Mortgage Rate Update

New site for Evan's blog

2008-07-25T10:48:00.001-07:00

I have moved my blog to a new address. Please visit me at the new link-
http://webhost.mortgagetrustinc.com/evanswanson/

Rate Update for July 24, 2008

2008-07-24T09:08:00.001-07:00

Mortgage rates have improved modestly today thanks to a weaker stock market and technical trading patterns.

The Dow Jones Industrial Average is currently off by over 100 points in response to weak earnings results out of Ford Motor Co. & slower than expected home sales. The weakness in stock is creating additional demand for bonds.

We can also credit the move lower to technical trading patterns. As the chart shows below, mortgage-backed bonds are “bouncing” higher off the recent low levels that they reached. This same pattern unfolded in the middle of June.

In real estate related news, I have posted a new article to my blog about key points in the housing bill expected to get signed into law in the next week. Here is a link to read it for yourself.

Current Outlook: floating

ACCESS loan for 0% down financing.

2008-07-23T16:17:00.000-07:00

0% down financing is getting harder and harder to find these days. The most common approach of creating 0% down financing is through the FHA loophole which allows for a seller to contribute the 3% required down payment via a down payment assistance program such as Nehemiah and Ameridream. However, recent reports suggest that the Federal Government will eliminate this flexibility with the passage of the latest housing bill.

Once that is gone what will be next? I may have found the answer with the ACCESS program we offer in conjunction with National Homebuyer Fund. This program will provide a 2nd mortgage for a homebuyer who meets the qualifications up to 100% of the purchase price (the website states 105% but we can't get mortgage insurance beyond 100%). Here are a few key points of the program:

*The ACCESS 2nd mortgage cannot exceed 14.99% of the purchase price & cannot exceed 100% combined loan to value. The most common approach is to structure the 2nd mortgage as a 5% 2nd mortgage subordinated behind a 95% primary mortgage.

*The ACCESS 2nd mortgage is a 20 yr. mortgage with a fixed interest rate which will be 2.00% higher than the rate on the primary mortgage. It has principal and interest payments.

*The ACCESS 2nd mortgage can be used in combination with a variety of 1st mortgage products including 30 year fixed rates with interest-only payments.

*The ACCESS 2nd mortgage carries no prepayment penalty.

*In order to qualify for this program the applicant must have at least a 680 credit score & cannot have income which exceeds 140% of the median household income (In the Portland area the limit would be $86,800).

Give me a call today if you'd like to see is this program will work for you!

Rate Update for July 23, 2008

2008-07-23T08:01:00.000-07:00

Mortgages backed-bond prices remain at the lowest level all year which means mortgage rates are also at the highest level. Looking ahead there is a mixed bag of news which could influence the direction of rates.

Working in favor of mortgage rates this morning are a couple items:
*Oil prices are now trading 16% lower from there highs back on July 11th. Lower energy prices should ease inflationary concerns.
*Because mortgage-backed bond prices are trading at multi-month lows there is considerable technical trading support which should help keep prices from dropping any lower.

However, there continue to be factors working against the prospect of lower mortgage rates:
*The stock market continues to rally from its low. Today the Dow Jones Industrial Average is up over 70 points. .
*Furthermore, the treasury is set to auction $31 billion in 2-year Notes today. The added supply of fixed income securities in the marketplace could push rates higher.

In real estate related news, I have posted a new article to my blog about key points in the housing bill expected to get signed into law in the next week. Here is a link to read it for yourself.

Current Outlook: neutral

Summary of the housing bill expected to be signed into law.....

2008-07-23T07:23:00.000-07:00

According to reports President Bush has dropped his opposition to the housing bill which is expected to be voted on today in the House of Reprsentatives. Now that the White House backs the legislation it is expected that this bill will come into law later this week or early next week.

After reviewing mutliple articles about the new law in the WSJ, NY Times, & Bloomberg I have recorded the video below which summarizes a few key points.

Your Guide to Understanding Mortgage Insurance

2008-07-22T15:45:00.000-07:00

When a home buyer takes out a new mortgage and has less than 20% down often times they will be required to provide mortgage insurance to the lender (exceptions exist when we're able to provide "combination loans" which are fairly uncommon these days).

Mortgage Insurance (also known as "mi" or "pmi') is insurance which covers the lender against a portion of their losses should the loan they make result in payment delinquency or foreclosure.

There are various forms of mortgage insurance which home buyers should be aware of. Here is a brief explanation of each:

Borrower-paid mortgage insurance (BPMI)- This is the most common form of mortgage insurance. The insurance premiums for this form are paid for by the borrower on a monthly basis and varies depending on the loan amount, loan-to-value, and credit score of the borrower. With this form of mortgage insurance the borrower can request that the mortgage insurance payment be removed from their monthly payment once they have established a 24-month clean payment record and can demonstrate that they have 20% equity in the property.

Example of monthly BPMI payment for $100,000 loan on 95% financing*: $65

Lender-paid mortgage insurance (LPMI or "No mi")- With this form of mortgage insurance the borrower accepts a modestly higher interest rate in exchange for not having to make a monthly mortgage insurance payment. Often times these plans create the lowest possible monthly payment and can be most tax efficient. However, as of late, this form of mortgage insurance is getting more and more difficult to qualify for. The other limitation with LPMI is that the increase a borrower accepts to their interest rate can never be removed even when they have achieved 20% equity in their home.

Example of additional monthly interest expense associated with LPMI for $100,000 loan on 95% financing: $33

One-time or "upfront" mortgage insurance- With this form of mortgage insurance the borrower makes a one-time mortgage insurance payment at the outset of taking the loan and then does not have to make any additional mortgage insurance payments for the duration of the loan. This option works best for a home buyer who is seeking to create the lowest possible monthly payment and has plenty of equity for down payment and settlement charges.

Example of upfront mortgage insurance for a $100,000 loan on 95% financing: $3,050

Split mortgage insurance- Split mortgage insurance combines aspects of the BPMI & the one-time mortgage insurance forms. With a split mortgage insurance structure the borrower pays an upfront or "one-time" mortgage insurance payment at closing & accepts a monthly BPMI payment as well. The most common form of this is with the FHA program. With a FHA loan the buyer finances an upfront mortgage insurance premium into the loan amount and makes a monthly mortgage insurance payment. These two amounts are less than if the borrower did the BPMI or one-time mortgage insurance exclusively.

Example of most common FHA split mortgage insurance form on a $100,000 loan on 95% financing: $1,425 upfront + $39.58 per month.

Rate Update for July 22, 2008

2008-07-22T07:59:00.000-07:00

Mortgages backed-bond prices are now at the lowest level we’ve seen all year which means mortgage rates are at the highest level.

Earlier in the morning it looked as if mortgage rates may benefit from a sell-off in the stock market following weaker than expected earnings outlooks from American Express, Apple, & Wachovia. In fact, Wachovia announced yesterday that they would discontinue their wholesale mortgage lending operations effective in August of this year.

However, stocks have reversed higher (pressuring bonds lower) following comments made by Philadelphia Fed President Charlie Plosser who said “inflation is too high” and that the Fed must “back up their words with action” by hiking short-term rates. The fact that the equity markets have risen on these comments is a clear signal that Wall Street is more concerned about inflation than economic growth.

We favor a floating stance at this point because we believe technical trading patterns will help mortgage rates move lower in the coming days. However, at some point inflation concerns may very well pressure rates higher in the long-term.

On a side note, I continue to update my blog with articles about the ongoing Fannie Mae and Freddie Mac story line. If you’re curious about these two companies and how important they are to our livelihood I would encourage you to read my first posting on the topic at this link.

Current Outlook: cautiously floating

NY Times article about Fannie and Freddie

2008-07-21T12:54:00.001-07:00

The NYT did a great article about foreign participation of Fannie Mae and Freddie Mac mortgage-backed bonds on July 21st.

The article quantifies the involvement of foreign investors in buying mortgage-backed bonds (which helps keep bond yields/ interest rates low). The article suggests that in the past few years Fannie Mae and Freddie Mac officials were "selling" mortgage-backed bonds as investments to foreigners by describing them as securities which were implicitly backed by the US Government even though the US has no legal obligation to bail Fannie Mae and Freddie Mac out. However, based on Henry Paulson's recent comments it looks likes this may actually be the case.

Here is a link to read the article for yourself.

Rate Update for July 21, 2008

2008-07-21T08:16:00.000-07:00

Mortgages rates have now reached multi-month highs.

Since Tuesday, July 15th the Dow Jones Industrial Average has rallied by over 6% as confidence in the financial sector has begun to return to investors’ psyche.

Watch today’s you tube video for a refresher on how the stock market impacts mortgage rates.

Current Outlook: cautiously floating

Rate Update for July 18, 2008

2008-07-18T07:48:00.001-07:00

Mortgages rates are slightly higher for a 3rd straight day.

Since July 15th the stock market has rallied by over 4%. This rally has pressured mortgage-backed bond prices lower by 188 basis points. Below is a chart showing mortgage backed bond prices over the past 6 months.

Mortgage-backed bonds are currently trading at recent support levels which mean we may see some stabilization to prices and possibly even a reversal. We are shifting our outlook to a cautiously floating stance in the hopes that this layer of technical support will help rates move back down.

Current Outlook: floating

Rate Update for July 17, 2008

2008-07-17T07:57:00.000-07:00

Mortgages rates are slightly higher again this morning following yesterday’s rally in the stock market.

In case you missed it the equity markets rallied by the largest margin in over 3 months on Wednesday. Mortgage-backed bonds tend to trade inversely with the stock market. When the stock market rallies it pushes bonds prices lower, which in turn causes mortgage rates to rise.

The stock market started the day higher today but has since backed off. In the absence of significant economic data we will be watching the stock market for direction the next 2 days.

Current Outlook: locking

Rate Update for July 16, 2008

2008-07-16T07:17:00.000-07:00

Mortgages rates are slightly higher this morning following worse than expected inflation data.

The Labor Department reported that the Consumer Price Index (CPI) soared by 5% on a year-over-year basis. This increase to consumer prices is the largest since May of 1991.

If you’ll remember back to yesterday’s rate update the PPI showed an increase of over 9% on a year-over-year basis which was the largest increase since 1981!
This double whammy of worse than expected inflation does not bode well for mortgage rates. For a detailed explanation as to why inflation causes mortgage rates to rise please view this link.

We are shifting our outlook to a locking stance in the near-term.

I also wanted to plug the article I wrote on my blog yesterday evening about Fannie Mae & Freddie Mac. Many of us have heard of these companies and may have a vague understanding of their role in the mortgage industry. This article is designed to help you gain a very clear understanding of their role & importance. To view click this link.

Current Outlook: locking

Fannie Mae & Freddie Mac in the news.....

2008-07-15T20:46:00.000-07:00

Unless you live under a rock you are probably very familiar with the turmoil ongoing in the financial sector of our economy. This turmoil brought Indymac Bank to its knees last Friday when the Federal Government seized it's assets for failing to maintain adequate capitalization. This bank failure is the 2nd largest bank failure in US history. Their failure has brought increased concern over the financial well-being of mortgage industry titans FNMA (Fannie Mae) & FHLMC (Freddie Mac).

Most people have heard of Fannie Mae and Freddie Mac but may not understand much about them. The media has recently done a great job of generating fear and panic surrounding these two companies but has yet to explain the crucial roles that these two entities play in our economy. It is my objective with this blog posting to clear some of this up and answer the following questions:

Who are Fannie Mae & Freddie Mac?
What exactly do they do?
Why are they so important?
Why are they currently in the news?
And what would be the implication of their financial failure?
What's next?

Who are Fannie Mae & Freddie Mac? and What exactly do they do?......A Brief History
To first understand who Fannie & Freddie are let's take a look at why they exist. Prior to these two entities (before 1938) the mortgage industry was fairly simple. A local or regional bank would collect money from individuals and businesses in the form of deposits and lend that money back out in the form of mortgages (or other types of loans).

This system worked pretty well for many years except for a couple limitations.

One problem with this system was that a bank was limited to lending out only a portion of the deposits they took in. Therefore, if a bank had $10 million in deposits they would have the ability to lend out only portion of those assets (say $9 million or 90% for example) depending on the prevailing reserve requirements. A reserve requirement is the minimum amount of deposits a bank must hold relative to the loans outstanding.

A second problem was that banks were typically limited to lending in the local area in which they were located.

Then came the national banks. These larger institutions had branch presence across the country. This gave them the ability to collect $10 million of deposits in New York City and redistribute these funds in the form of loans in another state (Illinois for example).

This system also worked fairly well for a number of years except during times of economic contraction when bank runs would occur. A bank run is when a large number of individuals withdraw their deposits from a bank for fear that the bank is going to fail.

This happened frequently following the Great Depression and stock market crash of 1929. The result was that when the economy needed monetary infusions to help boost growth the opposite would occur because banks would suffer huge declines in their reserves.

To rectify this problem, Franklin Delano Roosevelt founded the Federal National Mortgage Association (Fannie Mae) in 1938 as a government agency. This agency was to provide liquidity in the mortgage market by buying mortgages from banks which they then chopped up and securitized into mortgage-backed bonds (avid 'rate update' followers should know what these are) that were sold to investors.

From a banks perspective, they were now able to lend a borrower an amount of money for a mortgage, sell the mortgage to Fannie Mae (and book a small profit), then lend that same amount of money again, and again, and again. Conceivably, as long as investors were willing to buy the bond backed by the original mortgage there was an endless supply of liquidity available for mortgage lenders. With this financial invention "securitization" was born and the period of credit expansion in the US was underway.

Add Freddie Mac
In 1968 the Federal Government decided that they no longer wanted Fannie Mae on their Federal balance sheet so they privatised the company. So that Fannie Mae would not act as a monopoly they also chartered the Federal National Mortgage Association (Freddie Mac) to compete with them.

To this day both companies are in existence as publicly traded entities and continue to provide liquidity to the mortgage market through the same purchase & securitization process described above.

Why are they so important?
Virtually every bank and lender out there is running at or near the minimum reserve requirement ratio which is currently set at 3% (simply put). Therefore, if a bank has $100 billion in loans outstanding, they have to have at least $3 billion in capital as backing (the reason Indymac failed last Friday was because they fell below this 3% level).

What Fannie Mae & Freddie Mac allow banks to do is to continue to lend even if they are getting close to their reserve requirements because as soon as they lend the money on a mortgage (increasing their loans outstanding and decreasing their capital), they get the cash back from the sale of the mortgage (decreasing their loans outstanding and increasing their capital).

Why are they in the news?
Fannie Mae & Freddie Mac are currently in the news because they are experiencing financial difficulty.

The current problems at Fannie Mae & Freddie Mac are twofold.

First, their loan portfolios have gotten very large which has raised questions about their solvency. In fact, today, Fannie Mae boasts a loan portfolio of $5.3 trillion. However, they only have $84 billion in capital which means their reserves are only about 1.58% of their outstanding loans. If they were a bank then the Federal Government would have already shut them down.

Second, they are losing A LOT of money which is putting further pressure on their capitalization ratio. These companies lose money when mortgages perform poorly because they guarantee the principal and interest on the mortgage-backed securities that they issue even if the borrower defaults. Therefore, during periods of rising defaults, delinquencies, and foreclosures-as is currently the case- these companies incur huge losses. In fact, according to their last two quarterly reports, they've lost over $11 billion in operating income over the last 6 months. These large losses coupled with their already low capitalization rate has investors concerned over their long-term viability.

What would the failure of Fannie & Freddie mean to the mortgage market?
The bottom line is that such a failure would be devastating to the mortgage market. The void that the loss of these two institutions would create in terms of providing liquidity in the mortgage market would be irreplaceable by the private sector.

In the event that these two corporations failed at best we could count on mortgage offerings that mirror the "non-conforming" or "jumbo" mortgage market today. These are loans that are portfolioed or securitized by the private sector and typically have much more stringent qualifying guidelines & (say good-bye to low down payment and investor loans) higher interest rates (currently non-conforming fixed rates carry rates in the 7-8.5% range.

At worst, mortgage lending would seize to exist except for seller contracts and private "hard money" loans.

What next?
The fate of Fannie Mae and Freddie Mac will likely be impacted on the health of the housing market & the Federal Government's willingness to step in if need be.

Should we begin to see some stabilization in housing it would create incentive for borrowers to make their payments which would prevent foreclosures that cost these corporations billions. This could eventually allow Fannie Mae & Freddie Mac to return to profitability and hopefully rebuild their battered balance sheets.

However, should these two titans fail we believe the Federal Government will step in and nationalize these two entities to avoid an all out halt of mortgage lending in our economy. Of course, the longer-term problem with that is how the American taxpayer will pay for it.

Rate Update for July 15, 2008

2008-07-15T08:30:00.000-07:00

There are all sorts of things to talk about this morning.

First off, the stock market is trading lower this morning. The Dow Jones Industrial average is now down below 11,000. Fears over the financial sector continue to hurt stocks as confidence in the US Treasury’s plan to aid Fannie Mae and Freddie Mac is waning. Bad news for stocks is typically good news for mortgage rates. For an in depth look at the relationship between stocks and mortgage rates click here.

Despite the weakness in stocks mortgage rates may not benefit from the current financial environment. Inflation is showing its ugly head once again in today’s Producer Price Index Report (PPI). The PPI reports on inflation at the wholesale and manufacturing level of our economy. This morning’s report indicated that prices year-over-year increased by a whopping 9.2%, the most since June of 1981!

Furthermore, in testimony on Capitol Hill, Fed Chairman Ben Bernanke said the US Economy faces, “numerous difficulties” and gave an uncertain outlook on inflation.
All in all, the news isn’t pretty. We are going to recommend that our clients with near-term closing lock in if they haven’t already. Longer-term closing may be able to be patient and see lower rates in the next few weeks.

Current Outlook: mixed

New rules for the Mortgage Industry voted on today!

2008-07-14T13:05:00.000-07:00

The Fed voted to add more regulations to the mortgage lending industry today. For an overview see this article on wsj.com.

Also, here is a link to the Federal Reserve website to read their announcement.

Rate Update for July 14, 2008

2008-07-14T07:57:00.000-07:00

The Federal Government had a busy weekend dealing with ailing financial firms. Fannie Mae & Freddie Mac saw there stock prices fall by over 50% last week as investors expressed concern over the two firms’ large mortgage portfolio. The Treasury pledged to back to two companies should investor confidence erode further. This is good news for mortgage rates in the long-term.

On Friday Federal Regulators seized the troubled financial thrift Indymac Bank in what is the 2nd largest bank failure in US history. The news renews fears over the financial system and may help mortgage rates in the near terms because of investor appetite for safety.

Watch today’s you tube video to learn what we’ll be watching for this week.

Current Outlook: neutral

Rate Update for July 10, 2008

2008-07-10T08:50:00.000-07:00

Mortgage rates have come down by .25%-.375% over the past week. In the absence of any scheduled economic data our attention is focused on the stock market and technical trading patterns.

Watch today’s you tube video to get an understanding of how the technical trading patterns have shifted our near-term outlook for mortgage rates.

Current Outlook: locking bias

Rate Update for July 9, 2008

2008-07-09T08:47:00.001-07:00

Mortgage-backed bonds did rally yesterday which has helped mortgage rates trend lower. In the absence of any significant economic data we will be watching the stock market & technical trading patterns.

The stock market is currently trading modestly lower. Traders are trying to weigh the positive earnings news out of Aluminum maker Alcoa yesterday against the rising tensions in the Middle East.

If you haven’t heard Iran tested nine long-range missiles yesterday raising tensions between them and Israel. When geo-political tension exists it commonly causes mortgage rates to move lower. However, because this involves an oil producing nation if this conflict escalates mortgage rates could suffer due to higher oil prices.

From a technical standpoint mortgage rates rallied yesterday and are now facing overhead resistance. We favor locking in yesterday’s gains.

Current Outlook: locking

Rate Update for July 8, 2008

2008-07-08T13:28:00.000-07:00

In a surprising reversal stocks sank yesterday after starting the day in positive territory. The sell-off in the equity markets helped mortgage-backed bonds rally which is why mortgages rates are slightly better this morning.

Looking ahead there are a number of speeches today from key officials including Ben Bernanke and Henry Paulson. Their comments always have the ability to impact the markets so we’ll be listening for what they have to say.

Earnings season for stocks kicks off today. Publicly traded corporations report their earnings every 3 months following the completion of a quarter. The reason this is important for mortgage rates is because of the inverse relationship between the stock market and bond market. For more information about this dynamic visit this link.

The bottom line is if the stock market rallies it will likely hurt mortgage rates and vice versa.

Current Outlook: floating bias

2nd mortgage options

2008-07-07T11:51:00.000-07:00

What is a 2nd mortgage/ home equity loan?

A 2nd mortgage is a loan that is originated and subordinated behind a first mortgage. 2nd mortgages are also referred to as home equity loans, junior liens, or combination loans. These loans can take on various forms. The two most popular 2nd mortgages are the Home Equity Line of Credit (HELOC) and the Fixed Rate Home Equity Loan.

HELOC’s
A HELOC is a line of credit much like a credit card that is secured against the equity in a home. These are most often originated after a person has owned a home but can also be originated as a part of a purchase transaction.

HELOC’s have extremely flexible terms and is an excellent financial tool for homeowner’s with a large equity position in their home. HELOC’s typically have a 10-year “draw” term. During this period a user may borrower up to the maximum amount of the line of credit and pay it back as many times as they wish. Due to the flexible nature of the draws HELOC’s have variable interest rates that are based on the prime index plus a fixed margin. Margins on HELOC’s can vary from -0%-3.00%. The margin is determined by the borrower’s credit and equity available in the home. During the draw period borrowers make a minimum of interest-only payments based on the average balance during a given billing period (much like a credit card). The borrower may make additional payments at any time which will go towards reducing the balance owed against the line of credit. In the event that a borrower does not use the HELOC they will not pay any interest. Some HELOC’s do have an annual service fee charged for the maintenance of the account.

Fixed Rate Home Equity Loan
The most common fixed rate home equity loan is a 30/15 balloon program. With this loan a borrower will take out a sum of money and make payments based on a 30-year amortization at a fixed rate. However, at the end of 15 years if the borrower still had this loan they would be forced to pay-off or refinance the remaining balance. Typically these loans do not carry any penalty to prepay them early.

When would a 2nd mortgage make sense?
We originate 2nd mortgages in many different cases. 2nd mortgages are used as combination loans in purchase transactions in order to allow the client to avoid paying for costly private mortgage insurance. 2nd mortgages are also used when a client needs to borrow a small sum of money for a short period of time to satisfy an unbudgeted obligation. Since 2nd mortgages are relatively inexpensive to originate often times they can be more cost effective than refinancing a larger primary mortgage.

Rate Update July 7, 2008

2008-07-07T08:09:00.001-07:00

Mortgage rates appear to be trending higher as economic uncertainty prevails over the financial markets. Friday’s jobs report indicated that the labor market remains very weak. June marked the 6th consecutive month that the US economy lost jobs.
However, higher commodity prices continue to raise concerns over inflationary pressures in our economy.

The Fed is in a difficult position because they are responsible for maintaining price stability (low inflation) & sustainable economic growth. Over the next two days three Fed officials are scheduled to speak, including Ben Bernanke tomorrow. The financial markets will be listening to their outlooks as to when the Fed may act to lower or raise short-term rates in the future. We believe mortgage rates would benefit from an indication that they will likely move to raise short-term rates because of the implications it would have on the US Dollar.

For now, we are going to recommend that our clients lock.

Current Outlook: locking

Rate Update July 3, 2008

2008-07-03T09:00:00.001-07:00

This morning’s jobs report did show continued weakness in the jobs market. The report indicated that the US Economy lost 62,000 jobs last month. This marks the 6th straight month of contraction in the jobs market. As I explained in yesterday’s ‘rate update’, a weak jobs report is likely to help mortgage rates. However, the bond market has shown a muted reaction thus far. Why?

Working against mortgage rates are two other stories:

First, oil prices continue to move higher. Oil futures rose to almost $146 a barrel earlier today which is also raising inflationary concerns.

In addition, the European Central Bank (ECB) announced this morning that they were raising short-term interest rates in order to combat inflation pressures in the EU. This announcement is likely to put pressure on the US dollar in the future which could lead to additional inflation pressure.

Current Outlook: neutral

Rate Update July 2, 2008

2008-07-02T07:57:00.000-07:00

Mortgage Rates rose modestly yesterday afternoon after the stock market rallied in the afternoon.

Attention is now focused on tomorrow’s monthly jobs report. I have posted a new article on my blog explaining the importance of the monthly jobs report which you can view at this link. The bottom line is that the monthly jobs report is an indicator of the economies health. When this report shows fewer jobs created than expected mortgage rates tend to go down and vice versa.

Watch today’s you tube video for our recommendation and why.

Current Outlook: floating into tomorrow's jobs report

Importance of the Employment Report on Mortgage Rates

2008-07-02T07:38:00.000-07:00

We often stress the importance of the monthly "jobs report" in trying to forecast the direction of mortgage rates. The objective of this post is to provide an explanation of why this report is so important.

Let's first have a look at what information can be found in the monthly "jobs report". Here is a summary:

Employment Report
In the US, the employment report, also known as the labor report, is regarded as the most important among all economic indicators. The report provides the first comprehensive look at the economy, covering nine economic categories. Here are the three main components of the report:

1. Payroll Employment: Measures the change in number of workers in a given month and measures the number of jobs in more than 500 industries (ex-¬farming) in all states and 255 metropolitan areas. The employment estimates are based on a survey of larger businesses and counts the number of paid employees working part-time or full-time in the nation's business and government establishments. This release is the most closely watched indicator because of its timeliness, accuracy and its comprehensiveness. It is important to compare this figure to a monthly moving average (6 or 9 months) to capture a true perspective of the trend in labor market strength. Equally important are the frequent revisions for the prior months, which are often significant.

2. Unemployment Rate: The percentage of the civilian labor force actively looking for employment but unable to find jobs. Although it is a highly proclaimed figure (due to simplicity of the number and its political implications), the unemployment rate gets relatively less importance in the markets because it is known to be a lagging indicator -- it usually falls behind economic turns.

3. Average Hourly Earnings Growth: The growth rate between one month’s average hourly rate and another’s sheds light on wage growth and, hence, assesses the potential of wage-push inflation. The year-on-year rate is also important in capturing the longer-term trend.

And why is it important?
The employment data give the most comprehensive report on how many people are looking for jobs, how many have them, what they're getting paid and how many hours they are working. These numbers are the best way to gauge the current state and future direction of the economy. They also provide insight on wage trends and wage inflation. If wage inflation threatens, usually interest rates will rise, and bond and stock prices will fall. The Employment Report is scheduled for release at 8:30 (ET) on the first Friday of each month by the Bureau of Labor Statistics.

Rate Update July 1, 2008

2008-07-01T08:01:00.000-07:00

Over the past two weeks the Dow Jones Industrial Average has lost approximately $316 Billion (yes with a ‘B’) in market capitalization. This weakness in the stock market has caused 30 year fixed rates to fall by .375%. If you have not yet read this blog posting on how the stock market impacts mortgage rates it would be timely now.

From a technical standpoint mortgage-backed bonds continue to take direction from stocks. However, I wanted to point out the graph below. The first circle at the bottom left shows the lows that mortgage backed bond prices hit at the beginning of March (during this time 30 yr rates hit 6.375-6.50%). From that low bond prices rallied over the next few days and rates dropped by .50%. Two weeks ago we also hit this low in bond prices (30-yr rates also hit 6.375%-6.50%). It looks like we are trying to rally back from these levels so we are going to maintain a floating position for now.

Current Outlook: floating

Pro's & Con's of the Oregon Bond Program

2008-06-30T13:10:00.000-07:00

As mortgage lenders continue to restrict their lending guidelines in response to the "subprime fallout" it is no wonder that mortgage originators are increasing their reliance on FHA & state sponsored first time home buyer programs to fill the void.

In Oregon we have the Oregon Bond program (http://www.oregonbond.us/). This particular program is offered through the Oregon Housing and Community Department and is funded through tax-exempt mortgage revenue bonds.

On the surface, the Oregon Bond program appears to be the "end all, be all" program for ANY first time home buyer. However, it is my goal with this blog post to inform you of the positive and negative aspects of this loan option.

Pro's:
*Low/ No down payment requirement- The Oregon Bond program has two down payment options for first-time home buyers. The first option called the "Rate Advantage" has a lower interest rate and carries a minimum down payment requirement of 3%. The second option called the "Cash Advantage" requires 0% down on the part of the home buyer. However, at the time of this posting the Cash Advantage program was temporarily suspended.

*Interest Rate- The Oregon Bond Program has a very attractive interest rate. At the time of this blog posting a borrower could lock in a 30 year fixed rate @ 5.75% for the Rate Advantage option. This is about .375% less than a comparable FHA option.

*Flexible credit approval- Like the FHA loan program the Oregon Bond loan can be fairly flexible in terms of an applicants credit score. Unlike conventional loans there are not adverse rate adjustments for applicants with lower credit scores.

Con's:
*Mortgage Insurance: The Oregon Bond loan program carries fairly expensive mortgage insurance requirements. Just like the FHA loan the mortgage insurance is structured with a 1.50% upfront mortgage insurance premium that gets financed into the loan plus a .50% monthly premium that is built into the monthly payment. For example, a $200,000 loan would get financed @ $203,000 to fund a $3,000 mortgage insurance policy at closing plus $83.33 per month.

*Recapture Provision: This provision is often overlooked by borrowers and loan originators but it can be a costly oversight. With an Oregon bond loan the home buyer may be subject to a recapture tax when the home is sold in the future. For a detailed explanation of this provision I would encourage you to research it at the Oregon Bond website. I will do my best to explain it here. The recapture tax is collected at a rate as high as 6.25% of the original loan amount if the home is sold within the first 9 years of the loan at a higher price than it was initially purchased for if the loan holder's income exceeds a certain threshold (currently about $70,000) at the time of sale. For example, a home buyer takes a loan out for $200,000 today to buy a home for $225,000. In 5 years, they decide to sell their home. At that time they sell their home for $275,000. If their household income at that time exceeds the threshold (determined at that time) then they would owe $12,500 (6.25% of $200,000) in recapture tax, even if they had refinanced during the course of owning the home.

*Inflexible guidelines: Although the Oregon Bond program is flexible in some degree (mostly credit and down payment) it is considered to be inflexible in other areas. For example, the program requires a 2-year work history in the same industry and school does not count. for many home buyers they have only been out of school for less than 2 years. These borrowers would not qualify for an Oregon Bond program but may qualify for FHA loans. Furthermore, there is a very limited set of Oregon Bond lenders to choose from. Therefore, an Oregon Bond application is subject to the underwriting tendencies of a few different lenders. This differs greatly from FHA where we can originate almost anywhere.

*Income limits: Unlike the FHA loan program the Oregon Bond loan program REQUIRES that an applicant be a first time home buyer (defined as not having owned in the previous 3 years) & may not have a household income that exceeds a certain level (depending on the county that the property is in). For the Portland-Metro area the income threshold is about $70,000 at the time of this post.

*Processing: Oregon Bond programs have to be reviewed by the lender and the state of Oregon. Typically speaking the process for getting an Oregon Bond loan is much more cumbersome and time consuming than a traditional FHA loan. We like to ask for 45-60 days to get an Oregon bond loan done whereas we can do FHA loans in a much shorter time frame.

Rate Update June 30, 2008

2008-06-30T08:20:00.001-07:00

The weak stock market may continue to help mortgage rates move lower. However, a weakening dollar may raise inflationary concerns.

The European Union reported the highest year-over-year inflation reading in 16 years this morning. How can European Inflation impact mortgage rates in the US?
In order to combat inflation the EU will have to begin raising short-term rates beginning this Thursday. As the EU raises short-term rates it will reduce demand for the US Dollar because investors will be able to earn higher returns with the Euro. The weakening dollar will continue to push oil prices and other commodity prices higher which could exacerbate inflation concerns in the US.

Looking ahead this week we have the June jobs report set to be released on Thursday. With the 4th of July holiday on Friday we may see increased volatility because of fewer traders working in the markets.

Current Outlook: neutral

Fannie Mae continues to tighten their guidelines....

2008-06-27T10:32:00.000-07:00

Fannie Mae released an announcement yesterday which indicated they are tightening some of their guidelines to qualify for a new mortgage. The reason this is important is because Fannie Mae dictates underwriting guidelines for virtually all mortgage lenders.

There is one guideline change within this announcement that we feel will be impactful and thought we should share it with you.

It involves a buyer who is buying a new primary residence but has yet to sell and close on their existing residence. In this circumstance the buyer is required to qualify for BOTH mortgage payments (BOTH= the proposed mortgage payment on the new house & the existing mortgage payment). However, currently we are able to offset a portion of their existing mortgage payment by giving them a credit for the market rent that their home would earn if they chose to rent it out (even if this is not their intention). This helps them qualify for the new house. However, Fannie Mae has changed that guideline to the following (bold and italicized copy represent the changes):

1) If current home is being retained as a 2nd home (basically no rental income needed to qualify, but home is not being sold) - qualify with the full PITI payment on both properties plus borrowers must have 6 months mortgage payments in reserves for both homes!

2) If the home is being retained for an investment property & rental income is needed to qualify, you need the following: a) Evidence that the borrower's have at least 30% equity in their current home, b) a copy of the fully executed lease agreement & c) evidence of receipt of the security deposit & deposit into the borrower's account. If the borrower's lack 30% equity (as verified by appraisal, AVM or BPO (Broker Price Opinion), you will also need 6 months' mortgage payments in reserve on both properties*!

With average market times increasing (Washington County currently around 70-80 days) this will delay buyer's ability to purchase a new home.

What you need to do?
Be sure your client gets pre-approved EARLY AND OFTEN!

Rate Update June 27, 2008

2008-06-27T08:16:00.000-07:00

This morning’s Personal Consumption Expenditure Report (PCE) showed that core inflation increased in line with analysts’ expectations. This is good news for mortgage rates because there has been a lot of concern over growing price pressures in our economy (inflation is the primary factor that drives mortgage rates).

With the stock market indexes losing value, oil prices over $140/ barrel, and continued fears in the financial industry there is a lot of uncertainty in the markets right now. BAD NEWS TENDS TO BE GOOD FOR MORTGAGE RATES because investors view bonds as a “safe-haven” for their investment dollars. In times of uncertainty bonds tend to get bid higher in price which pushes yields lower. We think mortgage rates have a good likelihood of moving lower amid all this uncertainty.

Current Outlook: floating bias

What is Personal Consumption Expenditure (PCE)?
The Core PCE excludes the volatile food and energy components from a measure of price changes in consumer goods and services. It consists of the actual and imputed expenditures of households and includes data pertaining to durables, non-durables, and services. It is essentially a measure of goods and services targeted towards individuals and consumed by individuals. This report is the Fed's favorite gauge on inflation.

Rate Update June 26, 2008

2008-06-26T09:13:00.000-07:00

Some mortgage programs saw improvements to rates this morning.

As expected the Fed kept rates unchanged yesterday afternoon. Watch today’s you tube video to better understand what they said and how it may impact mortgage rates.

Attention will now be focused on tomorrow’s Personal Consumption Expenditure (PCE) report. This report includes the Fed’s favorite gauge of inflation.

Current Outlook: neutral with a floating bias

What is Personal Consumption Expenditure (PCE)?

The Core PCE excludes the volatile food and energy components from a measure of price changes in consumer goods and services. It consists of the actual and imputed expenditures of households and includes data pertaining to durables, non-durables, and services. It is essentially a measure of goods and services targeted towards individuals and consumed by individuals. This report is the Fed's favorite gauge on inflation.

Rate Update June 25, 2008

2008-06-25T08:12:00.000-07:00

Rates are higher this morning.

The big news event of the day will take place today at 2:15 EST when the Fed gives their post-meeting statement. We already know that the Fed is likely to leave rates unchanged. What is more important is how they craft their language. Watch today’s you tube video to understand what we’ll be listening for.

Current Outlook: neutral ahead of Fed meeting

Rate Update June 24, 2008

2008-06-24T07:53:00.000-07:00

Mortgage-backed bonds are trading higher this morning which has helped rates remain unchanged from yesterday despite a sell-off in the afternoon.

The bond market is benefitting from a weak stock market. Over the past week I’ve referenced the impact that the stock market can have on mortgage rates. For a detailed explanation please search for the article, "how the stock market impacts mortgage rates" on this blog.

Tomorrow at 2:15 EST the Fed will give its monetary policy decision and post-policy statement. It is widely expected that they will leave rates unchanged. What is more important is how they craft the wording of their statement. We’ll break this down in tomorrow’s ‘rate update’.

In real estate news, the S & P Case-Shiller Home Price Index report was released today. It revealed further losses to home values in all 20 major metro areas that it follows. To view the report please visit this link.

Current Outlook: neutral ahead of Fed meeting

Rate Update June 23, 2008

2008-06-23T07:18:00.000-07:00

Weakness in the stock market has helped rates stabilize. The Dow Jones Industrial Average is back below 12,000 as credit related concerns continue. If weakness in the stock market persists we could see mortgage rates benefit.

We don’t expect a lot to change with regard to interest rates until Wednesday when the Fed is scheduled to issue their monetary policy decision. It is widely expected that they will leave rates unchanged but the substance of their statement could move the markets. It is clear that inflationary pressures in the economy are growing and the financial markets will be listening for how they plan to deal with it.

Current Outlook: neutral

Rate Update June 20, 2008

2008-06-20T08:27:00.000-07:00

Mortgage rates are slightly higher this morning than they were yesterday due to a sell-off in the bond market yesterday afternoon.
There is not economic data set for release today so we will be watching the stock market and technical trading patterns for clues as to the direction of mortgage rates. Stocks are currently trading lower in response to further concerns regarding bank write-downs & oil prices. Weakness in stocks typically helps mortgage rates move lower.

However, technical trading patterns have us concerned because bonds are trading up against a ceiling of resistance. Should bond prices break through this resistance it would be a sure sign that rates would move lower in the near term. For now we remain neutral.

Current Outlook: neutral

Rate Update June 19, 2008

2008-06-19T08:34:00.001-07:00

Mortgage rates did improve yesterday thanks to a rally in the mortgage-backed bond market that we expected. At this point mortgage-backed bond prices are trading right at the level we had predicted in yesterday’s rate update. We are going to shift our outlook to a neutral stance as concerning inflation data continues to trickle in.

Current Outlook: neutral

Rate Update June 18, 2008

2008-06-18T07:52:00.000-07:00

Mortgage rates improved by .125% yesterday afternoon because of technical trading patterns that we had identified in yesterday’s rate update.

Today there are two factors which we think provide a favorable outlook for mortgage rates in the near-term. Watch today’s you tube video for an explanation.

The stock market is trading lower this morning in response to weak outlooks from a couple major corporations. Read this link to get an understanding of how the stock market can impact mortgage rates.

From a technical standpoint mortgage-backed bonds look like they’ll continue to rally off their lows. Watch today’s you tube video to see how high we think they’ll go.

Current Outlook: cautiously floating

Rate Update June 17, 2008

2008-06-17T08:26:00.000-07:00

Mortgage rates increased by another .125%-.25% yesterday because of continued inflationary pressure.

This morning the Labor Department issued the monthly Producer Price Index (PPI) report. This report is important for inflation expectations because it indicates price changes in the wholesale and manufacturing level of our economy. The report indicated that price changes for wholesalers and manufactures have increased rapidly over the past year (7.2%). However, if you strip out volatile food and energy prices the Core increase was only 3%.

Despite the hotter than expected inflation data, which would typically be bad for mortgage rates, mortgage-backed bonds are actually trading higher this morning because of technical trading patterns. If you’ll look at the chart below you’ll see that mortgage backed-bond prices have reached this level two other times. Each time the bond market was able to “bounce” off this floor of support and move higher, which pushed rates back lower. The difference this time is that evidence of looming inflation is more visible this time around. We are going to recommend cautiously floating for those who can afford to lose another .125% in rate. Otherwise we would advise locking.

Current Outlook: cautiously floating

Guide for understanding the Good Faith Estimate (GFE)

2008-06-16T16:48:00.000-07:00

At the beginning of the mortgage application process mortgage lenders are
required by law to disclose to you the fees and charges that you can expect to incur in conjunction with the loan they are offering. This is accomplished on a Good Faith Estimate (GFE) and should be included with initial correspondence between you and the lender. Often times consumers have difficulty comparing GFE’s so we’ve put together this document to help.

Quick note: If a lender does not voluntarily or refuses to provide to you a GFE then you should be VERY skeptical of the services they are offering.

Understanding the Good Faith Estimate
It’s important to understand that the GFE is a snapshot of the entire transaction and includes expected settlement charges not only from the broker but also all the other 3rd party servicers involved with your purchase. These servicers would include the appraiser, lender, escrow/ title company, county recorder’s office, etc.

It may also include collections for your impound account so that you can have your real estate taxes and homeowner’s insurance collected with your monthly mortgage payment.

In order for you to make the best possible decisions with regard to your loan it’s important to understand what all these charges mean and how they affect your loan. Here is a summary of the fees you can expect to see on a GFE:

Section 800- Items payable in connection with the loanItems in this section are generally payable to the broker, the appraiser, credit reporting agency, and lender. These fees will usually vary slightly from lender to lender.

Loan Origination Fee, Loan Discount, Mortgage Broker Fee: Points are disclosed in this section. A point is equal to 1% of the loan amount and is a fee that can be charged at closing in exchange for a lower interest rate over the life of the loan. The status quo in the mortgage industry is to charge a 1% origination fee although lenders should also offer 0% point options.

Appraisal fee: The cost of your appraisal is disclosed in this section. A standard appraisal with an interior and exterior inspection runs $400-$450. Appraisals for newly constructed homes may also include a $75-$100 charge for a 442 final inspection. Depending on the type of loan sometimes the bank may not require an interior inspection of the property in which case the appraisal may only cost $300. More and more lenders are utilizing statistical databases to verify the value of a home without having to do a physical inspection of the property. In this instance an appraisal waiver could be as cheap as $50.

Credit report: A credit report costs between $18-$20 depending on the agency that it is pulled from. Depending on the length of your escrow we may need to pull multiple reports which could increase the cost on this line. Furthermore, if there are corrections that need to be made and supplemental work is required on your credit report then these charges can be much higher.

Processing fee: We have an in-house processing department. This means that documentation taken from you as the borrower, appraiser, credit reporting agency, title company, insurance agent, and realtors are packaged up and organized on-site. Our processing department then works in direct contact with our lender to make sure that your final approval and loan documents are ready for your closing in a timely manner. The processing fee is paid to compensate for their behind the scenes work.

Underwriting fee/ Wholesale Administration fee: All lenders have an underwriting department that is in charge of analyzing the loan and approving or denying it. Lenders will charge anywhere from $295-$1,100 to underwrite a loan package depending on the type and size of the loan.

Tax Related Service Fee: All lenders are required to order a tax service for each specific loan they originate. The tax service is responsible for checking in annually to make sure that a borrower is paying their taxes (i.e. federal, state, municipal, etc.). The reason this is important for a lender is because government agencies have the ability to place liens on a property ahead of their mortgage liens. The tax service fee is usually $75-$100 depending on the lender and can often be included in the Underwriting/ Wholesale Administration fee.

Wire Transfer Fee: Banking laws require that amounts of money greater than $10,000 be wired through the Federal Reserve Bank so that they can monitor the transfer and flow of money in the United States. Lenders incur fees every time they wire funds to the escrow company in order to fund your loan. Wire transfer fees range between $50-$150 and can also be included as a part of the Underwriting Fee/ Wholesale Administration Fee.

Document Preparation Fee: If you’ve ever signed loan documents before you know how many need to be signed. Many lenders charge a fee for drawing the set of loan documents which are then sent to escrow for your signatures. These fees can range between $50-$225 can also be included in the Underwriting Fee/ Wholesale Administration Fee.

Flood Certification Report: Lending laws require that lenders pull a flood report for every property they are lending against. These reports tell the lender whether or not the property is located in a flood zone and whether or not the borrower will need to purchase flood insurance in conjunction with their homeowner’s insurance. A flood certification report usually runs between $15-$30 and can also be included in with the Underwriting Fee/ Wholesale Administration Fee.

Section 1100- Title/ Escrow Charges
This section of the GFE discloses the expected settlement charges that the title/ escrow company will charge. Please note: In evaluating a loans for a home purchase, these fees may vary widely from lender to lender but at the end of the day these fees will be the same no matter what your GFE says and what lender you go with.

Closing or Escrow Fee: This fee is paid to the escrow company and is their compensation for acting as the 3rd party facilitator for the transaction. In a nutshell, for a purchase they take the funds from the buyer (down payment + loan proceeds) and exchange it for a deed to the property from the seller. For a refinance they take the loan proceeds from a new loan and pay-off all the existing debts that need to be paid off. Escrow fees are dependent on the size of the transaction but usually range between $250-$700.

Document Preparation Fee/ E-Doc Fee: Some escrow companies charge a fee for the process of working up a set of escrow documents which legally give them permission to act as the 3rd party facilitator. This fee is usually around $100.

Title Insurance: Title insurance protects you and the lender in case the title to the subject property does not accurately represent the correct and undisputable ownership of the property. Essentially it insures against losses incurred because of defects to the title of the property. Title insurance premiums are paid to the title insurance company and depend on the size of the loan and whether or not it
is a refinance or a purchase.

Endorsements to Title Insurance: Like any kind of insurance policy (i.e. title, auto, home) insurance companies write very general policies that apply to the most amounts of people so they can create economies of scale. Everybody’s situation is different which means you will likely also have to purchase endorsements to your title insurance policy. Title insurance is no different. These endorsements will be specific to your loan, property, and location. Endorsements usually will cost an additional $50-$250.

Courier: On the day that your loan funds the escrow company will have to get the new deed down to the county recorder to record the document. They almost always hire a courier to do this which will cost between $50-$125.

Re-conveyance Fees: Re-conveyance fees only apply to refinance transactions. These are fees that are charged to release the previous lender’s interest in the property and convey the new lender as the lien holder. Re-conveyance fees usually run $100 per existing loan.

Early-Issue Title Insurance (EITI): Early-Issue Title Insurance is an additional title insurance premium required by lenders for borrowers who are taking out a new loan secured by a newly constructed home. It is an insurance policy that protects you and the lender from any mechanics liens filed against the property after you close. The cost of the insurance is usually $2.00-$2.50 per $1,000 in the loan amount. If you are using Continental Home Mortgage in conjunction with buying a JLS Custom Home often time we can have this cost waived.

Section 1200- Government Recording & Transfer Charges
The 1200 section of the GFE are charges collected by the government to cover
recording charges and any taxes that need to be collected in connection with the transfer of real estate. Please note: As it was with the Title/ Escrow charges, at the end of the day no matter what lender you end up working with these charges will end up being the same even if they aren’t disclosed on the GFE.

Recording Fees: Each county recorder charges a slightly different amount to record the deed. The charges are based on a per page basis. Typically the cost to record the Deed is $100-$175.

City/ County Tax/ Stamps: Some counties collect a tax for any real estate sale that occurs inside the borders of the county. Most notably, Washington County, OR charges .10% of the purchase price to be split evenly between the buyer and seller.

Section 1300- Additional Settlement Charges
In unique circumstances there may be other charges that arise. For example,
sometimes Condominium Associations will charge set-up or pro-rated assessments to borrowers at closing. These fees may be itemized in this
section.

Section 900- Items Required By Lender to Be Paid in Advance
Charges in this section may vary depending entirely on the time of month you
close and the amount of your homeowner’s insurance premium. Please note:
Charges disclosed in this section are NOT dependent on the lender you choose
to work with.

Per Diem Interest: Line 901 is representative of the interest that the lender will collect at closing to pay for the interest on the loan from the date of funding to the end of the month. For example, if the loan closes on the 16th of the month then the lender will collect 15 days worth of interest at closing to pay for the rest of that month. Lenders have to collect interest at closing because mortgages are paid in arrears which means when you make a mortgage payment you are actually paying the interest for the previous 30 days. This differs from rents which is typically paid in advance (a tenant pays on the 1st of the month to live in the property for the next 30 days).

Hazard Insurance Premium: Hazard insurance and homeowner’s insurance are one in the same when it comes to your mortgage disclosures. You are obligated to select your homeowner’s insurance coverage and premium. Ultimately the premium you agree to is what will be paid at closing and show up on line 903. However, at the disclosure stages your mortgage professional will estimate this amount on your behalf.

Section 1000- Reserves Deposited With Lender
Section 1000 is only applicable if you intend on having real estate taxes and homeowner’s insurance included with your monthly mortgage payment. If you elect to pay these items separately then there will not be any amounts listed in this section.

If you choose to have your real estate taxes and homeowner’s insurance
impounded then the collections in this section will depend entirely on the amount of property taxes for the subject property, the timing of your scheduled close date, and the amount of your homeowner’s insurance. Your mortgage professional should be able to explain why the lender is collecting what they are collecting.

Rate Update June 16, 2008

2008-06-16T08:15:00.000-07:00

Over the past two weeks mortgage rates have increased by approximately .25%-.50% depending on the loan program. Concerns over inflation have been the main culprit. This morning news surrounding inflation topics continue to create headlines.

Crude oil prices rose to $139.89/ barrel this morning which will continue to put price pressure on every corner of our economy. Furthermore, the Euro Zone reported higher than expected inflation for May. Inflation overseas can negatively impact the demand for our long-term bonds domestically which is why this report is important.

From a technical standpoint mortgage-backed bond prices stand at multi-year lows. Last time prices reached this level they reversed and rallied higher, pushing mortgage rates back down. This scenario could play out again.

Current Outlook: neutral

Rate Update June 13, 2008

2008-06-13T08:02:00.000-07:00

Rates moved higher yesterday upon further selling pressure in the bond market. However, we are shifting our outlook to a floating position today. In yesterday’s ‘rate update’ we stated that , “From a technical standpoint we are testing multi-month lows on bond prices. We may see a bounce off these lows which would help rates move lower.” You can see this in the chart below where we circled the lows we reached at the beginning of March. Yesterday bond prices reached that same low and this morning bonds are trading higher which should help rates move back lower.

Current Outlook: floating

Rate Update June 12, 2008

2008-06-12T08:42:00.000-07:00

Rates are effectively unchanged this morning. However, mortgage-backed bonds have come under selling pressure which could pressure rates slightly higher later on today.

What is pressuring bonds?

*This morning’s retail sales report indicated that consumer spending grew twice as fast as economists had expected. This good news for our economy is helping stocks this morning which is creating selling pressure in the bond market.

*Second, Fed member Charlie Plosser said yesterday, “Monetary policy is quite accommodative right now, inflation is on everybody's mind...We have to take appropriate steps to do something about that." His comments are further sounding alarms regarding inflation.

From a technical standpoint we are testing multi-month lows on bond prices. We may see a bounce off these lows which would help rates move lower.

Current Outlook: neutral

Portland Metro Real Estate Market

2008-06-11T13:35:00.000-07:00

This was a recent piece done on KOIN 6 news involving the National Association of Realtors Cheif Economist.

Rate Update June 11, 2008

2008-06-11T08:01:00.000-07:00

Mortgage rates have increased .25%-.50% over the past couple weeks in response to increased focus on inflation in the financial markets. If you’ve been following ‘rate update’ closely then you know that we began sounding alarms back in the beginning of May when oil prices rocketed past $100/ barrel.

Consumers are beginning to hear that mortgage rates are moving higher which increases the likelihood that you will get asked why rates are moving higher. Please watch today’s you tube video for a concise explanation of what has happened in our economy that has pushed rates higher.

Current Outlook: neutral in near term with locking bias long-term

Helpful tips for evaluating a Good Faith Estimate

2008-06-10T09:46:00.000-07:00

Comparing two GFE’s from two separate lenders can often be a confusing and overwhelming task. It can be very difficult to differentiate between costs and fees that are connected to the lender and costs which are independent of the lender.

Here are some common tips in evaluating a GFE that will help you best understand what you’re evaluating.

* The 800 section is the only section that should vary between lender- It states very clearly on the GFE that the charges itemized in the 800 section are “ITEMS PAYABLE IN CONNECTION WITH THE LOAN.” It stands to reason then when comparing two lenders with two different loan offerings that this is the section which can vary between them. The rest of the sections in a GFE (1100, 1200, 1300, 900, & 1000) disclose charges form 3rd party-service providers or pre-paid interest, taxes, & insurance which are all independent of your lender. Although there may be discrepancies between two competing GFE’s in the non-800 sections these should not be taken into account because in the end these charges should end up being the same (some minor exceptions may apply).

*Differences in title and escrow fees do not necessarily represent a cheaper option- Many times clients will share GFE’s with us from another lender which at first glance appear to offer lower settlement charges. But, after carefully reviewing how the charges are broken out they find that it is not the case after all.

For example, let’s evaluate a situation where an applicant is comparing 2 GFE’s for a $250,000 loan they are taking out to buy a $350,000 home. Here is a summary of 2 GFE’s from two different lenders:

Lender 1-Total Estimated Settlement Charges - $7,103
Lender 2- Total Estimated Settlement Charges- $5,242

After closer evaluation the applicant realizes that despite the higher figure for Total Settlement Charges that lender is actually offering a lower closing cost option. Here is how the GFE’s broke down by section:

Sec. 800 charges (loan closing costs)
Lender 1= $1,608
Lender 2= $3,958

Sec. 900 (Prepaid Interest & Insurance)
Lender 1= $1,728 (cumulative= $3,336)
Lender 2= $467 (cumulative= $4,425)

Sec. 1000 (Prepaid Insurance & Taxes for reserves)
Lender 1= $2,650 (cumulative= $5,986)
Lender 2= $0 (cumulative= $4,425)

Sec. 1100 (Title & Escrow closing costs)
Lender 1= $975 (cumulative= $6,961)
Lender 2= $675 (cumulative= $5,100)

Sec. 1200 (County recording)
Lender 1= $142 (cumulative= $7,103)
Lender 2= $142 (cumulative= $5,242)

In taking a closer look at the GFE the applicant realizes that lender 2 is actually charging $2,350 more in lender fees than is lender 1. However, by “low-balling” the expected closing costs for title & escrow charges & by showing a loan with no impounds (versus Lender 1 who included prepaid taxes and insurance) Lender 2 was able to make their loan look cheaper. In fact, in this example it is not the case.

*Closing costs are not the only story- Just because a lender has presented to you a GFE with the lowest closing costs doesn’t make it the best option for you. Keep in mind that a GFE may not accurately disclose all the important terms of a mortgage. Therefore, in determining what loan option is best the applicant should also consider the type of loan, payment, prepayment penalty, and reliability of the lender.

Generally speaking there is an inverse relationship between closing costs and interest rate. Therefore, if an application intends on being in a home for the long-term it may make sense to incur more costs at closing by paying additional points in exchange for a lower interest rate.

*Trust your intuition- Although the GFE is meant to help consumer’s easily compare loan options from different lenders we often find that the average consumer has difficulty clearly comparing multiple GFE’s. Ultimately, it is usually a good decision to work with a lender that your intuition says you can trust. Give each lender an opportunity to walk you through their GFE and explain each of the charges. If a lender is not willing to give you a GFE or is not willing to take the time to explain it to you then often times this lender is not going to perform as promised.

Rate Update June 10, 2008

2008-06-10T07:49:00.001-07:00

Mortgage rates are higher this morning following a significant sell-off in mortgage-backed bonds yesterday. You can see on the chart below that since breaking below the 200-day moving average on June 4th mortgage-backed bonds have traded lower all but one day (red lines indicate down days & green lines indicate up days). Over that time mortgage rates have increased by about .25%.

In a speech given Monday night Fed Chairman Ben Bernanke said that the runup in oil prices, “has added to the upside risks to inflation and inflation expectations.” His comments indicate that inflationary pressures continue to mount which will hurt mortgage rates.

Current Outlook: locking

Rate Update June 9, 2008

2008-06-09T07:52:00.000-07:00

Mortgage rates are unchanged this morning.

A continuation of concerns surrounding inflation is dominating the headlines this morning (and over the weekend). For a review on how inflation impacts mortgage rates please refer to this blog posting.

Earlier today a Goldman Sachs analysts predicted that oil prices would reach $150/ barrel this summer. On Sunday the average price for a gallon of gasoline in the US reached $4. Some analysts think gas prices will reach $5.75 in the next 24 months.

We continue to favor a locking position in the long-run as inflation pressures will likely push mortgage rates higher.
Current Outlook: locking

.

What is a hybrid ARM?

2008-06-06T15:09:00.000-07:00

The most common ARM products we originate are hybrid ARMs. With a hybrid ARM the interest rate is fixed for an initial period of time before it reaches an adjustable rate period.

3/1, 5/1, 7/1, & 10/1 ARM’s- The most common hybrid ARM’s are the 3/1, 5/1, 7/1, and 10/1 ARM’s. With these loan products a borrower is able to lock in an initial interest rate for 3,5,7, & 10 years respectively. In most interest rate environments the borrower is able to lock in a lower rate for these initial periods than if they were locking into a 30-year fixed rate. Since most homebuyers do not stay in the same home or keep the same mortgage for more than 5 years these loans can provide the same level of interest-rate security as a fixed rate mortgage with a lower interest expense. After the initial fixed interest rate period is up these loans then go into an adjustable rate period where the interest rate will adjust either annually or every six months.

Refinancing when your home has recenlty been listed

2008-06-06T11:46:00.000-07:00

Has your home recently been listed for sale? If so, did you know that by having your home listed for sale your ability to refinance your mortgage is severely limited?

95% of banks will not lend on homes that have been recently listed for sale because they are concerned that the home might go back up for sale as soon as the loan is funded or that the borrowers are in dire financial straights. Lenders make their money by putting a mortgage in place and collecting interest over long periods of time. Therefore, anything that threatens the length the mortgage is typically a roadblock for loan approval.

That said, because we have the ability broker loans we have targeted a couple investors who will allow us to refinance a home that has been recently listed so as long as the home is off the market at the time when the formal application is made.

These lenders are limited to owner-occupied homes only and will only allow us to provide a rate/ term refinance (meaning that we cannot pull-cash out). Extenuating circumstances such as a job transfer that fell through may override this restriction.

So, if your plan is to put your home up for sale and there is a chance that you may instead decide to stay in the home and refinance it's best to have a conversation with us first.

Rate Update June 6, 2008

2008-06-06T08:07:00.000-07:00

Mortgage rates are unchanged this morning despite a lot of erratic movements in the financial markets.

Headed into the day we knew that the monthly jobs report would be important. Within the jobs report there were a couple measures that likely have traders confused on how to play the markets. First, the report indicated that the unemployment rate rose to 5.5% which was above analysts expectations (good for mortgage rates). This is the highest reading since October of 2004 and the large month-to-month increase in 22 years. You can bet the media will have a “field-day” with this. However, the bottom line is that the report showed the economy lost less jobs than were expected (bad for mortgage rates).

Overall the report shows continued weakness in the nation’s job market which would ordinarily be a good sign for mortgage rates. However, overshadowing this news is the fact that oil prices have soared in the past two days again raising inflationary concerns. This is certainly bad for mortgage rates and so we continue to favor a locking stance.

Current Outlook: locking

WSJ.com article about foreclosures & delinquencies

2008-06-05T12:21:00.000-07:00

The WSJ just published an article about the latest Mortgage Bankers' Association report on home delinquency and foreclosures. Both mortgage delinquency & home foreclosures are at all time-highs. Here is a link to read for yourself.

Rate Update June 5, 2008

2008-06-05T08:34:00.000-07:00

Mortgage rates moved higher this morning.

In yesterday’s ‘rate update’ we stated, “We expect that bond prices will experience a “break-out” in the next few days. A “break-out” is when bond prices move sharply above or below technical trading levels and mortgage rates often move sharply as well.”

Indeed this occurred yesterday afternoon when bond prices broke below the 200-day moving average. From there bond prices feel as much as 70 basis points at one point which is why mortgage rates are higher today.
Tomorrow the monthly jobs report will be released. In the past two months the jobs report has improved from the dismal numbers we saw in February. That said, we think the report will continue to improve which will put more pressure on rates to move higher. We recommend that our client lock in ahead of this report.

Current Outlook: locking

Rate Update June 4, 2008

2008-06-04T07:31:00.000-07:00

The labor department reported today that worker productivity increased greater than expected in the 1st quarter which is usually good news for mortgage rates. Despite the increase in worker productivity unit labor costs increased by more than analysts had expected. Watch today’s you tube video to understand why labor costs are an important factor for mortgage rates.

Mortgage-backed bonds are trading lower this morning and are caught in between the 10-day (red line) & 200-day moving average (blue line). We expect that bond prices will experience a “break-out” in the next few days. A “break-out” is when bond prices move sharply above or below technical trading levels and mortgage rates often move sharply as well.

Current Outlook: neutral

How do 7/1 Interest-only ARM's work?

2008-06-03T16:14:00.000-07:00

With a 7/1 interest-only ARM the loan will carry a fixed rate for the initial 7 years of the loan. After that, the interest rate will adjust on an annual basis. For the first 7 years of the loan the borrower may make interest-only payment on the outstanding balance. At the end of 7 years the payments will amortize annually based on the remaining term of the loan.

For example, let's say we could lock a loan today @ 6.00% on this program for a $300,000 loan. For the first 7 years the borrower would make an interest-only payment of $1,500 per month. At any time the borrower could make a payment above and beyond the interest-only payment which would be applied to principal. Because the loan carries an interest-only payment they could expect their payments to decrease upon paying down a portion of the principal.

After 7 years let's assume the rate adjusts to 8.00% and the balance was still $300,000 (because the borrower elected not to pay any principal over the first 7 years). At that time the monthly payments would increase to $2,380 which reflects a 23 year amortization at 8.00%.

This loan can be a great program because for most home-buyers the 7 year fixed period offers plenty of interest-rate security while the interest-only payment provides plenty of cash-flow flexibility.

Rate Update June 3, 2008

2008-06-03T06:55:00.000-07:00

There is no economic data set to be released today so our attention is focused on technical trading patterns and the stock market. Watch today’s you tube video to understand what we’re watching for.

Current Outlook: neutral

Rate Update June 2, 2008

2008-06-02T07:18:00.000-07:00

There were no changes to rates today from Friday. The financial sector is dragging stocks lower this morning following the announcement that Wachovia is ousting their CEO. The Dow Jones Industrial Average is currently down over 100 points which is helping mortgage-backed bonds move modestly higher.

Looking ahead, Friday brings us the monthly jobs report which we all know can move the markets.

Despite the gains this morning in the bond market we still think mortgage-backed bonds will drift lower over the next few days/ weeks because of technical trading patterns. We remain in a locking position for now.
Current Outlook: locking bias

Bi-Weekly payment programs, are they a good idea?

2008-05-30T16:18:00.001-07:00

With bi-weekly payment programs the lender or a 3rd party servicer will typically charge $200-$400 to sign up for the program. They will then automatically draw one half of your total monthly payment every 2 weeks and apply it to your mortgage. The reason that a bi-weekly plan pays down your mortgage quicker than the regular amortization schedule is NOT because you’re making the payment any earlier in the month but because you are making 13 payments per year (there are 52 weeks in a year, 26 bi-weekly periods, and therefore 13 total payments made).

With that said, keep in mind that you can create this very same impact by simply making one extra payment per year or by increasing your monthly mortgage payment by 1/12th of your principal and interest payment. For example, if your monthly principal and interest payment is $1,200 per month then you could add $100 per month (1/12th of $1,200) and have the same impact as the bi-weekly payment program without signing up or paying a fee.

The other consideration to make is how important is it for you to pay down your mortgage? Are their other financial objectives that deserve more attention or are better choices (i.e. retirement savings, investing for kids college education, paying down other debts, building a savings reserve fund, etc.).

Rate Update May 30, 2008

2008-05-30T08:30:00.001-07:00

Mortgage rates made a surprise reversal lower this morning on inflation & spending data that came in line with analysts’ expectations. Furthermore, we also think that an announcement out of the Federal government that they are opening an investigation regarding price manipulation in the energy trading markets could be helping mortgage rates. For a more detailed explanation about this reasoning watch today’s you tube video.

We still believe rates will move higher based on technical trading patterns so we are going to maintain a locking bias.

Current Outlook: locking bias

Rate Update May 29, 2008

2008-05-29T07:34:00.000-07:00

As we spoke about in Tuesday's 'rate update' investor sentiment seems to transitioning away from concerns about the credit markets and into concerns over inflation. This morning the Commerce Department revised their 1st quarter estimate of GDP by .3%. This positive news for the economy has pushed mortgage-backed bond below the 200-day moving average (blue line) as shown below.

Lower bond prices results in higher interest rates which is what we’re seeing this morning. Mortgage-backed bonds had traded above the 200-day moving average for the past 9 months. The shift today may mark higher interest rates for the foreseeable future.

Current Outlook: locking

Rate Update May 28, 2008

2008-05-28T08:09:00.000-07:00

Mortgage rates are modestly higher today than they were yesterday. For clients who did not get their rates locked yesterday we are recommending a floating position in the near-term because of technical trading patterns. If you look at the chart below you can see that bond prices have traded lower since last Wednesday when mortgage rates were about .25% better.

Bond prices have touched the 200-day moving average this morning (the blue line) and we expect this technical level to hold. If it does, bond prices should improve over the next couple days along with interest rates. The risk is that if this technical level does not hold we could see rates get much worse quickly.

Current Outlook: floating bias

Rate Update May 27, 2008

2008-05-27T08:17:00.000-07:00

Inflation, inflation, inflation seems to be popping up everywhere. This morning’s monthly consumer confidence report showed that consumer confidence sunk to a 16 year low. Ordinarily bad economic news would help mortgage rates but this morning it’s not the case. Watch today’s you tube video to understand why.

Here are a couple other links that are referenced in today’s you tube video:
*Wikipedia.org- Rational Expectations & inflation
*The Economist- Inflation in emerging economies
*Evan’s blog- Inflation & mortgage rates

Current Outlook: locking

Rate Update May 22, 2008

2008-05-22T07:57:00.000-07:00

As oil prices continue to hit new record highs inflation concerns are again weighing on bond prices which is pushing rates higher. In yesterday’s rate update we said:

“However, we remain concerned that continued inflation concerns will drag bond prices below these levels pushing rates higher.”

Unfortunately we are going to shift our outlook to locking. The last few times that mortgage-backed bonds have been pushed below technical layers of support they’ve moved sharply lower over the course of 2-3 trading days. For now we recommend locking in.

Current Outlook: locking

Rate Update May 21, 2008

2008-05-21T08:22:00.001-07:00

There is no new economic data scheduled for release today. At 2PM EST the Fed will release the minutes from their April 30th meeting. Sometimes this event can draw some reaction in the financial markets.

In the absence of any significant financial news we will be watching the stock market and technical trading patterns for clues as to the direction of mortgage rates. From a technical perspective mortgage-backed bonds are trading just above multiple layers of support (shown circled on the right side of the graph below). Should bonds bounce higher of these levels rates would surely improve. However, we remain concerned that continued inflation concerns will drag bond prices below these levels pushing rates higher.

Current Outlook: locking bias.

Rate Update May 20, 2008

2008-05-20T08:09:00.000-07:00

We mentioned in yesterday’s rate update that stocks may come under selling pressure because of technical trading patterns. Indeed that is happening this morning which is supporting mortgage-backed bond prices. Rates are modestly lower.

The technical trading picture for mortgage-backed bonds is complicated. We are going to recommend a locking stance for individuals who want to play it safe. However, for those who like to gamble, there is a chance that mortgage backed bonds could rally through technical resistance and move lower.

Current Outlook: locking

Inflation pressures

2008-05-20T07:36:00.000-07:00

If you've been a consistent reader of 'rate update' or this blog you know that inflation expectations are the primary factor for driving mortgage rates. When expectations of inflation increase it causes rates to rise and vice versa.

There are two articles published this morning which give contradictory forecasts for inflation. It just goes to show that no one knows for sure. Here are links to read for yourself:

-Barron's: Inflationary Risks Increasing

-WSJ.com: Fed's Kohn Sounds Upbeat Note, Says Current Rates Are Appropriate

What is a Home Equity Line of Credit (HELOC)?

2008-05-19T11:20:00.000-07:00

A HELOC is a line of credit much like a credit card that is secured against the equity in a home. These are most often originated after a person has owned a home but can also be originated as a part of a purchase transaction.

HELOCʼs have extremely flexible terms and is an excellent financial tool for homeownerʼs with a large equity position in their home. HELOCʼs typically have a 10-year “draw” term. During this period a user may borrower up to the maximum amount of the line of credit and pay it back as many times as they wish.

Due to the flexible nature of the draws HELOCʼs have variable interest rates that are based on the prime index plus a fixed margin. Margins on HELOCʼs can vary from -.50%-3.00%.

The margin is determined by the borrowerʼs credit and equity available in the home. During the draw period borrowers make a minimum of interest-only payments based on the average balance during a given billing period (much like a credit card). The borrower may make additional payments at any time which will go towards reducing the balance owed against the line of credit. In the event that a borrower does not use the HELOC they will not pay any interest. Some HELOCʼs do have an annual service fee charged for the maintenance of the account.

Rate Update May 19, 2008

2008-05-19T06:45:00.001-07:00

There is not much in the way of economic data scheduled to be released this week so we’ll be watching technical trading patterns and the stock market for clues on the direction of mortgage rates.

Stocks are currently trading up against technical resistance. Should the stock market reverse from recent highs we could see mortgage rates benefit.

Current Outlook: neutral

Rate Update May 16, 2008

2008-05-16T08:36:00.000-07:00

Mortgage rates have improved modestly from yesterday’s levels thanks to the technical support. Bond prices have now regained the levels they reached a week ago today. We are shifting our outlook to a neutral focus after being in a floating stance the past few days.

Current Outlook: neutral

Rate Update May 15, 2008

2008-05-15T08:15:00.001-07:00

Mortgage-backed bonds have found technical trading support at the 200-day moving average (blue line in the chart below). After rates increased by .25%-.375% over the previous four trading days it looks like bond prices may rise helping push rates back down.

Watch today’s you tube video for explanation about this chart.

Current Outlook: floating

Rate Update May 14, 2008

2008-05-14T08:12:00.000-07:00

Mortgage-rates have now increased by .25%-.375% since we shifted our outlook to locking on Friday, May 9th. The cause of the rate increase has been strength in the stock market and worse than expected inflation data.

However, this morning’s Consumer Price Index (CPI) report may help rates reverse course. The monthly report which is an important gauge on inflation showed that prices at the consumer level of our economy increased less than analysts’ expectations. This may be a sign that the weaker economy is helping curb the inflationary pressure of higher commodity prices.

We are going to shift our outlook to floating with the hopes that this news coupled with positive technical trading patterns will help mortgage rates move back lower.

Current Outlook: floating

Rate Update May 13, 2008

2008-05-13T08:12:00.000-07:00

This morning’s monthly retail sales report issued by the commerce department is raising concern over inflation. Watch today’s you tube video to learn what the report showed.

Here is a link to a blog posting explaining the relationship between inflation and mortgage rates.

Current Outlook: locking

Interest rates & Inflation

2008-05-13T07:42:00.000-07:00

What causes mortgage rates to go up or down? How come one day 30-year fixed rates are 6.00% and the next they're 6.125%? For many people the vision of a boardroom full of cigar smoking bankers comes to mind when contemplating this question. Or, many believe that the Federal Reserve Bank holds ultimate control with the Federal Funds Rate.

However, the truth of the matter is mortgage rates are entirely determined by the marketplace. Many factors can contribute to the direction of mortgage rates including stock market movements, technical trading patterns of mortgage-backed bonds, geopolitical news but of the most important is inflation.

I have provided a link below to an article that I feel does a good job of explaining the relationship between inflation & interest rates.

The Relationship of Inflation to Interest Rates

As well, here is an except from this article which summarizes the relationship:

When prices increase, your dollar gets to buy less. Over time, prices tend to steadily increase. Hence, your one dollar today is not necessarily equivalent in value to your one dollar tomorrow. A case in point: if you could buy four comic books with your one dollar when you were younger, guess what, Batman? You can't even buy one these days at that price. That is inflation.

So how is this related to interest rates? Investors, try to preserve the value of their money by investing in activities that have yields that are either equivalent or higher than the inflation rate (therefore, when their expectation for inflation increases, they will demand a higher interest rate to lend their money). Let's say that the local interest rate is pegged at 6.5%; the money that you earn, save and invest, should be able to at the very least, match that rate. Why, because at the end of the year, if your money stayed inside the piggy bank, its value would've been eroded by that rate. So if you save 100 dollars at the start of the year, at the end of the year its worth would've been shaved by $6.50 leaving your $100 worth only $93.5.....

So to wrap up, inflation is one of the factors that affect interest rates. When inflation moves up or down, the tendency is to increase or decrease (mortgage) rate(s) as well.

Rate Update May 12, 2008

2008-05-12T07:48:00.000-07:00

Mortgage rates rose Friday afternoon in response to inflation concerns surrounding oil prices. The economic calendar looks relatively light this week so we’ll be watching technical trading patterns as well as the stock market to forecast mortgage rates.

In case you missed it last week I posted this blog about how the stock market can impact mortgage rates. It may be timely reading.

Current Outlook: neutral

Rate Update May 9, 2008

2008-05-09T08:15:00.000-07:00

Mortgage rates are lower again this morning thanks to the rally in the bond market yesterday afternoon. However, the party may be short lived. Mortgage rates have benefitted from a weak stock market over the past couple days (on a side note, I recently blogged about the relationship between the stock market and mortgage rates which you can read by clicking this link). And although stocks are weak again this morning we expect that energy prices will begin to attract more attention.

Oil has now surpassed $126 per barrel which is likely to boost concerns over inflation. Energy prices impact the entire economy so as oil prices rise producers will try to pass the higher costs through to consumers.
When consumer prices rise mortgage rates will follow. We’ll keep an eye on oil prices but for the near-term we’re going to recommend that our clients lock their rates today.

Current Outlook: locking

How the stock market impacts mortgage rates

2008-05-09T07:45:00.000-07:00

Although inflation expectations are the primary factor that influence the direction of mortgage rates on a day-to-day basis the stock market can also have an impact.

To understand how this relationship works it's first important to understand how mortgage rates are determined. Mortgage rates are entirely determined by the price of mortgage-backed bonds (MBS's). MBS's are bonds that are issued by Fannie Mae & Freddie Mac that are backed by the interest paid by mortgage holders. Like the stock market there is an exchange where MBS's are traded.

There is an inverse relationship between the price of MBS's and mortgage rates. When the price of MBS's increase mortgage rates drop and vice versa.

So, to understand how the stock market can influence mortgage rates we have to understand how they impact the price of bonds. Stocks and bonds compete for the same investment dollar. In other words, an investor with money to invest has to make a decision to invest their money in either the stock market or in the bond market (it should be noted that there are other investment options but these two classes are the primary vehicles for investment capital).

For an investor stocks are generally thought to provide higher returns over time but also come with greater volatility. Conversely, bonds tend to have lower returns over time but have less volatility. Because bonds tend to provide low volatility with modest returns the bond market can often act as a "safe-haven" for investors who sell their stock positions.

Therefore, in general, when the stock market goes down it is a sign that investors are selling stocks and shifting their capital into bonds. This boosts bond prices and drives mortgage rates down. Conversely, when the stock market rallies it is a sign that investors are selling bond positions in order to shift capital into the stock market. The greater supply of bonds on the market drives prices lower and pushes mortgage rates higher.

It's important to understand that there are a myriad of factors that impact mortgage rates on a day-to-day basis. Inflation expectations & technical trading patterns are two of the primary factors that we monitor. However, in the absence of new information on these two topics it's not uncommon for mortgage rates to be impacted by the stock market in the aforementioned manner.

Rate Update May 8, 2008

2008-05-08T08:25:00.001-07:00

Technical trading patterns are what helped mortgage rates move lower yesterday afternoon. In yesterday’s ‘rate update’ we stated:

“Mortgage-backed bond prices continue to trade just above important technical support. We are watching this level and hope that prices hold. If prices should slip we will shift our outlook to a locking stance.”

Not only did bond prices hold yesterday afternoon but thanks to weakness in the stock market they rallied which pushing mortgage rates lower. Below is a chart showing bond prices hitting the technical support level (shown in circle). The green bar to the right of the circle represents bond prices moving higher off this level. This is a good sign for mortgage rates and so we shift our outlook to floating.

Current Outlook: floating

Rate Update May 7, 2008

2008-05-07T08:20:00.000-07:00

A report from the Labor Department showed worker productivity was better than expected in the first quarter. Furthermore, the report showed that labor costs increased less than economists had expected. Watch today’s you tube video to learn how productivity & labor costs can impact mortgage rates.

Despite the positive economic news mortgage rates have reacted to the stock market over the past couple days. When stocks have rallied mortgage rates have been pressured higher which is what we’d expect to see.
Mortgage-backed bond prices continue to trade just above important technical support. We are watching this level and hope that prices hold. If prices should slip we will shift our outlook to a locking stance.

Current Outlook: neutral with floating bias

Rate Update May 6, 2008

2008-05-06T07:22:00.000-07:00

A disappointing earnings report out of Fannie Mae is pressuring stocks lower this morning. This weakness is helping to support mortgage-backed bonds prices right at an important technical layer of support. If bonds can rally off this support level it would be a welcome sign for mortgage rates.

Working against interest rates is the ever-increasing price of oil. The price for a barrel of oil has hit $120 and one Goldman Sachs analyst believes it could go as high as $150-$200 over the next 12 months. This would certainly have inflationary impacts on our economy that would likely cause rates to rise.

Current Outlook: neutral with floating bias

Rate Update May 5, 2008

2008-05-05T07:48:00.000-07:00

Mortgage-backed bonds are coming under selling pressure this morning threatening the rate gains we made earlier on. Rates began the day .125% better than Friday morning’s rates thanks to weakness in the stock market stemming from the Yahoo/ Microsoft withdrawal.

However, mortgage-backed bonds are now beginning to sell-off as well likely in response to some inflationary imbedded in the monthly Institute for Supply Management (ISM) report.

We like the heavy technical trading support that is just below bond prices. If bond prices can hold we may see rates improve over the next couple weeks. However, if bond prices manage to break through this technical support rates will move higher before they get any better.

Current Outlook: neutral with floating bias

Rate Update May 2, 2008

2008-05-02T06:54:00.000-07:00

Every once in a while we get it right and yesterday we certainly called the right play on the monthly jobs report strategy. Although the report showed a 25,000 job contraction in April it was still enough to beat analysts’ expectations which were calling for 75,000.

As a result mortgage rates have moved higher. The second half of our prediction was that mortgage rates over the next 2-3 weeks would rally back pushing rates back to or even lower than they were mid-week.

Current Outlook: locking in near-term, floating long-term

Rate Update May 1, 2008

2008-05-01T08:28:00.000-07:00

As you’ve likely heard the Fed did cut short-term interest rates by .25% yesterday. If you read yesterday’s ‘rate update’ you knew this would happen. We also explained that there were two scenarios that might play out in their post-meeting statement. It turns out that one of the two scenarios did take place. Here is a summary:

*If the Fed stresses concern about inflation in their statement over economic recovery it is likely a sign that the Fed is done cutting rates in the near-term. Although concern over inflation is bad for mortgage rates because the Fed is indicating that that they’ll pause it could actually strengthen the US Dollar and help mortgage rates.

Essentially the Fed indicated that they are likely done cutting rates unless something drastic occurs.

Today the Personal Consumption Expenditure Price Index (PCE) was released and showed inflation in line with analyst’s expectations.

Tomorrow the monthly jobs report is due. As a reminder, analysts will be looking at the number of new jobs created in the economy. Typically, when this number beats expectations rates worsen and vice versa. Watch today’s you tube video for our advice on whether or not to lock……

Current Outlook: locking in near-term, floating long-term

Fed Cuts don't necessarily lower mortgage rates

2008-04-30T07:55:00.000-07:00

I thought it would be a good idea to post a link to my previous post which explains why Fed Rate cuts DO NOT lower mortgage rates. Here is a link to the article.

Rate Update April 30, 2008

2008-04-30T07:51:00.000-07:00

The markets are eagerly awaiting the Fed’s announcement which is scheduled to be announced at 2:15PM EST. Analysts expect that the Fed will cut short term rates by an additional .25%. As we’ve mentioned throughout this rate cutting cycle the Fed’s rate cut in and of itself will not move the markets. What could drive the markets is the tone of the Fed’s statement following the announcement. Here is a summary of what to listen for:

*If the Fed stresses concern about inflation in their statement over economic recovery it is likely a sign that the Fed is done cutting rates in the near-term. Although concern over inflation is bad for mortgage rates because the Fed is indicating that that they’ll pause it could actually strengthen the US Dollar and help mortgage rates.

*If the Fed maintains the view that their concern for inflation is “balanced” with economic growth then they are likely leaving the door open for future Fed cuts. In this instance we do not believe mortgage rates would benefit because of inflationary pressures.

To give you an idea of the scrutiny that the Fed faces in crafting their language for their statement you may want to check out this article from Marketwatch. Maybe they should begin hiring English Majors instead of Economists for this task…..

Current Outlook: neutral

Rate Update April 29, 2008

2008-04-29T08:07:00.000-07:00

Mortgage-backed bonds are trading modestly higher this morning pushing 30 year rates slightly lower. Watch today’s you tube video to understand what we’ll be listening for in tomorrow’s Fed announcement.

From a technical standpoint mortgage-backed bonds are trading against a ceiling of resistance. This means that all else being equal we’d expect prices to fall (pushing rates higher in the next couple days). A strong Fed statement indicating that they feel inflation pressures will curb in the coming months could help us break this resistance pushing rates lower.

Current Outlook: neutral with locking bias

The Four "C"s of qualifying for a mortgage

2008-04-28T17:28:00.000-07:00

In evaluating a loan application to determine wether or not an applicant qualifies for a mortgage lenders look at four areas. These four areas are known as the "Four C's" and stand for:

1) Credit
2) Capacity
3) Capital
4) Collateral

Here is a summary of each "C" and how they impact the loan approval process:

Credit:

Credit is arguably the most important factor of the 4 C’s. An applicant’s credit score taken from the credit report is the simplest measure of their credit strength. In determining an applicant’s credit score lenders will simply use the middle of the three credit scores reported by the three credit repositories (Transunion, Equifax, & Experian).

Credit scores are heavily influenced by a person’s payment history over the preceding 24 months. Other factors may include the proportion of revolving debt relative to the high credit limits, number of accounts, lack of credit depth, and many more.

Another factor that lenders may pay attention to in an applicant’s credit profile is their housing payment history over the preceding 12 months. This may be reflective in a previous mortgage on the credit report or by verifying rent payments if the applicant does not currently own a home.

Finally, bankruptcies, judgments, and foreclosures can all negatively impact the credit analysis for an applicant. Just because an applicant has these negative marks on their credit report doesn’t mean they cannot get approved for a mortgage. It simply means that they would have to show other compensating factors and/ or may have to accept higher rates and terms.

Capacity:

In addition to reviewing an applicant’s credit banks want to analyze their ability to repay the mortgage over time. The primary tool they use for this analysis is a debt-to-income ratio. Simply put, the debt-to-income ratio is the sum of all monthly payment obligations an applicant has (including the proposed housing payment) divided by their gross monthly income.

For example, here is a hypothetical debt-to-income calculation for John & Jane Doe

Obligations:
*Proposed housing payment (including real estate taxes and homeowner’s insurance): $2,000
*Car payments: $250
*Student loans: $150
*Minimum monthly payments on credit cards: $75

Income:
John’s monthly gross income: $5,000
Jane’s monthly gross income: $5,000

Debt-to-income calculation:
Total obligations: $2,000+$250+$150+$75= $2,475

Total income: $5,000+$5,000= $10,000

DTI=24.75%
In this case the debt-to-income ratio of 24.75% would likely be viewed upon favorably by the lender. In most cases banks will accept DTI’s as high as 45% and in some cases up to 50-65%.

Capital:

Does an applicant have a financial cushion to fall back on if their income is unexpectedly interrupted for a period of time? Has the applicant shown a pattern and habit of saving money over time? These are important questions to a lender and can be answered by reviewing an applicant’s capital accounts.

Capital accounts are any account with liquid assets that a borrower could access if need be. The most common forms of capital accounts on a loan application are checking, savings, money market, brokerage, IRA, and 401K accounts.

In most cases the bank will want to verify that an applicant has an amount equal to 2 months worth of their total housing payment (including real estate taxes and homeowner’s insurance) saved up in a capital account after they subtract any cash required for down-payment & settlement charges. If the mortgage is going to be secured by an investment property or second home the bank may want to see more capital for the applicant.

There are loan programs and lenders that do not require any capital or will allow capital to be gifted from family members.

Collateral:

The final piece of the mortgage application that the bank is interested in reviewing is the property itself. After all, if a borrower fails to make their monthly payments then the bank will take the house back and sell it in order to recoup the money that they loaned against it.

The value of a home will generally be determined by a professional appraiser’s appraisal report. Although, over the past few years automated and data base driven appraisals have become more common.

In reviewing the collateral for a property the bank will review two basic questions:

a) Does the appraiser’s determination of value for the subject property support the value that the applicant is buying (or refinancing) it for?

There are multiple methodologies for determining the value of a home. The two that show up in an appraisal report are the “cost approach” and the “sales comparison approach”.

The “cost approach” determines the value of a home based on the value to rebuild or replicate the property from scratch. This analysis will take into consideration the value of the land that the home is built on and add the cost to rebuild the improvements based on the square footage and amenities (i.e. basements, garages, etc.). The “cost approach” is less relevant to a bank because they never intend on rebuilding the property. However, they may review this in determining if the homeowner’s insurance policy provides enough coverage.

The “sales analysis approach” is the most relevant to lenders in determining the value of the collateral property. With this approach an appraiser will find what they consider to be the 3-6 most comparable properties that have sold near (usually within 1 mile) the subject property within the past 12 months.

The appraiser will then make adjustments to the value of the subject property by comparing various features of the home. Among the factors that can impact the adjustments are square footage, view, quality of construction, built in amenities/ upgrades, number of bedroom and bathrooms, heating cooling systems, etc.

The value as determined by the sales analysis approach is the most important in determining the value for the home in the lender’s perspective.

b) What is the ratio of the loan amount to the value of the property (LTV)?

The loan-to-value (LTV) ratio is also an important consideration for the bank. The LTV measures the amount of money the lender is lending against the value of the collateral.

All else being equal a greater LTV is riskier for the bank than the same loan application with a lower LTV. This is because in the event of foreclosure it is less probable that the lender will recoup the entire loan versus a loan with a higher LTV.

Important Thresholds
There are important thresholds in the underwriting guidelines of most banks which make it more or less likely that a loan will get approved or that a loan will be approved with more favorable or less favorable terms.

These are:

-LTV=

<70%- with an LTV of less than 70% the lender will generally feel very comfortable with the loan. This is because the borrower has a significant of “skin in the game” such that if they should fall behind on their payments they will likely do whatever they can to pay the loan current before foreclosures sets in. Lenders know this and therefore are less concerned about the other 3 C’s with these applications.

70-80%- In general lenders are also very comfortable with an LTV between 70% & 80%. This is because they know that if they had to foreclose on a property it is likely that they could recoup the loan with little risk.

80.01-90%- At 80-90% LTVs bank begin to look for other compensating factors in the file. They may begin looking closer at an applicant’s reserves, income, or source of down payment. It is likely that the bank may charge a premium to the interest rate of anywhere from 0%-.50% depending on the loan file.

Furthermore, if the applicant elects to do 1 loan they will require some form of mortgage insurance. Mortgage insurance is an insurance policy that the borrower usually pays for. The insurance would cover a portion of the lenders losses in the event that they had to foreclose on the property and they did not recoup the entire loan.

90.01%-95%- With less and less equity in the transaction a lender will certainly want to see other compensating factors at higher LTVs. This would include higher credit scores, greater reserves, employment stability, etc. The lender may impose a risk premium to the interest rate of .125%-1.00% Again, with one loan the lender will require the borrower purchase mortgage insurance in the event that they default on their payments.

95.01%-100%- With less than 5% equity into the transaction the lender will make sure that the borrower has ample reserves and solid credit. At these levels the lender is at the most amount of risk because in the event that the borrower defaults and forecloses on the home in the initial couple years it is almost guaranteed that the lender will incur a loss. Borrowers will typically pay a .25%-2.00% premium to their interest rate for this type of approach.

Rate Update April 28, 2008

2008-04-28T08:28:00.001-07:00

We don’t expect a lot of volatility until tomorrow afternoon when traders begin to position their portfolios ahead of an action-packed Wednesday, Thursday, & Friday. Watch today’s you tube video to find out what is on the schedule that could impact mortgage rates this week.

Current Outlook: neutral

Rate Update April 18, 2008

2008-04-18T09:45:00.001-07:00

Mortgage rates continue to increase thanks to momentum in the stock market. Mortgage rates have increase .25%-.50% across the board this week because of better than expected earnings reports. We’ve explained in the past on ‘rate update’ that mortgage rates often suffer from a rally in the stock market because fund managers have to sell bonds in order to create capital to buy into the stock market.

Today better than expected results out of Google & Citi Group are the culprits.

Current Outlook: locking

Rate Update April 17, 2008

2008-04-17T08:04:00.000-07:00

We thought that bond prices may hold at the 50-day moving average yesterday as they had the last four times that they tested this level. However, the stock market rally was too strong which pushed rates higher again. Here is a chart which shows pricing dropping below the 50-day moving average (black line):

From a technical perspective mortgage-backed bonds still have some room to drift lower so we might see rates move higher by another .125%-.25% before they stabilize. What could save the day? Merrill lynch reported weaker than expected earnings earlier today and Citi Bank is scheduled to release their earnings report tomorrow. Another weak report could help mortgage-backed bonds rebound and hopefully push rates lower.

Current Outlook: locking

Article about debt snowball pay-off for consumer debt

2008-04-16T09:05:00.000-07:00

In Praise of the Debt Snowball
Thursday, 28th September 2006 (by J.D.)
This article is about Choices, Credit Cards, Debt

During my twenties, I accumulated nearly $25,000 in consumer debt. I had a spending problem. With time, I was able to get my spending under control (mostly), but I still owned overwhelming debt. How could I get rid of it?

The personal finance books all suggested the same approach:

Order your debts from highest interest rate to lowest interest rate.
Designate a certain amount of money to pay toward debts each month.
Pay the minimum payment on all debts except the one with the highest interest rate.

Throw every other penny at the debt with the highest interest rate.
When that debt is gone, do not alter the monthly amount used to pay debts, but throw all you can at the debt with the next-highest interest rate.
This made perfect sense. By doing this, I would be paying the minimum amount in interest over the long term. The trouble was, my highest-interest rate debt was also my debt with the biggest balance (a fully-maxed $12,000 credit card at 19.8% interest). I’d plug away at this debt for several months at a time, but then give up because it felt like I was never getting anywhere.

This happened over and over. I’d start and fail. Start and fail.

Then I read about the Debt Snowball method in Dave Ramsey’s The Total Money Makeover. The Debt Snowball method is similar to the traditional approach except that instead of attacking high-interest rate debts first, you attack low-balance debts first. Why? Because you’ll get the psychological lift of pinging debts off in rapid succession. And if you’re like me, this makes all the difference. The Debt Snowball approach is:

Order your debts from lowest balance to highest balance.
Designate a certain amount of money to pay toward debts each month.
Pay the minimum payment on all debts except the one with the lowest balance.

Throw every other penny at the debt with the lowest balance.
When that debt is gone, do not alter the monthly amount used to pay debts, but throw all you can at the debt with the next-lowest balance.

When I read about the Debt Snowball method, I was skeptical. I knew it would cost me more in the long run, at least on paper. But I figured I had nothing to lose. I tried it. In four months I’d paid off most of my debts. I was shocked. I’d been trying and failing for years, and now I was able to make a huge dent in just months? It was all because I had changed my approach just slightly.

Humans are complex psychological creatures. They’re not adding machines. Many of us know what we ought to do but find it difficult to actually make the best choices. If we were adding machines, we wouldn’t accumulate $20,000 in consumer debt in the first place! It’s misguided to tell somebody so deep in debt that they must follow the repayment plan that minimizes interest payments. The important thing to do is to set up a system of positive reinforcement, and that’s exactly what the Debt Snowball method does.

Which method should you choose? Do what works for you. The first method can save you money in the long-run. But if you’ve tried it and failed, give the Debt Snowball method a shot. It might be the answer you’re searching for!

Rate Update April 16, 2008

2008-04-16T07:43:00.000-07:00

30 year fixed rates are higher again this morning. Watch today’s you tube video to understand why rates have been pushed higher.

We’re closely watching technical trading patterns again as mortgage-backed bonds trade up against the 50-day moving average price line.

Current outlook: Cautiously floating

Rate Update April 15, 2008

2008-04-15T07:34:00.000-07:00

Rates are slightly higher across the board this morning. Two things are working against mortgage rates.

First, as I mentioned in yesterday’s ‘rate update’ video we are in the heart of earnings season and a rally in the stock market could put upward pressure on mortgage rates. This is what is happening this morning after Johnson & Johnson (JNJ) reported better than expected first quarter earnings.

Second, the Producer Price Index (PPI), which reports on inflation at the wholesale/ manufacturing level of our economy, increased by over 1% in March. We know that inflation is the number one enemy of mortgage rates.

The good news is that mortgage backed-bonds are close to hitting tough technical trading support & the PPI report showed modest increases when you strip out volatile food and energy prices. We hope that traders will focus on these items as the day wears on. If not, we could see rates rise by another .25% before they stabilize.

Current Outlook: neutral

Rate Update April 14, 2008

2008-04-14T08:08:00.001-07:00

It will be a busy week for economic data to be released.
This morning we started the week off with the government releasing the monthly retail sales report. The report showed that retail sales in March were higher than what analysts had expected. Furthermore, the report revised February’s retail sales figure higher. Ordinarily this would pressure mortgage rates higher but analysts have shrugged their shoulders likely because they view this months report as an outlying figure in an overall weak trend.
Watch today’s you tube video to find what other reports and financial news will likely impact mortgage rates this week.
Current Outlook: neutral

WSJ.com article points out importance of 30 yr mortgage & liquidity

2008-04-12T13:52:00.000-07:00

I originate very few 15 year mortgages. The reason? I believe that cash is king. Given that mortgage rates are at historical low levels I would rather see my clients take out a 30 year amortizing mortgage and invest the difference instead of potentially creating a cash-trap with a 15 year loan. Here's an article that was published in the Wall Street Journal that places a 30-year mortgage at the top of the list for "surviving a cash crunch":

Take Seven Steps
So You Survive
A Cash Crunch
By BRETT ARENDS
April 12, 2008

No one wants to get caught in a cash crunch. Look at what happened to Bear Stearns.

Investors can't go running to the Fed.

Sometimes all it can take is a surprise bill, or a sudden loss of a job, to put your family's liquidity in peril. And these are treacherous times. The economy is rocky. Employers are cutting jobs. And some investments -- including home values -- are turning wobbly just when you may need them most.

The Federal Reserve, alas, isn't going to bail you out if you get hit by a liquidity crisis.

So where can you turn? If you're worried, check out your emergency lines of credit now, before there's a crisis.

Here are the seven habits of highly liquid people.

1. Refinance your mortgage over 30 years. Just switching your remaining debt from, say, a 20-year schedule will slash your monthly outflows by nearly a fifth. Borrowing against your home is the cheapest form of consumer debt.

2. Set up a home-equity line of credit. They're usually cheap to arrange, and you can draw on it when you need it. Right now, rates are as low as 5.25%.

3. Get a free float from a new credit card. Some still offer zero-percent interest on balances transferred from your current card. As always with the credit-card sharks: Watch out or they'll find a way to sock you with fees anyway.

4. Get your money back early from the IRS. Most Americans prepay too much tax, and the average refund is nearly $2,500. File a new W-4 with your employer to cut your monthly withholding. You have to estimate your likely bill in good faith. If you end up prepaying too little, you can make it up by Dec. 31. If you don't, you will have to pay 7% or so in penalties. The rate fluctuates, but it's a lot cheaper than an unsecured loan.

5. Set up unsecured financing sources now, while you don't need them. Ask your bank for an overdraft facility, of course. And apply for some emergency credit cards. Yes, the rates are usurious, so don't use them unless you have to. But someday you may have to.

6. Check out how to borrow from your 401(k) retirement plan. Most plans allow this, though the rules vary. The limits are often 50% of your balance, up to $50,000. It can take anywhere from a few days to a few weeks to get the money. Note: You may end up paying taxes, plus a 10% penalty, if you don't repay the money when you leave your employer, or within a specified period. It is usually five years. Check the rules ahead of time.

7. And, most obvious: Start saving. Most middle-class families can save thousands a year just by paring back on discretionary bills. This is a good time to slash those bills to the bone.

Financial Literacy article in the Economist

2008-04-12T07:11:00.001-07:00

I've blogged before about how impressed I am with the coverage that the Economist Magazine has provided throughout the credit crunch that we currently find ourselves in. My praise continues this week. They have published an article pointing out the importance of teaching the masses about financial literacy. I have said all along that the subprime mortgage mess is the fault of many of the parties involved. However, the best way to fix the situation does not lie in government regulation. Instead, it lies in teaching people responsible money management skills which is something that is currently lacking in our education system. Hoooorah for the Economist!

Economist article:
Financial literacy

Getting it right on the money
Apr 3rd 2008 | NEW YORK
From The Economist print edition

A global crusade is under way to teach personal finance to the masses
“EVERYBODY wants it. Nobody understands it. Money is the great taboo. People just won't talk about it. And that is what leads you to subprime. Take the greed and the financial misrepresentation out of it, and the root of this crisis is massive levels of financial illiteracy.”

For years John Bryant has been telling anyone who will listen about the problems caused by widespread ignorance of finance. In 1992, in the aftermath of the Los Angeles riots, he founded Operation HOPE, a non-profit organisation, to give poor people in the worst-hit parts of the city “a hand-up, not a handout” through a mixture of financial education, advice and basic banking. Among other things, Operation HOPE offers mortgage advice to homebuyers and runs “Banking on Our Future”, a national personal-finance course of five hour-long sessions that has already been taken by hundreds of thousands of young people, most of them high-school students.

That many poor people do not have a bank account—and that few of them understand why this puts them at a disadvantage (let alone other essentials of personal finance)—is at the heart of “the civil-rights issue of the 21st century”, says Mr Bryant. He calls the attempt to help people help themselves out of poverty through financial literacy and economic opportunity the “silver-rights movement”.

In January George Bush appointed Mr Bryant vice-chairman of his new President's Council on Financial Literacy. This was launched as part of his administration's increasingly frenetic response to the financial crisis that followed the meltdown in subprime mortgages, many of them given to borrowers who may not have understood the risks. Often borrowers did not even realise that their monthly payment would rise if interest rates went up, says Mr Bryant. Subprime borrowers on adjustable interest rates, whose mortgages make up just 7% of the total, accounted for more than 40% of the foreclosures begun in the fourth quarter of last year.

The council is not short of expertise. It is chaired by Charles Schwab, eponymous boss of a broking firm. Its other members include the head of Junior Achievement, which has been teaching children about money since 1919, and a co-author of “Rich Dad, Poor Dad”, a self-help bestseller. Already, it has approved a new curriculum for middle-school students, “MoneyMath: Lessons for Life”. (Lesson one: the secret to becoming a millionaire. Answer: save, save, save.) It is starting a pilot programme to work out how to connect the “unbanked” to financial institutions. And it is supporting what, echoing the Peace Corps, is called the Financial Literacy Corps: a group of people with knowledge of finance who will volunteer to advise those in financial difficulties.

April has been declared Financial Literacy Month by Congress. The need to make this more than a slogan is especially apparent this year. But America is not the only country where doing something about the widespread ignorance of personal finance is on the agenda. Governments from Britain to Russia are declaring their commitment to financial education. This month the World Savings Banks Institute, which represents retail and savings banks from 92 countries, will hold a summit in Brussels about financial education in the light of the subprime crisis.

Meanwhile, on March 17th a new campaign to promote financial literacy in the developing world was launched at a conference in Amsterdam. Called Aflatoun (“Explorer”), after a cartoon character based on a Bollywood star, it is the brainchild of Jeroo Billimoria, a social entrepreneur who previously worked with street children in India. Among other things, she founded a successful emergency 24-hour telephone service, called Childline. She found that many of the children she helped were entrepreneurial (indeed, such spirits may have played a part in their decision to leave home) and became convinced that, given better education, they would have done well in life.

Ms Billimoria addresses herself to children aged between six and 14, whom most educators consider too young to understand money. Having begun with experiments in rural India, her non-profit organisation, Child Savings International, has piloted the Aflatoun course in 11 countries, including Argentina, South Africa, Vietnam and Zimbabwe, since 2005. It is now extending the course to 35 developing countries. Only recently, after suggestions from the Dutch central bank and the European Commission, has Ms Billimoria started to adapt Aflatoun for rich countries such as Britain, the Netherlands, Ireland and perhaps America. “My mistake. I never thought it would be needed in developed countries,” she says. If only.

Fools and their money
It is a “well-established fact” that “a substantial proportion of the general public in the English-speaking world is ignorant of finance,” writes Niall Ferguson, an historian at Harvard University, in his forthcoming book about the history of finance, “The Ascent of Money”. He produces a long list of evidence to support this conclusion. According to one survey last year, four in ten American credit-card holders do not pay the full amount due every month on the credit card they use most often, despite the punitive interest rates charged by credit-card companies. Nearly one-third said they had no idea what the interest rate on their credit card was.

There is similar evidence elsewhere. For instance, a survey in 2004 by Cambridge University and Prudential, a big insurer, found that some 9m Britons are “financially phobic”, meaning that “they shy away from anything to do with financial information, from bank statements to savings accounts to life assurance.” Research by the British regulator, the Financial Services Authority, found that one-quarter of adults did not realise that their pensions were invested in the stockmarket.

Financial illiteracy is not limited to subprime mortgage borrowers, then; it is pervasive in all age groups, income brackets and countries. “Subprime is a mere symptom,” says Mr Ferguson, noting that many of the students he has taught in the “best universities in the world, including MBA programmes, don't even know the difference between the nominal and real interest rate.” This problem is more pressing than ever, he adds, because governments and businesses have pushed more of the responsibility for financial well-being onto individuals, whether by encouraging homeownership or by promoting personally-managed retirement accounts rather than defined-benefit pensions.

The education system deserves much of the blame, says Mr Ferguson, who recalls having learnt nothing about personal finance at school in Scotland. In the 2007 survey of American credit-card holders, over half of the respondents said they had learnt “not too much” or “nothing at all” about finance at school.

Americans still leave school not knowing much about money. A sample of high-school pupils aged 17 or 18 gave correct answers to barely half of a set of questions about personal finance and economics posed in 2006 by researchers at the State University of New York, Buffalo. Less than one-quarter knew that income tax could be levied on interest earned in a savings account. Three-fifths did not know the difference between a company pension, Social Security and a 401(k) savings account.

The same survey, undertaken every two years for Jump$tart, a coalition of 180 organisations in America that promote financial literacy, found that one in six had taken part in a course dedicated to personal finance. A further one-third said they had learnt a bit from studying other subjects, such as business or economics. Laura Levine, the head of Jump$tart and a member of Mr Bush's financial-literacy council, says things are moving in the right direction, but that progress is slow. The results of the 2008 survey, which are unlikely to show much change, are due to be published on April 9th.

At present only three American states require that students take a course in personal finance. Another 15 insist that it be incorporated in other courses. Beyond that, it is a case of persuading schools one at a time. “Personal-finance education is not a hard sell conceptually,” says Ms Levine, “but only when it comes to getting it prioritised.” School principals will usually agree that financial literacy is worth teaching, but they are reluctant to give it time and resources.

Even when personal finance is taught, the right lessons are not necessarily learnt. “Wherever you look in America or the OECD, classes in financial literacy don't do much good,” says Lewis Mandell, an economist at Buffalo. “As an educator, I'd like to believe you can teach people to do anything right, but clearly the way we are going about teaching personal finance needs to be improved.”

To Mr Mandell's frustration, the only classroom method that seems consistently to raise financial literacy among high-school pupils is playing a stockmarket-investing game—which rewards taking high-risk bets. Most other approaches tend to show only short-term increases in financial literacy, he says.

According to Mr Mandell, one problem is that if financial literacy is taught, it tends to be before a student's final year—before she has faced any important financial decisions, such as buying a car or taking out a credit card. Another is that teachers are often financially illiterate, too. Financial literacy may be less about acquiring knowledge than forming good habits, something that is arguably better done before high school, let alone adulthood.

This is where Aflatoun comes in. Ms Billimoria encountered a great deal of scepticism when she developed her financial-literacy programme for six- to 14-year-olds. Yet she was convinced that starting with youngsters would be more effective, because that is “when their concept of themselves is developing and by 14 most of their habits have formed.”

An important part of the teaching is getting the children to start saving, ideally by opening bank accounts. Typically, they have only tiny amounts, but this is enough to get them used to handling money properly. At first this faced a lot of resistance, as people asked, “How can young children handle money?” recalls Ms Billimoria, but “it soon caught on and parents started giving children money to save.” To demonstrate its broad applicability, Aflatoun was piloted in economies beset by different difficulties. Zimbabwe, for example, was selected for its astronomical inflation rate. The course was adapted to encourage children to save by buying assets such as pencils, which, unlike the country's money, could be a store of value.

A nudge in the right direction
“The depressing truth is that financial literacy is impossible, at least for many of the big financial decisions all of us have to take,” says Richard Thaler, a behavioural economist at the University of Chicago. Aptly for someone who has built his career on the study of irrational financial behaviour, Mr Thaler admits that even he finds it hard to know the right thing to do. “If these things are perplexing to people with PhDs in economics, financial literacy is not the right road to go down.”

Instead, policymakers should “focus on making the world easier”, he argues in a new book, “Nudge: Improving Decisions About Health, Wealth and Happiness”, written with Cass Sunstein, a law professor (and an adviser to Barack Obama). By this he means defining more carefully and simply the financial choices that people have to make, and building “sensible default options” into the design of financial products, so that the do-nothing option is “financially literate”. Today, the best choice typically requires some working out and an active decision.

This does not mean that the same choice is right for everyone. The growing complexity of financial choices in part reflects remarkable innovation, much of which has benefited consumers. As Operation HOPE's Mr Bryant points out, thanks to the availability of subprime mortgages, “homeownership has lifted many poor people out of poverty; the challenge is to make the product better.”

Sweden's system of saving for old age contains an example of what Mr Thaler means. It offers Swedes a choice of funds to invest in, but includes a well-designed low-cost default option, which has become the choice of 90% of the people. The same approach might be taken to America's company 401(k) retirement plans, in which today's choices require a high degree of financial literacy. Employees might also be automatically enrolled in savings plans, with a right to opt out, instead of today's under-used opt-ins.

Mr Thaler deserves to be taken seriously, as one of his earlier attempts to apply behavioural economics to saving has had impressive results. Recognising that people find it harder to save money they already possess than to promise to put aside what they might have one day, he designed the Save More Tomorrow scheme, which gets people to commit themselves to saving a slice of any future pay increases. Where implemented, the plan has already brought about sharp increases in saving rates.

Another idea would make it easier for people to choose a suitable credit card, by obliging card companies to supply customers with two downloadable files, perhaps once a year. One would explain the issuer's charging rules; the other would list the charges the consumer has actually incurred. The consumer could then upload this to one of several websites that Mr Thaler believes would soon appear. With one click, the most suitable card would be recommended. A similar system could work for America's Medicare prescription programme, in which preliminary research suggests that matching the drugs a person needs with the right insurance plan would save on average $700 a year, he says.

Better product design and financial education need not be alternatives, points out Mr Mandell. They can work in tandem. He is enthusiastic about schemes such as the Child Trust Funds introduced in Britain. These “baby bonds” give every child a fund that matures at adulthood, letting everyone start out with a nest-egg. Mr Mandell is particularly excited by the curriculum being designed to be taught in conjunction with these funds, starting when children reach the age of seven. “Teachers will be able to talk about money realistically, because the kids will have ownership of wealth.”

If you can make it there
One of the most interesting attempts to combine teaching and superior products is taking place in New York, championed by a mayor, Michael Bloomberg, who made his fortune selling financial information. He has created an Office of Financial Empowerment, which is trying to use the powers of government to promote both financial education and better design of financial products.

The city's regulatory powers mean that it can crack down on firms that exploit financial literacy, and educate the public at the same time, says Jonathan Mintz, New York's Commissioner of Consumer Affairs. It has found that many tax-preparation agencies are offering “rapid refunds” which, as many consumers do not realise, are in fact loans in anticipation of refunds. Its publicity blitz about these loans led to coverage on news programmes “in 22 states and Canada”, allowing the city to promote the message that “anyone promising a tax refund within two days is selling a loan—don't do it.”

Another initiative is to use the city's system of helping people to apply for the earned income-tax credit as a chance to encourage them to open a bank account. As well as explaining to applicants the importance of saving, the city is working with banks to offer carefully designed accounts, and has even persuaded some philanthropists to provide matching funds for the first $250 someone saves. “You are not just educating me, you are allowing me to nod my head and say yes, and get a windfall,” says Mr Mintz. “Financial education is much more effective when it is connected to something real that is happening.”

With Miami, San Antonio, San Francisco, Savannah and Seattle, New York has formed the Cities for Financial Empowerment Coalition, which met for the first time to share ideas on March 18th. There was general agreement that education and better product design should go hand in hand. Most big banks have started to sponsor financial-literacy efforts, if only to cover their backs. However, Mr Mandell remarks, by increasing the charges for bank accounts with only small balances they have in effect deprived children of what was traditionally the best practical educational tool, an account of their own.

Indeed, one of the biggest problems may be the illiteracy of financial-service firms, which often fail to provide the products that poor consumers most want. That, at least, seems to be the conclusion of a recent survey in two of New York's poorer neighbourhoods. Many people were using fringe financial products such as pay-day loans or money orders rather than the services of mainstream banks.

The mainstream financial providers are “missing genuine markets”, says Mr Mintz. “One of the open secrets in this industry is that when people are engaged in behaviour that seems irrational, often it has a rational basis.” Which only goes to show that consumers are sometimes only as literate as the products the financial-services industry chooses to sell them.

Mr Bryant makes the same point more colourfully, noting that some of the first people to be hit by the subprime-mortgage crisis were the very brokers who had sold people inappropriate mortgages. Having drunk their own Kool-Aid, they found themselves with enormous debts and no job. “It takes less credentials to be a mortgage broker than a pimp on a street corner in Harlem,” he says. “Because a pimp needs references.”

Rate Update April 11, 2008

2008-04-11T08:14:00.000-07:00

Mortgage rates increases yesterday afternoon by .125% but have since reversed back to the levels reported yesterday in ‘rate update’.

The bond market is trading slightly higher in response a weak stock market. The Dow Jones Industrial is currently down over 100 points in part because GE reported weak earnings and gave weak profit guidance.

We’ve talked about it before in ‘rate update’ but I have given an explanation as to why a weak stock market typically helps interest rates………

Current Outlook: neutral

How am I compensated as a mortgage broker?

2008-04-10T11:15:00.001-07:00

Our compensation typically ranges from 1-2% of the loan amount depending on the interest rate environment and type of loan we're providing.

With a 0% point loan structure the lender that we assign the servicing rights of your loan to will compensate us by paying us a fee for the right to collect the future mortgage payments. In this instance our client is not paying us our fee for originating the loan because the lender is.

Choosing a loan option with points is a little bit different. In this instance the borrower is paying us a fee of 0-2% that is paid at closing and is included in the closing costs. It is also possible that our compensation is paid as a combination between points charged to the borrower and fees collected from our lender. We are always happy to be transparent about our compensation so please feel free to ask us questions.

Our firm also charges a processing fee of $395 that will go towards the in-house processing of your mortgage paperwork. This insures that your loan closing will happen in a timely manner. If, for any reason your loan closes late because of an issue within our control we will absolutely refund this processing fee.

What is a point?

2008-04-10T10:52:00.000-07:00

A What is a point? A point is equal to 1% of the loan amount and is a fee that can be paid at closing in exchange for a lower interest rate for the life of the loan (in most cases the discount for paying a point is .25%-.375%). A point is disclosed on the Good Faith Estimate on lines 801 (Origination Fee), 802 (Loan Discount), or 808 (Mortgage Broker Fee). At the end of the day it doesn’t matter to you what the point is called. The bottom line is you need to decide whether or not you feel the upfront investment of paying 1% point is worth the discount in interest rate that you will receive. If you intend on having this loan for the long-term (i.e. > 5 years) then paying upfront points may be a good idea. However, for shorter term outlooks it generally does not make sense.

We typically recommend to our clients NOT TO PAY POINTS (adjustable rate mortgages are an exception)because in our experience the upfront cost of 1% point does not justify the long term savings. This is because we’ve found that most of our clients DO NOT keep their loans long enough to benefit from the modest interest rate discount that paying a point provides. Empirical data also supports our philosophy as the article below from the Seattle Times suggests.

Seattle Times Article about Points:
Report: Buying points rarely pays off

CHICAGO — A new report claims that borrowers tend to purchase too many points when selecting a mortgage and end up paying more than they would have with no points and a higher interest rate.

The study was co-authored by Abdullah Yavas, Elliott professor of business administration at Pennsylvania State's University's Smeal College of Business, and Yan Chang, of Freddie Mac. The two considered 3,785 individual mortgages originated from 1996 to 2003, looking at the points paid, interest rates and loan length.

Data showed that, on average, those who buy points are overestimating the amount of time they will hold their loans. They tended to pay off their mortgages about 37.5 months too early for the purchase of points to pay off,
defaulting, moving or refinancing before hitting a break-even point so the strategy made financial sense.

By purchasing points, borrowers lower the interest rate on the mortgage. One point is equal to 1 percent of the mortgage, charged as prepaid interest. Points paid to purchase a primary residence are deductible in the year they are paid on federal income-tax returns; points paid to refinance must be written off over the life of the mortgage.

"We underestimate the possibility that we may refinance in the near future — or refinance again in the near future — and we underestimate the possibility that we may have to move, either for job relocation or other
reasons," Yavas said.

Only 1.4 percent of borrowers who purchased points held their loans long enough to make it pay off; of those who didn't buy points, only 1.5 percent would have been better off purchasing them, according to the study.

However, Yavas pointed out that the data cover a time of decreasing interest rates and increasing property values, which led to a lot of refinancing.

The report also found that borrowers who buy points often don't treat them as costs they can never recover and so are less likely to refinance. When they do refinance, they often do it late, perhaps hoping to compensate for
the points paid.

If a borrower "paid too many points and the interest rates come down quickly, refinancing right away would be the same as accepting the fact that you shouldn't have paid those points," Yavas said.

Yavas took an interest in the topic after he decided to refinance his own home a few years back and considered the trade-off between points and interest rates.

Rate Update April 10, 2008

2008-04-10T08:14:00.001-07:00

Mortgage-backed bonds rallied yesterday afternoon pushing mortgages rates slightly lower. From a technical standpoint mortgage-backed bonds are trading in a wide range and there does not appear to be any significant resistance or support. Because there is no significant technical influence or heavy economic data out today we’ll keep an eye on the stock market. Should stocks rally we could see mortgage rates reverse higher and vice versa.

On a side note, I have posted a Wall Street Journal article on this blog which talks about global inflation pressure (to find simply search 'inflation'). This article would make excellent Sunday morning reading. In the long-term the pressures outlined in the article would push mortgage rates higher.

Current Outlook: neutral

WSJ.com article about global inflation pressures

2008-04-09T22:06:00.000-07:00

Inflation, Spanning Globe,
Is Set to Reach Decade High
By ANDREW BATSON
April 10, 2008; Page A1

Inflation is back.

After several years of relative stability, a wave of rising prices is washing over the world economy.

It comes at a most inconvenient time. The Federal Reserve is sharply cutting U.S interest rates -- the opposite of the usual response to rising inflation -- to prevent the housing bust and credit crisis from causing a deep, prolonged recession. That's making the global response to inflation more complicated.

Consumer prices in the U.S., Europe and other rich countries are projected to rise 2.6% this year, the highest inflation rate since 1995, the International Monetary Fund said Wednesday. In the U.S., consumer prices in February were 4% above year-ago levels. The 15 countries that share the euro currently see inflation of 3.5%, a decade high and well above the European Central Bank's preferred range. Even Japan, long plagued by flat or falling prices, is seeing modest inflation.

Rising prices for food, energy and other raw materials account for much of the pickup in inflation rates. High food and energy costs hit developing countries -- where consumers spend a larger share of income on those necessities -- particularly hard. In recent weeks, protests over rising costs have shook countries from Vietnam, where prices are up 19.4% from last year, to Egypt.

On Wednesday, the World Bank estimated global food prices have risen 83% over the past three years, threatening recent strides in poverty reduction. The IMF forecast consumer prices in emerging and developing countries will rise 7.4% this year, the most inflation since 2001 though still well below the double-digit levels of the recent past.

Some of the factors driving inflation vary from country to country: union-negotiated wage hikes in Germany, pork shortages in China, an electricity squeeze in South Africa, pay rises for civil servants in India.

But the fact that inflation is rising almost everywhere suggests some of its causes are global. As crops are sold for alternative-energy production, food prices have soared: The price of rice, the staple for billions of Asians, is up 147% over the past year. Increasing demand for natural resources among developing economies such as India and China has pushed up prices for raw materials world-wide. Oil-supply constraints have sent crude-oil futures surging above $112 a barrel Wednesday, a new record, resulting in rising fuel and transportation prices.

The weakening U.S. dollar is another source. Not only is it pushing up prices of American imports, it is transmitting inflation to the dozens of economies that link their currencies to the U.S. dollar, from Saudi Arabia to Hong Kong to Mongolia. Because of their currency pegs, these economies are forced to track Fed rate cuts even if they aren't facing recession. That is putting upward pressure on their prices. Additionally, years of easy credit earlier this decade -- the result of a global quest to avoid falling prices, or deflation -- are a contributing factor.

An increasingly global economy may also be a culprit. Globalization got some credit for low inflation in recent years: The economic rise of China, India and the former Soviet Union helped expand the global work force and increase manufacturing capacity, holding down the prices of many goods. But the economic boom in emerging markets also means their currencies and prices are steadily rising, boosting the prices rich countries pay for imports from those poorer countries.

"Overall, the effects of globalization have ceased -- probably in the long term -- to be spontaneously disinflationary," Christian Noyer, governor of the Bank of France, said last month.

Rising prices cut consumer spending power, especially among the poor. They can also stir bad memories of dislocation caused by previous bouts of inflation. Fears of inflation, in turn, can spur more of it: If households and companies come to think of rising prices as normal, that can create self-fulfilling expectations that keep inflation high. Inflation clouds the price signals that let market economies function and makes it harder for businesses to plan.

"It's hard to reverse inflation expectations once they've risen," says Kenneth Rogoff, a Harvard University professor and former chief IMF economist.

Food and Energy

For now, rising food and energy prices are inflation's prime drivers. Core inflation, a measure that excludes volatile food and energy prices, is not rising as quickly as overall inflation. But commodity-price gains are beginning to work their way through the global economy. Even if commodity prices stay where they are, global inflation could continue rising for months to come as companies react to previous price rises.

The world's largest iron producer, Brazil's Companhia Vale do Rio Doce, known as Vale, got its customers to agree to a 65% price increase on ore from its main mine this year, far larger than last year's 9.5% increase. That led steelmakers like Baosteel Group Corp., China's biggest, to raise product prices by 17% to 20% in recent months.

"It will have a pretty big effect on our material costs," Jim Owens, chief executive of Caterpillar Inc., the big U.S. maker of construction equipment and engines, said on a recent visit to Beijing. Caterpillar is preparing price increases of up to 5% on its products to take effect by July.

In St. Louis, Solutia Inc. is raising prices for resins used to make laminated glass by up to 40%, blaming climbing costs for materials, energy and transportation. "We are now at a point where sourcing raw materials at continuously higher prices makes no sense for our business, unless the effects are passed on," said Solutia Vice President Luc De Temmerman.

Kimberly-Clark Corp., maker of household goods, began raising prices in February between 4% and 7% for some paper products, including Huggies diapers, Cottonelle bath tissue and Viva paper towels. Hershey Foods Corp. raised the selling price of its chocolate bars 13% in February after boosting prices between 4% and 5% in April 2007. Hanesbrands Inc., which owns the Champion and Hanes apparel lines, has warned that sustained high cotton prices could filter through to retail prices.

Pricey Cab Rides

In Temecula, Calif., Gary Byler, owner of Southwest City Coach, has raised the fares for his four-taxi fleet for the first time in the 10 years he has been in business. His base fare has gone from $1 to $2.50 and the per-mile charge from $2.50 to $2.75. "Insurance costs have gone up 40%. Fuel prices have doubled," he said.

Just as there is variation in the level of inflation -- from 1% in Japan to 17% in Latvia -- countries' responses to it vary. Central bankers in the U.S and the United Kingdom are focusing on the risks of recession, so they are cutting rates even at the risk of fueling inflation. Others are attempting to drive inflation down: Central bankers in Australia, Chile, China, Colombia, Hungary, Poland, Russia, South Africa, Sweden and Taiwan all have raised interest rates recently.

The trade-off between maintaining growth and fighting inflation is particularly difficult in Europe, where banks are also under strain and inflation is picking up. The European Central Bank considers inflation a bigger worry than the fallout from the U.S. credit crisis. It fears soaring energy and food prices will spill over into wages and other prices. So despite persistent money-market tensions, the ECB has refused to cut rates. It is expected to hold that line in its meeting Thursday.

Flash Point

Germany's recent wage gains are a flash point. Last week, some two million German public-sector workers won a nearly 8% pay raise over two years, their biggest settlement in 16 years. In March, some 93,000 German steelworkers won a 5.2% wage hike, while train drivers picked up an 8% pay increase spread over two years.

In Slovenia on Saturday, some 10,000 protesters from across the Continent gathered at a conference of central bankers to agitate for higher wages. They got a cold response. "It would be an enormous mistake to imitate Germany," ECB president Jean-Claude Trichet told a news conference afterward, noting recent German wage restraint allowed workers there some space to catch up.

In the U.S., Fed officials are concerned that food and energy prices have increased inflation even though the economy is sliding into recession. But they are generally confident that inflation will recede as rising unemployment prevents workers from winning wage increases.

Handling social pressures from inflation is tricky. China has raised minimum wages to moderate inflation's impact on living standards, but Premier Wen Jiabao has also promised the government will ensure that average inflation this year won't accelerate past last year's 4.8%.

That's intended to reassure people like Monica Li, a 40-year-old travel agent in Beijing. She says her daughter's kindergarten just raised its fees to cover higher costs for lunches. Now Ms. Li is worried that costs for health care and housing are also headed upward. "It could really be a problem for us if inflation today, which is mainly in food and other necessities, leads to a series of chain reactions," Ms. Li says.

Countries have long tried to buy stability by fixing their currencies, more or less tightly, to the U.S. dollar. Now those decisions are contributing to inflation in Asia and the Middle East. Central banks in countries with strict dollar pegs must follow the Fed's rate cuts: If they don't, investors seeking higher returns would move money to these countries, placing upward pressure on their currencies and imperiling their dollar pegs. Hong Kong has mirrored the Fed's recent rate cuts, igniting the local property market. Housing prices there were up 31% from a year earlier in January, and rising rents are now feeding inflation.

Countries that both peg their currencies and export commodities are experiencing an inflationary double whammy. As nations from the Middle East to Mongolia earn income from selling resources, rising commodities prices are stimulating the local economy and feeding inflation. Meanwhile, these economies are feeling the effects of rising global prices for food and raw materials. Inflationary pressure is further heightened as their central banks match Fed rate cuts.

Problems in Mongolia

This complicates life even on Mongolia's steppes, where many people are nomadic herders and food prices tend to fluctuate by season and weather. The country's currency, the togrog, is unofficially pegged to the U.S. dollar, boosting prices. As the country's income from copper exports surged, inflation reached 15.1% at the end of 2007.

Similarly, inflation is stoking instability amid the Middle East's energy-fed boom. In Qatar, a rich emirate jutting into the Persian Gulf, surging revenue from natural-gas sales have led to more government spending. This year's budget is 46% higher than last year's, and more than four times the spending of just six years ago. Much of that is going to build highways, airports, infrastructure and schools. Says Yousef Hussain Kamal, Qatar's finance minister: "The surplus is huge."

So is inflation, at 13.7% on the year in the last quarter of 2007. In part that's because Qatar followed its currency peg and moved in step with the Fed's rate cuts. The region's low-paid expatriate work force was hit hard. While local inflation means higher food and housing costs, the value of workers' savings -- which they often send home to families -- is sinking with the dollar. That has triggered strikes and riots in the United Arab Emirates by construction workers.

Commodity exporters with more flexible currencies have been better at containing rising prices. Inflation in Canada, a big oil producer, has been lower than expected, at just 1.8% in February year-on-year. The central bank attributes that in part to the surge in the Canadian dollar, up 17% against the U.S. dollar in 2007. Australia, a major exporter of coal and iron ore, has also seen its currency rise, and its central bank has been steadily raising rates to cool the economy. Inflation was 3% in December.

"Australia has done all right because the currency has been quite strong, and interest rates are high," says Ben Simpfendorfer, an economist for Royal Bank of Scotland. "The Gulf might have looked more like Australia if it weren't for the pegs."

Absorbing the Pain

Central banks, especially the Fed, are hoping that slowing growth in the U.S. and Europe will ease inflationary pressures globally, especially when fast-growing emerging economies begin to feel the slowdown's pain. Some economists argue that current commodity prices are higher than underlying demand can justify, and predict they could fall sharply if speculators retreat and global growth eases. And, at some point, the Fed will stop cutting U.S. rates, helping arrest the decline in the dollar and the inflationary side-effects.

"Inflation almost always falls during economic downturns. The Fed has history on its side," says Julian Jessop, an economist with Capital Economics in London. He expects inflation to be much lower globally a year from now, and the new IMF forecast does, too. Nonetheless, he says, "The outlook for inflation is much more uncertain than it has been for a while."

--Chip Cummins in Dubai, Kelly Evans in New York, Sue Feng in Beijing and Joellen Perry in Frankfurt contributed to this article.

John Burns explains housing cycles

2008-04-09T13:48:00.000-07:00

I came across this video and thought it did a good job of explaining the factors involved in creating housing cycles.

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