The Fed Descends On Jackson Hole, The Market Won't Get What It's Looking For

Today is a holiday-shortened session but that doesn't mean that the markets will be on vacation.

The day's big event is Federal Reserve Chairman Ben Bernanke's speech at the Fed's annual symposium in Jackson Hole, WY.

Investors will dissect every phrase looking for clues about the economy and housing.

More importantly, markets want some advance notice about whether the Fed will lower the Fed Funds Rate at its next meeting September 18.

It won't get any.

Just before his address was scheduled to begin, the Fed's favorite predictor of inflation -- the Personal Consumption and Expenditures report -- was released and showed that growth is within a tolerable range.

It's more likely that Bernanke will spend time talking about data that is known (i.e. the PCE report and other measurable statistics) versus data that is unknown (i.e. how the credit markets will impact the U.S. economy in the future).

With fewer traders participating today, expect more volatile action than usual as the three-day Labor Day Weekend begins.

(Image courtesy: Hot Dog Records)

How The Stock Market Rally Changed Mortgage Pricing For The Worse

Mortgage rates unexpectedly increased yesterday afternoon as the U.S. stock market staged a late rally.

By the end of the day, the Dow Jones Industrial Average was up 1.9 percent, or 247.77 points.

This is a typical pattern.

When stocks are moving higher, investors want to ride the wave and look for sources of cash. Often, bonds serve as that source.

Now, remember that mortgage rates are based on the price of mortgage bonds. When bonds are in demand, bond prices increase and the associated rates fall. When bonds are being sold -- as what happened yesterday -- prices decrease and that pushes mortgage rates higher.

That's what happened yesterday.

As the DJIA added 150 points in the last two hours of trading, mortgage rates rapidly worsened. If you locked your rate in the afternoon, it may have been markedly worse than if you locked in the morning.

How Credit Cards May Be Replacing Home Equity As A Funding Source

As mortgage guidelines loosened between 2002 and 2006, homeowners often used their home equity to retire credit card and other consumer debt. They did this by increasing the size of the mortgage and taking "cash out" from their home.

As you'd expect, this type of mortgage transaction is called a "cash out" refinance.

Well, now that mortgage guidelines are tightening, it's growing more difficult for a homeowner to engage in this type of home loan.

Mortgage lenders are restricting the total amount of equity that can be withdrawn from a home, usually as a percentage of the home's value.

This may be one reason why the amount of credit card debt is rapidly increasing among Americans.

Throughout May and June, for example, credit card balances increased 12% and 8% respectively even as consumer spending remained relatively flat.

Therefore, we can hypothesize that Americans -- unable to "cash out" from their homes -- are putting more money on their credit cards and slowly reaching their collective credit limits (upon which the borrowing stops).

When the borrowing stops, spending stops, too, and this has the impact of slowing down the economy.

A slower economy, of course, reduces inflationary pressures and that makes the U.S. dollar stronger to international investors. That strength, in turn, creates buying pressure on mortgage bonds which pushes mortgage rates down for everyone. Naturally, lower rates encourage more borrowing.

Yes, it's a cycle. And it's one worth watching.

What's The Existing Home Sales Report Got To Do With You? Nothing.

When the National Association of Realtors® releases its monthly Existing Home Sales report, people tend to watch every word, fact and figure in the statement in hopes of decoding the real estate market.

It's all wasted energy.

It's impossible to use the NAR report in everyday living because the NAR report is a national story. Real estate, on the other hand, is not a national market.

All real estate is local.

Think of your own town. There's at least one each of the following:

• An improving neighborhood
• A declining district
• An abandoned area
• An out-right scary street

In a national report, these regions are lumped together into one measurement.

So, when we see that the median home sale price fell over the last year, or that national inventory rose to a 9.6 month supply, it doesn't really mean much to your street in your town.

The NAR report lumps every street in every town together into one big blob of data.

Your area may be seeing explosive growth tied to school districts, or affordability, or proximity to transportation, or just plain "good value" -- regardless of what national real estate statistics report.

So, as always, be wary of "national" real estate stories -- the true story is a local one.

The Week In Review (August 28, 2007) : What To Watch For

This week is data-heavy so markets will finally get to focus on fundamentals instead of fear.

For the past two weeks, uncertainty about the economy has led to psychologically-driven mortgage interest rate movements.

Rising defaults devalue mortgage holdings and many investors are now expecting the defaults levels to rise even more.

When defaults exceed expectations, it indicates that the risk of holding mortgage notes was estimated to be too low. As the risk is adjusted higher, mortgage rates are move higher, too.

This is a major reason why jumbo loans -- loans over $417,000 -- are suddenly carrying much higher interest rates.

Note: The chart above does not reflect actual mortgage rates. It is provided by Bankrate.com and it's meant to show how jumbo loans are moving in a different direction from conforming, 30-year fixed rate home loans.

Markets will have some hard data upon which to reflect this week including two consumer confidence reports and the Personal Consumption and Expenditures report. The former is often used to determine consumer spending patterns (although it doesn't often work) and the latter is the Federal Reserve's preferred inflationary gauge.

Expect markets to be especially volatile towards the end of Thursday and for all of Friday -- many traders will be leaving their posts early for the three-day Labor Day weekend.

Understanding Real Estate Terms: Absorption Rate

In light of today's New Homes Sales data and Monday's forthcoming Existing Homes Sales report, let's review a term that real estate professionals use to describe housing inventory.

Absorption Rate is a real estate term for the length of time required to sell all of a given stock in a given area.

We can use it to determine how quickly homes are selling in a neighborhood, city, or region.

The formula to calculate Absorption Rate is simple:

• Add up the number of homes on the market
• Divide it by the number of homes taken off the market in the past 30 days because offers were accepted for the sale of those homes

For example, if 500 homes are on the market and 89 of these homes received offers in the past 30 days, the absorption rate is 500/89, or 5.6 months.

In general, the smaller the absorption rate, the more seller-friendly the region.

The Truth About the Mortgage Market

Upper Marlboro, MD – Subprime mortgages have now been credited for bankrupting well over 110 lenders and seriously damaging operations at many major mortgage firms. They've reportedly wiped out 5 hedge funds, tens of thousands of jobs, and have led to millions of foreclosures with millions more on the way. And, as if that weren't enough, subprime mortgages are also blamed for massive volatility in the stock, bond, credit, futures, and real estate markets here in the US and around the globe. Some say losses in the mortgage securities market alone could reach hundreds of billions of dollars this year.

This means that, for any Americans looking to buy, sell, or refinance a home, they are confronting a very different market from the one that existed just 6-12 months ago.

How did this happen?
The recent real estate boom was fueled by a period of record home appreciation and historically low interest rates. Banks, in order to compete, loosened guidelines and began offering more funding to more borrowers through riskier, non-conforming or "exotic" mortgages.

These ideal lending conditions persisted for several years, supported by high demand, historical real estate data, home prices, and massive trading volume/profits on mortgage-backed securities and other financial instruments on Wall Street.

Then, in 2006, a slowdown in real estate led to a deterioration of home values, an increase in inventories, and ultimately to today's tightening of credit guidelines, leaving many investors unable to sell or refinance out of their existing positions. Many Americans who had tapped into their equity were suddenly tapped-out and overextended as home values fell. Foreclosures followed in record numbers and a re-valuation of mortgage bonds and other financial instruments created the credit/liquidity domino effect we're now experiencing.

Unfortunately, it's going to get a lot worse before it gets better. According to the latest estimates, over 2 million subprime and Alt-A adjustable rate mortgage (ARM) holders will face payment increases of up to 30%-100% when their loans reset in the next 2 to 18 months. These loans make up less than 40% of the total mortgage market, but the negative effects, as we have seen, of increased foreclosure activity can have a ripple effect throughout the industry and around the globe.

What does this mean to you and your mortgage?

Sellers: If you're planning on selling your home, be prepared for an even smaller pool of qualified buyers. While some experts predict a settling of this credit crisis over the coming year, tightened credit guidelines and diminishing mortgage products could knock out as many as 15%-30% of potential qualified buyers. Now is not the time to sit and wait for the best possible price. Have a serious talk with your real estate agent. Having experienced buying/selling transactions in your area, he or she can help you price your home accordingly. He or she can also help ensure that your buyers are pre-approved and stay pre-approved throughout the entire transaction.

Buyers: Get pre-approved by your mortgage professional. While there are a lot of great deals out there, getting credit is becoming tougher and tougher, and it's taking longer and longer to complete a transaction. Remember, what you qualify for today could change tomorrow in a volatile market. For those looking to refinance, keep this in mind. There is no time to delay! Communicate with your lender. Don't do anything that could negatively affect your credit, and make sure you get all your documentation in on time.

ARMs Borrowers: If your ARM is scheduled to reset in the next 2-18 months, you need to schedule an appointment with a mortgage professional right away. Whether your ARM is subprime, Alt-A, or even if you have a pre-payment penalty, don't let a default or foreclosure situation sneak up on you. Did you know that your monthly payments can increase anywhere from 30% to 100% once your loan resets? At the very least, give yourself the peace of mind of knowing what your adjusted payment will be.

Borrowers with less-than-perfect credit: Each week it seems lenders are shedding more and more mortgage products. Many lenders have stopped offering No-Doc loans and are reducing all forms of Stated-Income loans. While it might be challenging, borrowers with credit issues need to see a loan expert. Often they have credit repair resources and other strategies to help you reach your financial goals.

Finally, there's an important concept to embrace: all markets, while cyclical in nature, are self-correcting, be it credit, real estate, stocks, or bonds. For the last 6 or 7 years, real estate was booming and riding high. The correction we're experiencing now – while it seems harsh and could get much worse – is, in a sense, "natural" and directly related to the extremely loose guidelines and perhaps overzealous lending and leveraging during the boom cycle.

Samuel Pabón is affiliated with Premier Investments Mortgage, LLC, a Licensed Broker, Maryland Department of Labor, Licensing & Regulation. For a free consultation or more information about the mortgage market, contact Samuel Pabón at 301.702.0190.

IndyMac Has Decided To Resume Prime Jumbo Home Loans

IndyMac Bank announced today that it will resume originating prime, single-family residential, full doc jumbo loans after they temporarily reduced the origination of these products due to the recent credit crunch in the secondary markets.

You can read more about the minimum credit standards here.

New Homes "Sold" Is Not The Same As New Homes "Closed"

With tomorrow morning's New Home Sales report, markets will get a look at the number of newly-constructed homes sold in July.

The figure is expected to be in the 825,000 range. This is lower than June's 834,000 figure.

But -- as always -- there is more to the story.

When the Census Bureau reports on New Homes Sales, it only counts the number of new sales contracts written. Specifically, New Home Sales doesn't measure what happens to contracts after they are signed.

So, for each buyer that rescinds his contract or does not qualify for financing, the New Home Sales data is over-stated by 1.

A "new home sale" may cancel before closing for a multitude of reasons, including:

• Buyers can't sell their old homes and can't get financing
• Buyers are angry when developers reduce price on similar properties
• Mortgage products are no longer available for the buyer's borrowing profile

According to RealEstateJournal.com, cancellation rates were as high as 40% for big builders in November 2006. We can only theorize that the number has since increased as home sales slow overall and the mortgage product menu shrinks.

In other words, tomorrow's New Homes Sales data is somewhat irrelevant to the overall U.S. housing market. It only measures contracts being written, not contracts being closed.

The Census Bureau even acknowledges this on their Web site.

Why Private Mortgage Insurance (PMI) Is Suddenly Popular

Suddenly, Private Mortgage Insurance is back in vogue. If only by default.

The story background is well-documented in this Bankrate.com article from 2002. The article is five years old, but it still raises some salient points.

What the article doesn't highlight is that second mortgages such as home equity loans are typically sold to Wall Street, bundled in with sub-prime and "near-prime" loans.

Today, as the number of buyers for these higher-risk loan pools shrinks, some mortgage lenders have stopped offering second mortgages in order to reduce their overall lending risk.

PMI payments tend to be higher than their piggyback counterparts, but The Tax Relief and Health Care Act of 2006 narrows that gap using tax deductibility. The act grants itemized deductions for some private mortgage insurance (PMI) and government mortgage insurance (MIP) expense premiums paid in 2007.

For all loans originated in the 2007 calendar year, mortgage insurance is tax-deductible provided that two tests are met:

1. The homeowner's household income is $100,000 or less in 2007
2. The home loan is for a primary or secondary residence

For households earning more than $100,000, the deduction is phased out to the tune of 10% per $1,000 of additional income until it reaches 0% at $110,000

So, if a single person earns $90,000 in 2007 and buys a home using MI, the MI expenses are tax-deductible in 2007. However, there's a catch! Because the tax code is due to expire December 31, 2007, there is no guarantee that the MI will be tax-deductible in 2008.

As always, talk with your tax professional about how tax deductions work and whether you qualify for a PMI deduction.

As the number of mortgage products continues to shrink, PMI will continue to grow in popularity. The graphic/poll above will shift, too.

(Image courtesy: LendingTree.com)

Like The Fed Funds Rate, The Fed's Discount Rate Does Not Control Mortgage Rates

Friday, the Federal Reserve lowered its Discount Rate by 0.50% in an effort to preserve liquidity among our nation's banks.

This has nothing to do with mortgage rates that people like you and I get for our homes. Well, not directly at least.

The Discount Rate is the rate at which banks borrow money from the Federal Reserve. It is different from the Fed Funds Rate which is the rate at which banks borrow from each other.

After the adjustment last week, the Discount Rate now stands at 5.750%; the Fed Funds Rate is 5.250%. Note that the Fed "charges" more than other banks because it wants to be the "lender of last resort".

And last week, it was.

When the Fed lowered the Discount Rate Friday, it signaled that it was concerned for the nation's banks and their liquidity. A reduced Discount Rate strengthen the system by lowering bank operating expenses and increasing capitalization.

The Fed also extended its normal payback period from one day to 30 days. The additional 29 days buys extra time for banks to rebalance their books through asset sales or debt issuance.

On Friday, mortgage rates fell in response to the Discount Rate announcement, but not because the two are related.

Inflation devalues mortgage bonds and the Fed's move signals that inflation pressures may be subsiding. When the inflation is falling, mortgage bonds improve in price and these higher prices yield lower rates.

This is why mortgage rates dipped. Not because the Fed lowered the Discount Rate, but because what the lowering signaled about the economy.

The Week In Review (August 20, 2007) : What To Watch For

Again last week, financiers failed to answer the major question dogging Wall Street: What is the "right" risk model to use for mortgage lending? The models of the past are being proven to have been wrong.

So, why do risk models matter?

Because the basic tenet of lending states that the riskier the loan, the higher the interest rate that should be charged on the loan. If the risk is unknown, then there can't be an interest rate.

If there can't be an interest rate, then there can't be a loan.

This is one of the reasons why a few lenders chose to stop making loans last week. The decision wasn't made because the companies are going bankrupt, it's because they can't determine what their loans' interest rates should be.

Sometimes, the safest course of action for a bank is to sit on the sidelines until the market finds direction.

With very little data hitting the wires this week, expect markets to move wildly in response to Hurricane Dean's damage toll, stock market activity and public statements from the Federal Reserve.

If the Fed signals that the economy is slowing down because of the credit markets or if the storm causes more damage than is expected, expect mortgage rates to fall as inflationary pressures will subside.

Inflation is the enemy of mortgage bonds so less inflation means higher bond prices (and lower mortgage rates).

(Image courtesy: The Weather Channel)

Why The Mortgage "Crisis" Is Not A "Crisis" For Everyone

Another day, another batch of Gloom-and-Doom stories in the news. Remember to keep a level head -- the media's job, in part, is to sell newspapers and capture eyeballs. Using the word "crisis" repeatedly is one way to meet that goal.

A few facts to keep it all in perspective:

1. There are still BILLIONS of dollars being lent to homeowners every single day.
2. In May, 98.3% of full documentation, "prime" conforming and jumbo mortgage payments were not 60 days late
3. In May, 99.5% of full documentation, "prime" conforming and jumbo mortgages were not in default

In other words, there is still a very low default for borrowers willing to submit tax returns, W-2s, bank statements, and other financial data along with their loan application. This represents the large percentage of American homeowners and is why the mortgage "crisis" is not so bad for most people.

The credit market troubles with home loans are more "inconvenience" than "crisis" and, so far, are limited to those that are self-employed, are highly commissioned, have poor credit history, and/or are unwilling to document their financial world to a mortgage lender.

If you are feeling in any way overwhelmed, reach out to your loan officer for advice and opinion. You'll get better perspective from an industry insider than an industry reporter.

Source
Jumbo concerns in real estate markets
Amy Hoak
CBS MarketWatch, August 14, 2007, 6:00 P.M. ET
http://www.marketwatch.com/news/story/rates-jumbo-mortgages-rise-though/story.aspx?guid=%7BFDE8DFF0-86F7-4C4D-A217-877912918B6E%7D">

Is Your Loan Officer Incorrectly Reading In Which Direction Mortgage Bonds Are Moving?

As we discuss over and over again, mortgage interest rates are determined by the price of mortgage bonds. Nothing else, and nothing more. The challenge in that truth is that mortgage bond pricing is not very accessible to the general public.

This includes the press.

As a result, the media tends to use a government bond called the "10-Year Treasury Note" as a mortgage rate indicator because it tends to move in the same direction as mortgage bonds.

Not knowing any better and making matters worse, a lot of loan officers also use the 10-Year Treasury Note as a benchmark. This is dangerous to their clients.

Look at the data from today (as of 11:20 A.M. ET):

• 10-Year Treasury Note: + 53 basis points
• 30-Year 6.000% Mortgage-Backed Bond: - 19 basis points

If you were watching the 10-Year Treasury Note today, you'd think that mortgage rates would be decreasing over the course of the day instead of increasing.

This same divergence has occurred several times in August and -- for people watching the wrong indicator -- may have led to costly rate lock errors.

The ONLY security to watch with respect to mortgage rates each day is the price of mortgage-backed securities.

A Few Good Reasons To Ignore Your Mortgage Prepayment Penalty

Industry trade magazine Inside B&C Lending pegs the 2006 dollar volume of new sub-prime loans at $640 billion. According to the Real Estate Charts chart above, 78% of those dollars were in 2-year adjustable loans.

A loan of this variety is often called a 2/28 ("two twenty-eight").

A 2/28 originated in 2006 will reach its first adjustment period sometime in 2008. Adjustments on sub-prime loans are typically 3% at the first adjustment, and 1.5% every six months thereafter until the "cap" of 7% above the original rate is reached.

Looking back to 2003-2006, a homeowner facing an upward adjustment in his mortgage rate could usually just replace the existing home loan with a new one, thereby avoiding the upward adjustment altogether. This is commonly called "refinancing" your home.

At present, though, this is a much more difficult proposition; there are considerably fewer mortgage products available for sub-prime borrowers to use.

With fewer available products into which to change, the homeowner with an adjusting mortgage may have no choice but to swallow the higher rate after the two-year fixed rate period ends.

If your home loan is among the 78% of 2/28s originated in 2006 -- even if you have a pre-payment penalty -- it may be time to call your loan officer just to check out your options.

Paying a little bit extra today on a new loan may be better than paying a lot on an adjusted mortgage tomorrow.

The Fed Funds Rate Does Not Directly Impact Mortgage Rates

It's been on the news a few times lately, so let's address a key misconception about the Fed and its relationship to mortgage rates.

The markets now anticipate that the Fed will lower the Fed Funds Rate within the next 45 days. As a mortgage rate shopper, there's not much reason to be interested. That's because the Fed Funds Rate is not directly tied to mortgage rates.

The chart above is courtesy of HSH Associates and shows how the Fed Funds Rate has moved in relation to mortgage rates since June of 2004. If there was a connection between the two, mortgage rates would have moved higher along with the FFR (brown) line.

The FFR is important because its used as a throttle for the economy. The higher the rate, the harder is it to borrow money and/or finance "stuff", and so, therefore, the lower the throttle. When the FFR is lowered, it signals that the economy is slowing down too fast for the Fed and a little bit more "gas" is needed.

Economists are fearful right now that credit market turmoil will rapidly decelerate the U.S. economy and that is why they are calling for the Fed to lower the Fed Funds Rate. A lower FFR could add some life to business and consumer spedning and that is what propels our economy forward, of course.

Whether the Fed does, or whether the Fed doesn't, expect mortgage rates to remain relatively stable regardless. Interest rates on mortgages are set by the demand for mortgage-backed securities, not by the Fed Funds Rate.

The Week In Review (August 13, 2007) : What To Watch For

After all the volatility and talk of a global crumble, all of the major U.S. stock indices posts gains last week. It just goes to show you what a strange roller coaster ride we're all on.

Last week, the market bounced its way through:

1. The Fed's press release stating that inflation is still a concern
2. Central banks around the world injecting gobs of cash into the global economy
3. A French bank halting withdrawals in several funds until the "true" value of the assets can be determined
4. Bleak outlooks from several high-profile U.S.-based lenders

And none of those items were based on scheduled economic data releases.

This week, by contrast, hosts a bevy of economic growth predictors that will hit the wires. Continuing with today's Retail Sales report, mortgage rate shoppers will get no rest from the recent see-saw action.

Tuesday and Wednesday feature six releases between them, Thursday holds three, and Friday is capped with the University of Michigan Consumer Sentiment survey.

Until mortgage bond risk is re-valued by Wall Street, though, expect the data's normal importance to be somewhat muted. Rates should respond more to external factors like the ones we saw last week.

(Image courtesy: Pacific National Exhibition)

What's The True Risk In Mortgage Lending? It's Anyone's Guess Right Now.

Any security -- stock, bond, or otherwise -- has a specific risk associated with it. Based on that risk, an investor decides whether or not the price is worth paying. If the security is a "good value", an investor will buy it. If not, the investor will pass.

Until recently, mortgage bonds were considered a good value because the risk of the investment was relatively low compared to the reward (i.e. interest rate).

If you're wondering why markets are in disarray right now, it's because the risk tagged to the mortgage bonds was dramatically underestimated.

Hindsight, as they say, is 20/20.

When homeowners began defaulting on home loans at a quicker pace than was expected, the risk attached to each mortgage bond increased. Higher risk should mean higher return, but investors don't have the right to change a homeowner's mortgage rate.

As a result, the "reward" on mortgage bonds moved below the risk on which they were originally priced. The bonds, therefore, are a losing bet and the investors either (a) try to sell the bond at a lower price, or (b) hold the less valuable bond and hope for a rebound.

The bigger problem in the markets is that -- at least so far -- the financial models used to determine mortgage "risk" were proven wrong. Until new models are tested and "approved", markets will continue to literally guess what a mortgage bond should be worth.

This is the major reason why markets have gyrated wildly in August. Investors have no idea what the true value of their mortgage bond investments are/will be.

What A Roller Coaster Ride It's Been

U.S. stock markets have been on a roller coaster ride lately.

Since the Dow Jones Industrial Average hit it's all-time high on July 19th of 14,000 it has lost 1000 points because of concerns about credit conditions and the ongoing housing slump. The turbulence continued today as the Dow opened up with a 223 point loss before pairing back some of its losses.

Today's sell-off was due to the fact that BNP Paribas, France's largest bank, said it was freezing three funds because current conditions make it impossible to value their assets, which was touched off by problems in the U.S. subprime market. Just last week, Chief Executive Officer Baudouin Prot said the bank's exposure to U.S. subprime was "absolutely negligible'', very small or insignificant, when the company reported a 20% increase in second-quarter net income.

To make matters worse for stock markets, Home Depot, the world's largest home-improvement retailer, said it may have to cut its $10.3 billion price for the contractor unit it agreed to sell to buyout firms in June. Home Depot also stated that it reduced the amount it's willing to pay in a tender offer for 250 million of its own shares.

Brought to you, courtesy of The Mortgage Market Guide

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Ignore the statewide statistics, forget the city figures. Phooey to the neighborhood. Reinforcing the notion that all real estate is local, meet Street Advisor, the definitive guide to America's many streets.

Unfortunately, there just hasn't been enough helpful information cataloged just yet to make Street Advisor a powerful force. That doesn't mean you can't be the first, of course.

Participate in the Local Expert program, or just share what you know for the fun of it. Leave comments about your block's restaurants, upload photos of the streetscapes, and write about recent real estate sales activity. As Yelp is to local businesses, Street Advisor is to, well, streets.

Stop by and add to your street's official Street Advisor review.

Making English Out Of Fed-Speak (August 2007 Edition)

The Fed left the Fed Funds Rate unchanged again yesterday for the ninth time in a row after 17 consecutive hikes.

The Fed once again highlighted inflation containment as its chief concern while noting that pressures on the economy appeared to be moderating.

This was good news for holders of home equity lines of credit and credit card debt -- both products' interest rates are based on Prime Rate, a derivative of the Fed Funds Rate.

Not surprisingly, the Fed also gave a nod to the recent gyrations in stock and bond prices, although it did not state whether that was a strength or weakness to the overall economy.

Mortgage rates were flat after the Fed's fairly neutral remarks.

Source
Parsing the Fed Statement
The Wall Street Journal Online
August 7, 2007
http://online.wsj.com/mdc/public/page/2_3024-info_fedparse_shell.html

What If You Got To The Closing Table And The Money Never Showed Up?

Several high-profile mortgage lenders, including American Home Mortgage, closed their doors this week and stopped funding loans. Others dramatically limited their list of "eligible" borrowers.

Many buyers and sellers across the country have been stranded at the closing table without funds this week, only adding to the confusion.

Because the story is not getting much press, let's talk about why lenders are having to shut down. It's not because they made bad loans in the past, per se.

It's because their only function is to serve as a go-between for Wall Street and home owners.

Different from mortgage banks, a "traditional" bank collects deposits from customers and then lends some of those deposits in the form of mortgages. Then, a special quasi-government agency steps in and buys the mortgages from the bank, in effect, "replacing" the deposits.

If you've heard of Fannie Mae or Freddie Mac, they are the quasi-government agencies we're talking about. Their mandate is to buy home loans from banks that meet certain criteria.

For a mortgage bank, though, Fannie and Freddie are not the buyers -- it's hedge funds, pension funds, international investors, and others. If these end investors decide to stop buying loans, the mortgage bank can't play matchmaker anymore.

And that is precisely what's happening.

Unlike Fannie and Freddie, mortgage banks rely on investors to provide money to their clients and, now that many investors closed the spigot on mortgage loans, many mortgage banks have no choice but to fold.

Money Magazine's Best Places To Live 2007

Money Magazine recently listed their 2007 Top 100 Places To Live with Middleton, WI topping the list.

The full Top 10 list, in order:

1. Middleton, WI
2. Hanover, NH
3. Louisville, CO
4. Lake Mary, FL
5. Claremont, CA
6. Papillion, NE
7. Milton, MA
8. Chaska, MN
9. Wallingford, PA
10. Suwanee, GA

How did Middleton get to number one? The formula seems to make sense:

• Good education system
• Low crime rates
• Short commutes to work
• Good air quality

Number 100 on the list? Cottonwood Heights, Utah.

Why Bad News For Stocks Can Be Good News For Mortgage Rates

Money leaving the stock market helped mortgage rates move lower yesterday. As the Dow swung from a 140-point gain to a 140-point loss in a matter of hours, dollars were looking for a place to "park".

Mortgage bonds were one beneficiary.

When investors sell stocks in a portfolio, they don't always want to keep the resultant cash sitting in their bank account. In search of higher returns, bonds are often an attractive follow-up investment.

This process is sometimes referred to as "flight-to-quality" -- dollars leaving risky investments like stocks and moving into safer bets with more predictable returns.

The safest of all bets is a U.S. government-issued bond called a treasury that is practically guaranteed, and therefore, is considered to be risk-free.

Mortgage bonds carry slightly more risk than treasuries, but that is why their rate of return is a little bit higher, too.

As demand for mortgage bonds increase, mortgage rates fall and that's what we saw happen yesterday. Today, the stock market opened with a small gain and mortgage rates are giving back some of Tuesday's improvement.

Inflation Lower - Consumer Confidence Highest Since 9/11

The Core Personal Consumption price index or Core PCE index, which excludes volatile food and energy, rose 1.9% in the past year, the lowest since early 2004. Wall Street was looking for an increase of 2.0% year-over-year.

The Bureau of Economic Analysis also reported that inflation increased 0.1% in June, the lowest monthly inflation since November. The Core PCE is the Fed's favorite inflation gauge and their comfort zone is in the 1 - 2% range.

The personal savings rate as percentage of disposable personal income was 0.6% in June. It was 0.4% in May. Previous data had showed May savings at a negative 1.4%, the 26th straight month the yardstick showed red.

However, the June report included revised estimates for income, spending and saving back through 2004. As a result, most months during the past two years that had showed a negative saving rate were adjusted to show a positive rate.

The Conference Board's Consumer Confidence Index rebounded in June to 112.6 up from 105.3 in June when economists were looking for a reading of 105. "The rebound in Consumer Confidence has catapulted the Index to its highest reading in nearly six years. An improvement in business conditions and the job market has lifted consumers' spirits in July.

Looking ahead, consumers are more upbeat about short-term economic prospects, mainly the result of a decline in the number of pessimists, not an increase in the number of optimists. This rebound in confidence suggests economic activity may gather a little momentum in the coming months."

The Conference Board is the world's preeminent business membership and research organization. Best known for the Consumer Confidence Index and the Leading Economic Indicators, The Conference Board has, for over 90 years, equipped the world's leading corporations with practical knowledge through issues-oriented research and senior executive peer-to-peer meetings.

The Consumer Confidence Survey is based on a representative sample of 5,000 U.S. households. The monthly survey is conducted for The Conference Board by TNS. TNS is the world's largest custom research company.

Brought to you, courtesy of The Mortgage Market Guide

Why Alerting Your Mortgage Lender About Bad News In Advance Is Better Than Surprising Them

Having trouble paying your mortgage? You aren't alone. According to RealtyTrac, 1 out of every 134 homes filed for foreclosure in the first half of 2007.

More and more, though, mortgage companies are doing their best to work things out with delinquent homeowners.

Loss of a job or a sudden medical emergency are just some of the multitude of reasons that force an otherwise responsible borrower to find themselves in difficulty.

What's important to remember is that you are not alone, and there are people you can talk to. Remember: foreclosure is a difficult and expensive proposition for a mortgage company and it wants to avoid the foreclosure process as much as you do.

If you are having trouble making payments -- before you fall behind! -- call your mortgage lender and explain to them your situation. The lender will likely put you in touch with credit counselors and will usually attempt to work out a payment plan with you.

Never miss a payment (or make a partial payment) without first speaking to your lender because no news is bad news in the case. The lender will assume the worst -- that you plan to never make a payment again.

People with excellent credit are burdened with bad luck all the time so don't let a temporary problem destroy your credit or threaten your home.

No one benefits from drastic action taken against you, so give the lender a call and work things out to everyone's satisfaction.

The Week In Review (August 1, 2007) : What To Watch For

The stock markets faced large losses last week and the bond market was a beneficiary. That was good news for mortgage rates, but the news could have been better.

Unnerved by losses in the sub-prime market, investors are beginning to question the safety of mortgage bonds overall. Once considered a "safe" investment, mortgage bonds may be losing their luster and that could drive mortgage rates higher.

Less demand for mortgage bonds forces mortgage rates up.

This week, markets should stop taking their cue from "sentiment" and instead focus on actual data. There's a lot of inflation-related news coming up.

Tuesday was the first big data day of the week, featuring Personal Consumption and Expenditures (PCE) and the Employment Cost Index. The former answers "What is the cost of living for ordinary people?" and the latter answers "What is the cost of keeping a workforce?".

Increases in either would be viewed as inflationary which should contribute to a rise in mortgage rates.

Then, on Friday, the Bureau of Labor Statistics will release the jobs report from July. Markets are expecting 135,000 new jobs created, a 3,000 increase over June 2007.

As always, though, the real story in the Non-Farm Payrolls report is not the headline, but the upward or downward revisions to May's data and June's data.

It's been a wild ride for mortgage rate shoppers lately. This week does not figure to get any smoother.

(Image courtesy: Seeking Alpha)

The Charts Show That Thursday's Stock Market Plunge Was Really Just A "Blip"

The Dow Jones Industrial Average lost 311.50 points Thursday. On the rankings of Top 10 Daily Losses of All-Time, 311.50 doesn't even come close, according to djindexes.com (and the charts above).

So, as we always do, let's put Thursday's action in perspective for the average person.

#7 on the "total points" list happened five months ago today -- February 27, 2007. On that day, the Dow lost 416.02.

Was it a crisis? Probably not. We know that because if you pulled your money out of the market February 27, you would have missed the 10.3% in market gains since that day.

Thursday's loss doesn't register in the Top 10 on a points basis, and on a percentage basis, it's even farther off the chart. At 2.3%, the loss is just a blip.

The point is this: If you are invested in stocks, don't react too swiftly to the headlines. Many passive investors lose money when trying to time the market's ups-and-downs. If you're nervous about your exposure to stock market fluctuations, speak with your wealth planning professional for advice.

The Dow's worst day ever remains Black Monday on which the market lost 22.61%. Since that date, however, the Dow Jones Industrial Average has added more than 12,000 points. Investors that stayed the course endured temporary pain, but emerged as winners.

Don't let Thursday's losses get your down.

(Image courtesy: Dow Jones Indexes)

Using Flip-Charts To Understand How Sub-Prime Mortgages Work

This video from CNBC via YouTube does a terrific job of illustrating how sub-prime mortgage defaults are impacting mortgage rates overall.

There's some jargon in there, but overall, it's very easy to follow.

The Biggest Banks Are Eliminating The Most Prevalent Sub-Prime Loan

Mixed news from the sub-prime sector, depending on how you look at it. Many lenders discontinuing their short-term ARM products.

Washington Mutual, Countrywide and Wells Fargo are among the sub-prime lenders no longer offering the 2/28 mortgage product.

The "2/28" is a adjustable rate mortgage in which the interest rate remains fixed for two years, and then adjusts for the loan's remaining 28 years.

The 2/28 mortgage was the basis of all sub-prime lending in recent years.

First Franklin has gone a step further, eliminating the 2/28 and the 3/27. As you'd expect, the 3/27 is a mortgage in which the interest rate remains fixed for three years, and then adjusts for the loan's remaining 27 years.

Lenders are continuing to offer 5/25 mortgages and 30-year fixed mortgages.

The mortgage lenders hope that longer "fixed rate periods" on their mortgage products will help keep their loans from defaulting so soon.

Today, 2/28s originated in 2003 and 2004 are in their adjustment phase and are contributing to rising foreclosure rates across the country.

For homeowners, the downside to loan portfolio paring is that longer fixed-rate periods creates more "time risk" for the lending bank and, therefore, leads to higher interest rates for home loans.

The potential upside, though, is that better sub-prime loan performance overall will reduce the risk levels in sub-prime, thereby lowering mortgage rates. Either way, borrowing money classified as "sub-prime" continues to get more difficult.

If you believe you are a sub-prime borrower, speak with your mortgage lender and/or financial planner and craft a plan to improve your credit rating and lending risk profile.

(Image courtesy: The Wall Street Journal)

Why Medical Bills Are More Dangerous To Homeowners Than ARMs

If you own a home and somebody else depends on your income, consider that the leading cause of home foreclosures is not "adjustable rate mortgages".

As cited many times over (including by a Harvard law professor), the answer is medical bills.

Even for the insured, medical expenses can dramatically impact a family's finances and push it into bankruptcy.

Over one million families discovered that sad fact in 2004 and medical bills have not gotten any cheaper, says the Bureau of Labor Statistics.

Death is another major cause of foreclosure.

When a family's primary wage-earner dies, the secondary wage-earner is now obligated to pay the family's monthly obligations and that may include a mortgage payment. Sadly, that income may not be enough to cover the bills.

A strong life insurance policy can offset bills, ease transition periods, and even pay off the home's remaining mortgage obligation.

Whether you're a first-time buyer or a seasoned investor, consider protecting yourself and your family with adequate medical and life insurance coverage, as well as taking preventative health care steps.

There are resources online to help you determine what coverage is necessary, but the best place to start for this highly personal discussion is with your personal financial planner.

Life is a series of surprises and it's never too soon to be prepared.

(Image courtesy: NCSALL)

Back From Vacation ...

Time to get plugged back in ...

It sure has been an interesting ride in the markets the last week or so ...