Even if you’ve been recently pre-qualified (or pre-approved) for a mortgage, it may be prudent to get “re-approved”.

The mortgage industry is changing quickly; being prepared beats the alternative.

Recently, mortgage lenders have made adjustments in what they will lend, and to whom. This shrinks the pool of eligible mortgage borrowers.

Some of these guideline changes include:

• Low or no downpayment loans may require more income and/or assets
• No income verification (i.e. stated) loans may not be available
• Higher credit scores may be necessary to qualify

In addition to tighter guidelines, many mortgage lenders are now required to pass higher fees and/or mortgage rates along to their clients as well.

The burden of these mandatory extra costs will be the difference-maker in a mortgage approval for some mortgage applicants.

Getting re-approved can give home buyers a realistic sense of how mortgage financing may shape up in the changed mortgage environment. It’s important to make sure that the mortgage plan still fits into your short- and long-term financial goals.

But, if nothing else, getting re-approved gives you the opportunity to speak with your real estate and loan officer about changes to the industry, and how it impacts you on a personal level.

For most Americans (but not all), mortgage interest is tax-deductible in the year in which it was paid.

With some advance planning, therefore, a homeowner can increase his 2007 tax deductions by paying additional mortgage interest while the calendar still reads 2007.

The key is to make the mortgage payment due January 2008 a few days early.

Because mortgage interest is paid in arrears, a mortgage payment due January 1, 2008 accounts for interest that accumulated throughout December 2007.

Rather than make January’s mortgage payment on January 1, 2008, a homeowner can send payment this week or next — while it’s still 2007 — and increase the amount of mortgage interest paid in 2007. This can increase 2007′s tax deductions.

Tax planning can be a complicated issue and not all homeowners qualify for mortgage interest tax deductions. Be sure to consult your tax professional before making any tax planning decisions. If you are without a tax professional, call or email me; I would be happy to make a trusted recommendation to you.

Risks favor: Cautiously Floating as Bond Sits on Support

Current Price of FNMA 5.5% Bond: $98.91, Up 3bp

Today is the first of the new Fed auctions with the central bank offering $20 billion from its 28-day credit facility. The auction runs between 10am and 1pm ET. The Fed's goal is to encourage commercial banks to borrow from this new Fed sponsored facility, which will hopefully spark increased lending to businesses and then to end-consumers. The desired result would be additional competition to LIBOR products, which can potentially lower the LIBOR – a big help to those with ARM loans adjusting based on the index.

Pressuring Stocks lower are some comments made yesterday by former Fed Maestro, Alan Greenspan, who remarked there was a 50-50 chance for a recession to go along with a combination of rising consumer prices and a receding economy. It was not long ago he was calling for a 33% chance of a recession, so it sure appears that Mr. Greenspan has turned even more negative on the state of the economy.

The Fed wants to fight off a recession, but they may be fighting this battle with a hand tied behind their back…this is due to higher levels of inflation. More rate cuts will help the economy, but we know that cuts help spur on inflation. With the current rate of inflation in the US ticking higher and towards the upper range of acceptable limits, additional Fed cuts would push inflation even higher. So should the Fed risk a recession to protect against inflation or move to avoid recession and risk inflation?

The Fed gets its favorite read on inflation this Friday with the Personal Consumption Expenditure (PCE) Report. It will be very important to see if Core PCE remains under 2% – that would still give the Fed the green light for more cuts. But a read above 2% spells big trouble and could lead to “Stagflation”. The Fed would rather see a recession than have troublesome inflation…and over the long term, this would be the correct choice if it came down to that.

The New York Empire State Manufacturing Index for December declined to a reading of 10.3, which was well below expectations of 21.0 and the lowest reading for the volatile Index since May. Readings over zero indicate economic growth while those below indicate contraction.

As we head into the week before the Christmas holiday, there are several economic reports which could move the market. These include tomorrow's Housing Starts and Building Permits report; Thursday's final reading on third quarter GDP, the weekly Initial Jobless Claims and Philadelphia Fed Manufacturing reports; and the aforementioned critical PCE Report on Friday.

Bond prices are attempting to hold above support on the 50-day Moving Average. We will continue to cautiously float, but should prices fall beneath this floor we will change to a locking bias.

Last week proved once again: The Fed does not control mortgage rates.

On Tuesday, after the Federal Open Market Committee lowered the Fed Funds Rate by 0.250%, mortgage rates began an ascent that carried all the way through Friday’s close.

As a result, mortgage rates are dramatically higher today than just one week ago.

Other factors contributing to last week’s run-up in mortgage rates:

1. The costs of running a business grew much faster than expected
2. The cost of living grew much faster than expected
3. Holiday sales were much stronger than expected

All three of these items point to inflation, the enemy of mortgage bonds. Inflation tends to push mortgage rates up.

This week, there isn’t much new data of importance until Friday’s Personal Consumption Expenditures release. PCE is the Federal Reserve’s preferred measure of how much more (or less) everyday living is for Americans.

As the week progresses, expect increasing volatility in mortgage rates.

Market players will be in short supply because of holiday parties, half-days, and vacations. Fewer buyers and sellers in a marketplace mean finding the “right price” is more challenging.

In its biggest month-over-month jump since 1973, the Producer Price Index rose 3.2 percent in November.

PPI is like a “cost of living” measurement for consumer, except that it applies to business.

PPI measures how expensive it is to produce goods on a day-to-day basis.

PPI spiking in November is an important development for all of us. When businesses spend more to create outputs, they may decide to pass those higher costs on to consumers.

Sometimes, they pass on the costs right away. Sometimes, they wait. Eventually, consumers could more for everything because businesses are paying more.

Now, economists and experts will say “if we don’t count the cost of energy and food, business costs only rose 0.4% in November”.

Yes, they’re right. But costs are costs and businesses still have to pay them. And the price of energy is not expected to cheapen anytime soon.

Eventually, we all could pay more and, when we do, it will be called “inflation”. That would be bad for mortgage rates.

Current Price of FNMA 5.5% Bond: $99.34, -12bp

The market volatility continues as Mortgage Bonds are trading lower and are attempting to hold above support on the 25-day Moving Average.

This morning's economic news was negative for Bonds. The always volatile Retail Sales Report for November recorded the largest gain in six months, by rising 1.2% and double expectations. When excluding the effect of auto sales, Retail Sales rose an even higher 1.8%. Tempering the strength of the report were higher gasoline prices, which when excluded, leaves Retail Sales at a leaner 0.6%.

Also weighing on bonds this morning was a very hot Producer Price Index (PPI) Report, showing producer or wholesale prices rising by 3.2% in November, double expectations and the largest increase since August 1973. Once again the culprit was higher energy costs with gasoline prices surging 34.8% and overall wholesale energy prices rising by 14.1% in November - a new record. After excluding volatile food and energy prices, the Core PPI increased by 0.4%, which was also twice expectations. The hot wholesale inflation numbers immediately applied selling pressure on Bonds. On a year over year basis, PPI had its highest increase since 1981, at an alarming 7.2%, with the Core Rate at a more modest 2%. While this has the markets concerned, PPI is very volatile and often does not translate into consumer inflation as it may get absorbed by productivity gains and profits. This puts even more emphasis on tomorrow’s Consumer Price Index Report, which will give us a look at the pace of consumer inflation.

Weekly Initial Jobless Claims declined by 7,000 to 333,000 last week with the four-week moving average of claims falling by 2,000 to 338,750. Claims were forecast to be reported at 335,000. This is a slight negative for bonds, as the labor market continues to show stability.

During the past several days, Mortgage Bonds have been bouncing up and down between support and resistance. Longer-term, the Up Escalator is still intact, although it may be vulnerable amidst the heightened volatility. We are very carefully floating for now.

Conforming mortgages are getting more expensive — but not because of mortgage rates.

To protect against further weakness in the housing sector, Fannie Mae and Freddie Mac are instituting “delivery fees” on all conforming mortgages, effective March 2008.

Fannie Mae’s Adverse Market Delivery Charge and Freddie Mac’s Market Condition Delivery Fee will add a one-time, quarter-percent fee to every home loan purchased from mortgage originators.

This means that on a $100,000 conforming mortgage, the borrower could:

1. Pay a $250 fee out-of-pocket
2. Accept a slightly higher interest rate that “finances in” the higher fee

Because the fee is in percentage terms, as the loan size increases, so does the fee. A $300,000 mortgage will carry a $750 fee, for example.

Unfortunately, mortgage borrowers may not get to choose on how they pay the extra cost. Many mortgage lenders are just adding it to their rate sheets.

Be aware, the 0.25% fee does not apply to all loans — only to loans sold to Fannie Mae and Freddie Mac. This specifically excludes portfolio loans and sub-prime loans.

If you’re not sure for what type of loan you are applying, be sure to ask.

Risks favor: Cautiously Floating

Current Price of FNMA 5.5% Bond: $99.34, -28bp

Talk about a crazy market…the wild ride continues as prices are now down 28bp, but that’s 19bp better than the worst levels seen so far today.

The markets were looking for a holiday treat yesterday by way of a 50bp Fed cut in the Discount Rate. And when the news arrived that the cut was only 25bp, Stock traders threw a tantrum. But this morning, a surprise gift arrived – The Fed announced a plan to help inject $40 Billion Dollars into the markets by opening a new auction facility. The Fed said, “Under the term-auction facility program, the Fed will auction term funds to depository institutions against a wide variety of collateral that can be used to secure loans at the discount window” – this means the Fed will lend money to Banks for shorter terms and these Banks will be able to borrow against a wider range collateral. The first of these Fed auctions will be on Monday, December 17th when they release $20 Billion in 28 day paper. The 28-day term for these funds will help ease some pressure in the money markets and increase liquidity in the frozen short-term commercial paper market. This may also hopefully narrow the higher spreads in Libor rates.

On the news, Stocks have moved sharply higher, erasing much of yesterday’s enormous losses. And as you might expect, Mortgage Bonds are having the opposite reaction. The FNMA 5.5% Bond is trading significantly lower, attempting to hold at support on the 25-day Moving Average.

Yesterday’s .25% cut to the Fed Funds rate wasn’t unanimous, as Boston Fed President Eric Rosengren dissented, preferring a half-point cut. The Fed also dropped its previous guidance statement that growth and inflation risks were in balance, choosing instead to 'act as needed' to keep the economy growing and hold inflation in check.

In today's economic news, the US Balance of Trade showed our trade deficit increased to a wider than expected -$57.8 billion in October due to higher costs of imported oil. The market was expecting a deficit of -$57.0 billion. Both imports and exports rose to record levels with imports rising to $199.5 billion while exports grew to $141.7 billion. If factoring out oil imports, the trade deficit would have decreased for the fourth consecutive month. Our trade deficit with China continued to grow with a record $25.9 billion short-fall.

Extremely volatile is the only way to describe the markets. Prices are still riding above the “Up Escalator”, so the longer-term trend in Mortgage Bonds remains favorable – but clearly not for the feint of heart.

The Fed lowered the Fed Funds Rate by 0.250%. The rate decrease was not well-received, though, as many investors were calling for a deeper cut of a half-percent.

In response, dollars moved from stock markets to bond markets and, therefore, mortgage rates fell.

Because it is tied to the Fed Funds Rate, Prime Rate fell by 0.250% yesterday, too. 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 consumer and business slowdowns. This leaves the possibility of future Fed Funds Rate cuts open.

Source
Parsing the Fed Statement
The Wall Street Journal Online
December 11, 2007
http://online.wsj.com/public/resources/documents/info-fedparse0712.html

The Federal Open Market Committee meets today and will release a public statement at 2:15 P.M. ET.

It is widely expected that the FOMC will lower the Fed Funds Rate by at least 0.250%.

When the FOMC lowers the Fed Funds Rate, it is trying to “loosen” credit for American businesses and consumers. When credit is “looser”, it is cheaper, and easier to procure.

Looser credit promotes spending and propels the U.S. economy forward.

By contrast, when the FOMC raises the Fed Funds Rate, it is trying to “tighten” credit which, in turn, slows down the U.S. economy.

The FOMC does not control mortgage rates, but it does have a direct impact on Prime Rate because (Prime Rate) = (Fed Funds Rate) + (3.000%).

Credit cards, construction loans and home equity lines of credit are all tied to Prime Rate and so interest rates are expected to fall on these loan types this afternoon.