Your Certified Mortgage Planner — Michael Eiden, Mortgage Blogger

The Fed lowered the Fed Funds Rate by a quarter-percent to 2.000% this afternoon.

Because it is tied to the Fed Funds Rate, Prime Rate also fell by a quarter-percent. Prime Rate is now 5.000%.

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.

Mortgage rate shoppers are also benefitting.

Each time the Federal Reserve cuts the Fed Funds Rate, it’s meant to stimulate the economy in growth. Too much stimulation can create too much growth and that often leads to inflation (which causes mortgage rates to rise).

This is one reason why mortgage rates had not fallen over the past few months. Each Fed Funds Rate cut made it more likely that the economy would overheat in the second half of 2008.

So, because the Federal Reserve signaled that a rate-cutting “pause” may be ahead, investors are reducing expectations for a Fed-induced inflation cycle for later this year, pushing rates lower.

The FOMC’s next scheduled get-together is a two-day meeting June 24-25, 2008.

Source
Parsing the Fed Statement
The Wall Street Journal Online
April 30, 2008
http://online.wsj.com/internal/mdc/info-fedparse0804.html

***BREAK NEWS*** Fed’s dropped their target rate by .25% to 2.00%

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

Markets expect the Fed to lower the Fed Funds Rate by 0.250 percent in its press release but it’s not what the Fed does that matters to economy right now.

It’s what the Fed says.

If the Fed states that future rate cuts are needed to stabilize the economy, mortgage rates should rise because rate cuts tend to create inflation. Inflation is the enemy of mortgage rates.

By contrast, if the Fed states that it will “pause” before making additional rate cuts (or hikes), mortgage rates should fall.

We’ll dissect the message in full late this afternoon but the most important message to remember is this:

The Federal Reserve does not directly control mortgage rates.

The Fed only controls the Fed Funds Rate, the interest rate on a very specific type of loan made from one bank to another. The Fed Funds Rate, however, is directly related to a consumer-focused interest rate called Prime Rate.

Prime Rate is the basis of interest rates on credit cards and home equity lines of credit.

If the Federal Open Market Committee votes to lower the Fed Funds Rate by a quarter-percent, it means that the interest rate on Americans’ collective credit card and home equity line debt will fall by a quarter-percent, too.

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

Markets expect the Fed to lower the Fed Funds Rate by 0.250 percent in its press release but it’s not what the Fed does that matters to economy right now.

It’s what the Fed says.

If the Fed states that future rate cuts are needed to stabilize the economy, mortgage rates should rise because rate cuts tend to create inflation. Inflation is the enemy of mortgage rates.

By contrast, if the Fed states that it will “pause” before making additional rate cuts (or hikes), mortgage rates should fall.

We’ll dissect the message in full late this afternoon but the most important message to remember is this:

The Federal Reserve does not directly control mortgage rates.

The Fed only controls the Fed Funds Rate, the interest rate on a very specific type of loan made from one bank to another. The Fed Funds Rate, however, is directly related to a consumer-focused interest rate called Prime Rate.

Prime Rate is the basis of interest rates on credit cards and home equity lines of credit.

If the Federal Open Market Committee votes to lower the Fed Funds Rate by a quarter-percent, it means that the interest rate on Americans’ collective credit card and home equity line debt will fall by a quarter-percent, too.

RealtyTrac released Q1 2008 foreclosure statistics and the data follows an interesting statistical phenomenon most commonly known as the “80/20 Rule”.

The 80/20 Rule states that 80 percent of the effects come from 20 percent of the causes.

In this case, 80 percent of bank repossessions in the first three months of 2008 came from 20 percent of the states in the union.

Accounting for 156,463 repossessed homes nationwide:

1. California (40,023 homes)
2. Texas (14,935 homes)
3. Michigan (12,016 homes)
4. Ohio (10,299 homes)
5. Florida (10,185 homes)
6. Georgia (8,265 homes)
7. Arizona (7,956 homes)
8. Colorado (7,022 homes)
9. Tennessee (4,533 homes)
10. Indiana (4,446 homes)
11. Illinois (4,216 homes)

Overall, 0.55 percent of homes were repossessed by banks in the first quarter.

Mortgage markets lost ground last week on inflation concerns and a general feeling that “the worst may be over” on Wall Street.

As investors moved money into the stock market, mortgage rates ticked higher for the second straight week.

The biggest story from last week was the rising cost of gasoline.

Rising energy costs combined with rising food prices are creating worries about the American consumer’s ability to spur the economy forward.

That sets up the biggest story of this week — the Federal Open Market Committee meeting.

The FOMC starts a 2-day meeting Tuesday and is widely expected to lower the Fed Funds Rate by 0.250 percent at its adjournment.

Cuts to the Fed Funds Rate are meant to promote growth in the economy by decreasing borrowing costs for businesses and consumers. For example, credit card rates are tied to the Fed Funds Rate so when the Fed Funds Rate falls, American households pay less interest and (theoretically) have more money to spend on “things”.

But the FOMC meeting is not the only big news to watch for.

On Thursday, the Personal Consumption Expenditures data is released. PCE is the Federal Reserve’s favorite inflation gauge because it’s a smarter version of the “Cost of Living” index. If PCE rises more than expected, it’s an indication of inflation and inflation tends to make mortgage rates rise.

Then, on Friday, it’s the jobs report. The economy is expected to post the fourth consecutive month of negative job growth. Markets have been highly sensitive to the jobs data lately so expect wild swings in mortgage rates in its wake.

And lastly, sprinkled throughout the week, more than 100 influential members of the S&P 500 will report their earnings. If earnings and outtlooks are strong, mortgage rates should rise. If earnings are weak, mortgage rates should fall.

Why Fed Rate Cuts Do Not Equal Lower Mortgage Rates

Last Updated: April 23, 2008

The Federal Reserve has been on a rate cutting spree once more. Many mortgage applicants are calling their mortgage representative and expecting a lower interest rate. Others who have been waiting to refinance are puzzled as to why mortgage rates have not moved lower during the recent six Fed rate cuts. This is difficult to explain to consumers who have watched a 3.0% reduction by the Fed with very little benefit in mortgage rates.

Is a Fed rate cut really good news for mortgage rates? The facts may be surprising. The Fed can only control the Discount Rate and the Fed Funds Rate. This is very different from mortgage rates. A mortgage rate can be in effect for 30-years while a rate set by the Fed can change from one day to another.

It is often said history repeats itself. And if history is any teacher, we can learn from what happened to mortgage rates the last time the Federal Reserve was in a rate-cutting cycle.

The last time the Fed was in a lengthy rate cutting cycle was back in 2001 from January 3, 2001 to December 11, 2001. In the span of 11 months, they cut the Fed Funds rate 11 times with eight of those cuts by 50bp. This resulted in a total of 475bp or 4.75% in short-term interest rate cuts taking the Fed Funds Rate from 6.00% down to 1.75%. Now most uninformed people would naturally think because the Fed cut rates by so much during this time that mortgage rates would follow suit and trend lower as well. Not so. Mortgage rates actually moved higher during this time of significant rate cuts because inflation, the arch enemy of bonds, gradually rose.

Now let's take a look at what happened with the Fed's most recent cutting cycle, the first since 2001. On September 18, 2007 the Fed cut the Fed Funds Rate by 50bp. The mortgage bond market briefly enjoyed a 'knee-jerk' reaction to the Fed move by closing higher that day, but lost 140bp over the following two sessions. Then on October 31, 2007 the Fed lowered the Fed Funds rate by 25bp. The mortgage bond market responded by losing 78bp over the following five trading days. On December 11, 2007 the Fed once again lowered rates by 25bp and the mortgage bond market lost 88bp in the next three days. So far this year, the Fed delivered a surprise 75bp rate cut on January 22, 2008 and mortgage bonds lost a whopping 144bp in just 2 days. Eight days later and as widely expected, the Fed cut rates by 50bp. Within 13 days from that 50bp cut, mortgage bonds lost 269bp. On March 18, 2008 the Fed cut by 75bp and mortgage bonds lost 113bp in 6 days and 214bp in 22 days.

Newspaper headlines rarely tell the full story and today’s papers provide a terrific example.

From the Baltimore Sun (and others):

New-home sales lowest since 1991
8.5% March decline exceeds forecasts; prices also tumble

As always, there’s more to the story than the headline.

The Census Bureau reported a 8.5 percent decline in New Home Sales last month, but in the “fine print” of the report, the Census Bureau cites a margin of error of 16.1 percent.

By including a margin of error, the Census Bureau is acknowledging that the “headline number” is not precise and that the actual change in New Home Sales data lies somewhere between the values -24.6% and +7.6%.

Notice that the range of possible reading includes positive numbers.

This means that New Home Sales could have just as easily shown growth in March — if only the Census Bureau had interviewed a different set of home builders.

The Census Bureau acknowledges this possibility, adding that it “does not have sufficient statistical evidence to conclude that the actual change is different from zero.” The data, therefore, is worthless.

The housing market may be strong or the housing market may be weak. Most likely, it is both of these things. It all depends on your street in your neighborhood because all of real estate is local.

Either way, look deeper than the headlines. They’re a good source of information, but the real analysis requires a deeper look.

Source
New Residential Sales In March 2008
Census.gov
April 24, 2008
http://www.census.gov/const/newressales.pdf

More than 130 million Americans will receive tax rebates this year as part of Congress’ $168 billion economic stimulus package.

Payments begin in about two weeks and range from $600 for individuals to $1,200 for couples, plus an additional $300 per child.

Not everyone is eligible for a full rebate, however.

For single filers earning more than $75,000 and joint filers earning more than $150,000, the tax rebate is reduced by $50 for each $1,000 of income beyond the limits.

An individual with no children, therefore, will not receive a tax rebate if income exceeds $87,000 annually. The IRS provides a tax rebate calculator that can help make sense of the math.

For tax filers using direct deposit, the rebates will be paid based on the last two digits of the social security number:

• SSN ending in 00-20 will arrive May 2
• SSN ending in 21-75 will arrive May 9
• SSN ending in 76-99 will arrive May 16

For tax filers using paper checks instead of direct deposit, payouts begin a little bit later on May 16 and extend through mid-July. The IRS makes the exact dates known on its Web site.

For late income tax filers, the IRS send rebate checks about two weeks after the returns are processed, but not before the regularly scheduled date.

This was forwarded to me in an email and I am posting it here, because I believe it’s important to remember.

Enjoy,

Michael Eiden

After 21 years of marriage, my wife wanted me to take another woman out to dinner and a movie. She said, ‘I love you, but I know this other woman loves you and would love to spend some time with you.’ The other woman that my wife wanted me to visit was my MOTHER, who has been a widow for 19 years, but the demands of my work and my three children had made it possible to visit her only occasionally. That night I called to invite her to go out for dinner and a movie. ‘What’s wrong, are you well,’ she asked? My mother is the type of woman who suspects that a late night call or a surprise invitation is a sign of bad news.

‘I thought that it would be pleasant to spend sometime with you,’ I responded. ‘Just the two of us.’

She thought about it for a moment, and then said, ‘I would like that very much.’

That Friday after work, as I drove over to pick her up I was a bit nervous.

When I arrived at her house, I noticed that she, too, seemed to be nervous about our date. She waited in the door with her coat on. She had curled her hair and was wearing the dress that she had worn to celebrate her last wedding anniversary.

She smiled from a face that was as radiant as an angel’s. ‘I told my friends that I was going to go out with my son, and they were impressed,’ she said, as she got into the car. ‘They can’t wait to hear about our meeting.’

We went to a restaurant that, although not elegant, was very nice and cozy.

My mother took my arm as if she were the First Lady. After we sat down, I had to read the menu. Her eyes could only read large print. Half way through the entrees, I lifted my eyes and saw Mom sitting there staring at me. A nostalgic smile was on her lips. ‘It was I who used to have to read the menu when you were small,’ she said. ‘Then it’s time that you relax and let me return the favor,’ I responded.

During the dinner, we had an agreeable conversation — nothing extraordinary mostly catching up on recent events in each other’s life.

We talked so much that we missed the movie.

As we arrived at her house later, she said, ‘I’ll go out with you again, but only if you let me invite you.’ I agreed.

‘How was your dinner date?’ asked my wife when I got home. ‘Very nice, it was much more so than I could have imagined,’ I answered.

A few days later, my mother died of a massive heart attack. It happened so suddenly that I didn’t have a chance to do anything for her.

Some time later, I received an envelope with a copy of a restaurant receipt from the same place mother and I had dined. An attached note

said: ‘I paid this bill in advance. I wasn’t sure that I could be there; but nevertheless, I paid for two plates – one for you and the other for your wife. You will never know what that night meant for me. I love you, son.’

At that moment, I understood the importance of saying in time: ‘I LOVE YOU’

and to give our loved ones the time that they deserve. Nothing in life is more important than your family. Give them the time they deserve, because these things cannot be put off till ‘some other time.’

Somebody said it takes about six weeks to get back to normal after you’ve had a baby…Somebody doesn’t know that once you’re a mother, ‘normal’ is history.

Somebody said you learn how to be a mother by instinct….Somebody never took a three-year-old shopping.

Somebody said being a mother is boring…Somebody never rode in a car driven by a teenager with a driver’s permit.

Somebody said if you’re a ‘good’ mother, your child will ‘turn out good’…Somebody thinks a child comes with directions and a guarantee.

Somebody said ‘good’ mothers never raise their voices.Somebody never came out the back door just in time to see her child hit a golf ball through the neighbor’s kitchen window.

Somebody said you don’t need an education to be a mother…Somebody never helped a fourth grader with their math.

Somebody said you can’t love the second child as much as you love the first….Somebody doesn’t have two children.

Somebody said a mother can find all the answers to her child-rearing questions in books…Somebody never had a child stuff beans up his nose or M&M’s in her ears.

Somebody said the hardest part of being a mother is labor and delivery…Somebody never watched her ‘baby’ get on the bus for the first day of Kindergarten or on a plane headed for military ‘boot camp.’

Somebody said a mother can do her job with her eyes closed and one hand tied behind her back .Somebody never organized seven giggling Brownies to sell cookies.

Somebody said a mother can stop worrying after her child gets married…Somebody doesn’t know that marriage adds a new son or daughter-in-law to a mother’s heartstrings.

Somebody said a mother’s job is done when her last child leaves home…Somebody never had Grandchildren.

Somebody said your mother knows you love her, so You don’t need to tell her…Somebody isn’t a mother.

Pass this along to all the ‘mothers’ in your life and to everyone who ever had a mother. This isn’t just about being a mother; it’s about appreciating the people in your life while you have them.