Monday, March 24, 2008

Looking Back And Looking Ahead

Conforming mortgage rates edged slightly lower for the second week in a row.
Mortgage rates fell for two main reasons:
The Federal Reserve offered fiscal support for troubled mortgage-backed securities
A government group gave Fannie Mae and Freddie Mac permission to lend more of money to American homeowners
These two actions combined to make mortgage-backed securities safer for mortgage bond investors and when mortgage bonds are safer, their required rate of return (i.e. interest rate) comes down.
This is the financial concept of Risk vs. Reward in action.
Expect mortgage rates to be in flux and highly volatile again this week, however.
Aside from housing and consumer confidence data, markets will respond to Friday's Personal Consumption Expenditures data. PCE is a "Cost of Living" index that the Federal Reserve watches very closely.
PCE is different from other Cost of Living indices because it accounts for "substitutes". For example, if beef is getting too expensive, PCE will substitute chicken -- much like a regular person would.
In this way, PCE better reflects the true cost of living for the average American.
PCE is expected to show 2 percent growth year-over-year. If the actual figure is higher, expect mortgage rates to rise on inflation concerns.

Why Fed Rate Cuts Do Not Equal Lower Mortgage Rates

The Federal Reserve has been on a rate cutting spree once more. Many mortgage applicants are calling their mortgage representative and expecting a lower interest rate. Others who have been waiting to refinance are puzzled as to why mortgage rates have not moved lower during the recent five Fed rate cuts. This is difficult to explain to consumers who have watched a 2.25% reduction by the Fed with very little benefit in mortgage rates.
Is a Fed rate cut really good news for mortgage rates? The facts may be surprising. The Fed can only control the Discount Rate and the Fed Funds Rate. This is very different from mortgage rates. A mortgage rate can be in effect for 30-years while a rate set by the Fed can change from one day to another.
It is often said history repeats itself. And if history is any teacher, we can learn from what happened to mortgage rates the last time the Federal Reserve was in a rate-cutting cycle.
The last time the Fed was in a lengthy rate cutting cycle was back in 2001 from January 3, 2001 to December 11, 2001. In the span of 11 months, they cut the Fed Funds rate 11 times with eight of those cuts by 50bp. This resulted in a total of 475bp or 4.75% in short-term interest rate cuts taking the Fed Funds Rate from 6.00% down to 1.75%. Now most uninformed people would naturally think because the Fed cut rates by so much during this time that mortgage rates would follow suit and trend lower as well. Not so. Mortgage rates actually moved higher during this time of significant rate cuts because inflation, the arch enemy of bonds, gradually rose.
Now let’s take a look at what happened with the Fed’s most recent cutting cycle, the first since 2001. On September 18, 2007 the Fed cut the Fed Funds Rate by 50bp. The mortgage bond market briefly enjoyed a “knee-jerk” reaction to the Fed move by closing higher that day, but lost 140bp over the following two sessions. Then on October 31, 2007 the Fed lowered the Fed Funds rate by 25bp. The mortgage bond market responded by losing 78bp over the following five trading days. On December 11, 2007 the Fed once again lowered rates by 25bp and the mortgage bond market lost 88bp in the next three days. So far this year, the Fed delivered a surprise 75bp rate cut on January 22, 2008 and mortgage bonds lost a whopping 144bp in just 2 days. Eight days later and as widely expected, the Fed cut rates by 50bp. Within 13 days from that 50bp cut, mortgage bonds lost 269bp.

Re- Approve your Pre-approval

Since August 2007, mortgage lending guidelines have changed very quickly and often without notice.
Some of the more well-known changes include:

-Broad restrictions on stated income home loans
-Broad restrictions on 100 percent financing
-"Risk-based fees" for credit scores under 740

Some of the lesser-known restrictions relate to property type and occupancy status as well as debt-to-income levels and mortgage payment histories, because of the number of changes and their collective scope, home buyers should be prudent and get re-pre-approved for their home loan.
Even if you last spoke with your loan officer four weeks ago, it's important to know how market changes could ultimately impact your home loan approval.
The market really is that different. Talk to your loan officer about a re-pre-approval today.