It's a short, but heavy, week for mortgage markets. Investors are returning to the fray after a few lighter-than-normal weeks and their return should bring some stability to mortgage rates.
Last week, mortgage bond prices rose which, in turn, moved mortgage rates down.
The main reason for last week's rate improvement was the assassination of Pakistan's former Prime Minister.
Unlike economic data that can be forecasted or extrapolated, a political assassination happens instantly and it creates uncertainty about the future political and economic policies of a nation.
Consider the following facts about Pakistan:
Instability in Pakistan threatens the economies of many nations. After the assassination, investors' risk models changed in an instant and many sought stability.
As the world's largest marketplace, the United States is where they find it. This is sometimes called "safe haven buying" or a "flight-to-quality" in the newspapers and on TV.
As the investors move their money to the U.S. markets, demand for mortgage bonds increases and this pushes mortgage rates down -- just like we saw last week.
This week, mortgage markets will be digesting the minutes from the Federal Open Market Committee's last meeting and the December jobs report. Investors are expected weakness in the job report so if they get it, mortgage rates won't do much.
If the report comes in strong, though, expect mortgage rates to rise. More people working means more income to pump back into the economy and that makes markets fearful of inflation.
When evidence of inflation appears, mortgage rates tend to rise.
(Image courtesy: Encyclopaedia Brittanica)
The Fed lowered the Fed Funds Rate by 0.500% to 3.000% yesterday. The move was widely anticipated and so Wall Street's reaction was muted.
Because it is tied to the Fed Funds Rate, Prime Rate also fell by 0.500% yesterday. Holders of home equity lines of credit and credit card debt benefited from the change and will see lower interest costs in next month's statements.
In the statement above -- as explained by The Wall Street Journal -- the Fed expresses concern about the housing and jobs markets, while noting that inflation is less of a worry. This leaves the possibility of future Fed Funds Rate cuts open.
SourceParsing the Fed StatementThe Wall Street Journal OnlineJanuary 30, 2008http://online.wsj.com/public/resources/documents/info-fedparse0801b.html
If you only read headlines this past week, you may have missed two very important points.
The first story relates to Housing Starts. Housing Starts measure the number of new homes entering the construction phase. The headline blared "Housing starts plunge to 16-year low".
If you are a homeowner, this is terrific news.
Because home values are governed by Supply and Demand, fewer homes built means that home demand has a chance to rebalance against home supply.
This places upward pressure on home prices nationwide.
When Housing Starts drop, it says more about weakness in builder sentiment that it does about the state of the housing nationwide. Housing Starts are at all-time lows because builders want to sell the product they have before putting more product on the market.
The second story was yesterday's New Home Sales figures.
The headline read that "US new-home sales slide in record plunge" but, again, let's look a little deeper.
New Home Sales are defined as homes that are newly built. Stated differently, it specifically counts the number of homes sold that were once classified as "Housing Starts".
If Housing Starts falls, therefore, we can expect New Home Sales to fall, too. The two data points count the same housing inventory at two different points along a timeline.
These two stories are related but neither should be construed as bad news. As builders cut back on the supply of homes, it should create an increase in relative demand.
For homeowners, this is a positive development.
(Image courtesy: New York Times)
Mortgage rates change from day-to-day, but last week's volatility was a record-breaker.
After drooping through Tuesday and then skyrocketing Wednesday and Thursday, mortgage rates retreated slightly on Friday.
By weeks' end, rates were at their same levels from mid-December.
This is in contrast to Tuesday, just after the Fed's rate cut and before the stock market rally. Mortgage rates had been touching near four-year lows for some home loan products.
This week could be equally hectic because heavy economic data it hitting the wires, and because the Federal Open Market Committee is meeting.
The major activity gets started Tuesday with the Consumer Confidence report.
Markets care about this survey because recessions tend to be self-fulfilling prophecies -- if people believe it will happen, it generally does. Therefore, if average Americans are feeling worse about the economy, it may cause stocks to sell-off to the benefit of mortgage rates.
Notice from the graph above how confidence plunged through the second half of last year.
On Wednesday, the FOMC adjourns from its two-day meeting.
What the Fed does will not be as important as what the Fed says. Markets will dissect the FOMC's press release for clues about our economy's strength. If the statement cautions about dramatic weakness in the economy, expect mortgage rates to fall on the absence of inflation.
Then, on Thursday, markets get treated to the Personal Consumption Expenditures report. The PCE is a Cost of Living index and is the Federal Reserve's favored inflationary report. If "normal living expenses" are increasing, it should create upward pressure on mortgage rates.
And lastly, on Friday, the Bureau of Labor Statistics releases the jobs report for January.
Markets are expecting an improvement on December's figure and if that adjustment is greater than expected, mortgage rates will rise on the belief that the economy is not as weak as previously reported.
It will be a busy week like last week so it pays to think in terms of "payment" instead of "rate". If you're in the market for a mortgage and your proposed payment is within budget, consider locking in advance of this data-laden week.
(Image courtesy: The Wall Street Journal Online)
(Pronounced: NEGH-ah-tive am-ohr-tih-ZAY-shun)
Negative amortization is the process by which a loan's principal balance increases on a month-over-month basis.
This is in contrast to a "typical" amortization schedule in which the principal balance decreases.
Negative amortization is an optional feature on some home loans.
These mortgages are usually referred to by the brand names "Option ARM", "Pick-a-Payment", or "Payment Option ARM".
Many industry veterans collectively call refer to these types of mortgages as "Neg-Am" loans.
When a Neg-Am mortgage statement arrives each month, the homeowner can choose his preferred payment structure.
Choice #1 is like making a "minimum payment" on a credit card. It is the only option that adds to the principal balance so, therefore, it is the only negative amortization option of the four payment choices.
In this sense, negative amortization is a choice and not a certainty.
In the early 2000s, Neg-Am loans grew popular as home affordability products. Many homeowners made the minimum payment each month and found that their mortgage balance had swelled.
Some of these homeowners lost their homes.
Because of their complex structure and potentially devasting consequences, NegAm home loans have been dubbed "nightmares" by several media publications.
However, many sophisticated homeowners have successfully applied NegAm loans to help meet their financial goals.
Like all home loans, NegAm products are a better fit for some homeowners than others. Some likely candidates include:
Homeowners with questions about negative amortization loans should seek counsel from a qualified mortgage professional.
When the Federal Reserve lowered the Fed Funds Rate by 0.75% yesterday, it was in response to economic weakness that mounted since its last meeting December 11, 2007.
By contrast, the mortgage markets meet every day.
Because of this, mortgage rates had already "priced in" the weakness to which the Fed was reacting.
This is why mortgage rates did not fall by the same 0.75% yesterday -- they only fell slightly.
Two important rates that did fall, though, were the 6-month LIBOR and the 1-year constant maturity treasury (CMT).
These are two popular interest rates used in adjustable-rate mortgages.
When an ARM adjusts, it adjusts according to a simple math formula:
(New Interest Rate) = (Index) + (Margin)
Where:
Index: A variable, usually 6-month LIBOR or the 1-year CMT. Margin: A constant, usually ranging from 1.500% to 6.999%
So, if the indices move lower -- as we saw yesterday -- the adjusted interest rate on a mortgage is going be lower, too.
As an example, LIBOR fell percentage point over the last month from 4.83% to 3.83%. This means that mortgage rates tied to LIBOR will adjust 1 percent lower than they would have in December 2007.
For every $100,000 in a principal + interest loan, this yields $65 per month in savings.
Of course, each mortgage has unique index, margin and rate characteristics so talk to your loan officer about how your ARM operates.
As promised, last week was heavy on data and on drama. And mortgage rates continued their slide lower.
This week, by contrast, is devoid of data and markets are already digesting the Federal Reserve's surprise 0.750% rate cut this morning.
Mortgage rates are falling in response, but not because of what the Fed did as much as what the Fed implied by doing it.
The Federal Reserve does not control mortgage rates, per se, but it does exert an influence. This is because when the Federal Open Market Committee makes changes to the Fed Funds Rate, it is making a broader statement about the health of the economy.
This morning, and in advance of its 2-day meeting January 29-30, the Federal Reserve chopped the Fed Funds Rate by 75 basis points to 3.500%. This signals to markets that the Federal Reserve is keen on engineering a soft landing for the economy.
Mortgage rates are falling for a different reason.
The chart above is from last week and illustrates what traders thought the Fed would do to the Fed Funds Rate at its January meeting.
Note that over a two-month span, the market expectation changed. The blue line (4.250%) represents the Fed Funds Rate prior to this morning.
Two months ago, markets overwhelmingly expected the FOMC to lower the Fed Funds Rate by 0.250% at its January get-together(as represented by the white line).
As time passed, however, that expectation changed and mortgage rates changed, too. This is not a correlated event, however. Both the Fed Funds Rate and mortgage rates tend to fall during times of economic weakness.
On the right of the chart is last Friday. At that time, market expectations for the January meeting were equally split between a 0.500% drop and a 0.750% drop (as represented by the orange and red lines, respectively).
The 0.500% drop signals weakness; the 0.750% signals dramatic weakness.
So, after the Federal Reserve's surprise move this morning, it turns out that the Fed sees dramatic weakness. Mortgage markets are reacting to this "news" and resetting their bets by buying more mortgage bonds.
This added demand is causing rates to fall, but not anywhere near the three-quarter percent levels by which the Fed cut the Fed Funds Rate.
Mortgage rates are down slightly.
(Image courtesy: Federal Reserve Bank of Cleveland)
Posted on January 22, 2008 | Comments (0)
Overall, mortgage rates are at their lowest levels since late-2005.
Despite rates falling, however, not everyone can take advantage.
This is because mortgage lenders started to tighten the guidelines of what they will lend and to whom, also beginning in late-2005.
In other words, the chart at right doesn't apply to all homeowners equally.
If you are new in your home, or have refinanced your mortgage within the last 24 months, make a call or send an email your loan officer to ask about today's low-interest-rate environment.
(Source: Bankrate.com)
On average, Americans are now paying more than $3.00 per gallon for gasoline. This is roughly 40 percent higher than the cost of gasoline last January when gas hovered near $2.15 per gallon.
Higher gas prices are one reason why the economy is slowing down. With so many additional dollars being spent at the pump, there's less money for discretionary items.
But, it could be worse.
The 5-year chart above shows how gas prices are failing to keep pace with rising oil costs. From 2003-2005, the correlation was fairly strong; starting in mid-2007, it's been fairly weak.
If gas prices had been keeping pace with oil prices since last summer, Americans may have been subject to prices upwards of $5.00 per gallon nationwide.
(Image courtesy: GasBuddy.com)
It's a point that's always worth repeating:
Ben Bernanke and the Federal Reserve do not control mortgage rates
This is particularly relevant today as newspapers, television programs, and market pundits posit that the U.S. is in the midst of a recession.
The latest evidence supporting that assertion is that Retail Sales grew at its slowest pace since 2002 -- the last time the U.S. was in a recession.
Many people fear recessions, but they are natural parts of a business cycle. As the nation's protector of the economy, though, the Federal Reserve can weaken a recession's impact on the economy by lowering the Fed Funds Rate.
When the FFR is lower, businesses and consumers pay less interest on business debt and consumer debt, respectively. This leaves more money available to spend on goods and services, thereby providing a subtle boost the economy.
This is why the Fed Funds Rate is integral to financial markets and why it gets so much attention in the press. It's also why some people are calling for a drastic rate cut at the Fed's next meeting -- many believe that the economy is hurting pretty badly.
It's not a coincidence that this outlook is causing mortgage rates to fall.
When Corporate America is struggling (or expected to struggle), investors don't like to be over-exposed to the stock market because of its variable nature. By contrast, the fixed returns of the bond market provides a little bit more safety.
As demand for stocks wanes during a recession, therefore, demand for bonds can pick up.
Mortgage rates can fall at times like this because rates are "born" from the price of mortgage bonds. The higher the price, the lower the corresponding rate.
So, as investors leave the stock market and buy bonds -- including mortgage bonds -- the increased demand raises prices and pushes mortgage rates lower.
All of this happens independent of the Federal Reserve -- it's a natural function of the stock and bond markets.
The Federal Reserve does not control mortgage rates but it does control the Fed Funds Rate. And both tend to respond to economic weakness.
(Image courtesy: ABC News)
For all that's been said about the proposed Bank of America-Countrywide merger, what's not getting talked about is how the merger will impact existing Countrywide customers.
The short answer is that it won't.
A mortgage (and its corresponding note) is a legal contract between the lender and the lendee, signed on the date of closing. It is binding and cannot be altered by either party, even if the mortgage is transferred between lenders.
As a homeowner, the only way to "end" the contract is to satisfy the home loan with a full repayment. That can happen one of three ways:
Mortgage payment servicers commonly transfer home loans between each other. This happens on an everyday-basis -- not just when there's a merger, or a closure.
When mortgages are transferred, HUD requires the former lender to send a 15-day advance notice to its lendee; the new lender is required to send a similar notice.
So, for homeowners that write their mortgage checks to Countrywide every month, it's possible that the address to which you mail your payment may change, but the terms of your mortgage cannot.
Markets are welcoming the return of cold, hard data this week.
Most of last week was spent making sense of Fed speakers, recessionary fears, and a takeover of the nation's largest lender.
This week, we'll find out if the recent fears of recession are on target, or overblown.
The data deluge starts Tuesday with the Retail Sales report.
Markets are predicting the worst Holiday Shopping numbers since 2002 and those low expectations have already been priced into mortgage bonds. Therefore, only a completely terrible number will cause mortgage rates to move lower.
Also on Tuesday, markets get hit with the Producer Price Index. This is like a "Cost of Living" measurement, but for business. If businesses are paying more to operate, it's likely that those costs get passed to consumers.
Last month, PPI was the highest on record since 1973 because of high energy costs. If it comes in high again, mortgage rates should rise on the expectation that consumers will eventually bear the burden of higher costs.
Wednesday, the consumer Cost of Living index gets released in addition to the Beige Book. The Beige Book is the Federal Reserve's local market reports that point to overall strength or weakness in different regions.
Then, on Thursday, markets will be watching the number of first-time filers for Unemployment Claims. After Unemployment Rates jumped last month, it's expected that jobless will be higher than "normal", suggesting that employers are still trimming their workforces.
This is recessionary and should help to hold mortgage rates down.
Lastly, on Friday, it's the University of Michigan Consumer Sentiment report. Mostly used as a "confidence" gauge, strong readings are thought to push the economy forward because a confident consumer is likely to spend more.
Statistically, though, that correlation is not clear. But, mortgage bonds are sensitive to the report and that's why we watch it.
It's a busy week of data and expect markets to get a firmer sense of where the economy is headed. Weakness is expected and mortgage rates are already pricing it in.
Therefore, be wary of better-than-expected results this week because mortgage bonds could correct quite quickly.
Clipped from NBC's Today Show, real estate maven Barbara Corcoran talks about preparing your home for sale. As usual, her remarks are spot-on.
Some highlights from the 5-minute video:
Corcoran also offers pricing tips that can help get your home sold faster.
Watch the entire interview at MSNBC.
Private Mortgage Insurance (PMI) is an insurance policy paid to a lender in the event that a homeowner defaults on his home loan.
These defaults are up 35 percent over last year, according to an industry group -- bad news for all homeowners requiring PMI with their mortgage.
Much like home insurers adjust premiums after a worse-than-expected Hurricane Season, PMI insurers are raising mortgage insurance rate for all homeowners, regardless of credit history.
And it comes at a time when PMI is in higher demand.
Because second mortgages are not as available as in recent years, using PMI is the only way for some homeowners to get approved for home loans with a less-than-20-percent downpayment.
PMI rates are higher than they were six months ago and additional defaults make it likely that PMI rates will rise again in 2008. As PMI rates increase, so does the cost of homeownership for people whose lenders require it.
SourceMortgage-Insurer Defaults Hit Record Associated PressDecember 31, 2007. 12:30. P.M.http://biz.yahoo.com/ap/071231/mortgage_insurers_defaults.html?.v=1
After demonstrationg tremendous resiliency since the summer, the U.S. economy finally showed signs of breaking last week.
Markets appear to have abandoned the notion of runaway growth and are now wondering "how slow?" and "how soon?".
Coincidentally, three Federal Reserve Bank officials are speaking publicly this week and may help provide some clues. Predictably, newspaper articles are discussing the likelihood of a Fed rate cut.
It's important to remember that when the Federal Reserve lowers the Fed Funds Rate, it is not lowering mortgage rates, too. Instead, mortgage rates are determined by the price of mortgage bonds.
Bonds prices -- like stock prices -- are based on supply and demand and are not set by a government policy. Just like the Federal Reserve can't set the price for IBM stock, it can't set mortgage rates, eigther.
However, the Federal Reserve can influence mortgage rates.
This is because part of the Federal Reserve's role is to manage inflation in the U.S. economy and inflation rates are directly connected to mortgage rates. As inflation pressures increase, mortgage rates usually rise.
So, if the Fed speakers express concern about inflation this week, expect mortgage rates to elevate. If the speakers say that inflation pressures have subsided, expect mortgage rates to idle or fall.
Either way, whether the Federal Open Market Committee reduces the Fed Funds Rate by a half-percent, quarter-percent, or not at all at its next meeting, mortgage rates will move to their own beat.
If the risks of inflation outweigh the risks of recession, mortgage rates should rise.
(Image Courtesy: Pro Music News)
Since September 2007, the Federal Reserve has lowered the Fed Funds Rate by 1.000%.
This has caused Prime Rate to fall by 1.000%, too. This is because the Fed Funds Rate and Prime Rate are directly related.
In mathematical terms, the relationship looks like this:
(Prime Rate) = (Fed Funds Rate) + (3.000%)
So, because Prime Rate is the interest rate upon which credit card rates are based, as the Fed Funds Rate falls, so does the cost of consumer debt.
This is how rate cuts spur the economy.
When the Federal Reserve lowers the Fed Funds Rate, Americans spend less money on interest payments. Therefore, there is more money available for savings and/or spending on other goods and services.
Considering that Americans carry $2.5 trillion of non-mortgage consumer debt, the Federal Reserve's cumulative 1.000% rate cut is now saving Americans $25 billion dollars on an annual basis.
In the face of weak economic data, the Federal Reserve is expected to cut the FFR again this month to jumpstart the economy. Every additional quarter-percent cut would save Americans $520 million in interest payments monthly.
SourceHow the failure of subprime mortgages hurts the overall economy John GallagherDetroit Free Press, January 6, 2008http://www.freep.com/apps/pbcs.dll/article?AID=/20080106/BUSINESS06/801060585/1002/BUSINESS
(Image Courtesy: Wall Street Journal Online)
Stock markets tanked last week behind high oil prices and weak employment data.
Amid a sell-off that led to a 4.5% decline in the S&P 500, investors sought safety in the bond markets.
As a result, mortgage bonds improved last week, driving some mortgage rates to their lowest levels in two years.
This week, with no economic data on tap, mortgage markets will find direction from a variety of sources.
The first is oil. If oil prices fall this week, expect that mortgage rates will rise slightly. Cheap oil can be fuel for an economic engine so if oil prices are lower, it could help stave off recession.
No recession, though, means that inflation is more likely and inflation usually leads to higher mortgage rates.
The second source of direction will come from the three Fed officials scheduled to speak publicly this week.
Talk of recession should drop mortgage rates across the board whereas talk of inflation should raise them. Chairman Bernanke's speech will draw the most attention; he speaks Thursday.
And lastly, mortgage rates could move this week on profit-taking from mortgage bond traders.
Mortgage rates have fallen because there has been more demand for mortgage bonds. More demand leads to higher prices which decreases bonds' rate of return.
If traders look to lock in profit, they will sell their mortgage bonds, reverse that process, and rates will rise.
On the first Friday of each month, the Bureau of Labor Statistics releases key data about the American workforce.
The report is officially called "Non-Farm Payrolls" but most people refer to it as the "jobs report".
The jobs report's influence on markets is palpable for two major reasons:
When consumer spending is strong, the economy expands. This tends to be bad for mortgage rates because a growing economy is at risk for inflation.
Inflation causes mortgage rates to rise, making home ownership more expensive.
By contrast, when consumer spending is low, the economy tends to contract. This tends to be good for mortgage rates because -- well -- it's not inflation.
So this morning's jobs report held two key data points:
The newspapers and television shows are saying that this news is terrible and that the U.S. is headed for recession. That point is debatable. What isn't conjecture, though, is that with fewer Americans in the workforce, there is less money available to propel the economy forward.
That's why mortgage rates should fall today -- because the threat of inflation is reduced.
SourceU.S. payrolls rose 18,000 in DecGlenn SomervilleReuters.com, January 4, 2008http://www.reuters.com/article/economicNews/idUSN0324081520080104
The price of oil briefly touched $100 per barrel yesterday, just short of the all-time inflation-adjusted high of $102.81 in April 1980.
According to economic forecasting firm Global Insight, each $10-per-barrel increase in oil prices:
And, because oil prices have nearly doubled from the $51/barrel levels of January 2007, the above figures calculate out to:
In addition, oil's run-up has ignited fears of inflation and of recession, with the possibility that both would exist at the same time. This rare economic condition is commonly referred to as "stagflation"
Stagflation is a particularly difficult situation for the Federal Reserve because increasing the Fed Funds Rate would increase the likelihood of recession whereas lowering the Fed Funds Rate would increase the risk of inflation.
For now, mortgage rates are benefiting because less evidence of inflation could attract foreign investment in mortgage bonds. As demand for bonds increases, mortgage rates fall.
SourceWeakened U.S. Economy May Be Facing New Test Sudeep ReddyThe Wall Street Journal Online, January 3, 2008http://online.wsj.com/article/SB119930367405362875.html