Watch What I Do, Not What I Say I'll Do

The University of Michigan Consumer Sentiment Survey slipped to 88.4 in March, down from February's 91.3 and its lowest level in six months.

Why should you care about the UofM survey? In a nutshell, you shouldn't. But, you sort of have to.

Here's why: Consumer confidence is considered important by markets because hundreds of "real people" are telling the surveyors how they feel about the economy.

Because the surveyed people are the "word on the street", economists can get a better glimpse into how the economy is likely to perform in the near-term.

For example, if people are feeling good about their personal finances, they are more likely to spend more and propel the economy forward. The reverse is also true. If they feel uneasy about their personal finances, they will curtail spending and pull the economy back.

But, confidence surveys can be worthless because what people say and what they do are often two very different things.

On the heels of today's UofM survey, the Commerce Department released the Personal Spending report.

We would expect that the falling University of Michigan confidence numbers would translate into lower levels of Personal Spending. On the contrary! Personal Spending was up by whopping 0.6%. People are less confident about the economy, but are still choosing to spend more.

Mortgage markets are mixed on today's data and mortgage rates are relatively unchanged.

Bernanke Says Inflation Is "Somewhat Elevated"

Ben Bernanke delivered a prepared speech to the congressional Joint Economic Committee Wednesday in which he stated that inflation is "somewhat elevated", but that it's no reason to expect a Fed Funds Rate hike anytime soon.

Some of Chairman Bernanke's more salient points:

1. Economic growth has slowed because of a "substantial correction" in the housing market
2. Sub-prime industry problems are self-contained (so far)
3. Business spending will pick up this year
4. Consumer spending will propel the economy forward
5. Inflation is down largely because of energy costs are down

In other words, there are multiple reasons why inflation is higher than desired and even Bernanke admitted that there are upside and downside risks to each of these points. As a result, markets had a hard time digesting the text.

Immediately following his speech, mortgage rates improved, but by the end of the day, rates had swung back to unchanged.

What Last Night's Oil Price Spike Reveals About Market Nerves

Oil prices are down since last year overall, mostly because the political risk has been removed from pricing.

Last night, though, a rumored Iranian attack on a U.S. ship in the Persian Gulf showed how quickly markets can flip if oil supply is threatened.

Immediately, the political risk of tightened oil supply found its way into the price of oil.

Within minutes of the rumor, oil prices jumped more than $5 per barrel to cross the $68 level. Only after the U.S. military refuted the story did prices retreat.

Higher oil prices create higher costs for Americans in many facets of life including gasoline bills, heating and cooling costs, and energy bills.

Higher oil prices increase costs on business and consumers and that is considered to be inflationary, which generally leads to higher mortgage interest rates.

Would You Have Answered The Mortgage Type Quiz Correctly?

The pie chart at right comes from a Bankrate.com survey, sampling 1,000 adults about their current housing situation.

The question asked: What type of mortgage do you currently have?

While the 34% "Don't Know" figure is troubling, even more frightening is the 6% "ARM" figure.

The sample size was small, but far more than 6% of homeowners carry adjustable rate mortgages. Some of the survey responders may have mistaken their "5-year fixed rate mortgage" for a true fixed rate mortgage -- even though they are aware that the rate can change after 60 months.

According to the Federal Reserve, ARM holders tend to be unaware of how often their home loan can adjust, the maximum interest rate to which it can adjust, or even the rules by which the new, adjusted interest rate is calculated. That all can lead to financial stress in a household.

If you own a home, you need to understand the basic structure of your own mortgage the same way that you need to balance your checkbook each month. Even if you have a fixed rate mortgage -- you may be mistaken, after all.

It's never too late to look over your mortgage statement or reviewing your closing documents. If you don't know how to interpret what you're reading, get help from a professional.

For additional information that may be of benefit, you can look through the topics in the "Learning Center" portion of my website.

(Image Courtesy: Bankrate.com)

The Week In Review (March 26, 2007) : What To Watch For

The Fed held the Fed Funds Rate at 5.250% last week and included verbiage in its Press Release that the FFR may have to come down before it goes up again. This gave investors reason to cheer and the stock market rallied to its best week in four years.

Mortgage rates did not fare as well, however, weighed down by competing fears about inflation and sub-prime lending.

This week could be a wild one for mortgage rate shoppers -- there are six major data points, culminating in Friday's Personal Consumption Expenditures (PCE). If PCE measures higher than expected, mortgage rates will spike Friday.

PCE matters because it is a lot like the "Cost of Living" index. The main difference is that it specifically subtracts out sales made to business and governments. Therefore, PCE paints a more accurate picture of consumer spending because it isolates cost pressures on individuals.

One more reason why PCE can move markets so quickly: the Fed tells us that PCE is their preferred inflation measurement. So, because the Fed watches it, we should watch it, too.

The Headlines On Housing Aren't Telling The Whole Story

As a consumer, it's very easy to be misled by newspaper headlines. Today provides a great example.

"Sales of Existing Homes Up 3.9% For The Biggest Monthly Gains In Three Years"

What was not mentioned in the headline was that total inventory rose by 5.9%, adding more supply than for which there is demand.

More supply usually pushes prices down and last month was no exception. The median sale price was down 1.3% from February 2006.

This is the second time this week that real estate headlines were misleading.

Monday, you probably saw this headline in your preferred news source: "9% Jump in New Home Construction". The headline was followed by an article highlighting strength in the housing sector because more homes are being built.

Missing from the articles, though, was that the Housing Starts survey's Margin of Error was 10.2%.

Without getting into the math behind it, if Margin of Error exceeds the measurement, the data measured is worthless. The headline could have read "1.2% Drop In New Home Construction" and that would have been "true", too.

(Author's Note: If you want to know more about how Margin of Error works, check Google and find an answer that suits you. Or, just trust me on it.)

Housing may be strong or housing may be weak. But, most likely, housing is both of these things. It all depends on your particular street because all real estate is local. Either way, look deeper than the headlines -- there's always more to the story.

The Fed Gets Ambiguous; Mortgage Rates Fall

Ben Bernanke and the Federal Open Market Committee spoke with ambiguity yesterday in electing to keep the Fed Funds Rate at 5.250%.

So far, mortgage rates have benefited.

A major goal of the Fed is to manage the expectations of markets. Therefore, what the Fed says is sometimes not as important as what it does.

In yesterday's announcement, the Fed expressed concern that inflation is not slowing as expected, but also added verbiage that its next move may be to drop the FFR. Previously, the Fed discussed the need for "additional firming" of policy (read: rate hike); that language was removed entirely.

A lower Fed Funds Rate means that money is "cheaper" which tends to be good for consumers and business. Mortgage rates moved lower on the possibility.

The Fed Sets The Fed Funds Rate Sets Prime Rate

This afternoon, the Fed adjourns after a two-day meeting and it is widely expected that they will leave the Fed Funds Rate unchanged at 5.250%.

So, what is the Fed Funds Rate and why does it matter to everyday people?

The Fed Funds Rate matters to you and me because it is used to calculate Prime Rate, a popular consumer interest rate used for credit cards and home equity lines of credit.

And why is it called "Prime Rate"?

That's because banks are smart.

Banks know that if Prime Rate was called something like "Consumer Loan Interest Rate", we would all have our guard up. Instead, it's named "Prime Rate" and that makes us feel warm and fuzzy. "Prime" is a strong word with a positive connotation.

It's important understand, though, that when the Fed makes changes to the FFR, it directly impacts Prime Rate; the two move in lock-step.

Prime Rate is always 3.000% higher than the Fed Funds Rate.

For example, in June 2004, the FFR was 1.000% and Prime Rate was 4.000%. Since that date, however, the two have increased to today's levels of 5.250% and 8.250%, respectively.

Because of the increase, credit card balance-carrying Americans have faced a 4.00% APR increase and homeowners with home equity lines of credit have watched their HELOCs more than double in payment.

The Fed is widely expected to leave the Fed Funds Rate unchanged today, but may provide clues about the future path of the benchmark rate. Any hints that the FFR will be lowered should provide a boost to the housing market.

Of course, the opposite is true, too. If the Fed cites economic strength and that FFR may have to be increased, it should have a detrimental effect on housing.

(Image Courtesy: Wall Street Journal)

Mortgage rates are somewhat restrained today as the Fed begins its two-day meeting.

As reported by the Census Bureau, Housing Starts -- defined as the number of units for which construction began -- surprised to the high-side, despite a cold February.

The 9% increase over January showed relative strength, but when compared to February 2006, the number of starts is down 28.5% year-over-year.

This data points to an overall slowing in the housing market.

Supporting the slowdown, Building Permits are also down. That data point registered a 2.5% decline versus last month, and a 28.5% decline versus February 2006.

Market mentality is that the FOMC will look at today's housing data as indicative of a general housing slowdown, and that is generally good for mortgage rates.

Traders will stop short of placing heavy bets, though, so until tomorrow afternoon's FOMC press release, expect general malaise and flatness in mortgage rates.

(Image courtesy: Wall Street Journal)

The Week In Review (March 19, 2007) : What To Watch For

Sub-prime mortgage news dominated the headlines this past week as the Chicken Littles were out in full force. Perhaps the fears of a credit crunch are overblown, but then again, perhaps there's reason to worry.

Like everything else in the world of economics, it all comes down to expectations.

Markets makes predictions about the future health of the economy and then they place bets to reinforce their predictions. This week, there will be several "expectation setters" to keep an eye on.

The major expectation setter will be Wednesday as Ben Bernanke and the Federal Open Market Committee meet to discuss U.S. monetary policy. After their meeting, the FOMC will issue a press release that will be heavily scrutinized by global investors.

Traders will be reading between the lines to see if the Fed believes our economy is expanding or contracting.

Any whiff of contraction and mortgage rates will plummet because the prevailing expectation is that the Fed is comfortable with the current expansion levels.

The other expectation setter comes in two parts: Monday's Housing Starts data and Friday's Existing Home Sales data.

Markets will be looking at both of these figures to see if sub-prime mortgage defaults spilled over into builders' development plans and the general housing market, respectively.

This could be a volatile week for mortgage rates with so much uncertainty ahead.

The headlines are once again full of news from the mortgage and real estate front, and this time, the "subprime meltdown" is taking center stage ...

A "subprime" home loan is a loan where the client has some significant credit issues, or was otherwise unable to qualify for a standard, conventional loan. Due to the fact that these loans tend to be quite risky for the lender...they also bear higher interest rates to match, as well as often being adjustable rates that likely have recently hiked sky high, not to mention the steep prepayment penalties they generally carry.

These loans have been around for years - so why all the drama now?

Many subprime and other adjustable home loan rates have moved dramatically higher, due in part to the Federal Reserve Boards recent rate hike cycle. So as these rates are adjusting higher - and the payment right along with it - the homeowners are finding that they are unable to keep up with the dramatic increase in payment.

In the past, homeowners in this situation would simply throw the house on the market, realize enough of a profit to cover any prepayment penalties, and literally move on. But the soft real estate market isn't making this quite so easy any more - houses are not selling as quickly, and the home appreciation rates enjoyed in the past have moderated.

So the subprime homeowner is stuck - and many of these homes are falling into foreclosure, causing even more problems. As more and more loans are defaulting, mortgage lenders are forced to tighten up their lending standards across the board in response...making it tougher for a troubled homeowner to even refinance to get out of trouble. Many subprime lenders are feeling the pain, and in some cases, actually being forced to close their doors as they are hit with all the defaulted loans and foreclosed properties coming back home to roost.

How does this impact you?

Read about it in my complimentary weekly market update by clicking on the green MMG Banner on the right.

The Cost of Living Index Increases; Mortgage Rates Increase, Too.

The Consumer Price Index came in higher than expected this morning, registering a 0.371% increase. Excluding volatile gas and food prices, CPI grew by 0.241%. The latter figure is called "Core CPI".

CPI is sometimes referred to as the "Cost of Living Index" because it measures how consumers are impacting by changing prices of energy, housing, transportation, food and beverage, apparel, entertainment and medical services.

When CPI moves higher, it generally "weakens" the value of a dollar because that dollar buys less. This is an inflationary cycle and generally leads to higher mortgage rates.

While both CPI figures are slightly higher than expectations, markets are taking the news in stride. Mortgage rates are only slightly off their best levels of the week, mostly on Friday-related profit-taking.

How To Answer "How Much Home Can I Afford?"

Home shoppers know to consider the impact that a new home will have on their household budget and that is called keeping your eye on the ball.

Unfortunately, most shoppers are keeping their eye on the wrong ball.

The proper way to answer the "How Much Home Can I Afford" question is to think in terms of monthly payment and not in terms of a home's listed sale price.

When a shopper considers affordability in terms of purchase price, he negates the monthly payment impact of:

• Real estate taxes
• Condo/management fees
• Homeowner's insurance
• Mortgage insurance (if applicable)
• Downpayment

A hypothetical $300,000 home could have a combined payment as low as $1,800 or as high as $3,000, depending on the factors listed above.

In addition, mortgage rates change daily, so that can swing the payments either direction, too.

A smarter way to answer "How Much Home Can I Afford" is to determine a target monthly payment and then work backwards.

This way, each home is considered for its overall holding costs (i.e. mortgage, taxes, related fees) instead of its sticker price.

Conforming ARMs Are Going Deliquent More Rapidly Than Sub-Prime ARMs

The Mortgage Bankers Association released a report yesterday detailing how mortgage-holding homeowners are meeting their obligations.

The statistics were a major factor in the Wall Street sell-off yesterday as investors increasingly grow nervous that sub-prime mortgage defaults will spill over into other credit markets and take the economy with it.

The report stated that fourth quarter sub-prime mortgage delinquency rates increased to 14.44% from 13.22%.

This is a 9% jump.

But (as we should always do with statistics), let's go a little deeper.

The report also listed data on non-sub-prime loans. The delinquency rates on these "other" mortgages was even worse! Delinquencies rose from 3.06% to 3.39%.

This is a 10.78% jump.

You would never know it without looking deeper into the numbers, but conforming ARMs went delinquent in Q4 with more vigor than sub-prime ARMs.

Either way, so long as markets are worrying about credit markets, it will siphon money out of stocks and into bonds. Added demand for bonds usually helps to keep mortgage rates low so there may be silver lining here after all.

Moving To A New Town Means Adjusting To A New Cost Of Living

For the budget-aware, buying a new home involves calculating how new PITI payments will impact the household budget.

For in-town moves, the math is fairly simple -- consider your existing budget and replace your old housing cost with your new housing cost.

For non-local moves, however, the budgeting grows more complicated because each city has a distinct Cost of Living.

Bankrate.com makes an interesting calculator available that -- while not perfect -- does a fairly good job of helping a home buyer plan for a new life in a new town, complete with estimated heating bills and grocery tabs.

(Image Courtesy: Calendars and More)

The Week In Review (March 12, 2007) : What To Watch For

The mounting pressure on sub-prime lenders sparked talk of a recession as economists wonder how the housing market will be impacted.

Many sub-prime lenders discontinued 100% financing programs this past week and a few of the biggest names -- New Century and Fremont -- stopped taking applications altogether.

These changes pushed mortgage rates lower through market close Thursday. Upon Friday's open, however, the Non-Farm Payrolls report revealed enough employment and wage strength to make markets reconsider their long-term perspective.

Mortgage rates snapped back quickly and erased much of the week's gains.

This week is back-end heavy with data which should generate more volatility as the week goes on.

Most important to watch for: Thursday's Producer Price Index (PPI) and Friday's Consumer Price Index (CPI). Both are widely watched for clues about economic growth prospects.

Mortgage rates were moving higher yesterday morning after the 8:30 EST release of February's jobs report.

The 97,000 new jobs created was in-line with the 95,000 expectation, but January's numbers were revised higher by 35,000 to 146,000.

In addition, the report showed a slight drop in unemployment and an increase in average hourly earnings.

If we put it all together, it looks like this:

1. More jobs created
2. Fewer people leaving the workforce
3. More income for everyone involved

Separately, these items often lead to higher levels of consumer spending. Together, they may be a lock.

More spending creates more growth and that is why mortgage rates were moving higher yesterday.

Sub-Prime Changes Freeze Out Homeowners

The snowballing in sub-prime lending is becoming an avalanche.

Effective today, many lenders have discontinued 100% financing programs and other "piggyback" scenarios. These types of loans represented the widest doors to homeownership for Americans in recent years.

There are several reasons why a home loan applicant may be considered "sub-prime", but the most common reason is because of the applicant's credit score.

As mortgage lenders continue to tighten their parameters of to whom they will and will not lend, it becomes more important for people to practice strong credit and debt management skills.

myFICO.com features an educational area on the "art" of credit scoring. Regardless of your experience, you'll be sure to learn something. Also, don't forget that you can get a free copy of your credit report once annually.

(Image Courtesy: Sentrx)

Like Me And You, Sub-Prime Lenders Have Credit Limits

Turbulence in the sub-prime lending market forced several big name lenders to shut their doors to business in recent weeks.

In a healthy sub-prime environment, institutional investors buy mortgages in large bundles called "pools" from sub-prime lenders.

The current environment is not healthy, however. Loans are defaulting more quickly than in the past and investors are requiring that the sub-prime lenders "buy back" the bad loans instead of including them in the loan pools.

Unlike a traditional bank, sub-prime lenders don't typically have a deposit base from which to make loans; the lenders often use a bank-issued credit line which carries an interest charge for every dollar used.

As a result, the bad loans sit on the books while the lender is forced to pay interest on them. To add an additional challenge -- just like you and I have limits on our credit lines, so do sub-prime lenders.

So, with enough bad loans hanging around, the lender may be paying interest on the loans nobody wants and may be maxed out on their credit line. This can generate a tremendous loss for the lender who may have no choice but to sell the bad loans for cents on the dollar and/or exit the business altogether.

This is a simplification, of course, but if the default trend continues, more sub-prime lenders will find themselves in a similar pinch in the coming months.

Two Extra Days To File Taxes Means Two Extra Days To Find Deductions

Many of us are knee-deep in paperwork from our banks, our advisors and lenders as we prepare for the April 17, 2007 tax deadline.

Yes, I said April 17, 2007.

April 15 is a Sunday and April 16 is Emancipation Day, a legal holiday in the District of Columbia. So, this year, we all have two extra days to get our federal taxes filed.

If you purchased a home in 2006, you may be entitled to a few extra tax deductions, courtesy of the IRS. Some of the deductions for which you and your accountant should be on the lookout include:

1. Interest on a primary mortgage
2. Home improvement loan interest
3. Discount Points
4. Property taxes
5. Capital gains exclusion
6. Home-based business deductions
7. Selling costs and capital improvement
8. Moving costs
9. Mortgage interest tax credit
10. Energy tax credits

If you are not currently working with a tax professional and need a recommendation, call or email me anytime. It would be my pleasure to help you.

The Week In Review (March 5, 2007) : What To Watch For

Two weeks ago, the tone on Wall Street was overwhelmingly positive and the glass was half-full. Last week, however, that all changed.

The week began with former Fed Chairman Alan Greenspan's remarking that a 2007 recession may be looming, and it ended with Dow posting its worst one week loss in more than four years.

The glass is now half-empty.

Two weeks ago, market bears could barely be heard above the bulls. The roles are now firmly reversed and that is good news for mortgage rates.

Remember, rates generally fall when the economy sputters.

The economic calendar is sparse this week until Friday's jobs report. Until then, expect extreme volatility as market psychology dictates the market (and mortgage rate) movement.

The Good ... Bad ... Ugly of it All

A couple of weeks ago I read a Yahoo Finance article titled: "Throwing Good Money After Bad" by Robert Kiyosaki.

With all of the recent talk about whether or not we will experience rampant inflation, or a recession is getting ready to show its ugly head, or worse yet, the U.S. economy will suffer through a deflationary period ...

I think the points made, as well as, the examples Robert Kiyosaki uses to illustrate those points are interesting (to say the least). Whether or not you agree or disagree with Mr. Kiyosaki's views is, actually, irrelevant ...

The fact is that if you are involved in the mortgage and/or real estate business ... You probably have clients/customers that read Robert Kiyosaki books, articles, etc. and will have questions regarding his views.

You should be prepared to answer the questions/concerns of your past, present, and future clients/customers. A great resource for staying informed and updated with what is happening in the economy is The Mortgage Market Guide.

The Mortgage Market Guide (MMG) is a comprehensive series of daily market commentaries. Information includes Rate Alerts, FNMA Bond Charts, FNMA Bond Chart Commentary, Stock Market Commentary, Economic and Fed Talking Points, Economic Indicators and Forecasts for the Week and advice just for Originators. Lock or Float advice is delivered in a format that is easy to understand.

Whether you are a manager, loan officer or real estate agent, the newsletter is an invaluable tool to gain the knowledge necessary to educate your prospects, clients and partners, as well as, provide accuarate and informative advice regarding their mortgage.

There is even a FREE 14 Day Trial.

Fed President Poole Says "There Could Be A Recession"

Speaking in Chile this morning, St. Louis Fed President William Poole said that while "there could be a recession" in the coming months, the Fed is not expecting it.

This echoes Ben Bernanke's speech earlier this week in which he stated that the U.S. economy still has room for growth.

Poole's comments are soothing markets at the end of a volatile week for mortgage rates and what will likely be the worst one-week slide in stock prices since 2002.

The biggest wild card to mortgage rates today and through early next week is the continued stigma attached to sub-prime lending.

There is a growing concern that defaults will spill over to other sectors of the economy, raising the overall risk in mortgage lending. With higher risk comes higher rates -- sub-prime borrower or not.

(Image Courtesy: Federal Reserve)

Sharing Your Credit Card Balances Can Lower Your Mortgage Rates

Typically, higher credit scores get lower mortgage rates and access to a wider array of mortgage products.

Extent of Indebtedness comprises 30% of a credit score and is the second largest component in the credit scoring model. In plain-speak, Extent of Indebtedness is: "How close is this person to maxing out his cards?"

The ideal percentage of credit balance to credit limit is around 35%. Anything over 70% can be hazardous.

If you are close to your credit limit on one or more cards, you can "trick" the agencies into improving your scores by moving high balances to other, "under-used" cards.

For example, let five cards at 10% of their credit limit receive portions of the balance from a 70% card.

"But my 70% card has a 2.9% introductory rate; the other cards are at 18% or more! What a waste."

That's okay -- just keep this advice in context. If you aren't applying for a home loan in the coming months, there are fewer reasons to try to boost your score and no reason to shift to your balance. I don't recommend increasing your cost of credit solely for a higher credit score.

However, if you need to get your scores up quickly, sharing credit card balances among all your cards -- even if the rate of payment is much higher -- can result in substantial savings on a mortgage month over month.