When the government nationalized mortgage lending in September, housing analysts predicted lower mortgage rates.For a brief two-week stint, they were right — post-takeover, the 30-year, fixed rate mortgage fell below 6.000 percent nationally for the first time in 7 months.

Since then, however, mortgage markets have reversed.  Rates are now at pre-takeover levels.

Now, this isn’t to say that the nationalization was a failure — far from it.  The government’s takeover of Fannie Mae and Freddie Mac accomplished two very important goals:

1. It restored failing confidence in the U.S. mortgage markets
2. It opened legislative channels for faster, more relevant housing reform

And, long-term, most people agree, these are essential elements for a U.S. economic recovery.  Over the short-term, however, the plan has not delivered the sustained low mortgage rate environment that was envisioned.

The biggest reason why rates are higher is because of Wall Street’s manic trading behavior.  When the economic outlook shows hints of sun, investors sprint to risky stock markets; when it shows signs of gloom, they flee in favor of ultra-safe treasuries.  The buy-sell patterns have led to some of the wildest trading days on record and it’s not what the Treasury expected.

See, when the takeover was first announced, mortgage-backed bonds were elevated to “government status”.  This created new demand for mortgage bonds which helped to push down rates.  But, in the weeks that followed, the world’s credit markets unraveled and traders sought the dual comfort of safety and liquidity in their portfolios.

That’s a combination that only U.S. treasuries can provide.  Versus “true” government bonds, mortgage-backed securities are just quasi.

We can’t know where mortgage rates will move for certain but, for now at least, the 4 percent range some had predicted is out of reach.  Until credit order is restored globally, expect volatility to continue and rates to remain up.

(Image courtesy: The Wall Street Journal)

The Federal Open Market Committee voted to cut the Fed Funds Rate by one-half percent today.  The benchmark rate now stands at 1.000 percent.

In its press release, the Fed wasted no time addressing the key issue at-hand, stating that economic activity has “slowed markedly”, pointing to three main causes:

1. Consumer spending is falling
2. Business equipment spending is falling
3. Slowing foreign economies are hurting U.S. businesses

Furthermore, the voting FOMC members are wary of an “intensification” of the current financial market turmoil.

The announcement’s 4th paragraph is noteworthy, too.  It lists the plethora of growth-stimulating steps that the Fed has taken so far this year and concludes that credit conditions should improve in time.  It does notes, however, that if markets don’t improve in good time, the committee will “act as needed”.

In the wake of the announcement, stock markets rallied.  Investors liked what the Fed had to say and it drew funds into the stock market from all corners of Wall Street.  Unfortunately for mortgage rate shoppers, one of those corners happened to be the mortgage bond market.

The exodus from bonds caused mortgage rates to rise.

It’s a common misconception that the Federal Reserve controls mortgage rates and today’s market action should help dispel that myth.  As the Fed Funds Rate falls back near its 50-year low, mortgage rates are bumping up against a 3-year high.

Source
Parsing the Fed Statement
The Wall Street Journal Online
October 29, 2008

http://online.wsj.com/internal/mdc/info-fedparse0810.html

The Federal Open Market Committee adjourns from its scheduled 2-day meeting today at 2:15 P.M. ET and the markets are eagerly awaiting the central bank’s press release.In it, Fed Chairman Ben Bernanke is expected to address the U.S. economy, the future of credit, and the new Fed Funds Rate.

It’s this last point to which mortgage rate shoppers should pay attention — when the Fed Funds Rate falls, mortgage rates tend to rise.

The inverse relationship between mortgage rates and the Fed Funds Rate is based on the idea that cuts to the Fed Funds Rate are designed to add gas to U.S. economic engine.

In theory, over time, Fed Funds Rate cuts work to improve Corporate America’s balance sheets, thereby rewarding shareholders.  Therefore, when the Fed Funds Rate falls, or is expected to fall, investors often rush to buy stocks before their prices get bid up.  Part of that process, of course, includes selling the “safe” parts of their portfolio which are usually loaded with mortgage-backed bonds.

If you were looking for a reason why mortgage rates tanked Tuesday while the Dow Jones added 11%, now you have it.

The Fed Funds Rate stands at 1.500% and markets are split about how far the FOMC will cut it this afternoon:

• A “pause” is expected by 2 percent of traders
• A 0.250% rate cut is expected by 5 percent of traders
• A 0.500% rate cut is expected by 45 percent of traders
• A 0.750% rate cut is expected by 40 percent of traders
• A 1.000% rate cut is expected by 8 percent of traders

Without a consensus opinion among traders, no matter what the Fed does today, a lot of investors will be forced to rebalance their portfolios to account for their “bad bets”.  This will add to market volatility for sure.

Mortgage rates are calm this morning.  The calm likely won’t last.  If you are floating your mortgage rate and want to avoid additional risk, consider locking your rate prior to the FOMC press release.

Despite turmoil on Wall Street, the housing sector continues to deliver good news.Last month, led by a 22 percent surge from the West Region, New Home Sales rose 2.7 percent over August.

A “new home” is a newly-built residence, never before lived in.  New homes are usually built and sold by real estate development companies and their respective marketing firms.

The surge in New Home Sales volume is consistent with the other good news we’ve seen from the housing sector.  It marks the 4th positive signal in the last two weeks.

• October 8: Homes under contract to sell surge 7.4 percent
• October 23: Foreclosed homes fall 12 percent in September
• October 24: The supply of “used homes” falls to an 8-month low
• October 27: The supply of new homes falls by 7 percent

However, it can’t be ignored why housing is showing a statistical improvement.  The main causes are two-fold:

1. Banks are getting better about selling foreclosed homes
2. Builders are keen to dump their excess inventory

Both of these factors drive down home sales prices nationwide which, in turn, draws value-seeking home buyers back to the market.  In addition, because the number of active sellers dwarfs the number of active buyers, today’s home seekers enjoy a tremendous amount of negotiation leverage, making real estate even more attractive.

But, as with everything in business, markets seek balance.  As home supplies dwindle, buyers’ ability to negotiate sales prices and closing costs will fall.  It’s Supply and Demand — as supplies drop, relative demand rises, and prices rise with it.

In every American neighborhood, homes that are priced “right” are selling quickly.  And now that banks and builders have figured out the formula, more homes are going under contract than at any time since 2007.

Much of the current economic climate is being blamed on housing.  If the data is accurate, though, we can infer that the climate may not last much longer.

(Image courtesy: AP.org)

Mortgage markets followed the recurring trading pattern of 2008 last week — volatility, volatility, and more volatility.After opening with a strong performance that drove rates down, late-week fears of a global recession reversed that path.  Mortgage rates ended the week unchanged.

This was an unexpected outcome for the week considering that:

1. The dollar gained 5%, making bonds “worth more”
2. Oil fell 11%, helping to spur consumer spending
3. LIBOR dropped slightly, signaling a credit thaw

Each of the above factors usually helps to generate new demand for mortgage bonds, pressuring mortgage rates lower.

But, this market is anything but normal.  Because of the stock market’s weak showing last week, several hedge funds were forced to liquidate their holdings and move into cash.  The rampant selling dumped an excess supply of mortgage bonds onto the market, offsetting the favorable bond market conditions, and causing mortgage rates to rise sharply from Wednesday to Friday.

Unsuspecting rate shoppers found this out the hard way.

This week, mortgage markets should be similarly unpredictable — there is a bevy of economic news and government news on which markets will chew, digest, and attempt to swallow.

On the economic side, the two most influential data points are the Consumer Confidence survey, and Personal Consumption Expenditures.  The former will be used to predict Holiday Season shopping — a weak reading should cause mortgage rates to rise — and the latter is the Federal Reserve’s measure of inflation.

If PCE is low, expect calls for more economic stimulus which would help mortgage rates to recede.

And, on the government side, the Federal Reserve will hold its scheduled 2-day meeting Tuesday and Wednesday.  It’s widely expected that the Fed will lower the Fed Funds Rate by at least 0.250 percent, maybe more.

Often, when the Fed Funds Rate falls, mortgage rates rise in the immediate wake of the announcement.  Be aware of this if you are currently floating a mortgage rate.

(Image courtesy: Wall Street Journal)

Statistics are what you make of them, but sometimes, they can provide good perspective.For example, from its peak in 2005 to its trough in late-2007, the number of “used” homes sold nationwide plunged.

• In 2005: Roughly 7 million homes sold annually
• In 2007: Roughly 5 million homes sold annually

Through all of 2008, though, Existing Home Sales volume has been essentially flat.  Some months up, some months down, but always hovering near the 5 million unit mark.

The data from September is no different.

For the 13th consecutive month, the number of home resales nationwide straddled the 5 million benchmark, clocking in at 5.18 million units.  This tells us that everyday Americans are still buying and selling real estate at a fairly steady clip — despite what the news keeps telling us.

Versus August, September sales volume grew by 5.5 percent.

Now, couple this two other data points and we can see that the housing market is showing multiple signs of strength:

1. The national home supply is now down to 9.9 months
2. The number of homes under contract is up 7.4 percent

Again, though, statistics are what you make of them.  Just as there are positive signals about real estate, there are negative ones, too.  The credit markets are one example of that.

But, either way, with a full year of stable sales volume behind us and stories of recovery in beat-up markets like California, we can’t ignore the idea that housing may be done trolling its bottom.

It takes willing buyers and willing sellers to turnaround a market.  It appears that housing may have both.

(Image courtesy: The Wall Street Journal Online)

According to foreclosure-tracking service RealtyTrac, the foreclosure rate is falling nationwide.Versus August, foreclosures fell by 12 percent in September 2008 as more than half of the states showed month-over-month improvement.

Most interesting in the data is that several states that led the foreclosure boom in 2007 now appear to be leading the charge out of it.

For example:

• In Arizona, foreclosures are down 9.43 percent
• In California, foreclosures are down 31.64 percent
• In Colorado, foreclosures are down 6.22 percent
• In Illinois, foreclosures are down 5.14 percent
• In Michigan, foreclosures are down 22.43 percent

But despite September’s promising data, the press is choosing to report that foreclosures are up 71 percent over the same period last year.  The data is accurate, but not necessarily relevant.

When home buyers and sellers engage real estate markets, they rarely think in annual terms.  For them, it’s about buying or selling this month, or next month, or the month after that.  When someone is “in” the market, their mentality is “right now”.

In other words, annual data is more befitting of an economist, while month-to-month data is more befitting of you.  Of course foreclosures are up 71 percent since last year — a lot has happened since then.  But on a monthly basis, signals point to improvement.

September’s foreclosure data may be a signal of market recovery, or it may just be a blip.  Time will tell, really.  Either way, RealtyTrac’s foreclosure data reinforces what most real estate professionals already know and that’s that markets all over the country are showing signs of life.

In the widest definition possible, amortization (pronounced: am-ohr-tih-ZAY-shun) is the scheduled process by which a loan’s principal balance pays down to $0.The opposite of an amortizing loan is an interest only loan for which there is no scheduled principal repayment schedule.

With respect to mortgages, amortization is what determines how much of a monthly payment goes to principal, and how much goes to interest.    Amortization schedules are the same for all fixed rate, non-interest only home loans including 15- and 30-year fixed rate mortgages, as well as all non-interest only ARMs.

Monthly principal and interest payments on a mortgage are based on the mathematical formula above, where:

• P = principal
• A = payment
• r = monthly interest rate
• n = number of payments

Now, if you’ve ever paid on an amortizing home loan, you don’t need to use the formula to know that mortgage amortization schedules are dramatically front-loaded with interest.

In other words, in the early years of loan, the interest due on a mortgage is relatively high versus the principal due.  And, if you’ve ever heard someone say, “You don’t pay down much of a loan in the first few years,” now you know — mathematically — why that is.

This interest-heavy mortgage repayment schedule helps banks to collect as much loan interest as possible up-front, offsetting potential loan losses.

But, just because the bank sets an amortization schedule doesn’t mean that a homeowner can’t change it.  In any given month, a borrower can prepay extra principal to the lender, thereby changing the formula and accelerated the loan payoff date.

There are calculators online that do the prepayment math for you, but before making extra payments, talk with your loan officer or financial advisor first.  Prepaying your mortgage could trigger a stiff penalty from your lender, or put your liquid assets at risk.  Prepayment is not a bad plan, but it may be a bad plan for some.

(Image courtesy: Mortgage News Daily)

In an effort to limit risky borrower behavior, Fannie Mae announced a new round of mortgage guideline changes last week.Unlike previous its previous 20-plus updates that raised income requirements and minimum credit scores (among other changes), Fannie’s latest guideline tweaks focus on the value of its underlying mortgage assets — home equity.

Effective December 13, 2008, Fannie Mae will require larger equity positions on some of its insured purchases and refinances.

A few of the updates include:

• Limiting primary residence, cash out refinances to 85% loan-to-value
• Requiring 10% downpayments on second/vacation homes
• Requiring a 25% equity position on all investment property refinances

And, while the above changes represent 5 percent equity increases over the current mortgage guidelines, some of the other updates call for increases of as much as 20 percent.

As we head into the election and Congress mulls over another economic stimulus package, it’s unclear if mortgage rates will move higher or lower as we close out the year.  We do know, however, that getting approved for a conforming mortgage will, in general, be harder come December 13, 2008.

If you’re finding yourself on the fence about your next move — whether it’s to buy or to refinance — consider taking the necessary steps before the guidelines change.

Low, low mortgage rates don’t mean much if you don’t have enough home equity to get a home loan approval.

(Image courtesy: The New York Times)

Last week, the Dow Jones Industrial Average recorded both its largest one-day point gain and second-largest one-day point loss in history.Mortgage markets got whipsawed, too.

From day to day, huge rate swings made mortgage rate shopping difficult.  It wasn’t uncommon for lenders to change pricing 3 times per day.

When the week closed, though, rates were lower than at Market Open Monday, marking the first week of improvement in mortgage rates since early-September.

Last week’s constant mortgage rate movement had several causes:

• Retail Sales data was weaker than expected
• The Federal Reserve report showing a slowdown in all 12 regions
• New evidence that commodity inflation pressures are easing

The biggest driver was — and continues to be — trader uncertainty.

As measured by the “Fear Index”, market volatility reached an all-time high last Thursday.  Investors moved into cash positions, selling assets of all types — including mortgage bonds.  This created an excess supply of bonds on the market which drove down prices and, in turn, pushed up rates.

But, there was a demand-side issue impacting rates last week, too.

If you’ll remember, the first $250 billion of the government’s Rescue Plan was meant to buy bad mortgage debt.  Last week, however, those plans changed.  Instead, the $250 billion was applied to the balance sheets of the nation’s largest banks.

This caused an immediate $250 billion reduction in mortgage bond demand and the reduced demand further depressed prices.  Again, mortgage rates rose as a result.

This week, with very little economic data, expect psychology, politics and corporate earnings to drive mortgage rates — more than 20% of the S&P 500 will report their July-September 2008 numbers.

If earnings are weak, expect mortgage rates to rise on concerns about recession; lately, that has been the market pattern.  Conversely, if earnings are strong, expect mortgage rates to improve.

(Image courtesy: The New York Times)