Your Certified Mortgage Planner — Michael Eiden, Mortgage Blogger

The Fed lowered the Fed Funds Rate by 0.500% to 3.000% yesterday. The move was widely anticipated and so Wall Street’s reaction was muted.

Because it is tied to the Fed Funds Rate, Prime Rate also fell by 0.500% yesterday. Holders of home equity lines of credit and credit card debt benefited from the change and will see lower interest costs in next month’s statements.

In the statement above — as explained by The Wall Street Journal — the Fed expresses concern about the housing and jobs markets, while noting that inflation is less of a worry. This leaves the possibility of future Fed Funds Rate cuts open.

Source
Parsing the Fed Statement
The Wall Street Journal Online
January 30, 2008
http://online.wsj.com/public/resources/documents/info-fedparse0801b.html

It’s Fed Day afternoon…and one of the most highly anticipated and hotly debated Fed Decisions will be released at 2:15pm ET. It’s interesting to see the folks in the media come on the air, who earlier this morning said that a Fed cut of 50bp would immediately cause home loan rates to drop by 50bp as well. SCARY.

Let’s first get to the news – then we’ll talk about what the Fed might do, and the likely market reaction. The ADP Employment Report was released this morning, suggesting that Friday’s official jobs number should come in around 150,000 new jobs – which is more than double current consensus estimates. While this shows employment growth in the economy, the problem with the jobs numbers is in the inevitable revisions to follow.

But the ADP Report – while interesting -took a back seat to the more reliable and much weaker than expected 4th Quarter GDP Report. Fourth quarter GDP showed a 0.6% annual growth rate, almost half the 1.1% growth rate expected by economists and far below the 4.9% rate recorded during the third quarter. Overall, GDP grew by only 2.2% during 2007, the slowest growth rate since the economy was coming out of a brief recession in 2002.

So what will the Fed do? The Fed Funds Futures contracts is pricing in an 80% chance of a 50bp cut, and a 20% chance of a 25bp cut. I think a 50bp cut is likely – but should we get a 25bp cut, the statement will probably contain language that the Fed will cut further if necessary. Neither of these is very good for the long term future of mortgage rates, due to the eventual inflationary pressures the cuts will create. And Bond Traders will eventually be smart enough to figure that out.

I feel a 50bp cut is in the cards, which will take the Fed Funds Rate down to 3.0%. This would be a big help for business loans, consumer loans, Home Equity Lines of Credit and Adjustable Rate Mortgages. But how will this affect fixed rates today? Fed Rate cuts do not have a direct impact on fixed mortgage rates. In fact, they often serve to push them in the opposite direction, by fanning fears of inflation when they cut – or by fighting inflation when they hike. Fixed mortgage rates are directly affected by inflation, because a fixed rate mortgage provides the investor with a fixed rate of return for a long period of time. As inflation increases, the buying power of that fixed return is eroded, because it costs more dollars to buy the same amount of goods and services. So if inflation is on the rise – investors will demand a higher fixed rate of return to compensate them for the more rapid erosion of buying power on their return.

The last time the Fed had a long cutting cycle was back in 2001. The Fed cut eleven times in eleven months, and eight of those cuts were by 50bp, for a total of a 4.75% drop in the Fed Funds Rate. But mortgage rates were actually higher throughout this drastic cutting cycle, because inflation ticked higher. Let’s look at more recent history, and as we have pointed to previously: the Fed cut by 50bp on September 18, 2007, and after prices enjoyed a move higher that afternoon, Mortgage Bonds lost 94bp over the next two days. On October 31st, the Fed lowered by 25bp…and over the next five trading days, Mortgage Bonds lost 78bp. On December 11th, the Fed lowered by another 25bp, and over the next two days, Mortgage Bonds lost 64bp. Most recently – the surprise 75bp cut by the Fed cost us about 150bp on our rate sheets over the next two days.

Now, if that isn’t enough evidence to examine your current mortgage strategy and get off your butt and get your application in, I don’t know what is

Make it a great day!

Michael

P.S. If you have found this info useful, make sure you pass on this post. It’s easy to do and that’s what friends are for right!

(content courtesy of Mortgage Market Guide)

When the Federal Open Market Committee adjourns from its two-day meeting today, it is widely expected to lower the Fed Funds Rate.

This does not mean that mortgage rates will fall.

In fact, using history as an indicator, we should expect mortgage rates to rise if the Fed Funds Rate falls.

Remember: The Fed Funds Rate is an overnight interest rate between banks; mortgage rates are long-term rates based on the bond market. These are two very different animals.

The FOMC’s press release hits the wires at 2:15 P.M. ET.

If you only read headlines this past week, you may have missed two very important points.

The first story relates to Housing Starts. Housing Starts measure the number of new homes entering the construction phase. The headline blared “Housing starts plunge to 16-year low“.

If you are a homeowner, this is terrific news.

Because home values are governed by Supply and Demand, fewer homes built means that home demand has a chance to rebalance against home supply.

This places upward pressure on home prices nationwide.

When Housing Starts drop, it says more about weakness in builder sentiment that it does about the state of the housing nationwide. Housing Starts are at all-time lows because builders want to sell the product they have before putting more product on the market.

The second story was yesterday’s New Home Sales figures.

The headline read that “US new-home sales slide in record plunge” but, again, let’s look a little deeper.

New Home Sales are defined as homes that are newly built. Stated differently, it specifically counts the number of homes sold that were once classified as “Housing Starts”.

If Housing Starts falls, therefore, we can expect New Home Sales to fall, too. The two data points count the same housing inventory at two different points along a timeline.

These two stories are related but neither should be construed as bad news. As builders cut back on the supply of homes, it should create an increase in relative demand.

For homeowners, this is a positive development.

Mortgage rates change from day-to-day, but last week’s volatility was a record-breaker.

After drooping through Tuesday and then skyrocketing Wednesday and Thursday, mortgage rates retreated slightly on Friday.

By weeks’ end, rates were at their same levels from mid-December.

This is in contrast to Tuesday, just after the Fed’s rate cut and before the stock market rally. Mortgage rates had been touching near four-year lows for some home loan products.

This week could be equally hectic because heavy economic data it hitting the wires, and because the Federal Open Market Committee is meeting.

The major activity gets started Tuesday with the Consumer Confidence report.

Markets care about this survey because recessions tend to be self-fulfilling prophecies — if people believe it will happen, it generally does. Therefore, if average Americans are feeling worse about the economy, it may cause stocks to sell-off to the benefit of mortgage rates.

Notice from the graph above how confidence plunged through the second half of last year.

On Wednesday, the FOMC adjourns from its two-day meeting.

What the Fed does will not be as important as what the Fed says. Markets will dissect the FOMC’s press release for clues about our economy’s strength. If the statement cautions about dramatic weakness in the economy, expect mortgage rates to fall on the absence of inflation.

Then, on Thursday, markets get treated to the Personal Consumption Expenditures report. The PCE is a Cost of Living index and is the Federal Reserve’s favored inflationary report. If “normal living expenses” are increasing, it should create upward pressure on mortgage rates.

And lastly, on Friday, the Bureau of Labor Statistics releases the jobs report for January.

Markets are expecting an improvement on December’s figure and if that adjustment is greater than expected, mortgage rates will rise on the belief that the economy is not as weak as previously reported.

It will be a busy week like last week so it pays to think in terms of “payment” instead of “rate”. If you’re in the market for a mortgage and your proposed payment is within budget, consider locking in advance of this data-laden week.

Are conforming loan limits going up to $729,750.00? Kinda yes, and kinda no!

Yesterday, the President and Congress worked-out an economic stimulus deal. But it’s not law yet.

The plan would up the conforming loan limits for the remainder of 2008. Currently, the limit on conforming loan amounts is $417K.

What’s the big deal? If you had a JUMBO, at a $500K loan amount, and could get the rate down 1%, as a CONFORMING loan, you could save $330.00 a month. Now, I have never claimed to be a rocket scientist, but I think a lot could be done with $330 a month don’t you? How bout invested at 10% for 30 years? Any guesses? Try a cool $745,961.02!!! Crazy huh!

That concept is called TMV (Time Value of Money) meaning the longer money is working for you in a compound interest environment, the more it makes exponentially. Here is an example, if you just waited on year to start saving that $330 bucks you would lose $74,461.42 ($330 a month @ 10% for 30 years $745,961.02 MINUS $330 a month @10% for 29 years $671,499.60)

Now, I know this isn’t signed into law yet, however regardless of what rates are doing, it’s ALWAYS a good idea to sit down with a qualified mortgage planner and determine if your current mortgage/debt strategy is line with ALL your financial goals. Read my earlier post on annual mortgage reviews.

Until next time, all the best!

Michael

P.S. I just had an idea, send me an email with the subject “mortgage review” and I will get you a form to complete and start your mortgage check-up. If we end needing to complete a new mortgage strategy, I will pay for the appraisal. How’s that for being committed to helping you with your goals!

(Pronounced: NEGH-ah-tive am-ohr-tih-ZAY-shun)

Negative amortization is the process by which a loan’s principal balance increases on a month-over-month basis.

This is in contrast to a “typical” amortization schedule in which the principal balance decreases.

Negative amortization is an optional feature on some home loans.

These mortgages are usually referred to by the brand names “Option ARM”, “Pick-a-Payment”, or “Payment Option ARM”.

Many industry veterans collectively call refer to these types of mortgages as “Neg-Am” loans.

When a Neg-Am mortgage statement arrives each month, the homeowner can choose his preferred payment structure.

1. Pay the minimum balance due only
2. Pay the interest due only
3. Pay the principal + interest payment on a 30-year amortization schedule
4. Pay the principal + interest payment on a 15-year amortization schedule

Choice #1 is like making a “minimum payment” on a credit card. It is the only option that adds to the principal balance so, therefore, it is the only negative amortization option of the four payment choices.

In this sense, negative amortization is a choice and not a certainty.

In the early 2000s, Neg-Am loans grew popular as home affordability products. Many homeowners made the minimum payment each month and found that their mortgage balance had swelled.

Some of these homeowners lost their homes.

Because of their complex structure and potentially devasting consequences, NegAm home loans have been dubbed “nightmares” by several media publications.

However, many sophisticated homeowners have successfully applied NegAm loans to help meet their financial goals.

Like all home loans, NegAm products are a better fit for some homeowners than others. Some likely candidates include:

• 100%-commissioned salesperson who want better control over tax deductions
• Owners of multiple investment properties who want better control over cash flow
• Investors who seek leverage in real estate and who clearly understand market risk

Homeowners with questions about negative amortization loans should seek counsel from a qualified mortgage professional.

The Dow Jones Industrial Average surged 631.86 points in the last three hours of trading yesterday as traders piled into equities.

Fueling the rally? The bond market.

For as much as stocks gained today, bonds lost. Including mortgage bonds. The dramatic sell-off created a huge swing in mortgage rates and erased nearly all of 2008′s rate improvements.

This is one reason why it pays to be aware of your home loan. That way, when markets change and a doorway to payment reduction opens, you can quickly step through it.

As yesterday illustrated, with mortgage rates, opportunity is often fleeting.

With stocks poised to rise again today, it should likely happen at the expense of bonds. Mortgage rates are trending higher, too.

When the Federal Reserve lowered the Fed Funds Rate by 0.75% yesterday, it was in response to economic weakness that mounted since its last meeting December 11, 2007.

By contrast, the mortgage markets meet every day.

Because of this, mortgage rates had already “priced in” the weakness to which the Fed was reacting.

This is why mortgage rates did not fall by the same 0.75% yesterday — they only fell slightly.

Two important rates that did fall, though, were the 6-month LIBOR and the 1-year constant maturity treasury (CMT).

These are two popular interest rates used in adjustable-rate mortgages.

When an ARM adjusts, it adjusts according to a simple math formula:

(New Interest Rate) = (Index) + (Margin)

Where:

Index: A variable, usually 6-month LIBOR or the 1-year CMT.
Margin: A constant, usually ranging from 1.500% to 6.999%

So, if the indices move lower — as we saw yesterday — the adjusted interest rate on a mortgage is going be lower, too.

As an example, LIBOR fell percentage point over the last month from 4.83% to 3.83%. This means that mortgage rates tied to LIBOR will adjust 1 percent lower than they would have in December 2007.

For every $100,000 in a principal + interest loan, this yields $65 per month in savings.

Of course, each mortgage has unique index, margin and rate characteristics so talk to your loan officer about how your ARM operates.

In a surprise move this morning – the Fed cut the Federal Funds rate by .75%, lowering it to 3.5%. They held a special meeting last night in light of US Stock futures trading significantly lower. Let’s face it, we are in a global economy and the rest of the world if really fearing a US recession.

This is the first time the Feds have met outside their normal scheduled meeting since September 17th 2001 and we all know why that happened, God Bless America. This has also been the deepest one day cut since 1984!

What does all this mean? Well, as many of you know, I am not in the business of giving general advice but I can share this with you. If you share concerns about an impending recession, you had better make sure your investments are allocated properly for a bear market. Second, mortgage rates are at a level we haven’t seen since June of 2005 and those were 40 year lows! It may be a great time to analyze your liabilities and make sure they are working for you in the most efficient manner. Lastly, and maybe most important, you are going to want to make sure that you maintain a liquid cash position. If you follow the very wealthy, you know they always buy when things aren’t looking so good and everyone is selling.

I highly encourage you to get with your money professionals, Financial Planner, CPA and I am a little bias toward this but your Mortgage Planner as well. After all, next to taxes, interest charges are very expensive if not planned for properly.

If you would like to know how the recent markets health is affecting your financial health, give me a call or send me an email and let’s get that check-up!

Best,

Michael Eiden

P.S. If you have found this post to be valuable, pass it on to a friend would ya? After all, that’s what friends are for right! Take care, talk with you soon.