It’s a point that’s always worth repeating:

Ben Bernanke and the Federal Reserve do not control mortgage rates

This is particularly relevant today as newspapers, television programs, and market pundits posit that the U.S. is in the midst of a recession.

The latest evidence supporting that assertion is that Retail Sales grew at its slowest pace since 2002 –  the last time the U.S. was in a recession.

Many people fear recessions, but they are natural parts of a business cycle.  As the nation’s protector of the economy, though, the Federal Reserve can weaken a recession’s impact on the economy by lowering the Fed Funds Rate. 

When the FFR is lower, businesses and consumers pay less interest on business debt and consumer debt, respectively.  This leaves more money available to spend on goods and services, thereby providing a subtle boost the economy.

This is why the Fed Funds Rate is integral to financial markets and why it gets so much attention in the press.  It’s also why some people are calling for a drastic rate cut at the Fed’s next meeting — many believe that the economy is hurting pretty badly.

It’s not a coincidence that this outlook is causing mortgage rates to fall. 

When Corporate America is struggling (or expected to struggle), investors don’t like to be over-exposed to the stock market because of its variable nature.  By contrast, the fixed returns of the bond market provides a little bit more safety. 

As demand for stocks wanes during a recession, therefore, demand for bonds can pick up.  

Mortgage rates can fall at times like this because rates are “born” from the price of mortgage bonds.  The higher the price, the lower the corresponding rate. 

So, as investors leave the stock market and buy bonds — including mortgage bonds — the increased demand raises prices and pushes mortgage rates lower.

All of this happens independent of the Federal Reserve — it’s a natural function of the stock and bond markets.

The Federal Reserve does not control mortgage rates but it does control the Fed Funds Rate.  And both tend to respond to economic weakness.

(Image courtesy: ABC News)

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For all that’s been said about the proposed Bank of America-Countrywide merger, what’s not getting talked about is how the merger will impact existing Countrywide customers.

The short answer is that it won’t.

A mortgage (and its corresponding note) is a legal contract between the lender and the lendee, signed on the date of closing. It is binding and cannot be altered by either party, even if the mortgage is transferred between lenders.

As a homeowner, the only way to “end” the contract is to satisfy the home loan with a full repayment.  That can happen one of three ways:

1. The home is sold and the mortgage is repaid
2. The home is refinanced and the mortgage is repaid
3. The home loan is paid down to $0 balance by the homeowners

Mortgage payment servicers commonly transfer home loans between each other.  This happens on an everyday-basis — not just when there’s a merger, or a closure. 

When mortgages are transferred, HUD requires the former lender to send a 15-day advance notice to its lendee; the new lender is required to send a similar notice.

So, for homeowners that write their mortgage checks to Countrywide every month, it’s possible that the address to which you mail your payment may change, but the terms of your mortgage cannot.

(Image courtesy: The Wall Street Journal Online) 

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Markets are welcoming the return of cold, hard data this week. 

Most of last week was spent making sense of Fed speakers, recessionary fears, and a takeover of the nation’s largest lender. 

This week, we’ll find out if the recent fears of recession are on target, or overblown.

The data deluge starts Tuesday with the Retail Sales report. 

Markets are predicting the worst Holiday Shopping numbers since 2002 and those low expectations have already been priced into mortgage bonds.  Therefore, only a completely terrible number will cause mortgage rates to move lower.

Also on Tuesday, markets get hit with the Producer Price Index.  This is like a “Cost of Living” measurement, but for business.  If businesses are paying more to operate, it’s likely that those costs get passed to consumers. 

Last month, PPI was the highest on record since 1973 because of high energy costs.  If it comes in high again, mortgage rates should rise on the expectation that consumers will eventually bear the burden of higher costs.

Wednesday, the consumer Cost of Living index gets released in addition to the Beige Book.  The Beige Book is the Federal Reserve’s local market reports that point to overall strength or weakness in different regions.

Then, on Thursday, markets will be watching the number of first-time filers for Unemployment Claims.  After Unemployment Rates jumped last month, it’s expected that jobless will be higher than “normal”, suggesting that employers are still trimming their workforces. 

This is recessionary and should help to hold mortgage rates down.

Lastly, on Friday, it’s the University of Michigan Consumer Sentiment report.  Mostly used as a “confidence” gauge, strong readings are thought to push the economy forward because a confident consumer is likely to spend more. 

Statistically, though, that correlation is not clear.  But, mortgage bonds are sensitive to the report and that’s why we watch it.

It’s a busy week of data and expect markets to get a firmer sense of where the economy is headed.  Weakness is expected and mortgage rates are already pricing it in. 

Therefore, be wary of better-than-expected results this week because mortgage bonds could correct quite quickly.

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Clipped from NBC’s Today Show, real estate maven Barbara Corcoran talks about preparing your home for sale.  As usual, her remarks are spot-on.

Some highlights from the 5-minute video:

1. Go online and shop for your own home first
2. Empty your home of two-thirds of the “stuff”
3. Keep your home immaculately clean

Corcoran also offers pricing tips that can help get your home sold faster.

Watch the entire interview at MSNBC.

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Private Mortgage Insurance (PMI) is an insurance policy paid to a lender in the event that a homeowner defaults on his home loan.

These defaults are up 35 percent over last year, according to an industry group — bad news for all homeowners requiring PMI with their mortgage.

Much like home insurers adjust premiums after a worse-than-expected Hurricane Season, PMI insurers are raising mortgage insurance rate for all homeowners, regardless of credit history.

And it comes at a time when PMI is in higher demand. 

Because second mortgages are not as available as in recent years, using PMI is the only way for some homeowners to get approved for home loans with a less-than-20-percent downpayment.

PMI rates are higher than they were six months ago and additional defaults make it likely that PMI rates will rise again in 2008.  As PMI rates increase, so does the cost of homeownership for people whose lenders require it.

Source
Mortgage-Insurer Defaults Hit Record
Associated Press
December 31, 2007. 12:30. P.M.

http://biz.yahoo.com/ap/071231/mortgage_insurers_defaults.html?.v=1

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Some quick statistics:

• 13% of Americans will die before age 65
• 28% of Americans will face a long-term disability before age 65 and be unable to work and/or earn an income

Despite these facts, Americans are twice as likely to be insured on their lives as on their long-term health.

Life insurance is important, but is much less likely to be redeemed than a suitable long-term disability insurance contract. 

Consider that 1 in 2 personal bankruptcies is the result of costly medical bills from years of medical treatments.

Then, consider that 75 percent of those bankrupted families actually had health insurance coverage. At some point, health insurance companies stop paying for long-term care, shifting the burden to the injured.

A person with a long-term disability cannot work his “normal” job and cannot earn his “normal” income.  Financial distress usually follows.

Many employers offer long-term disability insurance that can help protect against a long-term medical crisis.  Do some homework and then verify your finding with a qualified financial planner.  Long-term disability comes in many flavors and it’s important that your individual coverage suit your long- and short-term financial goals.

Many families go broke because of long-term health issues and a large percentage lose their home to foreclosure.  Adequate long-term disability insurance can help prevent both of these scenarios.

Source
6 Money Fears
David Futrelle
Money Magazine, December 15, 2005

http://money.cnn.com/2005/09/13/pf/fears_dieyoung/index.htm

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Since September 2007, the Federal Reserve has lowered the Fed Funds Rate by 1.000%. 

This has caused Prime Rate to fall by 1.000%, too.  This is because the Fed Funds Rate and Prime Rate are directly related. 

In mathematical terms, the relationship looks like this: 

(Prime Rate) = (Fed Funds Rate) + (3.000%)

So, because Prime Rate is the interest rate upon which credit card rates are based, as the Fed Funds Rate falls, so does the cost of consumer debt.

This is how rate cuts spur the economy.

When the Federal Reserve lowers the Fed Funds Rate, Americans spend less money on interest payments.  Therefore, there is more money available for savings and/or spending on other goods and services.

Considering that Americans carry $2.5 trillion of non-mortgage consumer debt, the Federal Reserve’s cumulative 1.000% rate cut is now saving Americans $25 billion dollars on an annual basis.

In the face of weak economic data, the Federal Reserve is expected to cut the FFR again this month to jumpstart the economy.  Every additional quarter-percent cut would save Americans $520 million in interest payments monthly.

Source
How the failure of subprime mortgages hurts the overall economy
John Gallagher
Detroit Free Press, January 6, 2008

http://www.freep.com/apps/pbcs.dll/article?AID=/20080106/BUSINESS06/801060585/1002/BUSINESS

(Image Courtesy: Wall Street Journal Online)

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Stock markets tanked last week behind high oil prices and weak employment data. 

Amid a sell-off that led to a 4.5% decline in the S&P 500, investors sought safety in the bond markets. 

As a result, mortgage bonds improved last week, driving some mortgage rates to their lowest levels in two years.

This week, with no economic data on tap, mortgage markets will find direction from a variety of sources.

The first is oil.  If oil prices fall this week, expect that mortgage rates will rise slightly.  Cheap oil can be fuel for an economic engine so if oil prices are lower, it could help stave off recession. 

No recession, though, means that inflation is more likely and inflation usually leads to higher mortgage rates.

The second source of direction will come from the three Fed officials scheduled to speak publicly this week. 

Talk of recession should drop mortgage rates across the board whereas talk of inflation should raise them.  Chairman Bernanke’s speech will draw the most attention; he speaks Thursday.

And lastly, mortgage rates could move this week on profit-taking from mortgage bond traders. 

Mortgage rates have fallen because there has been more demand for mortgage bonds.  More demand leads to higher prices which decreases bonds’ rate of return. 

If traders look to lock in profit, they will sell their mortgage bonds, reverse that process, and rates will rise.

(Image courtesy: The Wall Street Journal Online)

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On the first Friday of each month, the Bureau of Labor Statistics releases key data about the American workforce.

The report is officially called “Non-Farm Payrolls” but most people refer to it as the “jobs report”.

The jobs report’s influence on markets is palpable for two major reasons:

1. Consumer spending makes up two-thirds of the economy
2. When more people are working, there is more consumer spending

When consumer spending is strong, the economy expands.  This tends to be bad for mortgage rates because a growing economy is at risk for inflation. 

Inflation causes mortgage rates to rise, making home ownership more expensive.

By contrast, when consumer spending is low, the economy tends to contract.  This tends to be good for mortgage rates because — well — it’s not inflation.

So this morning’s jobs report held two key data points:

1. The Unemployment Rate reached 5.0% in November 2007
2. For all of 2007, payroll growth averaged 111,000 per month, down from 189,000 in 2006

The newspapers and television shows are saying that this news is terrible and that the U.S. is headed for recession.  That point is debatable.  What isn’t conjecture, though, is that with fewer Americans in the workforce, there is less money available to propel the economy forward.

That’s why mortgage rates should fall today — because the threat of inflation is reduced. 

Source
U.S. payrolls rose 18,000 in Dec
Glenn Somerville
Reuters.com, January 4, 2008

http://www.reuters.com/article/economicNews/idUSN0324081520080104

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The price of oil briefly touched $100 per barrel yesterday, just short of the all-time inflation-adjusted high of $102.81 in April 1980.

According to economic forecasting firm Global Insight, each $10-per-barrel increase in oil prices:

1. Increases gas prices by 19 per gallon
2. Cuts consumer spending by one-third of a percent
3. Reduces employment by 100,000
4. Adds one-half percent to consumer prices

And, because oil prices have nearly doubled from the $51/barrel levels of January 2007, the above figures calculate out to:

1. $0.95 more per gallon in 2007 because of oil prices
2. 1.67% cut to consumer spending in 2007 because of oil prices
3. 500,000 lost jobs in 2007 because of oil prices
4. 2.50% increase in consumer costs in 2007 because of oil prices

In addition, oil’s run-up has ignited fears of inflation and of recession, with the possibility that both would exist at the same time.  This rare economic condition is commonly referred to as “stagflation”

Stagflation is a particularly difficult situation for the Federal Reserve because increasing the Fed Funds Rate would increase the likelihood of recession whereas lowering the Fed Funds Rate would increase the risk of inflation.

For now, mortgage rates are benefiting because less evidence of inflation could attract foreign investment in mortgage bonds.  As demand for bonds increases, mortgage rates fall.

Source
Weakened U.S. Economy May Be Facing New Test
Sudeep Reddy
The Wall Street Journal Online, January 3, 2008

http://online.wsj.com/article/SB119930367405362875.html

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