By Bob Mangold

Accelerator loans, common in Australia and the U.K. but new to the U.S., use special accounts that encourage paying off your mortgage in 1/3 the time of a traditional 30 year loan

A different type of home loan, called a mortgage accelerator, has migrated to the United States. It uses several methods of savings or a line of credit and a borrower’s paycheck to shorten the time until a mortgage is paid off, potentially saving tens of thousands of dollars in interest expense.

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Not to be confused with biweekly programs that shorten a mortgage through extra payments, the mortgage-accelerator program is based on an approach common in Australia and the United Kingdom, where borrowers deposit their paychecks into accounts that, every month, apply every unspent dime against the mortgage loan balances.

In Australia, more than one-third of homeowners use mortgage-accelerator programs. In the U.K., it’s about 25% of all loans originated.

The premise is that borrowers utilize a savings account or line of credit. Borrowers then directly deposit their entire paychecks into the credit accounts. Monthly expenses, other than mortgage payments, are funded by draws against the lines of credit or savings account, whether those are through automatic withdrawals, checks, cash withdrawals or credit cards. Even if borrowers end up not paying anything extra on the principal during a month, they still capture some interest savings because the average balances are less than they would have been with conventional loans.

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Here’s how it works

As an example, let’s say your mortgage payment on a conventional fixed-rate mortgage is $2,000 and your monthly net income is $5,000. With the mortgage accelerator, even if you spend the $3,000 difference, your average mortgage balance for the month is $1,500 less than it was with the conventional mortgage.

That’s because the entire $5,000 is deposited in the loan account and you made draws of $3,000 for living expenses spread over the month. At a 7.75% loan rate, that saves you about $10 in interest expense that month.

Now, $10 here and $10 there does add up over time, although both loan programs have annual fees of $30 to $60, but the accelerator part of the mortgage lies in having all your net pay going against the mortgage and an assumption that you have a positive monthly cash flow — meaning you don’t spend as much as you make.

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For a free analysis of your mortgage, visit; www.azmortgagecalculator.com

Help for the undisciplined

Of course, all borrowers already have that money available with a conventional mortgage and without the cost of refinancing. A borrower would simply need the financial discipline to use all that money as an additional principal payment.

For the undisciplined, the mortgage-accelerator program makes the additional principal payments automatically. That’s the real hook to this program: Unless you spend the money by drawing against your savings or line of credit, your paycheck goes toward paying off the house.

Where a mortgage-accelerator loan program gives a homeowner additional flexibility, however, is in having a line of credit or savings available if there is an emergency need for cash. If you make additional payments on a conventional 30-year fixed-rate loan, you can’t borrow that money without taking out a home-equity line of credit or a home-equity loan. (which may not be available at the current time)

With the mortgage-accelerator program, you already have the line/savings in place. That gives homeowners confidence that they can be aggressive in paying their mortgages and still have money readily available if a financial emergency crops up.

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High volatility today in the rate and stock markets; treasuries were under pressure after the 5 yr note auction had a higher yield than what was expected pushing the 10 yr down 18/32 at one point with its yield jumping to 3.52% for a very short time. Mortgage prices at 2:00 were down 16/32 on the day. At 2:15 the FOMC statement was released and flipped the markets hard; the 10 rallied from -18/32 to +11/32, the yield dropped from 3.52% to 3.41% and mortgage prices from -16/32 to +6/32. Most lenders held the line on the early afternoon selling, and also didn’t bite on the knee jerk rally on the statement. The DJIA jumped to +80 on the statement, but also fell back to close on the lows of day—-buy the rumor, sell the fact?

The FOMC statement had little new in it as far as we saw other than a reaffirmation that the Fed would likely keep rates low for a long time as the economic outlook, while improving isn’t likely to grow much with unemployment high and home price wealth lost. Nothing really new in the statement, just confirmation rates are likely not about to increase much. The 10 yr once again has held its support at 3.50% on a closing basis. While treasuries were volatile today, mortgage prices were even more so. The statement in its entirety follows.

FOMC Policy Statement: Information received since the Federal Open Market Committee met in August suggests that economic activity has picked up following its severe downturn.  Conditions in financial markets have improved further, and activity in the housing sector has increased.  Household spending seems to be stabilizing, but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit.  Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales.  Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.

In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability.  The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.  To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt.

The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010.  As previously announced, the Federal Reserve’s purchases of $300 billion of Treasury securities will be completed by the end of October 2009.  The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets.  The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted. (end)

The $43B 5 yr drew 2.470% with a 2.40 cover and an indirect bidder take of 44.8%. This is against the 2.435% to 2.460% anticipated yield in the WI trade this morning and an average over the ’09 auctions of 2.22 and 43.1%.

Tomorrow markets finally have data to think about. Weekly jobless claims at 8:30 are expected to increase by 5K to 550K, continuing claims down to 6.195 mil frm 6.23 mil the previous week.At 10:00 August existing home sales are expected to be +2.0% to 5.35 mil units annualized.

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Monday September 21, 2009

Rate markets opened better this morning with the stock index futures trading weaker. At 8:30 the 10 yr note +12/32 3.44% -4 BP, mortgage prices +6/32 and the DJIA -57. Global stock markets were weak as many currently are re-thinking the levels to which global stocks have risen in the face of what will be considered a slow economic recovery. It is on again, off again with the equity markets; one day its pedal to the metal, the next its bullish but maybe too much too soon. In the end, so far there has been no sustained selling in the US or any other bourse; on any dips buying cuts off declines. At 9:00 the DJIA -57, 10 yr note +11/32 and mortgage prices +7/32. At 9:30 the DJIA opened -68. the 10 yr +11/32 and mortgage prices +6/32; (see below for 10:10 levels)

This week supply and the FOMC meeting are the dominate events. August existing and new home sales and weekly jobless claims are the key data points. Treasury will borrow $112B in 2,5 and 7 yr notes.

At 10:00 this morning August leading economic indicators, expected to be +0.7%, were +0.9%, July LEI revised to +0.9% frm +0.6%;the 5th straight month LEI has increased; LEI is a read that provides the economic outlook six months out and is a compilation of six other data reports. Generally LEI has little direct impact on the bond and stock markets unless it is well off estimates.

This week’s Calendar:

Tuesday;

10:00 FHFA housing price index (+0.5%)

1:00 $43B 2 yr note auction

Wednesday;

7:00 AM weekly MBA mortgage applications

1:00 $40B 5 yr note auction

2:15 FOMC policy statement

Thursday;

8:30 weekly jobless claims (+5K to 550K, continuing claims 6.195 mil frm 6.23

mil last week)

10:00 August existing home sales (+2.0% to 5.35 mil units)

1:00 $29B 7 yr note auction

Friday;

8:30 August durable goods orders (+0.3%, ex transportation orders +1.0%)

9:55 the U. of Michigan consumer sentiment index (70.5 frm 70.2)

10:00 August new home sales (+1.5% to 440K units)

The MSCI World Index is trading at its highest valuation since back in 2003; an increasing concern that the equity markets have overrun themselves based on the economic outlook over the next year. The MSCI World measure is valued at 27.7 times profit, the most expensive level since June 2003. The Dow Jones Stoxx 600 Index of European shares slipped for a second day, losing 1.1%. A 55% increase since March 9 has driven valuations on the gauge to 47.4 times reported profit, also the highest level since June 2003. Markets have been here before, looking for a pullback, in each instance when concern has increased for a pullback it has lasted less than three days before new buying pushed key indexes to another new high on the current run up.

This week the leaders of G-20 countries are meeting in Pittsburg to consider the plight of economic and financial reforms. Most of the world is looking to the US to get going with financial reforms and new regulations designed to eliminate in the future any debacle that lead to this present calamity. There is however, something to consider; whatever regs and new regulators are implemented, in the long run they will not work. May work for a couple of decades but in the end the financial markets will find a way (gradually) to get around them and greed will once again cause a serious financial mess. Greed is what keeps markets going and Wall Street in business.

Once again the bellwether 10 yr note has successfully held its key and significant support at the 3.50% area (Friday’s close 3.48%); A week ago last Friday (9/11) the 10 yr note tested its key support at 3.38% but couldn’t hold it, last week the 10 yr moved back to the support levels. This morning the 10 yr has held again on the weaker open in the stock market, but with supply and the FOMC meeting this week we don’t expect rate markets will improve much until at least Wednesday afternoon and only then if investors increase selling and profit-taking on stocks.

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Friday, September 18, 2009

Treasuries and mortgages opened weaker this morning,

no follow-through from the strong rally yesterday. Pushing prices lower, the stock indexes started better pointing to a firm opening at 9:30. At 9:00 the 10 yr note -8/32, mortgages prices -5/32. At 9:30 the DJIA opened +52, the 10 yr -11/32 and mortgages -8/32 frm yesterday’s close. (see below for 10:00 levels)

There are no economic reports to deal with today; it is however a day that may see increased volatility with all financial options expiring as well as futures contracts, quadruple witching.

Yesterday’s better headline economic reports are getting the credit this morning for the better open in the equity market, but as we noted in yesterday’s afternoon report the interior data on the Philly Fed business index, weekly jobless claims, and housing starts were not so strong. Nevertheless, with Bernanke, Warren Buffet and about every analyst now convinced the recession is over, investors are continuing to buy equities. As long as the economic outlook remains positive lower interest rates will be difficult to achieve. Not much concern in the markets yet that the recovery will likely be at a snails pace compared to other recessions in the past 50 yrs.

Given the lack of follow-though frm yesterday so far this morning the rate markets may be vulnerable to more selling next week ahead of Treasury’s $112B of supply (2 yr, 5 yr, and 7 yr note auctions). Technically the 10 yr note and MBSs are still holding key moving averages and chart support levels, (3.50% for the 10 yr note and 100.03 on the Nov FNMA coupon now at 100.07). Still will hold to our slightly bullish outlook for rates but time and price equation is working against us; unless the 10 yr note and mortgages gain traction in the next few sessions both may turn technically bearish. The 10 can’t sit at this level for much longer before traders will turn more bearish. Mtg rates hovering at 5.00% levels have to break below it or that market also will give up the fight.

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Treasuries and mortgages were lower early, prior to 8:30 data. At 8:00 the 10 yr was -1/32 and mortgages unchanged. At 8:30 data flowed; August PPI up 2.7% with the core (ex food and energy) +0.2%—-both were higher than expectations. August retail sales were a lot stronger than we or the markets were expecting; up 2.7% overall and when autos are extracted a strong 1.1%. We were expecting retail sales ex autos at +0.4%.

The N Y Empire State manufacturing index was also better; at 18.8, from 12.08 in August; markets were looking for 15.0 on the overall. New orders were up t0 19.84 frm 13.43 in August and employment did dip a little, to -8.3 frm -7.45. Any reading over zero is considered expansion.

The initial reaction to the three reports wasn’t good for the bond and mortgage markets; at 8:40 the 10 yr note -11/32 to 3.46% +4 BP; mortgage prices were down 6/32.

Time 12:30 edt:

Treasuries and mortgage markets opened weaker this morning and fell further in price on the 8:30 economic data. The NY Empire State manufacturing index, the surprising increase in August retail sales sent the 10 yr note to 3.49% and mortgages about 10:30 were off 11/32. There was little reaction or interest in the jump in August PPI; stronger than expected but markets are not concerned that inflation is a worry point yet.

Stock markets started strong on the data but so far have spent most of the session hanging around unchanged.

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