Making English Out Of Fed-Speak (January 2008 Edition)

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.

Source
Parsing the Fed Statement
The Wall Street Journal Online
January 30, 2008
http://online.wsj.com/public/resources/documents/info-fedparse0801b.html

History Is A Teacher: Cuts To The Fed Funds Rate Lead To Mortgage Rate Hikes

When the Federal Open Market Committee adjourns from its two-day meeting today, it is widely expected to lower the Fed Funds Rate.

This does not mean that mortgage rates will fall.

In fact, using history as an indicator, we should expect mortgage rates to rise if the Fed Funds Rate falls.

Remember: The Fed Funds Rate is an overnight interest rate between banks; mortgage rates are long-term rates based on the bond market. These are two very different animals.

The FOMC's press release hits the wires at 2:15 P.M. ET.

Homeowners Rejoice! New Homes Sales Data Is Weak.

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 re-balance against home supply.

This places upward pressure on home prices nationwide.

When Housing Starts drop, it says more about weakness in builder sentiment than 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 time-line.

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)

The Week In Review (January 28, 2008) : What To Watch For

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 is 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)

Real Estate Term : Negative Amortization Home Loan

(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.

1. Pay the minimum balance due only
2. Pay the interest due only
3. Pay the principal + interest payment on a 30-year amortization schedule
4. Pay the principal + interest payment on a 15-year amortization schedule

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 devastating 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:

• 100%-commissioned salespersons who want better control over tax deductions
• Owners of multiple investment properties who want better control over cash flow
• Investors who seek leverage in real estate and who clearly understand market risk

Homeowners with questions about negative amortization loans should seek counsel from a qualified mortgage professional.

How The Stock Market Rally Was Terrible For Mortgage Rates

The Dow Jones Industrial Average surged 631.86 points in the last three hours of trading yesterday as traders piled into equities.

Fueling the rally? The bond market.

For as much as stocks gained today, bonds lost. Including mortgage bonds. The dramatic sell-off created a huge swing in mortgage rates and erased nearly all of 2008's rate improvements.

This is one reason why it pays to be aware of your home loan. That way, when markets change and a doorway to payment reduction opens, you can quickly step through it.

As yesterday illustrated, with mortgage rates, opportunity is often fleeting.

With stocks poised to rise again today, it should likely happen at the expense of bonds. Mortgage rates are trending higher, too.

(Image courtesy: The Wall Street Journal Online)

It's A Good Day To Have Your Mortgage Adjust

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 one 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.

The Week In Review (January 22, 2008) : What To Watch For

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)

Mortgage Rates Are Down (But Not Everyone Is Eligible)

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)

Be Thankful Gas Prices Aren't Keeping Pace With Oil Prices

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)

Which Leads Which Lower: Mortgage Rates Or The Fed Funds Rate?

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)

What The Bank of America-Countrywide Merger DOESN'T Mean For Homeowners

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:

1. The home is sold and the mortgage is repaid
2. The home is refinanced and the mortgage is repaid
3. The home loan is paid down to $0 balance by the homeowners

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.

(Image courtesy: The Wall Street Journal Online)

The Week In Review (January 14, 2008) : What To Watch For

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 numbers 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.

Common-Sense Tips To Help Your Home Sell 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:

1. Go online and shop for your own home first
2. Empty your home of two-thirds of the "stuff"
3. Keep your home immaculately clean

Corcoran also offers pricing tips that can help get your home sold faster.

Watch the entire interview at MSNBC.

Why Making A Less-Than-20-Percent Downpayment Is Getting More Costly

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.

Source
Mortgage-Insurer Defaults Hit Record
Associated Press
December 31, 2007. 12:30. P.M.
http://biz.yahoo.com/ap/071231/mortgage_insurers_defaults.html?.v=1

Consider Protecting Against Injury Before Protecting Against Death

Some quick statistics:

• 13% of Americans will die before age 65
• 28% of Americans will face a long-term disability before age 65 and be unable to work and/or earn an income

Despite these facts, Americans are twice as likely to be insured on their lives as on their long-term health.

Life insurance is important, but is much less likely to be redeemed than a suitable long-term disability insurance contract.

Consider that 1 in 2 personal bankruptcies is the result of costly medical bills from years of medical treatments.

Then, consider that 75 percent of those bankrupted families actually had health insurance coverage. At some point, health insurance companies stop paying for long-term care, shifting the burden to the injured.

A person with a long-term disability cannot work his "normal" job and cannot earn his "normal" income. Financial distress usually follows.

Many employers offer long-term disability insurance that can help protect against a long-term medical crisis. Do some homework and then verify your finding with a qualified financial planner. Long-term disability comes in many flavors and it's important that your individual coverage suit your long- and short-term financial goals.

Many families go broke because of long-term health issues and a large percentage lose their home to foreclosure. Adequate long-term disability insurance can help prevent both of these scenarios.

Source
6 Money Fears
David Futrelle
Money Magazine, December 15, 2005
http://money.cnn.com/2005/09/13/pf/fears_dieyoung/index.htm

Americans Are $6.25 Billion More Wealthy Since September Because Of The Federal Reserve

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 jump-start the economy. Every additional quarter-percent cut would save Americans $520 million in interest payments monthly.

Source
How the failure of subprime mortgages hurts the overall economy
John Gallagher
Detroit Free Press, January 6, 2008
http://www.freep.com/apps/pbcs.dll/article?AID=/20080106/BUSINESS06/801060585/1002/BUSINESS

(Image Courtesy: Wall Street Journal Online)

The Week In Review (January 07, 2008) : What To Watch For

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.

(Image courtesy: The Wall Street Journal Online)

Why It's Not So Bad That Unemployment Reached Its Highest Rate Since November 2005

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:

1. Consumer spending makes up two-thirds of the economy
2. When more people are working, there is more consumer spending

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:

1. The Unemployment Rate reached 5.0% in November 2007
2. For all of 2007, payroll growth averaged 111,000 per month, down from 189,000 in 2006

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.

Source
U.S. payrolls rose 18,000 in Dec
Glenn Somerville
Reuters.com, January 4, 2008
http://www.reuters.com/article/economicNews/idUSN0324081520080104

$100 Oil Could Mean More Than High Gas Prices For Americans

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:

1. Increases gas prices by $0.19 per gallon
2. Cuts consumer spending by one-third of a percent
3. Reduces employment by 100,000
4. Adds one-half percent to consumer prices

And, because oil prices have nearly doubled from the $51/barrel levels of January 2007, the above figures calculate out to:

1. $0.95 more per gallon in 2007 because of oil prices
2. 1.67% cut to consumer spending in 2007 because of oil prices
3. 500,000 lost jobs in 2007 because of oil prices
4. 2.50% increase in consumer costs in 2007 because of oil prices

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.

Source
Weakened U.S. Economy May Be Facing New Test
Sudeep Reddy
The Wall Street Journal Online, January 3, 2008
http://online.wsj.com/article/SB119930367405362875.html

The Week In Review (January 2, 2008) : What To Watch For

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:

1. It has nuclear capabilities
2. It is located on or near several important oil pipelines
3. It is in a state of political unrest

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 expecting 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)

Holiday Spending APPEARED To Be Lower, But It Wasn't Really Lower

During the Holiday Season, economists watch consumer spending intently because it makes up two-thirds of the U.S. economy.

When spending is stronger-than-expected, it can lead to inflation which pushes mortgage rates higher.

So far this season, mortgage shoppers should've been in good spirits. Sales had fallen four weeks in a row and the outlook for a late-December rally were bleak.

But there's more to the story than the headlines, though.

When stores report "sales" data, they don't report gift card sales.

Gift cards are only accounted for when they are redeemed for actual store merchandise.

So, with gift card sales projected to reach $26 billion this year, there is a $26 billion "shortfall" in the sales figures. That $26 billion will likely get booked in January when shoppers spend their "free money".

For as much as mortgage rates may have fallen on weak sales data in December, therefore, rates could surge higher when January's sales data is released.

Higher sales levels can lead to inflation and that is the enemy of mortgage bonds. With inflation comes higher mortgage rates.

Source
Retail Rush Falls Short, Now Come More Sales
Kris Hudson, Ann Zimmerman And Vanessa O'Connell
The Wall Street Journal Online, December 26, 2007
http://online.wsj.com/article/SB119859964475049505.html

How The Case-Shiller Home Price Index Over-Simplifies Real Estate Markets

The headlines say that home prices are down 6.7 percent from a year earlier. It's important to recognize that this is a national figure.

"National" has nothing to do with real estate. Real estate is local.

The chart above is from the latest S&P/Case-Shiller home-price index and -- averaged out -- shows that home prices are declining nationwide. Some areas are showing growth (or flatness):

• Charlotte
• Dallas
• Portland
• Seattle

And, in every town included in the survey, there are neighborhoods that are faring quite well, despite an overall sluggishness.

Real estate prices are local. Street by street even. National surveys like the S&P/Case-Shiller home-price index paints a broad picture of our nation's real estate market, but that level of reporting doesn't do much on a level that's actually relevant to Americans.

Source
Pace of Decline In Home Prices Sets a Record
James R. Hagerty And Kelly Evans
The Wall Street Journal Online, December 27, 2007
http://online.wsj.com/article/SB119867779499850669.html

The Difference Between Private Mortgage Insurance And Homeowners Insurance

Private mortgage insurance (PMI) is insurance for the mortgage lender in the event of homeowner default.

PMI helps the lender recover its costs and losses after foreclosing and selling a repossessed home.

PMI rates vary by loan type, loan size, and loan characteristics. The higher the risk to the bank, the higher the cost of PMI.

The two types of PMI are:

1. Borrower-paid mortgage insurance
2. Lender-paid mortgage insurance

Borrower-paid MI is the more common version of PMI. It may be payable up front, payable monthly, or both. However, once the mortgage balance is reduced to 80% of the home's value, PMI may no longer be required by a lender.

This reduction can occur by principal being paid down, home appreciation, or a combination of the two.

With lender-paid PMI, there is no monthly payment because the mortgage note's interest rate is increased and is, therefore, "self-insuring". That is, the lender collects higher payments each month and usually buys an insurance policy with the extra proceeds.

Different from private mortgage insurance is another type of insurance called homeowners insurance, or hazard insurance.

HOI is property insurance that protects against losses in the event of a catastrophe.

Mortgage lenders require borrowers to carry homeowners insurance because it protects the bank if the home is destroyed. However, it's a good idea to have additional coverage for personal property and for liability related to accidents that occur on-site.

For example, if a home is destroyed in a fire:

• The homeowners insurance will repay the lender for the amount due on the mortgage
• The personal property insurance will repay the homeowner for personal possessions destroyed
• The liability insurance will protect the homeowner from third-party claims related to the fire

HOI is typically paid in annual installments to an insurance company and rates vary by type of home and type of coverage requested.

Sources
Private Mortgage Insurance
Wikipedia
http://en.wikipedia.org/wiki/Private_mortgage_insurance

Home Insurance
Wikipedia
http://en.wikipedia.org/wiki/Home_insurance