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August 5, 1988
The bond market is going down hard this morning, and mortgage discounts will rise accordingly.
The basic Unemployment Rate rose .1% to 5.4%, but the market focused on NonFarm Payroll, which is up 283,000 for July (more than expected), and June's figure was revised up to 532,000, double the original report. Earlier in the week, Factory Orders were up 5.5%, the largest onemonth rise in 18 years, Durable Goods Orders were revised to up 9.4%, and Single Family Home Sales rose 8.4%. Though May Leading Economic Indicators were revised down to minus .8%, June's Indicators rose a strong 1.4%. Nasty numbers, for us.
The Fed still has not acted, as Fed Funds remain steady at 7.75%. We got the breather I was looking for this week, and until the Fed acts there is reason to hope for more occasional, short term, technical improvements in rates. When Fed Funds hit 8% for a couple of days, watch out.
To change the subject, let me mention an alternate strategy for negotiating loan discounts. The normal practice is to try to get the seller to pay as many points as possible. Except when a buydown is necessary for qualification, I believe your buyers are better off to use those funds in other ways.
Loan discounts are computed using an average loan life of seven to twelve years (most investors assume that half of a given loan portfolio will have been refinanced in that time). If your buyer keeps the loan for longer than that time, the effective interest rate (including the effect of the points) goes down, and the investor loses. Of course, the normal circumstance in a mobile place like Boulder is loan life closer to four or five years. In that case, the points are amortized over a short time frame, and the loan yield skyrockets (as does the true cost to the borrower).
So, consider asking a seller to spend the money earmarked for discount on material improvements to the property (NOT credits at closing those create all sorts of LTV problems), or an outright price reduction. At obvious lows in the rate cycle, a lower rate may help an assumption. But otherwise, pay the higher rate and invest the discount point budget in something more meaningful than the mortgage lender's enhanced yield.
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