The Impact Of Falling Oil Prices On Mortgage Rates

Falling oil prices is one reason why mortgage rates are dropping for the first time in 6 days.

Oil is off $9 per barrel from last week, a shift that correlates to $0.23 per gallon of unleaded gas, roughly.

This drop is good news for both home buyers and "rate shoppers" -- high gas prices is partly to blame for rising mortgage rates this week.

The connection between oil prices and mortgage rates is not necessarily clear, but it goes like this:

• High oil prices are linked to inflation
• Inflation devalues the U.S. dollar
• Mortgage bond repayments are made in U.S. dollars

Therefore, inflation devalues the payments made on mortgage bonds and investors typically avoid products with decreasing returns.

So, as demand for mortgage bonds fall, prices fall, too. This is basic Supply and Demand and many people "get" how that relationship works. But what is not so well known is that when the price of a bond falls, its corresponding interest rate goes up.

The reverse is true, too, and that's what we're seeing today. Because oil prices are falling, it's reducing one of the many inflationary pressures on the economy and mortgage bonds are suddenly more attractive to investors.

Higher demand means higher prices and lower yields. Mortgages rates are benefiting from the action this morning -- they're down about 0.125 percent across the board.

(Image courtesy: The Wall Street Journal)

Why It Will Be Easier To Get A Mortgage Approval Today Than Monday

Mortgage financier Fannie Mae is toughening its mortgage application decision-making process effective Monday, June 2, 2008.

The new guidelines will force many Americans to face higher mortgage rates, higher loan fees, or to be shut out from "prime" mortgage rates altogether.

The new "mortgage rules" include the following changes:

1. Higher income levels required for basic approvals
2. Interest only loans are now considered high-risk
3. Condos are now considered high-risk
4. 60-day mortgage lates within 6 months are a major red flag

Not all of the changes are for the worse, though.

In the new guidelines, self-employed borrowers will no longer be viewed as more risky than a W-2 employee. This will help small business owners and commission salespeople get more mortgage approvals than in the past.

Fannie Mae agreed to honor all mortgage approvals granted prior to its changes, so if you've been putting off that pre-approval, consider talking to your loan officer before the weekend starts.

Your mortgage approval will be much more lenient today than if you wait until Monday.

18 of 20 Real Estate Markets Show Signs Of Improvement

The monthly S&P/Case-Shiller Housing Price Index is a popular and often-quoted measurement of the housing market's health. The chart above is sourced from its report published yesterday.

In 18 of the 20 largest metropolitan areas, home values declined at a slower pace than in the previously measured month. The report also showed that national home prices are down 14.4 percent from March 2007.

Unfortunately, it's the more sensational "14.4" figure that newspapers chose to report this morning. If you never went further than the headline, you'd miss a key piece of analysis.

Comparing today's market to last year's market is a lot less valuable than comparing it to last month's market. That's a better way to analyze the market's health.

If we look beyond the headline and examine the data behind it, we see that housing may still be sagging in some areas, but it's not sagging nearly as much as it used to.

(Image courtesy: Standard & Poor's)

How Spiking Oil Prices Have Mortgage Rates In Tow

High oil prices are derailing the mortgage market this week, taking an almost-vertical path higher.

Since mid-February, prices are up by 50 percent.

Rising oil prices can be a threat to the U.S. economy because with every extra dollar that Americans pay to energy companies, there is less money available for every other company that makes up our national economy.

Strangely, it comes at a time when the "other" companies need it the most -- their costs of operating are rising, too.

So, businesses are faced with a tough choice and both options prove poor for mortgage rates.

1. Keep prices level and suffer smaller margins (and profits)
2. Pass higher costs onto consumers in the form of higher prices

If profits suffer, job cuts and a weak corporate spending can undermine an economic recovery. If higher costs are passed on, it leads to inflation and that devalues the U.S. dollar and mortgage bonds.

This is why mortgage rates have spiked along with oil prices this week. And, when oil prices level off a bit, we can expect that mortgage rates will, too.

Crude oil is up 1.8 percent this morning.

(Image courtesy: Wall Street Journal Online)

How We Know That Prime Rate Will Likely Rise Before It Falls

Three weeks after adjourning, Federal Reserve officials release detailed minutes of their most recent meeting.

The April 30, 2008 minutes were released Wednesday and it affirmed traders' beliefs that the Federal Reserve will not be in a hurry to lower the Fed Funds Rate again.

This is bad news for two groups of people whose borrowing costs are tied to Prime Rate, the interest rate that is 3 percentage points higher than the Fed Funds Rate:

1. Homeowners with home equity lines of credit
2. Americans with credit card debt

Because Prime Rate moves in lock-step with the Fed Funds Rate, it, too, has fallen by 3.25 percent since September and now rests at 5.000 percent.

With the release of the April FOMC Minutes, though, it appears that Prime Rate is more likely to increase than to decrease moving forward.

If your home equity line of credit offers a "convert-to-fixed-rate" option, now may be a good time to consider switching over. Be sure to talk with your loan officer first, though -- he/she may have alternate options for you.

(Image courtesy: The Wall Street Journal Online)

Simple Real Estate Definitions : Loan-to-Value

Loan-to-value is a math formula that represents the relationship between how much a home is "worth" and how much money is borrowed against it.

Loan-to-value is often abbreviated as "LTV" and is one of the many factors that lenders consider when underwriting a mortgage application.

The math formula is straightforward:

In the LTV equation, Loan Size is the amount of money borrowed from the bank and Home Value is the lower of the home's purchase price or appraised value.

Home loans with low loan-to-value ratios are usually less risky for banks. This is one reason why mortgage rates tend to be more favorable for home buyers and homeowners when their respective LTVs are low.

Typically, a "low" LTV loan is one in which the loan-to-value is 80 percent or less. In some instances, however, 70 percent is considered "low". The cut-off point depends on the mortgage lender and the mortgage product.

On a home purchase, the one way to lower LTV is to make a larger downpayment, thereby reducing the LTV equation's numerator. Buying a home for below-market value would not reduce LTV, for example, because the purchase price would be used as the equation's denominator.

On a home loan refinance, the denominator is always the home's appraised value.

Did You Ask: "Has There Been A Mortgage Rate Reprice In The Last Hour?"

Yesterday, several mortgage lenders issued three separate "rate sheets" in response to the changing mortgage market.

It was the fourth time in the last 6 trading days that mortgage lenders issued multiple rate sheets in a day, and continued the trend that started in mid-January.

The yo-yo nature of mortgage rates underscores the importance of making mortgage rate comparisons within a limited time frame.

Multiple quotes should be gathered with an hour of each other and, even then, it's prudent to ask your lender: "Has there been a mortgage rate reprice in the last hour?"

The current market volatility is in contrast to the "normal" environment of one-rate-sheet-per-day to which mortgage rate shoppers have been accustomed. But with the changing economy, we all have to adapt.

Mortgage rate quotes from this morning won't necessarily be valid this afternoon so if you're in the market for a home loan, be sure to do your shopping in a limited timeframe and don't forget to ask about the reprice.

(Image courtesy: City of Peterborough)

Looking Back And Looking Ahead : May 19, 2008

Optimism ruled the markets last week -- optimism about employment, optimism about housing, and optimism about inflation.

Mortgage rates edged lower overall.

Despite the positive sentiment from Wall Street, consumer confidence in the economy reached a 28-year low.

This is a normal divergence because investors live in the "future" of markets while Americans live in the "right now" of life where food prices are high, gas prices are still rising, and job prospects are somewhat weak.

Consumer confidence surveys have to be taken at face value, though. Yes, Americans are nervous about the economy and their household budgets, but that rarely deters them from spending.

In April, for example, Retail Sales (excluding autos) were up 0.5 percent -- more than double analyst expectations. And this was before economic stimulus checks showed up in tax-filers' mailboxes.

Perhaps this is one more reason why markets were so pleased last week.

This week, there isn't much economic information to sway markets. On Tuesday, we'll see the Producer Price Index which is like a Cost of Living for Business measurement and on Friday we'll see the Existing Home Sales report.

Strength in either will be good for the economy and should benefit both stocks and bonds, and should lower mortgage rates. Weakness will have the opposite impact.

(Image courtesy: The Wall Street Journal Online)

Smart Money Magazine Says Renters Have Lame Excuses

It's not often that a mainstream media publication taunts renters into buying homes, but that's exactly what Smart Money does in its latest issue.

The Smart Money Web site "lead-in" reads 5 (Lame) Excuses for Not Buying a Home. That's a forceful title!

It's unfortunate that renters could feel antagonized by the author's tone because the article raises very good counter-points to the more popular reasons why renters avoid homeownership.

Owning a home is a serious responsibility and does require commitment. However, a renter should not feel bullied or hurried into buying because, for as much as personal economics are at play, personal emotions are at play, too. Both deserve respect.

So, renters: Put your blinders on and give the Smart Money article a read. There's good advice in there once you get past the author's bias.

The "Inevitable" Recession That Never Was

Retail Sales measures total receipts at stores that sell tangible "things" and -- aside from weak demand for automobiles and automobile parts -- Retail Sales displayed surprising strength in April.

So much strength, in fact, that many experts are changing their predictions about the U.S. economy's fate.

Several months ago, most pundits declared that a economic recession was all but inevitable. Today, a growing number are changing their views.

Not only are stock and credit markets improving, but data such as April's Retail Sales figures suggest that their fears were overblown.

The takeaway from a story like this is that "experts" do a much better job of interpreting the past than predicting the future. A person can make an educated guess, but it's impossible to know what the future holds for the economy, or for housing, or for mortgage rates.

Even when the outcome is "inevitable".

Source
Recession? Not So Fast, Say Some
Kelly Evans And Justin Lahart
May 14, 2008, The Wall Street Journal Online
http://online.wsj.com/article/SB121068163716188223.html

What Mortgage Fraud Looks Like

According to the FBI's 2007 Mortgage Fraud Report, more than 46,000 cases of suspected mortgage fraud were reported last year. This led to bank losses exceeding $813 million.

If you're looking for reasons why mortgage underwriting is measurably more difficult in 2008 -- add "mortgage fraud" to the list. Lenders now perform extra scrutiny on each home loan application to protect against additional losses on all levels.

Mortgage fraud is a federal crime and exists in two basic varieties:

1. Fraud for Housing -- Misrepresentation by a mortgage applicant for purposes of buying a home, usually related to income, assets, or debts. The applicant intends to repay the loan as agreed.
2. Fraud for Profit -- Coordinated misrepresentations by a group of people related to applicants, appraisals, loan documents and relationships between buyer and seller. The applicant does not intend to repay the loan as agreed.

Although both are illegal, Fraud for Profit is most concerning to law enforcement officials and mortgage lenders. That's because Fraud for Profit tends to incorporate multiple loans for multiple homes in a single neighborhood.

In other words, the bank's potential loss is larger with Fraud for Profit schemes.

The photo above (from the FBI report) is from a Fraud for Profit home appraisal. It indicated that the "recently renovated condominium" included Brazilian hardwood, granite countertops, and a value of $275,000.

Clearly, this is untrue.

Despite increasing 31 percent, mortgage fraud growth slowed in 2007 as law enforcement agencies and mortgage lenders increased their efforts to identify and arrest perpetrators.

(Image courtesy: Federal Bureau of Investigation)

How Far Will Your Salary Go In A Different City?

Just like real estate markets differ from town to town, so does the Cost of Living.

Courtesy of CNNMoney, this helpful calculator measures the change in living expenses a person would face when moving between any two major cities in America.

The key expenses compared are:

• Groceries
• Housing
• Utilities
• Transportation
• Healthcare

The comparison data is provided by C2ER which, on its own Web site, charges $4.95 for each city-to-city comparison.

At CNNMoney.com, the exact same C2ER data is licensed and available for free.

Looking Back And Looking Ahead : May 12, 2008

With little economic news to influence trading and despite a late-Friday afternoon spike, mortgage rates edged lower last week.

Two weeks ago, when it lowered the Fed Funds Rate by a quarter-percent, the Federal Reserve noted two things:

1. The economy was stabilizing
2. High energy costs threatened inflation

In the days that followed, though, the U.S. dollar strengthened and crude oil prices fell.

This positive reinforcement of the Fed's outlook spurred the stock market at the expense of the bond market.

Mortgage rates rose during that period.

But, starting last Monday, the dollar started to soften and oil touched another all-time high. At $126 per barrel, crude oil is now close to double its May 12, 2007 price of $69.

High oil prices are inflationary and speak directly to the Federal Reserve's concerns: Too much inflation can derail a fragile, recovering economy.

The stock market gave up its prior gains last week and that is why we saw mortgage rates improve -- it was the unwinding of the economic optimism.

This week, optimism (or pessimism) about the economy will be swayed by a number of factors including Tuesday's Retail Sales report and Friday's Consumer Sentiment survey.

The most important data point to watch, though, will be Wednesday's Consumer Price Index report. We know we should watch it ... Ben Bernanke told us to watch it. Keeping inflation in check, remember, is one of the Fed's major focal points for the economy.

In addition, this week will feature 14 public speaking appearances by Federal Reserve members. Expect each speaker to speak plainly about the economy, its future and the Fed's current rate-cutting cycle.

When Fed speakers stump, markets listen closely so expect mortgage rates to be jumpy all week long.

(Image courtesy: The New York Times)

How The 84,000 Parts Of Inflation Impact Mortgage Rates

When the everyday "Cost of Living" increases, our dollars don't go as far as they used to. Economists call this inflation.

One popular method of measuring inflation is to track prices for 84,000 individual items and lump them together into a "basket". If the overall price is higher, then the economy is experiencing inflation.

If a picture is worth a thousand words, this one from The New York Times is worth at least 84,000.

Broken down item-by-item, life is more expensive in some places you expected, and some places you didn't. For example, over the past year:

• Gasoline: +26%
• Milk: +13.3%
• Children's Shoes: +4.6%
• Pet Supplies: +6.8%

Aside from damaging household budgets, inflation can be especially rough on both active home buyers and homeowners looking to refinance. Inflation is linked to high mortgage rates.

This is one reason why mortgage rates have fallen since the Federal Reserve's hints last week that its rate-cutting cycle may be over; many believed that additional Fed Funds Rate cuts would stoke inflation later this year.

In the absence of inflation, mortgage rates tend to improve (all things equal).

Source
All of inflation's little parts
Matthew Bloch, Shan Carter and Amanda Cox
The New York Times, May 3, 2008

The Counties In Which Home Prices Are Rising

When real estate news is reported on television or in the papers, it's usually told as a national story. Unfortunately, stories like these aren't helpful for everyday Americans because real estate is not a national market.

Real estate is local.

The graph above was used by Fed Chairman Ben Bernanke in a speech to Columbia Business School earlier this week. Using data from conforming mortgage fundings, it shows the change in home prices from year-to-year on a county level.

Any county not in red increased in value.

In other words, contrary to what reporters tell us, real estate is retaining its value just fine nationwide. Aside from a few counties and states, most areas appreciated.

Graphics like this put important real estate issues in perspective. Home values may be falling precipitously in some areas, but those neighborhoods represent just a fraction of the country overall.

In most regions, home values are up.

You're Not Immune -- No Matter What Your Credit Profile Looks Like

Four times annually, the Federal Reserve surveys 84 different banks about general banking conditions.

One of the survey questions asks about current mortgage lending standards and whether they are loosening or tightening.

The chart at right is from the April 2008 survey and it illustrates what we already know: It's getting TOUGHER and TOUGHER to get approved for a home loan.

Some of the areas in which mortgage guidelines are tightening are well-known:

• More thorough income documentation
• Higher credit score requirements
• More "money in the bank" post-closing

Some areas are less well-known:

• More scrutiny of prior delinquencies
• Strict review of appraised values
  

Overall, getting a mortgage approval from a bank is more difficult than in months past and the tightening trend is expected to continue throughout the rest of the credit cycle.

No "class" of buyers is immune, either -- not even the "prime" ones.

Home prices may fall going forward, but stricter mortgage guidelines means that fewer home buyers will be able to take advantage. If you're unsure about your credit profile, check with your loan officer to see how additional restrictions could impact your ability to purchase (and finance!) a home.

(Image courtesy: Federal Reserve)

Why Free Credit Reports Are Worth What They Cost

The ubiquity of "free" credit reporting services like FreeCreditReport.com, TrueCredit.com, and AnnualCreditReport.com have helped breed a new generation of credit-aware Americans.

Because credit ratings have more importance to everyday life than in years past, this is a welcome development. For example:

• Lenders use credit ratings to determine borrowing rates
• Insurers use credit ratings to determine premiums
• Employers use credit ratings to make hiring decision

Unfortunately for Americans, though, not all credit reports are created equal. And when it comes to actually applying for credit in the form of a new credit card or mortgage, the free reports are worth precisely what they cost.

This is one reason why home buyers should have their credit reviewed by a mortgage lender as soon as possible in the home buying process -- the free reports offered by the major credit bureaus may be misleading and incomplete.

Free credit reports are useful for identifying identity theft and reviewing active accounts, but do very little to help a potential creditor gauge your creditworthiness.

As the chart shows us, each industry's creditors has a way they like to do business and that way is the "standard" way.

(Image courtesy: The Wall Street Journal)

Looking Back And Looking Ahead : May 5, 2008

Mortgage rates ended higher last week on stronger-than-expected jobs data, strong consumer spending, and an appetite for riskier investments.

But, investors were most excited about the Federal Reserve's hint that its rate-cutting cycle may be over.

The week was quiet until Wednesday when the Federal Reserve voted to lower the Fed Funds Rate by a quarter-percent.

The rate cut wasn't the big news, however.

Market players were most interested in Fed's press release in which it confirmed that the economy is struggling, but improving. The remarks were both soothing and a strong contrast to the Alarmist Analysts -- the ones that make for better television than analysis sometimes.

The Fed's statement also forced investors to rethink their economic outlook for the short- and long-term and when investors change their outlook, markets can be volatile.

One of the more important shifts in thinking now is the attitude towards the U.S. Dollar. An improving economy tends to be good for the dollar and that can help lead to lower mortgage rates.

The dollar's gains last week, incidentally, helped lower gas prices nationwide for the first time in almost 3 weeks. In the 18 days leading up to Friday, gas prices had made 18 consecutive record-highs.

This week, with very little new data and with few companies reporting earnings, expect market momentum to determine in which direction mortgage rates will go.

Because momentum can change quickly, be prepared to lock your mortgage rate if you see one that fits your budget -- it may not last long.

Why Mortgage Rates Aren't Falling Even Though The Economy Is Shedding Jobs

According to the Bureau of Labor Statistics, the U.S. economy shed 20,000 jobs in April 2008. The labor force now counts at 146 million people as employed.

Normally, a loss of jobs would foretell economic weakness and would be a good thing for mortgage rate shoppers. Today, though, traders had been expecting a larger loss of 70,000 jobs.

In other words, today's jobs report looks surprisingly strong.

The stock market is now rallying on optimism that "the worst is over" for the U.S. economy and evidence supporting the Federal Reserve's remarks that its rate cuts were starting to take hold.

The stock market's gains are the bond market's losses.

Mortgage rates are up today because the cash that is fueling the stock market is coming from the sale of all types of bonds -- including mortgage bonds.

This is unwelcome news for people doing mortgage comparisons today, or buying a home this weekend.

In general, interest rates on adjustable-rate mortgages are increasing more than on fixed-rate mortgages.

(Image courtesy: Wall Street Journal Online)

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

The Fed lowered the Fed Funds Rate by a quarter-percent to 2.000% yesterday afternoon.

Because it is tied to the Fed Funds Rate, Prime Rate also fell by a quarter-percent. Prime Rate is now 5.000%.

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.

Mortgage rate shoppers are also benefiting.

Each time the Federal Reserve cuts the Fed Funds Rate, it's meant to stimulate the economy in growth. Too much stimulation can create too much growth and that often leads to inflation (which causes mortgage rates to rise).

This is one reason why mortgage rates had not fallen over the past few months. Each Fed Funds Rate cut made it more likely that the economy would overheat in the second half of 2008.

So, because the Federal Reserve signaled that a rate-cutting "pause" may be ahead, investors are reducing expectations for a Fed-induced inflation cycle for later this year, pushing rates lower.

The FOMC's next scheduled get-together is a two-day meeting June 24-25, 2008.

Source
Parsing the Fed Statement
The Wall Street Journal Online
April 30, 2008
http://online.wsj.com/internal/mdc/info-fedparse0804.html

Why It Doesn't Matter What The Federal Reserve Did Yesterday

The Federal Open Market Committee adjourned from its two-day meeting yesterday.

Markets expected the Fed to lower the Fed Funds Rate by 0.250 percent in its press release (which it did), but it's not what the Fed does that matters to the economy right now.

It's what the Fed says.

If the Fed states that future rate cuts are needed to stabilize the economy, mortgage rates should rise because rate cuts tend to create inflation. Inflation is the enemy of mortgage rates.

By contrast, if the Fed states that it will "pause" before making additional rate cuts (or hikes), mortgage rates should fall.

We'll dissect the message in a separate post, but the most important message to remember is this:

The Federal Reserve does not directly control mortgage rates.

The Fed only controls the Fed Funds Rate, the interest rate on a very specific type of loan made from one bank to another. The Fed Funds Rate, however, is directly related to a consumer-focused interest rate called Prime Rate.

Prime Rate is the basis of interest rates on credit cards and home equity lines of credit.

Since the Federal Open Market Committee voted to lower the Fed Funds Rate by a quarter-percent, it means that the interest rate on Americans' collective credit card and home equity line debt will fall by a quarter-percent, too.