Your Certified Mortgage Planner — Michael Eiden, Mortgage Blogger

Just a reminder that taxes are due tomorrow, April 17 — even if your tax documents state otherwise. This is because of Emancipation Day, a legal holiday in the District of Columbia.

Emancipation Day dates to April 16, 1862 when President Abraham Lincoln signed a bill ending slavery in that area. When IRS deadlines fall on a weekend or legal holiday, the due dates are moved to the next business day.

According to the IRS, at the time that tax instructions were approved for printing, the tax group believed that the April 16 date was accurate. They have since changed their mind.

Any IRS form, instruction or publication that shows April 16, 2007 as a due date is incorrect and should read April 17, 2007. This is the true 2007 tax due date.

(Image Courtesy: U.S. National Archives and Records Adminstration)

Unlike the stock market, it’s hard for the average person to know when the bond market is getting turned upside-down.

So, looking back at last Friday, when mortgage rates jumped very, very quickly in a short period of time, a lot of people got surprised (and burned).

With stocks, we can all turn on CNBC, Bloomberg, or host of other channels when the Dow Jones Industrial Average heads into a tailspin. That sort of “market event” usually the lead story on the evening news when it happens, too.

With the bond market, though, that almost never happens. There is no clear “buy” or “sell” signal.

So, even though mortgages are so important to everyday people and mortgage rates are determined by the pricing of mortgage bonds, there is nobody there when things are souring to “make it real” for the everyday Joe like there is for stockholders. We all just sit in the dark.

Last Friday, markets turned quickly and rate shoppers could have locked in lower rates if they only knew that the market was slipping away from them.

Until the media starts covering the bond market and mortgage rates, be sure to saddle up with a trusted advisor that can walk you through the land mines of the mortgage-backed securities markets.

The interest rate you save may be your own.

So, just how quickly have the markets turned?

According to Fed Futures Trading as watched by the Cleveland Federal Reserve, on March 13, it was as likely that the August Fed Funds Rate level would be 5.250% as it would be 5.000%.

In other words, markets were betting with equal odds that the Fed would drop rates as it would keep them steady.

Today, 30 days later, the odds are decidedly not 50/50.

Today, as the divergence between “blue” and “purple” show in the graph above, the probability now reads 75% vs. 15% in favor of the FFR staying put at 5.250%.

Markets have only a small bet that the Fed will drop rates prior to August.

This abrupt change in sentiment reflects the growing concerns that inflation continues to dog our economy. Remember, when inflation is present, the Fed tends to raise the FFR in hopes of slowing down the economy.

From a mortgage rate perspective, this partially explains why rates have been rising steadily over the past month. The more likely it is that inflation is present, the higher that mortgage rates will trend over time. Inflation pushes mortgage rates higher because an inflating dollar is worth less money.

Therefore, investors in mortgage-backed securities demand a higher interest payment on their mortgage bonds to compensate for that.

Interesting fact of the day: 55.5% of “wealthy” Americans have mortgages on their primary homes vs. 44.6% of the overall population.

This doesn’t mean that the wealthy are more indebted than the rest of us; it means that the wealthy are maximizing the tax deductions that the IRS makes available to every homeowner in the country.

It’s also possible that wealthy Americans may be more likely to work with financial planners and CPAs to devise short- and long-term financial plans that take advantage of mortgage interest.

See, unlike every other type of consumer debt, interest paid on most home loans are tax-deductible and are deducted from the homeowner’s annual income. For this reason, a homeowner’s “bottom line” interest cost is much, much less than his note rate.

If you are in the 28% tax , for example, and your note rate is 6.00%, your “bottom line” interest rate is 4.32%. Check with your CPA for exact math, of course.

Wealthy or not, every homeowner should consider the impact of losing tax deductions before paying off their mortgage. If the wealthy are doing it and they have a team of advisors surrounding them, maybe there’s something to it for everybody else.

With three members of the Federal Reserve scheduled to speak today, don’t be surprised if mortgage rates show some brief volatility.

Despite weakness in housing, the economy has shown resiliency and continues to push forward. Markets had widely expected a slowdown, but are now having to change course — rapidly. T

his is why mortgage rates have changed so suddenly in the past week.

Traders will be looking for clues about what the Fed sees that they don’t in the speeches from Mishkin, Fisher, and Plosser.

Of the three speakers, Dallas Federal Reserve President Richard Fisher is expected to provide the best “sound bites”. It was Fisher, after all, who claimed that the Fed was in the “8th Inning” of its rate hike cycle in June 2005 after nine previous rate hikes.

The Fed later increased the Fed Funds Rate eight more times before settling at today’s rate of 5.250%.

On strength in jobs and hiring, mortgage rates finished last week at their highest levels in six weeks.

It was a slow week last week until Friday when — with the stock market closed for Good Friday and with most bond traders on early vacation — the Non-Farms Payroll report handily beat expectations.

This created a ton of doubt with economists about whether our economy is speeding up instead of slowing down.

When the economy speeds up, it tends to erode the value of the dollar and that forces mortgage rates higher because mortgages are “paid” in dollars. If the dollar is weaker, investors will demand more dollars in return for every dollar they invest.

The stock market re-opened this morning and now momentum trading is continuing to push mortgage rates higher.

This week is practically devoid of economic data until Friday’s PPI data. So, until then, expect a lot of discussion around Wednesday’s minutes release from the March FOMC meeting.

The jobs data from last Friday whiplashed investors that were predicting a slowdown so these folks will be looking for clues about the Fed’s next move. There may be rate volatility surrounding the release.

Today’s mortgage rates are getting slammed on the heels of the Non-Farm Payrolls report. Instead of hitting the consensus estimate figure of 135,000 jobs, the report showed a very large 180,000 new jobs created in March.

Unemployment levels dropped to 4.4% pointing to underlying strength in the economy.

Mortgage bonds are selling off right now and that is driving mortgage rates higher.

On a normal trading day, the reaction in the trading pits would be extreme. But, with today being Good Friday, there aren’t many people in the office, so to speak. Fewer traders results in lower-than-normal trading volume and that is causing prices to swing even more wildly than normal.

Mortgage bonds have been down as much as 29 basis points today and when bond prices go down, mortgage rates go up.

To make a tough situation tougher, the stock market is closed today. When it re-opens Monday, expect a continuation of today’s bond sell-off as dollars move out of it and into the stock market.

More bonds sales will cause mortgage rates to climb even higher.

Want some help putting home values in historical perspective?

Using the video game Roller Coaster Tycoon, Speculative Bubble created a roller coaster whose tracks follow home values (adjusted for inflation) from 1890 to 2007.

The ride lasts three-and-a-half minutes, but the last thirty seconds really hammer home the point.

You can almost hear the people screaming…

Wondering how the dramatic change in sub-prime mortgage lending will impact you?

Try this stat on for size:

Since 1998, 1.4 million families have used sub-prime mortgages to buy their first home.

As sub-prime lending guidelines get tighter, there will be fewer first-time home buyers and that impacts every homeowner in the country.

The reason lies in “move up” buying.

When a sub-prime family buys their first home, the sellers of that home likely “move up” to a bigger home. In turn, the sellers of the second home may move up, too. And of the third home. And fourth, and so on.

Somewhere in that chain of events, all of our homes are represented.

Without sub-prime mortgages, maybe the move-up buyer is less prevalent with fewer buyers we could see higher home supply.

We are all connected in the real estate economy. What’s good for one, is good for all. And, the reverse is true, too.

Source
Testimony of Michael D. Calhoun
Center for Responsible Lending
March 27, 2007
http://www.responsiblelending.org/pdfs/House-Calhoun-Mar27-final.pdf

There is little on the domestic front to move markets today as traders wait for Friday’s jobs report.

The jobs data will take on more significance this month than in recent months because of Ben Bernanke’s testimony to Congress last week.

The Fed Chief spoke more strongly about inflation that we’ve heard from him in a long while.

That’s partly in response to market reaction to the Fed’s press release last week.

When the Fed softened it’s language on inflation, markets interpreted that to mean that the Fed planning to lower the Fed Funds Rate sometime soon in 2007. Bernanke needed to set the record straight (and he did).

With an eye on labor markets, Friday’s release takes on added importance and mortgage rates may move wildly as early as Thursday afternoon as traders place their bets.

Expectations are for 120,000 new jobs created in March.