Looking Back And Looking Ahead : June 30, 2008

Mortgage rates improved last week, marking the first time since mid-May that has happened.

The rate drop is the result of how mortgage markets interpreted the Federal Reserve's Wednesday press release.

In it, the Fed said:

1. Inflation pressures should lessen soon
2. Growth should remain steady this year
3. The credit market is currently fragile

Separately, none of this was news to the markets. But, considering all three statements together, investors grew nervous of leaving money in the stock market -- specifically in financials.

Post-Fed announcement, there was a wave of selling that dropped the Dow Jones Industrial Average nearly 20 percent from its October 2007 high.

As stocks sold off, though, mortgage shoppers were benefiting.

Rates ticked down in the Fed announcement's wake because the mortgage bond market acted as a "safe haven" for traders. More demand for mortgage-backed bonds caused rates to fall, accented by a favorable run very late in the day Friday.

This week, the momentum may continue, or it may not. There is a lot to capture traders' attention in this holiday-shortened, four-day work week.

The biggest data release of the week will, undoubtedly, be Thursday's Unemployment Report, but there are also two Fed speakers stumping, as well as Treasury Secretary Paulson speaking about the economy.

As the week goes on, more and more traders will be leaving for the long weekend so expect rates to move with greater force as Thursday afternoon gets nearer. And, if stocks haven't regained favor with investors by then, expect that mortgage rates will have a good week.

What To Do When Your HELOC Is Reduced By The Bank

A Home Equity Line of Credit is a bank product that grants homeowners access to the equity in their home at anytime, usually using checks.

Often called a HELOC, these equity-based credit lines function very much like credit cards:

• The rate is adjustable, tied to Prime Rate
• There is a minimum monthly payment
• There is a pre-set spending/credit limit

But, different from credit cards is that a HELOC is "guaranteed" by real estate and with real estate values in question nationwide, many banks are exercising a little-known clause in the HELOC contract.

With alarming frequency, banks are reducing the pre-set spending limits on their active equity lines. Via USPS, lenders are notifying homeowners with $100,000 HELOCs that their new HELOC limit is $25,000, for example.

And, the banks aren't being discriminate based on payment history or local real estate conditions, either -- it's happening everywhere with equal force.

The good news is that banks will accept appeals on HELOC reductions on a case-by-case basis.

One way to appeal a HELOC reduction is:

1. Call your lender's Customer Service line. Do not send an email.
2. Politely ask why the HELOC limit was reduced. Listen carefully to the explanation.
3. Explain why you would like your HELOC reinstated. Acceptable reasons may include home improvement projects or improper home valuation by the lender.
4. Be prepared to write a formal letter, if asked. Address the issues explained in #2.

Banks will typically not reinstate a HELOC if a borrower has been delinquent on payments, or lives in a severely depressed neighborhood. However, because lenders rely on computer models to assess risk, it's always a good idea to ask.

Sometimes the Human Element of an appeal can work in your favor.

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

The Federal Open Market Committee left the Fed Funds Rate unchanged at 2.000 percent this afternoon, as expected.

In its press release, the Federal Reserve noted the co-existence of inflation and recession.

On inflation, the Fed said that energy and food prices are contributing to an "elevated state" of inflation, but that it expects price pressures to ease "later this year and next year".

On the topic of recession, the Fed seemed a bit more concerned.

Overall, markets reacted favorably to the press release; both stocks and mortgage rates showed signs of improvement in the statement's wake.

Source
Parsing the Fed Statement
The Wall Street Journal Online
June 25, 2008
http://online.wsj.com/internal/mdc/info-fedparse0806.html

How The Fed's Words Should Trump The Fed's Actions Today

The Federal Open Market Committee adjourns from its 2-day meeting at 2:15 P.M. ET today. It's widely expected that the group will leave the Fed Funds Rate unchanged at 2.000 percent.

However, it's not what the Fed does today that has markets so interested. It's what the Fed will say.

One of the Federal Reserve's roles is to promote stability in the U.S. economy by protecting it from two major threats:

1. Inflation
2. Recession

The Federal Reserve's primary weapon against both of these hazards, though, is the same -- the Fed Funds Rate. To combat inflation, the Fed raises the Fed Funds rate. To fight recession, it lowers the Fed Funds Rate.

But, in today's economy, there is evidence of both, inflation and recession, meaning that the Federal Reserve is likely to leave the Fed Funds Rate unchanged for fear of setting the economy too far towards either threat.

Therefore, markets will be left looking for clues in the carefully-worded press release signed by Federal Reserve Chairman Ben Bernanke and the other voting members of the FOMC.

If the Fed admits added vigilance against inflation, it's expected that mortgage rates will fall because inflation causes rates to rise. By contrast, if the Fed harps on the downside risks in the economy, it's expected that mortgage rates will increase.

Either way, today's press release should be a market-mover.

If you're currently floating your mortgage rate or are deciding between different lenders, be aware that mortgage rates will enter a period of extreme volatility this afternoon.

It may be prudent to complete your rate shopping before 2:00 P.M. ET.

Simple Real Estate Definitions: PITI

Most homeowners make four housing-related payments each month:

1. Principal on a mortgage
2. Interest on a mortgage
3. Taxes on the real estate owned
4. Insurance for the real estate owned

Collectively, these payments are known by the acronym PITI, but don't let it fool you -- a homeowner's monthly expenses are still called PITI even if one or more of the elements doesn't apply.

For example, a homeowner with an interest only mortgage does not pay principal each month.

Additionally, condo owners typically don't pay homeowners insurance -- they pay a monthly assessment and/or maintenance fees to an association instead.

But, regardless for what it stands, determining a comfortable PITI should be every homeowner's starting point when looking for a new home. PITI is the monthly housing cost, after all, and by knowing what fits in your budget, it's a lot easier to compare homes and their related expenses.

It's certainly better than asking the bank "how much home can I afford" -- all that's going to tell you is the P and the I. As a homeowner, you need to know all four.

PITI is most commonly pronounced pee-eye-tee-eye.

(Image courtesy: Contractor-Books.com)

Looking Back And Looking Ahead : June 23, 2008

Mortgage rates edged higher for the fifth straight week and the benchmark 30-year fixed-rate mortgage is now at a 10-month high.

One reason why rates are spiking is because the temporary jolt from higher energy and food costs is starting to look like a longer-term trend.

For example, high energy prices get a lot of press, but its 19.4 percent increase since last year is dwarfed by the 64.8 percent increase in the price of grains over the same period of time.

Eventually, as businesses spend more because of these rising costs, they have no choice but to pass those costs on to consumers.

This very topic figures to loom large this week as the Federal Open Market Committee gets together for a 2-day meeting, adjourning Wednesday. The overwhelming expectation is that the Federal Reserve will hold the Fed Funds Rate steady at 2.000 percent.

However, it won't be what the Fed does that should impact mortgage rates this week, but what it says. The Fed's press release will hit the wires at precisely 2:15 P.M. ET and markets will look for clues about how Ben Bernanke & Co are viewing inflation and its impact on the sagging U.S. economy.

If the Fed indicates that fighting inflation is its primary goal, expect that mortgage rates will fall because inflation and mortgage rates tend to go in opposite directions.

Conversely, if the Fed says promoting growth in the economy is paramount and that the country can sustain additional inflationary pressures for now, expect that mortgage rates will rise.

There is other data hitting the wires this week including:

• Consumer Confidence (Tuesday)
• New Home Sales (Wednesday)
• Existing Home Sales (Thursday)
• Personal Consumption Expenditures (Friday)

Of all of these data points, only Personal Consumption Expenditures should have a major impact on rates. PCE is the Federal Reserve's preferred inflationary measurement.

The Midwest Flooding And Its Impact On Your Home Mortgage

Flooding in the Midwest has displaced thousands of families and caused billions of dollars in damages.

It may also cause mortgage rates to rise.

As the extent of the damage becomes more clear, prices for grain and livestock are soaring. For example, a host of dietary staples are suddenly more expensive at the supermarket, including:

• Meat
• Pork
• Chicken
• Dairy
• Eggs

Rising food prices are considered inflationary and inflation tends to make mortgage rates rise.

But, of all the foods that are increasing in price, it's corn whose price is rising the most -- up 70 percent so far since January. This is mostly because flood waters damaged up to 3 million acres of harvest in Iowa, our top-producing state.

Corn, of course, is a primary feed for livestock, so rising prices make it more expensive for farmers to raise hogs, cows and chickens. These higher costs get passed along to consumers and contribute to a higher Cost of Living around the country.

After facing (and adjusting) to rising gasoline prices, Americans are facing higher costs again -- this time at the supermarket. And if food prices don't recede with the flood waters, Americans may find that they're getting hit in a third place -- right in their mortgage rates.

Source
Hog Farmers Face a Perfect Storm
Ilan Brandt, Joe Barrett
The Wall Street Journal, June 20, 2008

(Image courtesy: The Wall Street Journal Online)

What You Need To Know About Mortgage Rate Quotes

Home buyers are often surprised when a "rate quote" from the morning won't be honored in the afternoon. Sometimes, the assumption is that the loan officer is just being sneaky.

This couldn't be less true.

Rate quotes change in the middle of the day because mortgage markets are in constant flux. All day, every day -- just like stocks.

And like stocks, a mortgage bond's morning price will likely "expire" before the day ends.

One way to visualize this is to look at today's Microsoft's stock price:

• At 9:30 A.M. ET, the price was $28.46
• At 9:38 A.M. ET, the price was $28.72

Over the course of 8 minutes, the stock rose by 26 cents and the "9:30 A.M. quote" was no longer available. For example, you couldn't call your stock broker at 9:38 A.M. and place an order for the 9:30 A.M. price because the price had changed.

Mortgage rates behave the same way.

Throughout 2008, mortgage rates have changed mid-day more frequently than in the past. On more than half the days, morning rate quotes were no longer valid in the afternoon. And, on at least 5 separate occasions, rates changed 4 times in just one day.

It's not typical, but it does happen.

So, if you're talking with your loan officer in the morning about a rate quote, be prepared to do all of your shopping in a compacted amount of time, and then be ready to make a decision.

By the time the afternoon rolls around, after all, that rate quote may well be expired.

Why Home Values May Rise When Home Building Falls To A 17-Year Low

A "Housing Start" is a new home on which construction has commenced and in May, Housing Starts fell to a 17-year low nationally.

At first glance, this may seem like a negative for the already-battered U.S. housing market.

IT'S NOT.

Falling Housing Starts reflects the broader real estate market and shows us that builders are working hard to get their already-built homes "off the books".

It would be foolish for them to build new homes now -- each new unit makes selling the existing ones tougher.

So, when we look at the figure objectively, we can see that Housing Starts reaching a 17-year low is actually good news -- real estate prices are based on Supply and Demand, after all.

With Housing Starts touching new lows, we can infer that there will be fewer new homes coming on the market in the coming months and that should help support higher home values nationwide for everyone.

(Image courtesy: The Wall Street Journal Online)

If That Home Is A "Good Buy", Make Your Offer Quickly

Each month, University of Michigan researchers survey the U.S. population about their thoughts on the economy -- is it improving, is it worsening, is it staying the same?

May's consumer confidence survey registered it's lowest reading since 1980.

Given the recent headlines, that shouldn't be surprising:

• Unemployment is spiking
• Gas prices are at an all-time high
• Housing markets keep getting bad press

But despite all of that, the American Consumer appears to be taking the economy's hiccups in stride.

For example, last month, retailers around the country reported rising sales levels that doubled what economists expected. This isn't supposed to happen when consumer confidence is falling as fast as it is, right?

But, a closer look at the retail sales data shows that discount retailers such as Target and Wal-Mart led the charge higher. So, although consumers are feeling worse about the economy, they're still spending money.

And when they do, they look for value.

For home buyers, this should sound familiar because it's every real estate agent's mantra right now -- "there's a lot of good values to be had." It's why some homes are getting multiple offers within days while others languish on the market for months.

The difference lies in the perceived value of the home.

Home buyers are actively looking for "good buys" and when they find them, they're quick to make an offer. It's why the housing market is showing pockets of strength despite low consumer confidence levels overall -- everyone's snapping up the bargains.

(Image Courtesy: Wall Street Journal Online)

Looking Back And Looking Ahead : June 16, 2008

Mortgage rates moved higher last week on lingering concerns about inflation, the fourth straight week in which rates rose.

Mortgage rates are now as high as they've been since October 2007.

Because inflation devalues mortgage bonds, market players are quick to unload them when signs of inflation are present.

Last week, there were several such signs:

1. The American Consumer is spending undettered despite economic uncertainty
2. The Cost of Living is rising faster than expected
3. The Federal Reserve reports that some business are passing higher costs on to consumers

Hence, the higher mortgage rates.

This week, only Tuesday registers as a "big data day" with reports on housing, productivity, and Producer Price Index -- the "Business Cost of Living" report.

There will be four members of the Federal Reserve speaking, though, and that will add some volatility to the market. Fed Chairman Bernanke is among the speakers, addressing Congress this morning at 10:00 A.M. ET.

So, expect mortgage rates to continue to jump and dip this week, taking their cues from inflation. More inflation means higher rates, and a slowing economy should cause rates to retreat.

(Image Courtesy: LA Times)

Guess Which 4 States Accounted For More Than 50 Percent Of May 2008 Foreclosures

RealtyTrac released its most recent foreclosure statistics, and if you only read the headlines, you would think the entire country was on the verge of losing its homes.

The underlying data tells a different story, however.

More than half of the country's foreclosure activity in May 2008 was tied to just 4 states in the union:

1. California (28 percent)
2. Florida (14 percent)
3. Arizona (5 percent)
4. Michigan (5 percent)

In other words, the majority of mortgage defaults are coming from a small minority of states.

See, between 2002 and 2006, California, Florida and Arizona were very popular with real estate speculators, many of whom over-extended themselves on real estate; and Michigan's economy has been decimated by job losses in the auto and manufacturing industries.

In addition, these 4 states are among the nation's most populous. It makes sense that they are distorting the national statistics.

On a local level, the news is not so grim. Not only did 20 states show a reduction in monthly foreclosure activity, but many more fell below the national foreclosure average. That type of story, though, doesn't make for good headlines, is all.

Search the full May 2008 foreclosure report for yourself on RealtyTrac's Web site.

Cancel Your PMI Before It's Too Late To Cancel It

When homeowners borrow more than 80 percent of a home's value, mortgage lenders often require a corresponding insurance policy called Private Mortgage Insurance.

PMI provides a cash payment to lenders in the event that a homeowner defaults.

But, because PMI policies are designed for high LTV loans only, they usually contain cancellation options for when home equity percentages reach 20 percent or more.

In other words, PMI can be temporary.

There is a caveat, however: Lenders will not automatically remove mortgage insurance when LTV falls below 80 percent -- the onus is on the homeowner to initiate a formal request.

Earlier this decade -- when home values were soaring -- many PMI-paying homeowners recognized their equity growth and successfully petitioned out from PMI.

Many other homeowners, however, forgot.

So today, as home values stagnate or depress in different U.S. markets, homeowners eligible for cancellation may find that both their home equity, and their right to cancel have vanished.

PMI helps make high LTV loans possible, but there's no reason to pay it longer than necessary. If your current mortgage requires PMI payments and your loan-to-value lurks below 80 percent, contact your mortgage lender to start the PMI cancellation process.

Or, if you're unsure about your home's value and the 80 percent threshold, call or email me anytime and I can help you connect with somebody to give you the answers you need.

Is The Federal Reserve Telegraphing Its Next Rate Hike?

The Federal Reserve is stumping hard on inflation this week, creating speculation that Fed Funds Rate hikes may be in store for later this month.

This is a counter-intuitive development because increases to the Fed Funds Rate are typically associated with periods of rapid economic expansion.

Lately, we've seen anything but.

Witness:

• High levels of unemployment
• Reduced consumer spending
• Falling consumer confidence

Despite the downbeat news, though, multiple Fed members are taking a hard line on inflation, adding that a strong dollar supports the economy and helps to offset high oil prices.

A rate hike could help accomplish that goal.

If the Federal Reserve votes to raise the Fed Funds Rate, Prime Rate will rise in tandem. Prime Rate is the basis of interest rates for credit cards and home equity credit lines. Holders of each debt type, therefore, would face higher monthly payments.

Mortgage rates, by contrast, would be expected to fall, but how the market would actually react to a rate hike is anyone's guess.

The Federal Reserve meets 8 times annually. Its next meeting is a two-day affair beginning June 24.

(Image courtesy: The New York Times)

Why Your "Dear Seller" Letter May Be Met With A "Dear John"

Several years ago, when homes sometimes sold within hours, prospective buyers often drafted "Dear Seller" letters, an accompanying personal note to help purchase offers stand out in a multiple-bid situation.

Today, some buyers are writing a different kind of letter to win a seller's favor -- a letter explaining why the buyer's offer is so far below the seller's asking price.

You can't blame buyers for trying to explain themselves, but after reading this tongue-in-cheek piece from The New York Times, it's clear that real estate negotiations between a buyer and a seller are simply a matter of perspective.

Whereas a buyer may use Fear to get his price, a seller may counter with Hope.

The article drafts a buyer letter and a suggested seller response. Both letters are powerful and persuasive, and hint at the real truth in real estate -- that reaching a purchase price agreement is only as difficult as finding a buyer and a seller committed to working together.

And that match happens every day in every city in America -- even the ones in which the housing market is reeling the most.

It's been said that a listing price is just a starting point for conversation, but if that conversation starts with "Dear Seller" and the seller is feeling hopeful, don't be surprised if you get a Dear John in response.

(Image source: The New York Times)

Looking Back And Looking Ahead : June 9, 2008

There was no rest for the mortgage-rate weary last week.

As mortgage bonds sold off early in the week, sharp rate hikes followed. A steady stream of better-than-expected economic reports had re-ignited inflation fears, drawing money from the bond market.

On Friday, however, the money flow reversed on a triple threat to the U.S. economy:

1. The Unemployment Rate took its biggest one-month jump in 22 years
2. Oil made its biggest one-day gain
3. The U.S. dollar lost a lot of value

By themselves, each of these events normally would be bad for mortgage rates but the Friday combination of all three led to a huge stock sell-off and renewed demand for bonds -- including the mortgage-backed kind.

Despite Friday's reversal, mortgage rates were higher on the week, overall.

This week, there won't be much economic data, but there will be six Federal Reserve members making speeches to the public.

The most anticipated of the set is Fed Chairman Ben Bernanke's address Monday evening on the topic of "inflation". Markets will be closed when Bernanke speaks so expect a delayed market reaction Tuesday morning.

Throughout the week, markets should continue their long-standing battle between the fears of inflation and the fear of recession. It's the same back-and-forth that we've seen since late-2007.

It's also the primary reason why mortgage rates rarely stay still anymore.

(Image courtesy: The Wall Street Journal Online)

Why It's Good News For Home Buyers When Unemployment Rates Surge

On the first Friday of every month, the Bureau of Labor Statistics releases its Non-Farm Payrolls report.

More commonly called the "Jobs Report", today's 2-page analysis of May 2008 shows that the economy shed jobs and that unemployment surged.

This is terrific news for home affordability.

That may sound counter-intuitive, so let's dig deeper into the jobs report and what it really tells us about the U.S. economy.

Over the last year, rising food and energy costs have chipped away at household budgets, leaving Americans with two basic choices:

1. Spend less on discretionary items like vacations and dining out
2. Demand more pay at work so they can vacation and dine out

If Americans choose to spend less, the economy eventually slows down because two-thirds of it is tied to Consumer Spending. This is anti-inflationary.

But, if Americans demand pay raises instead, businesses eventually pass those higher wage costs back to consumers in the form of higher prices.

This is called a "wage-price spiral" and it's very inflationary.

So, because today's jobs report showed unemployment surging by a half-percent to 5.5%, Americans really have no choice but to follow the "Spend Less" path -- they're not in a position to demand more pay at work.

Today's jobs data is good for home affordability because it relieves inflationary pressures in the economy and when inflation is falling, mortgage rates tend to do the same.

Better mortgage rates mean less expensive housing payments.

Source
Employment Situation Summary
BLS.gov, June 6, 2008

(Image courtesy: Wall Street Journal)

What Happens When Bernanke Says "Inflation" 55 Times In 5 Pages Of Text

Mortgage rates are a big deal when you're buying a home.

With even the slighest uptick in rates, 30 years of mortgage payments can get substantially more expensive and one of the most substantial threats to mortgage rates is an economic event called inflation.

Inflation's influence on mortgage rates is so large that markets can get jarred on just the mention of it and that's exactly what happened Wednesday when Fed Chairman Ben Bernanke uttered "inflation" 55 times in a 5-page speech at Harvard.

The speech started at 2:45 P.M. ET and by 2:53 P.M., the damage was done.

Market players interpreted Bernanke's remarks to mean that inflation may be worse than previously expected and mortgage rates moved up by 0.125 percent, or $8 per $100,000 borrowed.

This equates to $2,880 in extra payments over 30 years.

If you're actively shopping for a home loan and rapid rate movements make you nervous, consider locking in your mortgage rate today; rates have been especially jumpy all year and don't look to smooth out anytime soon.

(Image courtesy: ABC News)

The Proper Way To Give And Receive Gifts For Downpayments

When a home buyer is gifted cash for a downpayment, there is a right way and a wrong way to receive the funds.

The right way includes:

• Completing an acceptable gift letter
• Documenting the withdrawal of funds with receipts
• Documenting the deposit of funds with receipts

The wrong way is to ignore the rules that mortgage lenders clearly spell out for you.

Mortgage lenders watch gifts closely because they want to make sure that the "gift" is not really a loan-in-disguise. If it's a loan, the total dollar amount must be counted against the home's total loan-to-value and higher loan-to-values typically increase lender risk.

If it's a gift, a signed and dated gift letter should accompany the home loan application. An example:

I am the [relationship to recipient] of [name of recipient] and this letter serves as evidence that I am gifting [name of recipient] [amount of gift] to be used for the purchase of the home at [complete address of property].

This is a gift -- not a loan -- and there is no expectation of repayment.

Signed,
[Signature of donor]

For additional evidence that the gift is legitimate, the recipient should make sure that deposited funds are not commingled at the bank. If the gift is for $12,000, for example, then the recipient's bank deposit receipt should indicate that a $12,000 deposit was made.

There may be legal and tax liabilities when gifting funds between family members so if you're unsure about how donating or receiving a gift may impact you, call or email me. If I can't answer your question, I can certainly refer you to somebody that can.

Did You Know : The Lifespan Of A Mortgage Approval

Mortgage approvals don't last forever.

A conforming mortgage approval from Fannie Mae or Freddie Mac has a shelf-life of 120 days.

After 120 days, the approval expires and a mortgage applicant must re-submit his application for consideration.

In addition, a mortgage approval can "expire" within the 120-day period for other reasons:

• Change of job status or income
• Newly-acquired monthly debt (i.e. car payment, student loan)
• Change in asset levels

If your current mortgage approval (or pre-approval) is dated prior to February 3, 2008, it is now expired and your new approval may be subject to Fannie Mae's new, more strict, underwriting guidelines.

Looking Back And Looking Ahead : June 2, 2008

Mortgage rates rocketed higher last week, stunning active home buyers and mortgage rate shoppers.

Some conforming mortgage rates rose by as much as three-quarters of a percent before Friday's closing.

Even in a year in which mortgage rates have been extremely volatile, last week's spike was a large one.

The main driver of last week's increase was additional evidence that the U.S. economy was never in a recession at all; only that it was "weak".

From last week:

1. New Homes Sales (including cancellations) reported strong
2. Durable Goods showed surprising strength
3. The Chicago "Business Barometer" showed confidence

All three data points run opposite to what market players believed just six weeks ago and the reversal in mortgage rates is, in part, related to those traders selling out of bonds and moving into something else.

Another part of the shift is weak foreign demand for U.S. treasuries. Lackluster support from buyers drove down prices last week and helped push up yields.

It all adds up to mean that this is a dangerous time to float a mortgage rate and this week shouldn't be safer than last. Friday is Jobs Reports Day and that always swings a big stick in the mortgage markets.

Until Friday, though, mortgage rates are expected to exhibit the same volatility that they have all year -- some days up, some days down and most days by a lot.

Falling oil prices may create some downward pressure this week, but the overall momentum is higher.

(Image courtesy: Wall Street Journal Online)