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Will they or won't they pass it?

The uncertainty prior to the vote created huge market swings that ultimately sent the Dow Jones Industrial Average to its worst week since the 2001 terrorist attacks, while causing similar damage in the mortgage markets.

Mortgage rates worsened for the third straight week last week.

However, if we take the congressional vote out of the picture and look strictly at last week's data, we would have expected mortgage rates to fall instead of rise.

For example, the economy shed another 159,000 jobs, bringing the 2008 total to 760,000 lost jobs.  This reduces the likelihood of inflation and is normally good for mortgage rates.  In addition, the U.S. dollar had its strongest week ever against the Euro.  This usually attracts buyers to the mortgage bond market, driving down rates.

And third, Fannie Mae eliminated one of its mandatory loan fees.  This improves mortgage bond pricing for borrowers, ultimately leading to lower rates.

But, mortgage rates rose didn't fall last week and that shows how deep the economic uncertainty really ran.  And this week, with the bill now passed into law, we would expect the market to turn its attention back to fundamentals.  But it can't.

Unfortunately, there's no new data for release this week so, in the absence of data, markets should take their cues from the following sources:

1. The 8 scheduled Fed speakers, including Bernanke on Tuesday
2. Wednesday's Pending Home Sales report
3. Persistent rumors of a "surprise" Fed Funds Rate cut

Regardless of to what markets react, though, be prepared for them to react swiftly and for mortgage rates to dip and spike -- often in the same day. 

In other words, a mortgage rate quote from the morning is likely to be "expired" by the afternoon so if you see a rate and payment that you like, consider locking it.  It likely won't last long.

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

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.

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)

In an effort to provide "the most market support possible", Fannie Mae is cutting one of its mandatory loan fees by 0.250 percent, effective immediately.

Fannie Mae introduced the Adverse Market Delivery Charge in December 2007 to offset foreclosure and delinquency losses.  The initial fee was a quarter-percent of the amount borrowed. 

Then, as market conditions worsened, Fannie Mae doubled its across-the-board loan fee to 0.500 percent in August of this year.

As of today, the fee is back to its starting point.

Since the start of the 2008, Fannie Mae has made 21 separate changes to its mortgage guidelines.  Most have been detrimental to borrowers, increasing the difficulty, or the cost, of qualifying for a conforming home loan.

Today's change is among the few that are beneficial.

With mortgage pricing edging higher because of the looming Congressional vote and Wall Street's reaction to the weak jobs report, the good news is that price changes could have been worse. 

Fannie Mae's Adverse Market Delivery Charge flip-flip is keeping rates in check -- perfect timing for home buyers shopping for their new mortgage.

Buyers are returning to the housing market.

Each month, The National Association of REALTORS^® tracks homes under contract to sell, but whose closing has not yet happened.  It calls them "pending sales" and publishes a monthly report to quantify them. 

The Pending Home Sales report is important because it's meant to predict future home sales activity.  History shows that 80 percent of homes under contract will "close" within 60 days, and most of the rest will close within 120 days. 

If Pending Home Sales are up, it's believed, actual home sales will be up, too.

In August, Pending Home Sales jumped 7 percent from the month prior, returning to levels not seen in over a year.

The report's strength suggests that buyers are returning to the housing market, continuing the trend that started in March.  This is tremendously good news for sellers because more buyers on the hunt means more demand for homes which, in turn, leads sale prices higher. 

The Pending Homes Sales report is not a perfect predictor, however.  For one, it's not measuring an actual sale -- just the expectation of one.  In addition, it only accounts for "used" homes, ignoring new construction. 

But that aside, the strong uptick in August tells us that home buyers are re-engaging at a quickening pace and finding that "now" is a good time to buy real estate.  When buyer demand rises, the real estate market as a whole isn't usually that far behind.

(Image courtesy: The Wall Street Journal Online)

Monday, the Dow Jones Industrial Average closed below the psychologically-important 10,000 level for the first time since 2004. 

Despite the milestone-marker breach, however, there was a large group of Americans with reason to cheer.  As stocks sold off, mortgage markets rallied to the benefit of home buyers and mortgage rates shoppers everywhere. 

Conforming mortgages rates improved yesterday.

Most interesting here is that rates improved for the same reason that the stock market fell.  Because of lingering concerns about the worlds' economies, investors lost their collective appetite for risk Monday.  In response, they sold their stock positions and parked the proceeds in the "safe haven" of U.S. government-backed debt. 

The extra demand for safe investments pushed up the prices on mortgage bond which, in turn, pushed down mortgage bond rates.

Now, we can't predict when the market's risk appetite will return, but when it does, expect money to flow into stocks just as quickly as it left. 

All year long, with respect to stock markets, it's been either "everybody in" or "everybody out" and, for now, it's everybody out.  This is why mortgage rates fell Monday. 

But, when the momentum shifts -- and it will shift -- mortgage rate shoppers would do well to be prepared.  Be ready to lock that mortgage rate because as soon as the stock market reverses course, mortgage rates will head higher. 

And if stocks recover as quickly as they tanked, expect mortgage rates to spike badly.

(Image courtesy: USA Today)

Monday afternoon, the U.S. House of Representatives defeated the $700 billion "Bailout Bill", surprising Wall Street and the world.

The Dow Jones Industrial Average responded by falling 777.68 points -- its largest one-day loss in history and, this morning, every newspaper in America is covering the story as front page news.

Lost in the coverage, however, is how the "No" vote created a terrific opportunity for mortgage rate shoppers.

Yesterday, as money fled the tanking stock market, most of it ended up getting parked in the relative safety of government-backed bonds which includes, of course, the mortgage bonds. This rising demand for mortgage bonds caused rates to fall.

To investors, stock markets represent risk and bond markets represent safety. So, when market sentiment changes, as it did yesterday, Wall Street players often shift their dollars from one forum to the other. This is why yesterday's stock sell-off was good news for mortgage rate shoppers -- the added demand for "safe" securities drove down rates.

Conforming mortgage rates were lower by about an eighth-percent Monday.

Now, today, mortgage rates are opening flat, suggesting that markets are in a Wait-and-See Mode. Wall Streets knows that the defeated bill will re-emerge later this week and, when it does, expect traders to respond accordingly.

If the new-look bill is viewed as favorable to U.S. businesses without harming taxpayers, expect stock markets to improve and mortgage rates to rise. If the bill fails to accomplish that goal, however, expect mortgage rates to improve.

Have a specific mortgage question? Call or email me anytime!