory peak for 2023 so far is 508,813
For context, active listings for this week in 2015 were 1,205,000
Inventory growth has been slow this year, leading to negative year-over-year inventory since June. We must remember that 2022 had the biggest home sales crash, so the inventory growth was faster than normal.
Purchase application data
Purchase application data was up 2% weekly, making the count year to date at 15 positive and 17 negative prints and one flat week. If we start from Nov. 9, 2022, it’s been 22 positive prints versus 17 negative prints and one flat week. While home sales aren’t collapsing like last year, with mortgage rates over 7% the forward-looking housing data has been getting softer.
The week ahead: Bond yields, mortgage spreads and oil prices
Coming off jobs week, which clearly showed a softer labor market, and having the 10-year yield act like it did with better spreads, I am focusing on the bond market and mortgage rates this week. The key for me is the 4.34% level on the 10-year yield. Oil prices are looking to break out, with some credit stress in the system for renters and student loan debt payments coming into play again — that is something to keep an eye on for the economy.
DBRS, Inc. (DBRS Morningstar) finalized its following provisional ratings on the Mortgage Pass-Through Certificates, Series 2023-DSC2 (the Certificates) to be issued by J.P. Morgan Mortgage Trust 2023-DSC2 (JPMMT 2023-DSC2):
— $201.2 million Class A-1 at AAA (sf) — $201.2 million Class A-1-A at AAA (sf) — $201.2 million Class A-1-A-X at AAA (sf) — $201.2 million Class A-1-B at AAA (sf) — $201.2 million Class A-1-B-X at AAA (sf) — $201.2 million Class A-1-C at AAA (sf) — $201.2 million Class A-1-C-X at AAA (sf) — $32.0 million Class A-2 at AA (high) (sf) — $32.0 million Class A-2-A at AA (high) (sf) — $32.0 million Class A-2-A-X at AA (high) (sf) — $32.0 million Class A-2-B at AA (high) (sf) — $32.0 million Class A-2-B-X at AA (high) (sf) — $32.0 million Class A-2-C at AA (high) (sf) — $32.0 million Class A-2-C-X at AA (high) (sf) — $34.5 million Class A-3 at A (sf) — $34.5 million Class A-3-A at A (sf) — $34.5 million Class A-3-A-X at A (sf) — $34.5 million Class A-3-B at A (sf) — $34.5 million Class A-3-B-X at A (sf) — $34.5 million Class A-3-C at A (sf) — $34.5 million Class A-3-C-X at A (sf) — $14.8 million Class M-1 at BBB (low) (sf) — $10.8 million Class B-1 at BB (low) (sf) — $7.9 million Class B-2 at B (low) (sf)
Classes A-1-A-X, A-1-B-X, A-1-C-X, A-2-A-X, A-2-B-X, A-2-C-X, A-3-A-X, A-3-B-X, and A-3-C-X are interest-only(IO) exchangeable certificates. The class balances represent notional amounts.
Classes A-1-A, A-1-B, A-1-C, A-2-A, A-2-B, A-2-C, A-3-A, A-3-B, and A-3-C are also exchangeable certificates.
The exchangeable classes can be exchanged for combinations of depositable certificates as specified in the offering documents.
The AAA (sf) ratings on the Certificates reflect 34.70% of credit enhancement provided by subordinated certificates. The AA (high) (sf), A (sf), BBB (low) (sf), BB (low) (sf), and B (low) (sf) ratings reflect 24.30%, 13.10%, 8.30%, 4.80%, and 2.25% of credit enhancement, respectively.
Other than the specified classes above, DBRS Morningstar does not rate any other classes in this transaction.
This transaction is a securitization of a portfolio of fixed- and adjustable-rate, investor debt service coverage ratio (DSCR; 92.0%) and conventional (8%), first-lien residential mortgages funded by the issuance of the Certificates. The Certificates are backed by 950 mortgage loans (representing 1,546 properties) with a total principal balance of $308,148,236 as of the Cut-Off Date (August 1, 2023).
JPMMT 2023-DSC2 represents the third securitization issued from the JPMMT-DSC shelf (the first of such rated by DBRS Morningstar), which is generally backed by business-purpose investment property loans primarily underwritten using DSCR. J.P. Morgan Mortgage Acquisition Corp. (JPMMAC) serves as the Sponsor of this transaction.
The mortgage loans were underwritten to program guidelines for business-purpose loans that are designed to rely on property value, the mortgagor’s credit profile, and predominantly the DSCR, where applicable. Since the loans were made to investors for business purposes, they are exempt from the Consumer Financial Protection Bureau’s Ability-to-Repay (ATR) rules and the TILA/RESPA Integrated Disclosure rule.
JPMMAC, acquired (or in advance of closing, will have acquired) the loans directly from originators, or in other cases certain third-party initial aggregators (B4 Residential Mortgage Trust, Series I, B4 Residential Mortgage Trust, Series IV, (together, B4), MAXEX Clearing LLC (MAXEX) ,and Oceanview Dispositions, LLC (Oceanview) that directly or indirectly acquired other mortgage loans. On the closing date, JPMMAC will sell all of its interest in the mortgage loans to the depositor. Various originators, each generally comprising less than 15% of the pool (except LendingOne LLC with 17.7%), originated the loans. As further detailed in this report, DBRS Morningstar did not perform individual originator reviews for the purpose of evaluating the mortgage pool.
The Sponsor, or a majority-owned affiliate, will retain an eligible vertical interest representing at least 5% of the aggregate fair value of the Certificates, other than the Class A-R Certificates, to satisfy the credit risk-retention requirements under Section 15G of the Securities Exchange Act of 1934 and the regulations promulgated thereunder. Such retention aligns Sponsor and investor interest in the capital structure.
On any date following the date on which the aggregate unpaid principal balance (UPB) of the mortgage loans is less than or equal to 10% of the Cut-Off Date balance, the Optional Clean-Up Call Holder will have the option to terminate the transaction by directing the Master Servicer to purchase all of the mortgage loans and any real estate owned (REO) property from the Issuer at a price equal to the sum of the aggregate UPB of the mortgage loans (other than any REO property) plus accrued interest thereon, the lesser of the fair market value of any REO property and the stated principal balance of the related loan, and any outstanding and unreimbursed servicing advances, accrued and unpaid fees, any non-interest-bearing deferred amounts, and expenses that are payable or reimbursable to the transaction parties.
Of note, the representations and warranty (R&W) framework of this transaction, while still containing certain weaknesses, does utilize certain features more closely aligned with post-crisis prime transactions, such as automatic reviews at 120-day delinquency and the use of an independent third party R&W reviewer. For this, and other reasons as further detailed in Representations and Warranties section of the rating report, this framework is perceived as stronger than that of a typical Non-QM/DSCR transaction..
NewRez LLC d/b/a Shellpoint Mortgage Servicing will act as the Servicer for all of the loans following the servicing transfer date. Shellpoint currently services 44.9% of the pool. Prior to the servicing transfer date, Fay and Selene service 44.6% and 10.5% of the pool, respectively, as Interim Servicers. Computershare Trust Company, N.A. (rated BBB with a Stable trend by DBRS Morningstar) will act as the Paying Agent, Certificate Registrar, and Custodian.
For this transaction, the Servicer will fund advances of delinquent principal and interest (P&I) until loans become 120 days delinquent or are otherwise deemed unrecoverable. Additionally, the Servicer is obligated to make advances in respect of taxes, insurance premiums, and reasonable costs incurred in the course of servicing and disposing of properties (servicing advances). If the Servicer fails in its obligation to advance, the Master Servicer is obligated to make such advance to the extent it deems the advance recoverable. If the Master Servicer fails in its obligation to advance, the Securities Administrator is obligated to make such advance to the extent it deems the advance recoverable.
The transaction employs a sequential-pay cash flow structure with a pro rata principal distribution among the senior classes (Classes A-1, A-2, and A-3) subject to certain performance triggers related to cumulative losses or delinquencies exceeding a specified threshold (Trigger Event). Prior to a Trigger Event, principal proceeds can be used to cover interest shortfalls on Classes A-1, A-2, and A-3 before being applied to amortize the balances of the Certificates. After a Trigger Event, principal proceeds can be used to cover interest shortfalls on Classes A-1 and A-2 sequentially (IIPP). For the more subordinate Certificates, principal proceeds can be used to cover interest shortfalls as the more senior Certificates are paid in full.
Excess spread, if available, can be used to cover (1) realized losses and (2) cumulative applied realized loss amounts preceding the allocation of funds to unpaid Cap Carryover Amounts due to Classes A-1 down to A-3. Interest and principal otherwise payable to Class B-3 interest and principal may be used to pay the Cap Carryover Amounts.
The rating reflects transactional strengths that include the following: — Improved underwriting standards; — Certain loan attributes; — Robust pool composition; — Satisfactory third-party due-diligence review; and — 100% of the loans are current by MBA definition.
The transaction also includes the following challenges: — 100% investor loans; — Four-month servicer advances of delinquent P&I; and — Representations and warranties framework.
The full description of the strengths, challenges, and mitigating factors are detailed in the related report.
DBRS Morningstar’s credit ratings on the Certificates address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations for the rated Certificates are the Interest Distribution Amount, Interest Carryforward Amount, and the Class Principal Amount.
DBRS Morningstar’s credit ratings do not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction documents that are not financial obligations. For example, in this transaction, DBRS Morningstar’s ratings do not address the payment of any Cap Carryover Amount based on its position in the cash flow waterfall.
DBRS Morningstar’s long-term credit ratings provide opinions on risk of default. DBRS Morningstar considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/416784 (July 4, 2023)
Notes: All figures are in U.S. dollars unless otherwise noted.
The principal methodology applicable to the credit ratings is RMBS Insight 1.3: U.S. Residential Mortgage-Backed Securities Model and Rating Methodology (August 9, 2023; https://www.dbrsmorningstar.com/research/418987).
Other methodologies referenced in this transaction are listed at the end of this press release.
The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482.
The credit rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the credit rating process for this credit rating action.
DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.
This is a solicited credit rating.
Please see the related appendix for additional information regarding the sensitivity of assumptions used in the credit rating process.
DBRS, Inc. 140 Broadway, 43rd Floor New York, NY 10005 USA Tel. +1 212 806-3277
The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.
— Assessing U.S. RMBS Pools Under the Ability-to-Repay Rules (April 28, 2023; https://www.dbrsmorningstar.com/research/413297)
— Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023; https://www.dbrsmorningstar.com/research/415687)
— Third-Party Due-Diligence Criteria for U.S. RMBS Transactions (September 11, 2020; https://www.dbrsmorningstar.com/research/366613)
— Representations and Warranties Criteria for U.S. RMBS Transactions (May 16, 2023; https://www.dbrsmorningstar.com/research/414076)
— Legal Criteria for U.S. Structured Finance (December 7, 2022; https://www.dbrsmorningstar.com/research/407008)
— Operational Risk Assessment for U.S. RMBS Originators (July 17, 2023; https://www.dbrsmorningstar.com/research/417275)
— Operational Risk Assessment for U.S. RMBS Servicers (July 17, 2023; https://www.dbrsmorningstar.com/research/417276)
For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].