Jacksonville's Home Loan and Mortgage Broker

When it comes to mortgage rates, sometimes it’s better to “act now”.

On Tuesday, mortgage rates fell to their lowest levels in 4 years. It happened because the Fed said it would “employ all available tools” to resuscitate the economy.

On Wednesday, however, the markets had second thoughts.

After considering the long-term implications of a near-zero percent Fed Funds Rate and the cumulative cost of government intervention to-date, suddenly, traders grew fearful that U.S. government action would devalue the dollar and lead to inflation — the enemy of low mortgage rates.

As a result, mortgage markets unwound.

At first, the exit was a slow and orderly. Then, without warning, investors began a full-on sprint for the exits. By the end of the day, mortgage rates were higher by as much as a half-percent. Nearly all of Tuesday’s big gains were erased.

In hindsight, the reversal Wednesday wasn’t all that surprising — it’s the same trading pattern we’ve seen twice already this year. The first time was after the Fed’s “surprise” rate cut in January, and the second time was after the federal takeover of Fannie Mae and Freddie Mac in September.

Sharp rate drops tend to be followed by immediate bounce-backs, it seems.

But, unfortunately, not every would-be refinancing homeowner saw the increase coming. While those that locked at the first opportunity to save money are sitting pretty today, the rest that “waited for rates to go lower” are likely kicking themselves about it.

Going forward, mortgage rates may fall, or they may not. We can’t possibly know. But we’ve now seen the pattern 3 times now — when mortgage rates plunge like they did Tuesday, they rarely stay that low for long. When you find a rate you like, get in and get locked as soon as possible.

Sleeping on it for even one night may end up costing you dearly.

The Federal Open Market Committee voted to cut the Fed Funds Rate by at least three-quarters percent today. The benchmark rate now rests in a range of 0.000-0.250 percent.

In its press release, the FOMC identified three key economic sectors in which activity has weakened since October. The FOMC noted that:

1. The U.S. job market is deteriorating
2. Consumer spending levels are falling
3. Business investment is contracting nationwide

The Fed intends its rate cut to provide stimulate to each of these areas.

In addition, the voting members of the FOMC singled out inflation as a diminishing threat to the economy. This is an important admission because it’s well-known that cuts to the Fed Funds Rate can spark inflation. Rapidly falling oil prices and commodity costs, therefore, likely paved the way for today’s historic cut.

In its announcement to markets, the Fed gave The People what they wanted — a reassurance that the policy-making group would “employ all available tools” to help turnaround the economy. Lowering the Fed Funds Rate to an all-time low is one such step; its plan to purchase mortgage-backed debt in the open market is another.

After the announcement, stock markets rallied and mortgage bonds did, too. Rates ended the day slightly lower.

Source
Parsing the Fed Statement
The Wall Street Journal Online
December 16, 2008
http://online.wsj.com/internal/mdc/info-fedparse0812.html

The Federal Open Market Committee adjourns from its 2-day meeting at 2:15 P.M. ET today.

It’s widely expected that the Ben Bernanke-led FOMC will reduce the Fed Funds Rate by a half-percent to 0.500 percent.

Fed Funds Rate cuts are meant to stimulate the economy by lowering borrowing costs for businesses and consumers; interest rates on business credit lines and consumer credit cards are directly tied to the benchmark rate.

However, it won’t be what the Fed does today that will be as important as what the Fed says. And the markets are listening closely.

See, this FOMC meeting was originally scheduled to last 1 day but on November 20, it was extended to 2. Presumably, the extra day was meant to give the FOMC a chance to review its options, but now it has the markets expecting “something big”.

Wall Street wants Bernanke to outline credit-extenstion plan for banks, businesses and consumers. It wants the Fed to bolster markets to prevent the recession from become a depression. It wants action. Anything short of an explicit plan should push traders into ultra-safe U.S. Treasury bonds and that should lead mortgage rates higher.

If you are floating a mortgage rate today, it may make sense to lock prior to the Federal Open Market Committee’s press release. Expect volatility beginning around 2:00 P.M. ET today.

Mortgage markets improved last week, riding a steady stream of negative news into its best levels of the year.

Day-to-day, mortgage rates priced across a very wide range, but managed to close out the week lower overall.

Mortgage rates improving on “bad news” is a break from the trading patterns of September and October. Back then, even the slightly evidence of a recession caused mortgage rates to soar.

Now, however, markets have accepted economic weakness and have started to look to the future. Not even sagging retail sales and the rising ranks of the unemployed could quell market optimism.

Indeed, the incoming administration may be leading the sudden sentiment shift; its stimulus package is expected to top $1 trillion over the next 24 months and put thousands of unemployed Americans back to work. The widespread press coverage of this story may be one reason why Consumer Sentiment rose off its all-time low, despite the economic evidence that tougher times may still be ahead.

So, as markets shift their attention away from fundamentals and towards the government, mortgage rates are benefiting and refinance activity is gaining steam.

This week, the government should be the top story again. On Tuesday, the Federal Open Market Committee will adjourn from its 2-day meeting and is widely expected to lower the Fed Funds Rate by a half-percent to an all-time low of 0.500 percent. This move, too, is meant to stimulate the economy.

But it won’t be what the Fed does that matters; it will be what the Fed says.

In the 2:15 P.M. press release, Fed Chairman Ben Bernanke is expected to outline measures by which the Federal Reserve will stabilize the economy. If markets consider the moves to be “enough”, stock markets should soar and mortgage rates should suffer. However, there may be specific verbiage for providing mortgage relief, in which case, mortgage rates would fall.

Other noteworthy data scheduled for this week include the Cost of Living Index and Housing Starts, but neither should matter much to mortgage rates. For now, it’s all eyes on the government.

A mortgage is a contract between a bank and borrower, defining the terms by which a home loan must be repaid.

The paperwork, signed by both parties, includes provisions for things like:

• The interest rate
• The length of the loan
• The amount of money to be borrowed

But, like all loans, a mortgage loan can be paid off at any time. So, when market interest rates fall, homeowners will often exercise their right to an “early payoff” by securing a new loan that pays off the old one.

This process is most commonly known as a refinance.

A refinance is the changing of the loan terms against a property, often for a better interest rate or a lower monthly payment. When the refinance process is complete, the original lender’s loan is paid in full using the money from the new lender’s loan and the former’s relationship is officially terminated.

There’s no rule against how many times a person can refinance, nor is there an easy way to determine whether or not a refinance makes sense. In general, if you can reduce your monthly payment while limiting your closing costs, to refinance is a smart decision.

However, there are other reasons to refinance, too, including:

1. To convert from an ARM into a fixed rate mortgage (or vice versa)
2. To extract equity for paying off third-party debts or for cash
3. To extend a loan from 15 years to 30 year for payment relief

Because there are fewer third-parties involved with a refinance, it’s often simpler and less expensive than a comparable purchase transaction. The paperwork stack is often smaller, too.

It’s the age-old question for home buyers in need of a mortgage:

Which is better: Fixed or ARM?

Historically, the answer has hinged on a homebuyer’s desire to meet one of two mutually-exclusive mortgage financing goals:

1. Get low mortgage payments for better cash flow
2. Get long-term payment stability for better budget planning

But because of government intervention and lingering questions about the economy, fixed-rate mortgages are now pricing cheaper than their adjustable-rate counterparts.

Based on today’s mortgage market, therefore, home buyers can get both.

Versus a comparable 5-year ARM, conforming fixed-mortgage rates are priced roughly 0.250 percent lower and have been over the past 19 days. The quarter-percent difference equates to $33 saved per month on a $200,000 home loan.

Mortgage markets are ever-changing so rates we can’t know if this pricing anomaly will last. But, while it does, the decision to choose Fixed over ARM is a lot simpler.

For most Americans, mortgage interest paid on a home loan is tax-deductible in the year in which it was paid.

With advance planning, therefore, homeowners can increase their 2008 tax deductions and limit their tax liability on April 15.

The key is to make the January 2009 mortgage payment before the New Year begins.

In making the payment in 2008, the payment’s mortgage interest is applied against this year’s tax deductions instead of next year’s. And lest you think you’re paying “in advance”, remember that mortgage interest is paid in arrears; a payment due January 1 accounts for interest that accumulated in December 2008 anyway.

Tax planning is a complicated issue and not all homeowners will qualify for mortgage interest tax deductions. Check with your tax professional before making tax planning decisions.

If you don’t have an accountant you trust, call or email me anytime; I’m happy to make a recommendation to you.

Earlier this year and under pressure from the government, mortgage lenders made more than 200,000 loan modifications to delinquent homeowners.

The modifications came in one of three forms, or a combination:

1. Interest rate reduction
2. Loan term extension
3. Principal forgiveness

But despite the modifications, as of October 1, more than half of the homeowners that received assistance were already two months behind on their modified monthly payments.

This late-pay statistic was a focal point on Capitol Hill yesterday as the government admitted delinquencies “were larger than [they] thought they’d be”. Loan modifications are proving inadequate at slowing foreclosures and yesterday’s session opened the door to more effective foreclosure prevention measures.

However, of all of the statistics published, there was one of particular interest.

Based on its loan modifications to-date, the FDIC has found that modified borrowers default far less when new monthly payments are less than 38 percent of monthly household income. This is important because Freddie Mac guidelines for ordinary mortgage applicants currently cap that rate at 45 percent.

If the 38 percent figure holds up long-term, it may lead mortgage lenders to permenantly reduce maximum debt-to-income allowances. Already, mortgage insurers have taken this step so it’s not out of the question for lenders. Tighter guidelines mean fewer mortgage approvals.

If you’re unsure of whether now is a good time to buy a home, consider that mortgage rates are low, mortgage guidelines are tightening, and foreclosure prevention efforts reduce the supply of available homes.

Prices may not have bottomed, but the market is giving everyone a lot of reasons to consider buying now.

In a week in which mortgage markets struggled to find direction, mortgage rates edged higher overall. The weekly increase was the first since mid-November and it may signal higher rates as we head into 2009.

The week’s most talked-about story hit the wires Friday.

According to the government, the U.S. economy shed 533,000 jobs last month and the national Unemployment Rate rose to 6.7%. This was the largest number of jobs lost in any one month since the recession of 1974.

In a normal market, job losses of this magnitude would have caused stock markets and mortgage rates to fall. But stocks and rates didn’t fall Friday. To the contrary, both rose. This is because — while the jobs reports was the most talked-about story last week — it wasn’t the most important one. That story had already been told.

Last Monday — officially — we learned that U.S. economy is in recession.

Although most of Wall Street knew it already, the official determination was an acknowledgement that “bad economic data” is not only acceptable, but normal given the current conditions.

In other words, when the jobs data was released Friday morning, one reason why mortgage rates rose was because markets somewhat shrugged off the data, saying: “Yeah, of course job losses are up — we’re in a recession, after all.”

This is an unfortunate development for rate shoppers because bad data usually anchors mortgage rates lower. Going forward, that won’t likely be the case — at least until the recession is declared to be over.

This week, without much new data being released, markets should trade largely on news of federal intervention and expectations for the U.S. economy. As retail sales figures drip in from the weekend, be wary of stronger-than-expected numbers as that could pull mortgage rates higher. The same goes for Friday’s official Retail Sales data for November.

Either way, expect volatility throughout the week — same as we’ve seen all year long.

According to the government, American businesses are cutting staff at an accelerated pace, most recently paring 533,000 jobs this past November.

It’s the largest one-month decline since December 1974 and raises the year-to-date job losses to 1.9 million workers.

However, there is a silver lining in the data for all Americans — both employed and unemployed.

With each piece of negative news about the economy, Washington is more likely to pass new stimulus packages to the benefit of household budgets.

On one front, Federal Reserve Chairman Ben Bernanke has already alluded to further Fed Funds Rate cuts at the Fed’s two-day meeting starting December 15. Because the Fed Funds Rate is directly tied to Prime Rate, any cut in the benchmark lending rate would lead “floating” interest rates lower on home equity credit lines and other revolving debt.

And this talk from the Fed comes on the heels of its $500 billion pledge to buy mortgage-backed bonds. That demand-shifting move was announced last week and drove mortgage rates lower. It also marked the official start of the refinancing boom.

And, lastly, Capitol Hill is already responding to the jobs data with calls for “urgent” action. It’s a vague term, to be sure, but history has shown that Congress could pass any number of measures, each meant to put more money into household budgets nationwide.

The U.S. is in a verified recession and Washington is throwing the kitchen sink at it.

The end result is that today’s job data is a non-event of sorts for active home buyers. Mortgage markets expected a poor reading and they got it. Normally, data like this would cause mortgage rates to spike but this is not a normal market.

Now, with markets expecting additional stimulus, mortgage rates are edging lower today with hopes of an economic rebound.

Source
Employers cut 533,000 jobs in Nov., most since 1974
Barbara Hagenbaugh
December 5, 2008, USA Today