With Allen Robinson, Founder and President of First Trust Mortgage Corp
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Interest rates affect us all, so it’s good to get the scoop from an expert to see exactly how much of a change is on the horizon for 2017 with a President Trump in the Oval Office.
Allen Robinson is the President and Founder of First Trust Mortgagee, specializing in providing residential mortgages, and, therefore, is the perfect expert to address some of our concerns.
Rumors of an end of the year interest rate hike by the Federal Reserve have been twirling the wind for some time now, but since the election—possibly because of an anticipation of accelerating economic growth and a pickup in inflation—we’ve already had a hike of 0.5% in 10 days. Even so, rates are still relatively low with 30-year fixed-rate conventionals hovering around 4% and 15-year fixed rates in the low threes, at 3.25
Interestingly, says Allen, we’re now at the same place we were in January 2016, and, so, after a dip in mid-summer, we’re ending the year where we started. In spite of the rise in the fixed rates, the adjustable mortgage rates have not gone up nearly as quickly, creating a gap that most likely will continue. A seven-year adjustable (meaning that the rate is fixed for the first seven years and then changes in the years thereafter) today is going at a rate of 3.5% for those first seven years.
Looking back into the history of mortgage rates.
If the specter of rising interest rates is causing anxiety, a look into the past should quell those fears.
The averages for a 30-year mortgage:
In the 1970s—8.86.
In the 1980s—in the 12s and 13s
In the 1990s—8.12
In the 2000s—6.29
Today, that average is 3.94.
What will 2017 mean for the first-time home buyer?
Interest will rise affecting first-time home buyers, many of whom will be millennials going from the bar scene to life in the domestic lane. What they carry with them in many cases, unfortunately, is student debt. Adding that financial burden to higher mortgage rates and increased home prices, and you can see the financial challenges they’ll be facing. Typically, says Allen, millennials are putting down only 3% and then borrowing more, which, in turn, means they’ll have to pay private mortgage insurance to cover the loan-to-value gap on their home.
Who is the keeper of your mortgage?
Allen deals strictly with residential mortgages, of which, locally, 35 to 40% are FHA loans. It may come as a surprise to learn that all conventional loans are eventually bought by either Fannie Mae or Freddie Mac, meaning that the government actually owns the mortgage market and that banks are only pass-through institutions, taking their bit off the top to service these loans. As a consequence of this set-up, says Allen, “the government is directly involved in keeping these rates as low as they’ve been. We’ll see what happens as the new Trump administration moves in.”
The industry outlook is looking good for the moment, says Allen. “Here in South Florida, our biggest competition to the mortgage industry is people paying cash for their properties. The other stimulus is that rents have gone up so high that, in my world, if you keep the interest rates below 8%, it’s still more affordable to buy a home than it is to pay rent at these ridiculous rates.”
In spite of uncertainty over the direction of our new government in the coming year, it’s good to know, should you be in the market to purchase that new home, that the sky won’t be falling on it anytime soon.
Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital. Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.
Steve Pomeranz: Interest rates are rising. This is going to affect many a homeowner and new home buyer, especially for the upcoming year in 2017. To find out more about this, I’ve invited back mortgage expert Allen Robinson. Allen is the President and Founder of First Trust Mortgage, which he founded in 1996. He specializes in providing residential mortgages, and he’s been a regular guest over the last 10 years. Hey, Allen, welcome back to the show.
Allen Robinson: Hey, Steve.
Steve Pomeranz: Since the election, we have seen interest rates rise, I think very much in anticipation of accelerating economic growth next year, and, therefore, may be a pickup in inflation. Plus, the Fed is looking at some pretty positive numbers, and they are probably going to raise rates a little bit in the next few months. Where are mortgage interest rates right now?
Allen Robinson: Well, Steve, rates are still very good. Obviously, with the drama of the election, they’ve gone up about 0.5% in the last 10 days. But 30-year fixed rate conventionals are still hovering right around 4%; and 15-years in the low threes at 3.25.
Steve Pomeranz: Yeah. That’s been kind of in that 3.5 to 4% range now for what, two, three years?
Allen Robinson: Yes, and we are back exactly, believe it or not, at what we were in January of 2016. We dipped down mid-summer, but we’re basically ending where we started.
Steve Pomeranz: I purchased my own home in 2013. I think my 30-year rate is three and seven-eighths or three and three-quarters, so that’s right in the ballpark. It really hasn’t changed all that much.
Allen Robinson: I think the other thing that’s been interesting, as these fixed rate loans and the rates have gone up, is the adjustables have not gone up nearly as quickly. The adjustables now have a bigger gap between the 30-year fixed and say a seven-year adjustable. I think that’ll continue to grow.
Steve Pomeranz: What is the seven-year? What is that gap? What is the seven-year adjustable? How do they work these days?
Allen Robinson: It’s about 0.5% difference now. It’s 3.5 for a seven-year adjustable versus the 4.0 for the 30-year fixed. I anticipate that spread continuing to grow this year.
Steve Pomeranz: So a seven-year adjustable is in the first seven years, the rate is fixed at 3.5%, and then it changes every year thereafter. It’s adjustable every year thereafter. Is that right?
Allen Robinson: Correct, and then typically … The margin right now is at 2.25% and the indexes are [inaudible 00:02:48], but again, the rates are still very good.
Steve Pomeranz: Yeah. That’s some of the inside stuff that we don’t need to know right here. Let’s talk about 2017. Here we are in the fourth quarter of 2016. We’ve seen rates rise about 0.5% or maybe 0.4% from their lows recently, but a lot of people are worried that interest rates are going to be rising into 2017, especially first-time homebuyers, of which there are quite a few these days as millennials are starting to form households and want to buy houses. What’s your industry’s outlook for rates next year?
Allen Robinson: We’re expecting to see rates go up another 0.5% between now and the end of 2017. As you said, the majority of that impact will be on the first-time homebuyers because affordability gets more critical once you raise rates along with property values going up. There’s sort of a compounding effect there.
Steve Pomeranz: So on a 30-year amortization, meaning that you’re paying the loan off in 30 years, a 0.5% rise in the interest rate, let’s say per hundred thousand, amounts to about what?
Allen Robinson: If you do $100,000 loan at a 4% rate, you’re typically somewhere around $500 per every hundred thousand. So if you have another 0.5% increase, you’re going to go up $50 or $60 a month.
Steve Pomeranz: Do you think that’s going to push a lot of first home buyers out of the market?
Allen Robinson: It’s back to this layering effect, Steve. There are several things happening at the same time. Most everything in the residential mortgage world is getting easier as far as qualification, with one exception, and it hurts again the first-time homebuyers. The way we calculate student loan repayment is dramatically different in 2016 than 2015. When you say that part’s different because a lot of the millennials have student loans to pay back, they have rising home costs, they have rising insurance costs, and then you put on extra interest. Even if you knock 15 or 20% of the first-time homebuyers out, that’s still a lot of homebuyers.
Steve Pomeranz: Yeah. So they’re vulnerable because their financial situations are a little trickier than an established person, maybe in their 40s or something like that, where they’ve had their home, their student loans are mostly paid off, and their finances are more stable.
Allen Robinson: Yes, and they have a larger down payment. Back to if you put 20% down, if you’re buying your second home or third home or investment property, the millennials typically are putting down 3% or 3.5%, so they’re borrowing more. Then they’re paying a higher interest on what they’re borrowing. They pay private mortgage insurance where the others don’t. Again, it sounds insignificant, but it’ll matter come 2017.
Steve Pomeranz: That private mortgage insurance is something that you pay if your loan-to-value is greater than 80%.
Allen Robinson: Correct.
Steve Pomeranz: Is that still the correct number?
Allen Robinson: Yes.
Steve Pomeranz: So if you’re putting down 3%, you have to pay this extra insurance to guarantee the mortgage in case you default, the government doesn’t lose its money.
Allen Robinson: Correct.
Steve Pomeranz: How much of these loans are really government loans now? How much of them are private? What kind of loans do you generally do? What is your most conventional loan?
Allen Robinson: Again, we’re strictly residential. In that pool of money, we’re doing locally probably 35 to 40% are FHA loans, which are directly government influenced through HUD and the Federal Housing Authority. In addition to that, the conventional loans are all eventually bought by Fannie Mae or Freddie Mac. We can debate whether they’re public or private entities, but I would tell you 90% of what’s going on out there eventually has some effect by the government.
Steve Pomeranz: I think this is one of the key issues here is that in a sense, you can say that the government owns the mortgage market and that banks really only act as pass-through institutions. They take a little skim off the top to service the loans, but basically the loans are backed by the government. Is that accurate?
Allen Robinson: Absolutely. They’re still buying. I think the last number I saw, Steve, was like a trillion dollars a month, some ridiculous amount that Fannie and Freddie are still involved with purchasing mortgage-backed securities, which obviously are a form of mortgage bond. Regardless of what it might appear, the government’s directly involved in keeping these rates as low as they’ve been and buying them. We’ll see what happens as the new administration moves in.
Steve Pomeranz: So when your neighbor defaults, basically we’re all paying for that.
Allen Robinson: Correct. Indirectly or directly, it all trickles down to us as consumers. But again … And this comes up frequently, Steve … When it comes around interest rates, people outside of our industry would say, “How could you possibly provide somebody with a 3.5%, 30-year mortgage and think that’s profitable?
We have squeezed the requirements for somebody. They have very good credit if they’re getting 3.5%. They’re putting down, obviously, some type of down payment. We’re having an appraiser come in, and there’s no faking appraisals anymore. They’re actually done by third parties. On and on and on, so it’s a very secure instrument by the time it gets bought and sold, where I couldn’t say that to you 10 years ago.
Steve Pomeranz: Yeah, but also, wait until the next recession. You can’t control people’s employment. Again, if they’re thrown out of their current jobs, then it would be very hard for them to continue to pay their mortgages. Let’s get some historic ideas about interest rates. I’ve got a little chart that you gave me, and I’ll start you off. In the 1970s, the average rate of a 30-year mortgage was 8.86. Is that right?
Allen Robinson: That’s correct. That’s where as much as the media would like to say, “Oh, my God, the rates have gone up a half a percent in the last 10 days,” a 45-year average has been in the eights. You and I both have been around when we paid rates in the 12s and the 13s.
Steve Pomeranz: Yes. I’m not as old as you, Allen, but … Actually, that’s probably not true.
Allen Robinson: You’re lucky we’re on radio.
Steve Pomeranz: In the 1980s, the average rate was 12.7. In the 1990s, the average was 8.12. In the 2000s, 6.29, and today it’s 3.94. The average payment in the 70s with a mortgage that was 8.86% on a $200,000 mortgage was $1,589. Today, the same $200,000 mortgage would cost $948. That’s an amazing difference. Talk about being disinflationary or the cost of housing or of financing homes coming down. It’s really an amazing number. We’re kind of out of time, Allen. Any last thoughts? What are you seeing in today’s marketplace? Are you seeing a lot of loans being written or are the banks still pretty tough?
Allen Robinson: We’re writing at record levels, back to the ’04, ’05, ’06 area as far as numbers of transactions. I think here in South Florida our biggest competition to the mortgage industry is people paying cash for their properties. The other stimulus I would tell you is rents have gone up so high that in my world, if you keep the interest rates below 8%, it’s still more affordable to buy a home than it is to pay rents at these ridiculous rates.
Steve Pomeranz: That’s interesting.
Allen Robinson: We have a lot of room to grow before it would actually affect our real estate market.
Steve Pomeranz: Allen Robinson is President and Founder of First Trust Mortgage, and he’s a specialist in providing residential mortgages. Hey, Allen, thanks so much. To hear this conversation again, don’t forget to go to stevepomeranz.com. That’s Pomeranz, stevepomeranz.com. We will post this. You can hear it again. You can see a summary of it, and you can actually follow the transcript. It’s all there to help you do better with your financial concerns. Thank you, Allen.
Allen Robinson: Thanks, Steve.