The mortgage markets officially enter “Wait-and-See” mode beginning today as the Federal Open Market Committee begins their two-day meeting.

The importance of the FOMC’s meeting to mortgage markets is all in the words of the committee as opposed to their actions (or lack thereof). 

After all, the group has not “done anything” in a year and yet markets always consider its meetings to be a highly-anticipated event.

What will the FOMC say about inflation, the economy, and the outlook for the future?  This is what impacts the mortgage markets more than anything else.

If the Fed is fearful of inflation, mortgage rates will go up because the dollar is expected to lose value.  That dimishes the value of mortgage bonds to foreign investors.

If the Fed is satisfied that the economy is exhibiting controlled growth, mortgage rates will come down, by contrast.

Right now, markets are anticipating a bullish view on inflation from the Fed and that is one of the reasons why mortgage rates increased so dramatically since March. 

It will be looking for further clues at 2:15 P.M. ET Thursday afternoon.

For the first week in a long while, mortgage rates ended the week better than how they started. 

As we talked about last week, when there are no major data releases, the markets tend to move on momentum and psychology.  That’s precisely what pushed mortgage rates lower over the past five days.

This week, though, it’s back to reality.

Beginning in March, mortgage markets started to change their bets about the Federal Reserve’s next steps with the Fed Funds Rate.  Previously, investors believed that the Fed would lower the FFR in the first half of 2007, signaling a tamer inflation outlook in the economy.

Data didn’t support that view, though. 

Then, at the Fed’s May meeting, the tide really turned as the nation’s monetary policymakers noted how housing was cooling off, but that the economy was roaring ahead despite that. 

And that’s right around when the bond market started to take it on the chin.

Well, the Federal Open Market Committee meets again this week for a two-day meeting, adjourning Thursday.  The markets will be closely watching every word from Ben Bernanke & Co. to see if the new bets they’ve made on the economy and inflation will be backed up by the Central Bank.

The Fed drops their press release at 2:15 P.M. ET Thursday.

Until Thursday, watch for small movements in mortgage bonds in response to Monday and Tuesday’s housing data, and Thursday jobless claims statistics.

It was another favorable day for mortgage rates yesterday as average housing data and momentum trading carried bond prices higher. 

Bond prices up, mortgage rates down, of course. 

All things considered, mortgage bonds should not have moved as much as they did.  But, this is the summer season and in the summer, fewer traders show up for work. 

Especially during a week like this one in which there is no major data release. 

With fewer traders participating, there are fewer bond buyers to match with sellers, and fewer bond sellers to match with buyers. 

Therefore, it is much less likely that a person who wants to buy at a certain price will find somebody who wants to sell at a certain price.  Therefore, mortgage bonds (and interest rates) tend to move a lot more sharply during the summer than we’re otherwise used to seeing.

Today, three Fed presidents take the stump:  Janet Yellen (San Francisco), Timothy Geithner (New York), and Richard Fisher (Dallas).  Markets will listen to the Fed speaker for clues inflation and the economy. 

If the speakers indicate worry over inflation, mortgage rates will rise in response. 

After a tame Consumer Price Index report Friday, mortgage bonds staged a brief rally and rates retreated slightly.

Earlier in the week, mortgage rates were at their highest point in almost a year. 

Unfortunately for rate shoppers, mortgage investors are behaving like Dr. Jekyll and Mr. Hyde right now.  One moment, they hate the outlook on inflation; the next, they love it. 

What’s really confusing is that data points that made mortgage rates move higher or lower 6-9 months ago (i.e. jobs report, crude oil prices, housing stats) are now being discounted. 

Broader data points such as CPI seem to have taken center stage. 

At least for now.

This week, there are virtually no data points of consequence aside from Tuesday’s Housing Starts data.  Given last month’s seasonable weather across the county, don’t be surprised if the number surprises to the hot side.

So, without data, expect mortgage rates to respond to external factors, technical trading factors, and/or irregular weather patterns.

An interesting feature of interest only loans is that your payment is re-calculated each month based on how much money you are borrowing. 

The industry term for the re-calculation is “recasting”.

When an extra principal payment is made on an interest only loan, the new loan payment is calculated as:

(Outstanding Loan Size) * (Annual Interest Rate) / (12 months)

Therefore, an additional $500 principal payment against a $200,000 interest only loan at 6.000% will reduce next month’s mortgage by $2.50, or $30 annually. 

$30 is six percent of $500.

This is in contrast to an amortizing loan in which your mortgage payment never changes until the loan is satisfied.  Any additional payments to principal on these types of loans shave months off the end of a loan.

Recasting is not exclusive to interest only loans, however.  Many lenders will allow you to recast an amortizing loan for a small fee ($100-500) but may limit the total number of times you can recast over the life of your loan.

Interest only loans recast once monthly.

Interest only loans require discipline and are not proper for every homeowner (the same way that a 30-year fixed is not appropriate for every homeowner, either).  However, within a balanced financial portfolio, they can be a terrific financial planning tool.

 The American Consumer keeps spending.              

This morning, the monthly Retail Sales report showed a larger-than-expected jump.  Even after stripping out elevated gas prices, the sales increase was more than double the expected amount. 

The economy surges ahead, fueled by everyday spending, and this does not bode well for the future of mortgage rates.

The recent run-up in mortgage rates is largely from inflation fears.  With inflation, investors’ dollar-denominated securities have less value over time because the dollar itself is worth less. 

Runaway consumer spending exacerbates the potential for an overheated economy and that is why today’s figures are slightly troubling.  Each time you and I make a purchase, we are (in small way) contributing to the economy’s growth.

Inflation, of course, is the enemy of bonds and your mortgage rates are determined by the prices of mortgage bonds.  Inflation erodes the value of the bonds and that is what causes mortgage rates to increase. 

As a homeowner, higher mortgage rates may depress your local market because fewer home buyers can qualify for home loans, lowering overall demand.

Rates are up by as much as 0.875% in the past 3 months.