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Earlier this year and under pressure from the government, mortgage lenders made more than 200,000 loan modifications to delinquent homeowners.

The modifications came in one of three forms, or a combination:

1. Interest rate reduction
2. Loan term extension
3. Principal forgiveness

But despite the modifications, as of October 1, more than half of the homeowners that received assistance were already two months behind on their modified monthly payments. 

This late-pay statistic was a focal point on Capitol Hill yesterday as the government admitted delinquencies "were larger than [they] thought they'd be".  Loan modifications are proving inadequate at slowing foreclosures and yesterday's session opened the door to more effective foreclosure prevention measures.

However, of all of the statistics published, there was one of particular interest.   

Based on its loan modifications to-date, the FDIC has found that modified borrowers default far less when new monthly payments are less than 38 percent of monthly household income.  This is important because Freddie Mac guidelines for ordinary mortgage applicants currently cap that rate at 45 percent.

If the 38 percent figure holds up long-term, it may lead mortgage lenders to permenantly reduce maximum debt-to-income allowances.  Already, mortgage insurers have taken this step so it's not out of the question for lenders.  Tighter guidelines mean fewer mortgage approvals.

If you're unsure of whether now is a good time to buy a home, consider that mortgage rates are low, mortgage guidelines are tightening, and foreclosure prevention efforts reduce the supply of available homes.

Prices may not have bottomed, but the market is giving everyone a lot of reasons to consider buying now.

(Image courtesy: The Wall Street Journal)

In general, the more buyers and sellers there are for a particular item, the easier it is to find that "fair value" and make the deal. 

An abundant number of buyers and sellers often creates a liquid market in which assets -- in this case, mortgage bonds -- can be sold rapidly with minimal loss.

This week, though -- with so many traders on vacation -- the "liquid market" has gone illiquid.  The treasury market posted just 41 percent of its normal, daily volume Monday, leading to erratic pricing in the mortgage bond market which, in turn, caused mortgage rates to follow.

For example, mortgage rates started the day lower yesterday before sprinting higher over a 30-minute, early-afternoon span.  Markets were largely unprovoked by economic data, geopolitical developments, or technical factors.  It just, kind of, "happened" and the move left mortgage rate shoppers in the dust.

That could happen a lot this week.  So, if you're in the market for a mortgage, be ready to lock quickly.  With low liquidity, rates rarely sit still for long.

(Image courtesy: Purdue BCM)

For the first time in over a year, the sales of "used homes" fell below the 5-million unit trendline, helping to push the total home inventory higher by 0.1 percent nationwide.

Based on the rate at which homes are selling nationwide, it would take 11.2 months for the existing housing supply to be exhausted.

For home buyers, this is an opportune time for negative news on housing. 

First, sellers know that between now and the Super Bowl, housing activity will be light.  The general scarcity of buyers may force a seller to accept a bid he wouldn't have accepted otherwise.

Second, the economy is showing weakness and that, too, can concern a home seller.  Buyers are less likely to extend themselves during times of economic uncertainty, further reducing the buyer pool and, again, putting pressure on the seller to "make a deal".

And lastly, because the government has been trying to force mortgage rates down as a way to stimulate the economy, the weak housing data is actually making it cheaper to finance a home.  This means that a well-qualified home buyer can better stay within budget.

Each 0.500 percent rate reduction saves $33 per $100,000 borrowed.

It is important to remember, though,  that the U.S. housing market is not national -- it's highly localized.  This is one reason why national real estate reports can be misleading.  Just as figures from Phoenix have little to do with statistics from St. Paul, even data from neighboring ZIP codes can vary.

The universal truth, however, is that a home that is priced fairly will sell more quickly than a home that is not.  And, until the Super Bowl passes in 45 days, expect fewer buyers to be out there competing for them.

(Image courtesy: The Wall Street Journal Online)

Day-to-day, mortgage rates priced across a very wide range, but managed to close out the week lower overall.

Mortgage rates improving on "bad news" is a break from the trading patterns of September and October.  Back then, even the slightly evidence of a recession caused mortgage rates to soar. 

Now, however, markets have accepted economic weakness and have started to look to the future.  Not even sagging retail sales and the rising ranks of the unemployed could quell market optimism. 

Indeed, the incoming administration may be leading the sudden sentiment shift; its stimulus package is expected to top $1 trillion over the next 24 months and put thousands of unemployed Americans back to work.  The widespread press coverage of this story may be one reason why Consumer Sentiment rose off its all-time low, despite the economic evidence that tougher times may still be ahead.

So, as markets shift their attention away from fundamentals and towards the government, mortgage rates are benefiting and refinance activity is gaining steam.

This week, the government should be the top story again.  On Tuesday, the Federal Open Market Committee will adjourn from its 2-day meeting and is widely expected to lower the Fed Funds Rate by a half-percent to an all-time low of 0.500 percent.  This move, too, is meant to stimulate the economy.

But it won't be what the Fed does that matters; it will be what the Fed says. 

In the 2:15 P.M. press release, Fed Chairman Ben Bernanke is expected to outline measures by which the Federal Reserve will stabilize the economy.  If markets consider the moves to be "enough", stock markets should soar and mortgage rates should suffer.  However, there may be specific verbiage for providing mortgage relief, in which case, mortgage rates would fall.

Other noteworthy data scheduled for this week include the Cost of Living Index and Housing Starts, but neither should matter much to mortgage rates.  For now, it's all eyes on the government.

(Image courtesy: The Wall Street Journal Online)

For most Americans, mortgage interest paid on a home loan is tax-deductible in the year in which it was paid. 

With advance planning, therefore, homeowners can increase their 2008 tax deductions and limit their tax liability on April 15.

The key is to make the January 2009 mortgage payment before the New Year begins.

In making the payment in 2008, the payment's mortgage interest is applied against this year's tax deductions instead of next year's.  And lest you think you're paying "in advance", remember that mortgage interest is paid in arrears; a payment due January 1 accounts for interest that accumulated in December 2008 anyway. 

Tax planning is a complicated issue and not all homeowners will qualify for mortgage interest tax deductions. Check with your tax professional before making tax planning decisions.

If you don't have an accountant you trust, call or email me anytime; I'm happy to make a recommendation to you.

In a week in which mortgage markets struggled to find direction, mortgage rates edged higher overall. The weekly increase was the first since mid-November and it may signal higher rates as we head into 2009.

The week's most talked-about story hit the wires Friday.

According to the government, the U.S. economy shed 533,000 jobs last month and the national Unemployment Rate rose to 6.7%. This was the largest number of jobs lost in any one month since the recession of 1974.

In a normal market, job losses of this magnitude would have caused stock markets and mortgage rates to fall. But stocks and rates didn't fall Friday. To the contrary, both rose. This is because -- while the jobs reports was the most talked-about story last week -- it wasn't the most important one. That story had already been told.

Last Monday -- officially -- we learned that U.S. economy is in recession.

Although most of Wall Street knew it already, the official determination was an acknowledgement that "bad economic data" is not only acceptable, but normal given the current conditions.

In other words, when the jobs data was released Friday morning, one reason why mortgage rates rose was because markets somewhat shrugged off the data, saying: "Yeah, of course job losses are up -- we're in a recession, after all."

This is an unfortunate development for rate shoppers because bad data usually anchors mortgage rates lower. Going forward, that won't likely be the case -- at least until the recession is declared to be over.

This week, without much new data being released, markets should trade largely on news of federal intervention and expectations for the U.S. economy. As retail sales figures drip in from the weekend, be wary of stronger-than-expected numbers as that could pull mortgage rates higher. The same goes for Friday's official Retail Sales data for November.

Either way, expect volatility throughout the week -- same as we've seen all year long.

(Image courtesy: Wall Street Journal Online)

Government action fueled a mortgage market rally last week, leading mortgage rates lower for the second consecutive week.

Despite soft housing numbers and evidence of a slowing economy, mortgage rate shoppers found reason to celebrate:

• Citigroup was "rescued"
• Wall Street liked the new economic team
• The government pledged $600 billion to buy investment-grade mortgage bonds

These 3 elements helped drive mortgage rates to their lowest levels since January 2008 -- in some cases shaving a full percentage point off the offered rate.

Homeowners responded to the dip and refinance activity reached "a frenzy".  As evidence, at least one national mortgage bank reported more loans were locked on Tuesday, November 25 than for the first 24 days of the month combined.  Anecdotally, other lenders saw similar action.

However, low rates rarely stick around. 

The last time that rates like they did last week, markets recovered within a week and rates returned to "normal".  This week provides ample chance for that to happen again.

Throughout the early part of the week, 5 members of the Fed will make public appearances, including Fed Chairman Ben Bernanke.  With the Fed's next meeting scheduled for December 15, markets will be looking for clues about how the Fed may change the Fed Funds Rate. 

When the Fed Funds Rate falls, mortgage rates tend to rise on the news.

Then, on Thursday, retailers start announcing their "same store" sales figures for November.  This will clue us in to the true health of the economy because consumer spending accounts for two-thirds of it.  If same-store sales are dramatically lower, expect calls for a large Fed Funds Rate cut.

And lastly, Friday brings us the jobs report.  As terrible as the employment reports have been this year, it will take an especially higher number of jobs lost in November, or an exceedingly high Unemployment Rate to have much of an impact on mortgage rates.

This month, weak jobs data should be harmful to mortgage rates because more out-of-work Americans may lead to more mortgage defaults nationwide, plus additional Fed Funds Rate cuts.

(Image courtesy: The Wall Street Journal Online)