A noon-hour, mortgage-bond rally rendered homes more affordable for Americans Tuesday. It was the second straight day on which this happened.On both days, the action was swift.

The speed at which Monday’s and Tuesday’s respective rallies tore through mortgage markets illustrates how deep the uncertainty that surrounds the U.S. economy really is.

One reason why the market swings so quickly is that, lately, traders are tending to follow the herd.

As a mortgage rate shopper, it’s outstanding when the herd is moving in your favor.  However, when the herd moves in the opposite direction, the impact on your monthly housing cost can be huge.

Volatility has been the common theme for mortgage rates in 2008 and it’s likely to remain a factor until the nation’s economic picture gets a little bit more clear.

Some experts are saying that may happen in 2009.  Therefore, you should be prepared for rapid mortgage rate movement and act accordingly when you see a rate-and-payment combination that makes sense for your household budget.

The payment you see in the morning is likely to be gone by the afternoon.

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It’s a terrific time to buy a home, but not because homes happen to affordable.It’s a terrific time to buy because the variety of mortgage products available to home buyers looks poised to shrink.

Monday, Alt-A mortgage lender IndyMac Bank stopped accepting mortgage applications and it’s likely that other Alt-A lenders will likely follow suit.

Alt-A loans are ones in which borrowers can’t (or won’t) verify one of two major underwriting criteria:

1. Evidence of income
2. Evidence of assets

Since the Credit Crunch began last July, Alt-A mortgages have been a steady source of funds for “in-between” borrowers — those that are not quite prime, and not quite sub-prime. IndyMac was among the largest lenders of its type and had outlasted many of its peers.

Its position as a market leader and subsequent exit from lending means that the remaining Alt-A lenders will likely make one of two choices in the coming weeks:

1. Raise rates and fees because of greater Alt-A mortgage risk, or
2. Follow IndyMac’s lead and exit mortgage lending altogether

Both outcomes would be harsh for home buyers of all types because when any large bank takes mortgage-related losses like IndyMac just did, it tends to create major risk aversion in the market.

Risk aversion impacts everyone – even the “good” borrowers.

Banks have been nervous about lending for several months and so they’d rather pass on an “average” mortgage application rather than risk getting stuck with a potentially “bad” one. IndyMac’s exit may cause fewer mortgages to get approved.

In other words, buyers eligible for financing today may be ineligible tomorrow.

Therefore, if you’re a home buyer and you know your credit profile is less-than-ideal, consider writing a purchase contract sooner rather than later. Your mortgage options may be thinning, and the ones you have may be getting more expensive.

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Last week was fairly uneventful in the mortgage markets, with rates slightly edging lower across the board and without much data to influence trading.

Even Thursday morning’s hotly-anticipated jobs report was met with lukewarm interest; many traders had already left for the weekend.
Mortgage rates just drifted — a little up and little down, but mostly unchanged.

Mortgage insiders may have found last week to be boring, but for active home buyers, the semi-lull was a welcome break from the up-and-downs that have gripped the markets since January.

It’s been three consecutive weeks without a substantial increase to mortgage rates.

This week, rates aren’t expected to be as calm because Fed Chairman Ben Bernanke is taking two heavy topics and making public speeches about them.

The first speech is to the FDIC on Tuesday.  The speech will focus on mortgage lending.  The second is to House Financial Services Committee on Thursday and it will cover financial market regulation.  In both speeches, expect Bernanke is expected to address inflation and the health of the U.S. banking system.

These two subjects are closely linked to mortgage rates so watch for rate movement during, and after, the speeches.

• If Bernanke says inflation is moderating, mortgage rates should fall
• If Bernanke says the financial system is stabilizing, mortgage rates should rise

From a data perspective, there’s not much doing other than Friday’s Consumer Confidence survey.  Confidence surveys don’t have a direct impact on the economy, but markets are watching them more closely.  A strong reading could benefit the stock market which should, in turn, cause mortgage rates to rise.

(Image courtesy: Wall Street Journal Online)

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On the first Friday of each month, the Bureau of Labor Statistics releases its Non-Farm Payrolls report.More commonly, it’s called the “jobs report”.

The jobs report is a sector-by-sector look into the U.S. economy and whether businesses are hiring — or firing — workers.  This is one of the reasons why its release is so hotly anticipated each month — the jobs report can reveal a lot about the state of the U.S. economy.

Last month, the economy shed 62,000 jobs.

Now, many people will assume that job losses like this are terrible for the U.S. economy.  Sometimes, that’s true.

This month, it’s not.

Given the ongoing tug-o-war between inflation and recession, markets are somewhat pleased with the June job loss figures because job losses reduce the likelihood of inflation in the U.S. economy.

Inflation is considered by many — Ben Bernanke included — to be among the top threats to the U.S. economy — it devalues the dollar and leads to increases in the Cost of Living.

Inflation also threatens home affordability because mortgage rates tend to rise when inflation is present.

June’s job losses — while bad for those impacted — is helping to relieve inflationary pressures on the economy and that is boosting markets performance this morning.  Stocks are slightly up, and mortgage rates are slightly down.

(Image courtesy: The Wall Street Journal)

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In the summer of 2005, sub-prime mortgage lending was at its peak. Rates were relatively low and lending guidelines were relatively loose.

At the time, the “standard” sub-prime mortgage product was the 3/27 ARM.

The 3/27 had a few basic traits:
1. A fixed, 3-year “starter rate”
2. Every six months thereafter, the mortgage rate changed
3. The formula by which it changed was (4.999 percent + the 6-month LIBOR rate)

Because the summer of 2005 was the peak of sub-prime lending, it makes sense that the summer of 2008 is the peak of sub-prime adjusting.

For homeowners with adjusting sub-prime loans, there is some (relative) good news out there.

Today, the 6-month LIBOR hovers near 3.15 percent, meaning that an adjusted mortgage rate will be in the neighborhood of 8.15 percent.

This is versus the rate of 10.30 percent that sub-prime borrowers faced last summer when LIBOR was much higher than it is today.

Adjustments of any size can strain a household budget, though, so if you’re a sub-prime borrower and your pending adjustment will cause financial strife, be proactive — talk to your lender before you miss a payment.

Lenders are often more willing to talk with “current” borrowers than with delinquent ones.

(Image courtesy: Washington Post)

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As flood waters ran through Iowa and other Midwestern states, the nation’s corn supply was thought to be in danger.

Prices spiked in the wake of the floods, adding to the already-peaking grocery bills that many Americans are now bearing.

But yesterday, in a surprise report, the Agriculture Department said that many farmers had over-planted corn earlier in the season in order to cash in on corn’s rising market value.

The abundance of planting is offsetting a portion of the flood damage and this year’s harvest is now predicted to be the second highest on record.

For Americans in need of a home loan, this is terrific news because more corn supply means lower food prices and that puts a hold on at least one source of inflation.

Inflation is the enemy of mortgage rates.

The revised outlook for this year’s corn supply is now so much better than it was yesterday that the price of a corn bushel fell by 30 cents at the Chicago Board of Trade — the maximum allowable amount by rule.

Now, rapid movements in the price of corn may not seem relevant to everyday life, but even the smallest of details about the economy can trickle down and impact you as a homeowner.

The strength of the housing market may be correlated to consumer confidence and consumer confidence is definitely tied to the Cost of Living. And the same goes for the mortgage market — it’s all related to inflation.

With a surprise crop of extra corn, things may look just a little bit better.

Source
Corn Crop Largely Intact, Despite Floods
Scott Kilman
The Wall Street Journal, July 1, 2008

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Mortgage rates improved last week, marking the first time since mid-May that has happened.

The rate drop is the result of how mortgage markets interpreted the Federal Reserve’s Wednesday press release.

In it, the Fed said:

1. Inflation pressures should lessen soon
2. Growth should remain steady this year
3. The credit market is currently fragile

Separately, none of this was news to the markets. But considering all three statements together, investors grew nervous of leaving money in the stock market — specifically in financials.

Post-Fed announcement, there was a wave of selling that dropped the Dow Jones Industrial Average nearly 20 percent from its October 2007 high.

As stocks sold off, though, mortgage shoppers were benefiting.

Rates ticked down in the Fed announcement’s wake because the mortgage bond market acted as a “safe haven” for traders. More demand for mortgage-backed bonds caused rates to fall, accented by a favorable run very late in the day Friday.

This week, the momentum may continue, or it may not. There is a lot to capture traders’ attention in this holiday-shortened, four-day work week.

The biggest data release of the week will undoubtedly be Thursday’s Unemployment Report, but there are also two Fed speakers stumping, as well as Treasury Secretary Paulson speaking about the economy.

As the week goes on, more and more traders will be leaving for the long weekend so expect rates to move with greater force as Thursday afternoon gets nearer. And, if stocks haven’t regained favor with investors by then, expect that mortgage rates will have a good week.

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