0 On FED Watch. Mortgages up or down?

Mr.Mortgage is on FED watch this morning as this may have positive or negative implications for clients. When the Federal Reserve lowers the Fed Funds Rate, mortgage rates tend to increase, and it's always for the same, few, related reasons:

Rate cuts create long-term inflation pressure. Bought gas or food lately?
Rate cuts makes the U.S. dollar weaker.
Rate cuts reflect short-term economic weakness

But rate cuts are just one way that the Federal Reserve can impact mortgage rates; there's more than one color in the Fed's crayon box, after all.
How the FOMC treats the Fed Funds Rate today is only one part of the story. The other part is what the Federal Reserve does to make mortgages feel "safe" to market investors.

One reason why mortgage rates are slightly down this past week is because the Fed has intervened with normal market activity on multiple occasions and with each intervention, the Fed is implicitly or explicitly saying, "We will not let conforming mortgage debt default."
This "guarantee" from the Federal Reserve reduces the risk of mortgage loans sold through Fannie Mae and Freddie Mac. Lower risk = lower rates.

What the Fed says today will be as important as what the Fed does. If the press release reveals a proclivity for guaranteeing additional mortgage debt, expect mortgage rates to fall because mortgage debt will be considered "safer" for investors. The jumbo loan market will key off the conforming market.

Detail: On FED Watch. Mortgages up or down?

0 FED Cut no help to jumbo fixed rates.

The Federal Reserve key interest rates another half-percentage point. The move was expected after last week’s surprise cut in an emergency session failed to rally markets and quiet recession chatter.

The central bank has lowered rates five times for a total of 1.75 percentage points since September, including the aggressive 0.75 percentage cut last week - the first time the Fed lowered rates in between meetings since the 2001 terrorist attacks..

The Fed’s decision to cut rates further Wednesday afternoon comes on the heels of disturbing economic reports published hours earlier. The reports indicate a sharp slowing of the economy.
U.S. economic growth slowed to a rate of 0.6 percent in the last quarter of 2007. The increase in the gross domestic product (GDP) fell short of economists’ expectations by half and many believe the GDP will be in the negative this quarter. Two straight quarters of negative GDP equals a recession.

Fixed Jumbo Mortgage rates have been rising steadily this week in anticipation of the Fed cuts. We have seen a slight improvement in the 5Y and 7Y jumbo loan arm rates for highly qualified clients with equity or large downpayments.

Detail: FED Cut no help to jumbo fixed rates.

0 FED Hits Panic Button. Jumbo Loan Rates at Historic Lows.

On my way into work this morning, I heard that Ben Bernanke and the Federal Reserve Board cut the target rate for banks’ short-term lending to 3.5%. This makes it more worthwhile for banks to take on more risk with their money, lending it out in cases where they’ve been tight lately. The Fed announced this change between meetings, not at a meeting as normal announcements, in response to the free-fall that the world financial markets seem to be experiencing.

It will be interesting to see how the market reacts today. You could argue that if the U.S. stock market doesn’t drop 5% as it was expected to do today without the emergency rate drop, investors don’t think that this move by the Federal Reserve will help solve the economic problems.

When the Fed rate drops, so do interest rates on savings accounts and jumbo loan rates drop as well right? Well not exactly, here is a chart of the FED Funds, Prime Rate and the Fannie Mae 30Y Fixed. Conforming loans generally move in lockstep with jumbo mortgage loans so they act as a good indicator.

I see a loose correlation but nothing that suggests that we will see mortgage rates below 6% on a 30Y fixed jumbo mortgage anytime soon. Of course if the sky does indeed fall then all bets are off. Rates are excellent by all historical standards and refinances should be considered especially into long term fixed loans and 10/1 ARMs. Have a prosperous day.

Detail: FED Hits Panic Button. Jumbo Loan Rates at Historic Lows.

0 Waiting for the FED to refi? Your loan options might be gone.

If your mortgage is more than 3 years old, it's really likely that your mortgage rate is higher than it needs to be. It may be time to refinance. Don't wait for the FED to drop rates as we often hear from fence sitting clients. As you can clearly see from the chart the FED has little if any influence on mortgage rates.

Relative to any point in time since August 2005, mortgage rates are extremely low. If your mortgage is being professionally managed for you, your loan officer has already called you to start the refinance process. If he hasn't called, it may be time to find a new loan officer. But besides low rates, though, there's another major reason to check in with your loan officer.

In a down market, product innovation stops and the process of contraction begins. Mortgage lenders are constantly eliminating "fringe" mortgage products .

Now, "fringe" is a non-specific word because its definition changes constantly. What was "fringe" in 2005, for example, is somewhere in the nightmares and the enormous losses of the banks. This is why a home loan that gets approved today is not promised to be approved tomorrow.

And today's low mortgage rates don't mean a thing if you can't get a mortgage that uses them.

The Mortgage Fringe List is growing along with the number of mortgage defaults nationwide. More defaults = bigger list and as of January 2008, the list includes:

1.Mortgages that don't verify income and/or assets

2.Jumbo mortgages where the applicant's credit scores is below 660

3.Special mortgage products for low-income or first-time home buyer programs, including HomePossible and MyCommunity programs

4.Mortgages on investment properties with less than 20% equity in the home

This is a very different-looking list from the one of Summer 2007 which included home equity lines of credit to 100% and 90% investment property mortgages. These loans have since been discontinued and cast away by investors.


And, like those that inhabited the list before them, the mortgage products on today's Fringe List are very near to the same fate.

This is terrible news for a lot of people including:

1.Homeowners with adjusting ARMs, especially jumbo loans.

2.Home buyers with a 6-9 month time frame

3.Home sellers in declining markets

4.Homeowners in condominiums

5.Homeowners with "life changes" requiring mortgage planning

By Spring 2008, mortgage investors will have already added more restrictions on what they will lend and to whom. Some of the members of the Fringe List will be discontinued; many more will be added to it. Today's fringe borrower is tomorrow's mortgage market casualty so the best time to get a move on is now. If for no other reason that to hear about your options.

Left alone, homeowners will ignore their mortgage. It's the Law of Inertia. Unfortunately, that can have devasting results in a down-turning economy. By the time the homeowner recognizes a need for a new mortgage plan, many will discover the unpleasant truth that mortgage markets no longer serve them.
Mortgage rates are low and it's a terrific reason to check in with your loan officer. While you're on the phone, ask if you're "fringe" and -- if it makes sense -- take steps to protect yourself.

Detail: Waiting for the FED to refi? Your loan options might be gone.

0 FED Matters Little in Housing Meltdown.

Well, you’ve probably heard by now that the Fed lowered rates by .25. So what does that mean? A couple of points to think about:
1. What the Fed lowers is the shortest of the short term rates and it typically helps home equity loans but doesn’t matter much to mortgage rates.
2. Why did they lower rates? Because the financial markets are hurting and they needed to at least appear to help out the economy and the markets. Just this week (and it’s only Tuesday at 5:00) we’ve seen UBS announce $10 BILLION in writedowns (losses) and Washington Mutual announced $1.4 billion in write downs, laid off 3150 people and said, (I’m paraphrasing,) “We expect industry-wide volume in 2008 to be off 40% from 2006.” Both banks sought additional investments to shore up the balance sheets this weekend. UBS went to the Singapore Sovereign Wealth fund and an middle eastern investor for 10 billion and WAMU did a preferred stock offering at 2.5 billion. That shows you the degree of financial stress the world's largest banks are facing.
3. Will what the Fed did today help matters at all? I think the best way to describe it is sort of like putting a Mickey Mouse band-aid on a 6 inch gash in your arm. It doesn’t hurt, but it really doesn’t do much. The business world will benefit from cheaper borrowings (since prime is dropping) but the big problem in the economy (housing) won’t really be impacted.
4. Did the market like what it got, ahh, that would be a resounding no. Sort of like a little kid crying to his Mama, the Dow dropped almost 300 points in less than 2 hours.
Have you ever tried to push a string across the table? It’s hard to get it to move unless you are pulling it, isn’t it. Well, that’s sort of what The Fed is doing. They are using the tools that they have to try to save the market, but the tools that they have aren’t what the market needs, so they aren’t able to be very effective.

Detail: FED Matters Little in Housing Meltdown.

0 FED Cuts, housing continues downward spiral.

At 11:15a PST the FED announced a small rate cut of 0.25% this produced an immediate rally in stocks and a sell off in bonds. Most mortgage rates rose as the FED statement indicated that they were concerned about inflation. I know I see it throughout the everyday economy. Have you bought gas or groceries recently? Inflation is the enemy of the lender as it destroys the value of the money they receive over the life of the loan. The dollar fell following the announcement and oil spiked to a record high. Oil is traded in dollars so as the value falls relative to other currencies the price per barrel rises in general. Gas prices should follow suit in the coming days.

How does this matter at all to housing? Well, I would expect rates to remain somewhat range bound throughout the next few weeks. Any additional confessions of major losses by world banks on mortgage paper would result in a flight to quality that would push high quality mortgage rates down.

In other housing news that is sure to put pressure on prices is Citigroups announcement today that they will no longer do purchase money 2nd mortgages in CA. This is Citi's way of avoiding the meltdown in housing in bubblicious California.

Case-Shiller announced their August housing report yesterday. They produce the most widely respected index on housing. They track individual metros. Here is a breakout chart from Time Magazine. Some cities look like a roller coaster ride at Six Flags, enjoy:

Detail: FED Cuts, housing continues downward spiral.

0 Why do mortgage rates move around daily?

1) What are mortgage interest rates based on? The only correct answer is Mortgage Backed Securities or Mortgage Bonds, NOT the 10-year Treasury Note. While the 10-year Treasury Note sometimes trends in the same direction as Mortgage Bonds, it is not unusual to see them move in completely opposite directions. DO NOT work with a lender who has their eyes on the wrong indicators.

2) What is the next Economic Report or event that could cause interest rate movement?A professional lender will have this at their fingertips. For an up-to-date calendar of weekly economic reports and events that may cause rates to fluctuate, email mrmortgage (AT) thegreatloan (DOT) com and we'll add you to our mortgage rates report. Can't post the address here because the spam bots would get it and we would be getting offers for prescription drugs and to help Nigerians with money exchanges.

3) When Bernanke and the Fed "change rates", what does this mean. and what impact does this have on mortgage interest rates? The answer may surprise you. When the Fed makes a move, they can change a rate called the "Fed Funds Rate" or "Discount Rate". These are both very short- term rates that impact credit cards, Home Equity credit lines, auto loans and the like. On the day of the Fed move, Mortgage rates most often will actually move in the opposite direction as the Fed change. This is due to the dynamics within the financial markets in response to inflation. For more information and explanation, just give me a call.

4) Do you have access to live, real time, mortgage bond quotes?If a lender cannot explain how Mortgage Bonds and interest rates are moving in real time and warn you in advance of a costly intra-day price change, you are talking with someone who is still reading yesterday's newspaper, and probably not a professional with whom to entrust your home mortgage financing. Would you work with a stockbroker who is only able to grab yesterday's paper to tell you how a stock traded yesterday, but had no idea what the movement looks like at the present time and what market conditions could cause changes in the near future?

Detail: Why do mortgage rates move around daily?

0 The FED cut and rates are higher?

As clients are learning, mortgage rates are higher now than last week, back up to 6.5 percent for vanilla 30-year and 7% for Jumbo mortgages. Yes, higher.
Federal Reserve Chair Ben Bernanke probably has the same frustrated shoulder sag that we do: he played this thing exactly right, and has gotten nothing for his trouble but a run on the dollar.
The Fed's 0.5 percent was actually two quarters: the federal funds rate had been trading near 5 percent, 0.25 percent off-peg, for a few weeks. That was an inter meeting ease not formalized, a deft piece of central banking: if formalized, and then the crunch dissolved by itself, the Fed would have had to execute an embarrassing formal reversal. Instead, Sept. 7 news of sinking payrolls (an economic fade additional to and independent of housing and the crunch) made it easy to cut. At this moment the economy receives some dinky benefit from the cut (Construction money is 0.5 percent cheaper -- wanna build a house? Short-term rates are down -- how about a nice new neg-am pre-pay-penalty ARM? No?), but the crunch is still in place, especially in Mortgageland.

Other benefits have been cancelled as well. The 10-year T-note, driver for all long-term credit, has soared from 4.35 percent to 4.62 percent. The dollar run has been to the euro (now all-time high vs the dollar at $1.41) and to hard assets: gold at a 27-year high $744 and oil at one moment yesterday $84.

A great deal of domestic money has joined the run, buying into the fingernail-on-blackboard theorizing: there was no reason for Fed action; it guarantees a resurgence of inflation; it's just Bernanke's Put; and all bailouts all the time are bad.

This run has foreign fingerprints as well; Asia's currencies are dollar-pegged, but a race to hard assets is typical of our Persian Gulf friends and their several-trillion-dollar-hoard. Big currency moves often involve confidence, and it is disturbing in a time of financial crisis to find money running away from the dollar, the historical safe-haven. Confidence has aspects beyond interest rates and inflation: at some point, the average Persian Gulf observer of U.S. leadership, present and forthcoming, might well conclude that we don't have the good sense that Allah gave to the camel.

I like a good chart to see what happened in the past to see if it can give a little insight into the fog the future. Below is a chart of the U.S. dollar index which is our currency vs a basket of foreign currencies(Euro, Yen, Pound, Australian Dollar, etc.). Immediately below is the chart of the 10Y Treasury rates during the same period. In order to strengthen the dollar, rates need to rise to attract investment and/or taxes need to be reduced to drive growth. Taxes were cut during the early 80's, the growth engine revved up and interest rates dropped dramatically. I don't think with medicare, social security and a war machine at full speed the government can lower taxes. The FED is in a bind. The hope is that as they trash the dollar, this expands our export economy. Reviving growth, increasing tax receipts and paying back all the treasure we borrowed over the last few years. The US government owes 8.9 trillion dollars in bond money.

I believe rates across the board will need to rise in order to attract investment in our economy and to encourage investors to buy mortgage/ government debt. What's your take? I'm sure Bernanke and the new President could use you in Washington the next few years to sort out the problem.

Detail: The FED cut and rates are higher?

0 What's the cost of the interest rate drop to you?

Have you seen the value of your hard earned dollars? I remember as a child traveling to Mexico struggling to figure out how many thousands of pesos I had to get from my pocket to buy ice cream. The U.S. dollar has not collapsed to that degree but its value has declined dramatically in the last five years. An empire can't wage war and spend like a drunken sailor forever. Eventually, the currency suffers. How does this matter to you? Well as a starter, do you buy gas? Two reasons why it's $3 a gallon is rising global demand and the falling dollar. Oil is traded in dollars and the middle east pegs their currency to the green back. They are demanding more dollars because each month because they are worth less relative to other currencies.

In order to protect the dollar the FED would have had to keep rates steady on Tuesday. They chose to bail out speculative investors(hedge funds, investment banks, and leveraged buyout shops) and hope it trickles down to Joe Six Pack. Investors around the world could end up demanding higher interest rates on our government and mortgage debt.

We have seen the rate on the ten treasury and mortgage paper drift higher today. Just one day after the cut. This could result in much higher mortgage rates in the coming years. I believe fixed mortgage rates are a tremendous value and I think people will look back at 6-7% FIXED as the cheap money years. Have you traveled recently and seen the value of your bucks? Has your business been hurt or benefited from a falling dollar? Comment and you may win a free ice cold Sam Adams. Can I pay for it in EUROS?

Detail: What's the cost of the interest rate drop to you?

0 A ray of sun for borrowers and investors.

The long awaited Fed decision arrived with a bang! The Fed surprised many economists and traders with a half percent cut in both the Fed Funds and Discount Rates. Stocks soared higher and enjoyed their largest gain since 2003.
What does the Fed cut mean? Rates on consumer debt, car loans, and Home Equity lines will all benefit. But because Home Loan rates are tied more closely to inflation, it is not uncommon to see less of a reaction...or even an opposite reaction in mortgage rates.
The Fed cut also hurts rates of return on investments, which gives foreign investors less incentive to invest in US securities. This has sent the Dollar much lower against the currency of most major foreign countries. This makes foreign goods more expensive for us to buy, which adds to inflation pressures.
Overall, the Fed cut is good news for the economy, but may nudge inflation a bit higher long term. In the short run, we have seen an improvement in mortgage rates for prime credit borrowers especially within the jumbo and super jumbo market.

Detail: A ray of sun for borrowers and investors.

0 Waiting for the FED meeting on Tuesday?

Investors, clients and borrowers in general are looking forward to the FED meeting on Tuesday for a rate cut. The market has priced in a 50bps reduction. Any less and we could see major declines in stock markets. I would think that the FED will cut only 25bps. I think we can gather the overall thinking in these two quotes:

"It's not the government's job to bail out speculators, or those who made the decision to buy a home they knew they could never afford." - President Bush

"It is not the responsibility of the Federal Reserve--nor would it be appropriate--to protect lenders and investors from the consequences of their financial decisions."- Fed Chairman Ben Bernanke

Detail: Waiting for the FED meeting on Tuesday?