Why Mortgage Rates Haven't Fallen As Expected

When the government nationalized mortgage lending in September, housing analysts predicted lower mortgage rates.

For a brief two-week stint, they were right -- post-takeover, the 30-year, fixed rate mortgage fell below 6.000 percent nationally for the first time in 7 months.

Since then, however, mortgage markets have reversed. Rates are now at pre-takeover levels.

Now, this isn't to say that the nationalization was a failure -- far from it. The government's takeover of Fannie Mae and Freddie Mac accomplished two very important goals:

1. It restored failing confidence in the U.S. mortgage markets
2. It opened legislative channels for faster, more relevant housing reform

And, long-term, most people agree, these are essential elements for a U.S. economic recovery. Over the short-term, however, the plan has not delivered the sustained low mortgage rate environment that was envisioned.

The biggest reason why rates are higher is because of Wall Street's manic trading behavior. When the economic outlook shows hints of sun, investors sprint to risky stock markets; when it shows signs of gloom, they flee in favor of ultra-safe treasuries. The buy-sell patterns have led to some of the wildest trading days on record and it's not what the Treasury expected.

See, when the takeover was first announced, mortgage-backed bonds were elevated to "government status". This created new demand for mortgage bonds which helped to push down rates.

But, in the weeks that followed, the world's credit markets unraveled and traders sought the dual comfort of safety and liquidity in their portfolios.

That's a combination that only U.S. treasuries can provide. Versus "true" government bonds, mortgage-backed securities are just quasi.

We can't know where mortgage rates will move for certain, but, for now at least, the 4 percent range some had predicted is out of reach. Until credit order is restored globally, expect volatility to continue and rates to remain up.

(Image courtesy: The Wall Street Journal)

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

The Federal Open Market Committee voted to cut the Fed Funds Rate by one-half percent yesterday. The benchmark rate now stands at 1.000 percent.

In its press release, the Fed wasted no time addressing the key issue at-hand, stating that economic activity has "slowed markedly", pointing to three main causes:

1. Consumer spending is falling
2. Business equipment spending is falling
3. Slowing foreign economies are hurting U.S. businesses

Furthermore, the voting FOMC members are wary of an "intensification" of the current financial market turmoil.

The announcement's 4th paragraph is noteworthy, too. It lists the plethora of growth-stimulating steps that the Fed has taken so far this year and concludes that credit conditions should improve in time. It does note, however, that if markets don't improve in good time, the committee will "act as needed".

In the wake of the announcement, stock markets rallied. Investors liked what the Fed had to say, and it drew funds into the stock market from all corners of Wall Street. Unfortunately for mortgage rate shoppers, one of those corners happened to be the mortgage bond market.

The exodus from bonds caused mortgage rates to rise.

It's a common misconception that the Federal Reserve controls mortgage rates and yesterday's market action should help dispel that myth. As the Fed Funds Rate falls back near its 50-year low, mortgage rates are bumping up against a 3-year high.

Source
Parsing the Fed Statement
The Wall Street Journal Online
October 29, 2008
http://online.wsj.com/internal/mdc/info-fedparse0810.html

No Matter What Happens To The Fed Funds Rate Today, Markets Are Going To Turn Up The Volatility A Notch

The Federal Open Market Committee adjourns from its scheduled 2-day meeting today at 2:15 P.M. ET and the markets are eagerly awaiting the central bank's press release.

In it, Fed Chairman Ben Bernanke is expected to address the U.S. economy, the future of credit, and the new Fed Funds Rate.

It's this last point to which mortgage rate shoppers should pay attention -- when the Fed Funds Rate falls, mortgage rates tend to rise.

The inverse relationship between mortgage rates and the Fed Funds Rate is based on the idea that cuts to the Fed Funds Rate are designed to add gas to U.S. economic engine.

In theory, over time, Fed Funds Rate cuts work to improve Corporate America's balance sheets, thereby rewarding shareholders. Therefore, when the Fed Funds Rate falls, or is expected to fall, investors often rush to buy stocks before their prices get bid up. Part of that process, of course, includes selling the "safe" parts of their portfolio which are usually loaded with mortgage-backed bonds.

If you were looking for a reason why mortgage rates tanked Tuesday while the Dow Jones added 11%, now you have it.

The Fed Funds Rate stands at 1.500% and markets are split about how far the FOMC will cut it this afternoon:

• A "pause" is expected by 2 percent of traders
• A 0.250% rate cut is expected by 5 percent of traders
• A 0.500% rate cut is expected by 45 percent of traders
• A 0.750% rate cut is expected by 40 percent of traders
• A 1.000% rate cut is expected by 8 percent of traders

Without a consensus opinion among traders, no matter what the Fed does today, a lot of investors will be forced to rebalance their portfolios to account for their "bad bets". This will add to market volatility for sure.

Mortgage rates are calm this morning. The calm likely won't last. If you are floating your mortgage rate and want to avoid additional risk, consider locking your rate prior to the FOMC press release.

The Strength In New Home Sales Shows That Banks And Builders Have Figured Out The Market

Despite turmoil on Wall Street, the housing sector continues to deliver good news.

Last month, led by a 22 percent surge from the West Region, New Home Sales rose 2.7 percent over August.

A "new home" is a newly-built residence, never before lived in. New homes are usually built and sold by real estate development companies and their respective marketing firms.

The surge in New Home Sales volume is consistent with the other good news we've seen from the housing sector. It marks the 4th positive signal in the last two weeks.

• October 8: Homes under contract to sell surge 7.4 percent
• October 23: Foreclosed homes fall 12 percent in September
• October 24: The supply of "used homes" falls to an 8-month low
• October 27: The supply of new homes falls by 7 percent

However, it can't be ignored why housing is showing a statistical improvement. The main causes are two-fold:

1. Banks are getting better about selling foreclosed homes
2. Builders are keen to dump their excess inventory

Both of these factors drive down home sales prices nationwide which, in turn, draws value-seeking home buyers back to the market. In addition, because the number of active sellers dwarfs the number of active buyers, today's home seekers enjoy a tremendous amount of negotiation leverage, making real estate even more attractive.

But, as with everything in business, markets seek balance. As home supplies dwindle, buyers' ability to negotiate sales prices and closing costs will fall. It's Supply and Demand -- as supplies drop, relative demand rises, and prices rise with it.

In every American neighborhood, homes that are priced "right" are selling quickly. And now that banks and builders have figured out the formula, more homes are going under contract than at any time since 2007.

Much of the current economic climate is being blamed on housing. If the data is accurate, though, we can infer that the climate may not last much longer.

(Image courtesy: AP.org)

The Obvious Truth About Mortgage Rate Predictions

As the stock market dips then jumps then dips again, it's important to remember that markets are unpredictable and nobody knows what will happen tomorrow.

Unfortunately, that doesn't stop the analysts from trying.

An obvious example comes from May of this year. As the price of oil crossed $120 per barrel on its way to an all-time high of $147, a Goldman Sachs analyst was quoted as saying that $200 oil was "likely".

It seemed like a logical conclusion at the time.

Today, though, just five months after the prediction, the analyst's "likely" scenario looks downright laughable. Oil is off by more than 40 percent since that day. And there's hundreds of examples just like this, all around us.

Every day, economic experts and analysts are on television, telling us what's going to happen in the future:

• They tell us when housing prices will reach a bottom
• They tell us when stock markets will rebound for good
• They tell us what the economy will do over the next 12 months

But none of them operate with the proverbial crystal ball -- it's all on "gut".

Another example is from today's CNNMoney.com. In the wake of the government's banking response, a mortgage analyst predicts 7 percent interest rates over the next six months. This would represent a 1.5 percent increase from the recent lows.

The rate prediction may be accurate, or it may not. We won't know for another six months. But what we know today, though, is that mortgage rates are all over the place -- just like the stock market. One day up, another day down. And nobody knows what they'll do tomorrow.

Predicting the future has always been an inexact science, but that won't stop the experts from trying.

And, the experts are wrong as often as anybody else.

How Falling Gas Prices May Stave Off Recession

Given the stock market's recent performance, it's not surprising that gasoline's falling prices are garnering very little attention. That doesn't make it any less relevant, however.

Since peaking in July, gas prices are off by 20 percent.

Falling gas prices are an important positive for the U.S. economy because less money spent at the pump means that more money is saved per household for everyday items including food and other staples.

In addition, consumer spending makes up two-thirds of the economy.

Therefore, falling gas prices may lessen the impact of a forecasted recession. Because Americans are notoriously poor savers, the extra cash-on-hand is likely to get spent which will, in turn, push the economy forward through the upcoming holiday shopping season.

So, just as inflation can be bad for mortgage rates, so can recession. And while recession won't always cause mortgage rates to rise, right now, it's one of the factors driving rates higher. Falling gas prices may help keep that scenario at bay.

Looking Back And Looking Ahead : October 14, 2008

Throughout the feverish activity on Wall Street last week, mortgage bonds sold off with force, driving mortgage rates to their highest levels since July.

It was the fourth straight week in which mortgage rates worsened.

But, with the mortgage markets closed Monday, stock markets rallied to their largest one-day gain in history.

The Dow Jones' gains are expected to push mortgage rates down today, but not nearly enough to recover last week's losses. The market-wide carnage was mostly the result of a fear that has not been completely removed from investor psychology.

Until that fear is purged, therefore, expect mortgage rates to move on the dual basis economic data and market mentality. This will likely lead to rapid rate changes that will make shopping for a mortgage rate difficult.

This week, look for key inflation data including the Producer Price Index on Wednesday and the Consumer Price Index on Thursday.

Both measure the "cost of living" and reflect on price pressures in the economy. If costs are rising, it's considered inflationary and that tends to edge mortgage rates higher.

In addition, Retail Sales and Consumer Confidence data will be released this week, and carefully watched. If either (or both) show strength, markets may interpret the data to be inflationary as well, further adding upside pressure to mortgage rates.

(Image source: The Wall Street Journal)

Pending Home Sales Shows That More Buyers May Be Shopping For Homes Than You Thought

Buyers are returning to the housing market.

Each month, The National Association of REALTORS^® tracks homes under contract to sell, but whose closing has not yet happened. It calls them "pending sales" and publishes a monthly report to quantify them.

The Pending Home Sales report is important because it's meant to predict future home sales activity. History shows that 80 percent of homes under contract will "close" within 60 days, and most of the rest will close within 120 days.

If Pending Home Sales are up, it's believed, actual home sales will be up, too.

In August, Pending Home Sales jumped 7 percent from the month prior, returning to levels not seen in over a year.

The report's strength suggests that buyers are returning to the housing market, continuing the trend that started in March. This is tremendously good news for sellers because more buyers on the hunt means more demand for homes which, in turn, leads sale prices higher.

The Pending Homes Sales report is not a perfect predictor, however. For one, it's not measuring an actual sale -- just the expectation of one. In addition, it only accounts for "used" homes, ignoring new construction.

But that aside, the strong uptick in August tells us that home buyers are re-engaging at a quickening pace and finding that "now" is a good time to buy real estate. When buyer demand rises, the real estate market as a whole isn't usually that far behind.

(Image courtesy: The Wall Street Journal Online)

Looking Back And Looking Ahead : October 6, 2008

Congress approved the $700 billion "Bailout Bill" Friday, answering the question that dogged mortgage markets all week long:

Will they or won't they pass it?

The uncertainty prior to the vote created huge market swings that ultimately sent the Dow Jones Industrial Average to its worst week since the 2001 terrorist attacks, while causing similar damage in the mortgage markets.

Mortgage rates worsened for the third straight week last week.

However, if we take the congressional vote out of the picture and look strictly at last week's data, we would have expected mortgage rates to fall instead of rise.

For example, the economy shed another 159,000 jobs, bringing the 2008 total to 760,000 lost jobs. This reduces the likelihood of inflation and is normally good for mortgage rates. In addition, the U.S. dollar had its strongest week ever against the Euro. This usually attracts buyers to the mortgage bond market, driving down rates.

And third, Fannie Mae eliminated one of its mandatory loan fees. This improves mortgage bond pricing for borrowers, ultimately leading to lower rates.

But, mortgage rates rose, didn't fall last week, and that shows how deep the economic uncertainty really ran. And this week, with the bill now passed into law, we would expect the market to turn its attention back to fundamentals. But it can't.

Unfortunately, there's no new data for release this week so, in the absence of data, markets should take their cues from the following sources:

1. The 8 scheduled Fed speakers, including Bernanke on Tuesday
2. Wednesday's Pending Home Sales report
3. Persistent rumors of a "surprise" Fed Funds Rate cut

Regardless of how markets react, though, be prepared for them to react swiftly and for mortgage rates to dip and spike -- often in the same day.

In other words, a mortgage rate quote from the morning is likely to be "expired" by the afternoon. So, if you see a rate and payment that you like, consider locking it. It likely won't last long.

In The News...

The Senate passed a new version of the $700 billion rescue plan last night by a 74-25 measure, and authorizes the Treasury to buy illiquid assets from banks in an effort to thaw out frozen credit markets and to free up banks to start lending again. The plan includes a provision to increase the FDIC insurance cap to $250,000 from $100,000. It would also extend a number of renewable energy tax breaks for individuals and businesses. The bill expects to go back to the House of Representatives Friday after it rejected the former version on Monday.

The chance of an interest rate increase has increased at the FOMC meeting on October 29 amidst all of the economic turmoil. The Fed funds futures are currently pricing in a 70% probability for a 50bp rate cut by the Fed's next FOMC meeting on October 29 and a 25% probability for a 75bp rate cut by the December 16 FOMC meeting. Fed Fund Futures predict movement of the benchmark Federal Funds Rate, which currently stands at 2%.

Weekly jobless claims remained at their highest level in seven years. For the week ended Sept. 27, seasonally adjusted first-time claims for unemployment benefits rose 1,000, to 497,000 - the highest level since late September 2001.

The four-week average of claims rose 11,500 to 474,000 -- the highest since October 2001.

For the week ended Sept. 20, continuing claims rose 48,000 to 3.59 million -- the highest since September 2003.

The four-week average of continuing claims rose 46,750 to 3.53 million -- the highest since October 2003.

Brought to you, courtesy of The Mortgage Market Guide

Fannie Mae Halves One Of Its Mandatory Loan Fees

In an effort to provide "the most market support possible", Fannie Mae is cutting one of its mandatory loan fees by 0.250 percent, effective immediately.

Fannie Mae introduced the Adverse Market Delivery Charge in December 2007 to offset foreclosure and delinquency losses. The initial fee was a quarter-percent of the amount borrowed.

Then, as market conditions worsened, Fannie Mae doubled its across-the-board loan fee to 0.500 percent in August of this year.

As of today, the fee is back to its starting point.

Since the start of the 2008, Fannie Mae has made 21 separate changes to its mortgage guidelines. Most have been detrimental to borrowers, increasing the difficulty, or the cost, of qualifying for a conforming home loan.

Today's change is among the few that are beneficial.

This morning, mortgage pricing is edging higher because of the looming Congressional vote and Wall Street's reaction to the weak jobs report. The good news is that price changes could have been worse.

Fannie Mae's Adverse Market Delivery Charge flip-flip is keeping rates from rising as high as they might have otherwise risen today.