Mortgage rates improved last week, marking the first time since mid-May that has happened.The rate drop is the result of how mortgage markets interpreted the Federal Reserve’s Wednesday press release.

In it, the Fed said:

1. Inflation pressures should lessen soon
2. Growth should remain steady this year
3. The credit market is currently fragile

Separately, none of this was news to the markets.  But considering all three statements together, investors grew nervous of leaving money in the stock market — specifically in financials.

Post-Fed announcement, there was a wave of selling that dropped the Dow Jones Industrial Average nearly 20 percent from its October 2007 high.

As stocks sold off, though, mortgage shoppers were benefiting.

Rates ticked down in the Fed announcement’s wake because the mortgage bond market acted as a “safe haven” for traders.  More demand for mortgage-backed bonds caused rates to fall, accented by a favorable run very late in the day Friday.

This week, the momentum may continue, or it may not.  There is a lot to capture traders’ attention in this holiday-shortened, four-day work week.

The biggest data release of the week will undoubtedly be Thursday’s Unemployment Report, but there are also two Fed speakers stumping, as well as Treasury Secretary Paulson speaking about the economy.

As the week goes on, more and more traders will be leaving for the long weekend so expect rates to move with greater force as Thursday afternoon gets nearer.  And, if stocks haven’t regained favor with investors by then, expect that mortgage rates will have a good week.

A Home Equity Line of Credit is bank product that grants homeowners access to the equity in their home at anytime, usually using checks.Often called a HELOC, these equity-based credit lines function very much like credit cards:

• The rate is adjustable, tied to Prime Rate
• There is a minimum monthly payment
• There is a pre-set spending/credit limit

But different from credit cards is that a HELOC is “guaranteed” by real estate and with real estate values in question nationwide, many banks are exercising a little-known clause in the HELOC contract.

With alarming frequently, banks are reducing the pre-set spending limits on their active equity lines.  Via USPS, lenders are notifying homeowner with $100,000 HELOCs that their new HELOC limit is $25,000, for example.

And the banks aren’t being discriminate based on payment history or local real estate conditions, either — it’s happening everywhere with equal force.

The good news is that banks will accept appeals on HELOC reductions on a case-by-case basis.

One way to appeal a HELOC reduction is:

1. Call your lender’s Customer Service line.  Do not send an email.
2. Politely ask why the HELOC limit was reduced.  Listen carefully to explanation.
3. Explain why you would like your HELOC reinstated.  Acceptable reasons may include home improvement projects or improper home valuation by the lender.
4. Be prepared to write a formal letter, if asked.  Address the issues explained in #2.

Banks will typically not reinstate a HELOC if a borrower has been delinquent on payments, or lives in a severely depressed neighborhood.  However, because lenders rely on computer models to assess risk, it’s always a good idea to ask.

Sometimes the Human Element of an appeal can work in your favor.

The Federal Open Market Committee left the Fed Funds Rate unchanged at 2.000 percent this afternoon, as expected.

In its press release, the Federal Reserve noted the co-existence of inflation and recession.

On inflation, the Fed said that energy and food prices are contributing to an “elevated state” of inflation, but that it expects price pressures to ease “later this year and next year”.

On the topic of recession, the Fed seemed a bit more concerned.

Overall, markets reacted favorably to the press release; both stocks and mortgage rates showed signs of improvement in the statement’s wake.

Source
Parsing the Fed Statement
The Wall Street Journal Online
June 25, 2008

http://online.wsj.com/internal/mdc/info-fedparse0806.html

The Federal Open Market Committee adjourns from its 2-day meeting at 2:15 P.M. ET today. It’s widely expected that the group will leave the Fed Funds Rate unchanged at 2.000 percent.However, it’s not what the Fed does today that has markets so interested. It’s what the Fed will say.

One of the Federal Reserve’s roles is to promote stability in the U.S. economy by protecting it from two major threats:

1. Inflation
2. Recession

The Federal Reserve’s primary weapon against both of these hazards, though, is the same — the Fed Funds Rate. To combat inflation, the Fed raises the Fed Funds rate. To fight recession, it lowers the Fed Funds Rate.

But in today’s economy, there is evidence of both inflation and recession meaning that the Federal Reserve is likely to leave the Fed Funds Rate unchanged for fear of setting the economy too far towards either threat.

Therefore, markets will be left looking for clues in the carefully-worded press release signed by Federal Reserve Chairman Ben Bernanke and the other voting members of the FOMC.

If the Fed admits added vigilance against inflation, it’s expected that mortgage rates will fall because inflation causes rates to rise. By contrast, if the Fed harps on the downside risks in the economy, it’s expected that mortgage rates will increase.

Either way, today’s press release should be a market-mover.

If you’re currently floating your mortgage rate or are deciding between different lenders, be aware that mortgage rates will enter a period of extreme volatility this afternoon.

It may be prudent to complete your rate shopping before 2:00 P.M. ET.

Most homeowners make four housing-related payments each month:

1. Principal on a mortgage
2. Interest on a mortgage
3. Taxes on the real estate owned
4. Insurance for the real estate owned

Collectively, these payments are known by the acronym PITI but don’t let it fool you — a homeowner’s monthly expenses are still called PITI even if one or more of the elements doesn’t apply.

For example, a homeowner with an interest only mortgage does not pay principal each month.

Additionally, condo owners typically don’t pay homeowners insurance — they pay a monthly assessment and/or maintenance fees to an association instead.

But regardless for what it stands, determining a comfortable PITI should be every homeowner’s starting point when looking for a new home.  PITI is the monthly housing cost, after all, and by knowing what fits in your budget, it’s a lot easier to compare homes and their related expenses.

It’s certainly better than asking the bank “how much home can I afford” — all that’s going to tell you is the P and the I.  As a homeowner, you need to know all four.

PITI is most commonly pronounced pee-eye-tee-eye.

(Image courtesy: Contractor-Books.com)

Mortgage rates edged higher for the fifth straight week and the benchmark 30-year fixed-rate mortgage is now at a 10-month high.One reason why rates are spiking is because the temporary jolt from higher energy and food costs is starting to look like a longer-term trend.

For example, high energy prices get a lot of press, but its 19.4 percent increase since last year is dwarfed by the 64.8 percent increase in the price of grains over the same period of time.

Eventually, as businesses spend more because of these rising costs, they have no choice but to pass those costs on to consumers.

This very topic figures to loom large this week as the Federal Open Market Committee gets together for a 2-day meeting, adjourning Wednesday.  The overwhelming expectation is that the Federal Reserve will hold the Fed Funds Rate steady at 2.000 percent.

However, it won’t be what the Fed does that should impact mortgage rates this week, but what it says.  The Fed’s press release will hit the wires at precisely 2:15 P.M. ET and markets will look for clues about how Ben Bernanke & Co are viewing inflation and its impact on the sagging U.S. economy.

If the Fed indicates that fighting inflation is its primary goal, expect that mortgage rates will fall because inflation and mortgage rates tend to go in opposite directions.

Conversely, if the Fed says it promoting growth in the economy is paramount and that the country can sustain additional inflationary pressures for now, expect that mortgage rates will rise.

There is other data hitting the wires this week including:

• Consumer Confidence (Tuesday)
• New Home Sales (Wednesday)
• Existing Home Sales (Thursday)
• Personal Consumption Expenditures (Friday)

Of all of these data points, only Personal Consumption Expenditures should have a major impact on rates.  PCE is the Federal Reserve’s preferred inflationary measurement.

Flooding in the Midwest has displaced thousands of families and caused billions of dollars in damages.It may also cause mortgage rates to rise.

As the extent of the damage becomes more clear, prices for grain and livestock are soaring.  For example, a host of dietary staples are suddenly more expensive at the supermarket, including:

• Meat
• Pork
• Chicken
• Dairy
• Eggs

Rising food prices are considered inflationary and inflation tends to make mortgage rates rise.

But of all the foods that are increasing in price, it’s corn whose price is rising the most — up 70 percent so far since January.  This is mostly because flood waters damaged up to 3 million acres of harvest in Iowa, our top-producing state.

Corn, of course, is a primary feed for livestock, so rising prices make it more expensive for farmers to raise hogs, cows and chickens.  These higher costs get passed along to consumers and contribute to a higher Cost of Living around the country.

After facing (and adjusting) to rising gasoline prices, Americans are facing higher costs again — this time at the supermarket.  And if food prices don’t recede with the flood waters, Americans may find that they’re getting hit in a third place — right in their mortgage rates.

Source
Hog Farmers Face a Perfect Storm 
Ilan Brandt, Joe Barrett
The Wall Street Journal, June 20, 2008

(Image courtesy: The Wall Street Journal Online)

Home buyers are often surprised when a “rate quote” from the morning won’t be honored in the afternoon.  Sometimes, the assumption is that the loan officer is just being sneaky.This couldn’t be less true.

Rate quotes change in the middle of the day because mortgage markets are in constant flux.  All day, every day — just like stocks.

And like stocks, a mortgage bond’s morning price will likely “expire” before the day ends.

One way to visualize this is to look at today’s Microsoft’s stock price:

• At 9:30 A.M. ET, the price was $28.46
• At 9:38 A.M. ET, the price was $28.72

Over the course of 8 minutes, the stock rose by 26 cents and the “9:30 A.M. quote” was no longer available.  For example, you couldn’t call your stock broker at 9:38 A.M. and place an order for the 9:30 A.M. price because the price had changed.

Mortgage rates behave the same way.

Throughout 2008, mortgage rates have changed mid-day more frequently than in the past.  On more than half the days, morning rate quotes were no longer valid in the afternoon.  And, on at least 5 separate occasions, rates changed 4 times in just one day.

It’s not typical, but it does happen.

So, if you’re talking with your loan officer in the morning about a rate quote, be prepared to do all of your shopping in a compacted amount of time, and then be ready to make a decision.

By the time the afternoon rolls around, after all, that rate quote may well be expired.

A “Housing Start” is a new home on which construction has commenced and in May, Housing Starts fell to a 17-year low nationally.At first glance, this may seem like a negative for the already-battered U.S. housing market.

It’s not.

Falling Housing Starts reflects the broader real estate market and shows us that builders are working hard to get their already-built homes “off the books”.

It would be foolish for them to build new homes now — each new unit makes selling the existing ones tougher.

So, when we look at the figure objectively, we can see that Housing Starts reaching a 17-year low is actually good news — real estate prices are based on Supply and Demand, after all.

With Housing Starts touching new lows, we can infer that there will be fewer new homes coming on the market in the coming months and that should help support higher home values nationwide for everyone.

(Image courtesy: The Wall Street Journal Online)

Each month, University of Michigan researcher survey the U.S. population about their thoughts on the economy — is it improving, it is worsening, is it staying the same.May’s consumer confidence survey registered it’s lowest reading since 1980.

Given the recent headlines, that shouldn’t be surprising:

• Unemployment is spiking
• Gas prices are at an all-time high
• Housing markets keep getting bad press

But despite all of that,  the American Consumer appears to be taking the economy’s hiccups in stride.

For example, last month, retailers around the country reported rising sales levels that doubled what economists expected.  This isn’t supposed to happen when consumer confidence is falling as fast as it is, right?

But, a closer look at the retail sales data shows that discount retailers such as Target and Wal-Mart led the charge higher.  So, although consumers are feeling worse about the economy, they’re still spending money.

And when they do, they look for value.

For home buyers, this should sound familiar because it’s every real estate agent’s mantra right now — “there’s a lot of good values to be had.”  It’s why some homes are getting multiple offers within days while other languish on the market for months.

The difference lies in the perceived value of the home.

Home buyers are actively looking for “good buys” and when they find them, they’re quick to make an offer.  It’s why the housing market is showing pockets of strength despite low consumer confidence levels overall — everyone’s snapping up the bargains.

(Image Courtesy: Wall Street Journal Online)