Archive for May, 2008

The Impact Of Falling Oil Prices On Mortgage Rates

David Kosmecki | May 30, 2008 in Uncategorized | Comments (0)

Falling oil prices is one reason why mortgage rates are dropping for the first time in 6 days.

Oil is off $9 per barrel from last week, a shift that correlates to $0.23 per gallon of unleaded gas, roughly.

This drop is good news for both home buyers and “rate shoppers” — high gas prices is partly to blame for rising mortgage rates this week.

The connection between oil prices and mortgage rates is not necessarily clear, but it goes like this:

  • High oil prices are linked to inflation
  • Inflation devalues the U.S. dollar
  • Mortgage bond repayments are made in U.S. dollars

Therefore, inflation devalues the payments made on mortgage bonds and investors typically avoid products with decreasing returns.

So, as demand for mortgage bonds fall, prices fall, too. This is basic Supply and Demand and many people “get” how that relationship works. But what is not so well known is that when the price of a bond falls, its corresponding interest rate goes up.

The reverse is true, too, and that’s what we’re seeing today. Because oil prices are falling, it’s reducing one of the many inflationary pressures on the economy and mortgage bonds are suddenly more attractive to investors.

Higher demand means higher prices and lower yields. Mortgages rates are benefiting from the action this morning — they’re down about 0.125 percent across the board.

Market Update – May 29, 2008

David Kosmecki | May 29, 2008 in Uncategorized | Comments (0)

Risks favor: Locking as prices fall below 200-day Moving Average

Current Price of FNMA 5.5% Bond: $98.91, -56bp

Like Rock-a-Bye Baby, Bonds are falling after the break beneath the floor of support, cradle and all. The Bond has only made a decisive cross over the 200-day Moving Average on three seperate occasions in the past three years. This tells us that, barring a timely reversal, we are likely seeing a shift in the market towards higher interest rates.

In today’s news, Gross Domestic Product (GDP) grew at an upwardly revised 0.9% in the first quarter, slightly better than the 0.6% estimate because of lower demand for foreign goods and services, and a rise in investment in non-residential structures. Additionally, weekly Initial Jobless Claims were reported at 372,000, a little higher than consensus estimates of 370,000 claims. The four-week moving average for Initial Claims declined by 2,500 to 370,500. The four-week moving average of Continuing Claims rose to 3.06 Million, their highest level since February 2004. The job market is somewhat soft, but still somewhat stable.

The Treasury will auction off $19 Billion in 5-year Notes at 1:00pm ET. Yesterday’s 2-year Note auction wasn’t received well by investors and was part of the reason for Bonds moving lower. Today’s auction, if also not well received, could once again apply some selling pressure to the overall Bond Market.

At 2:30pm ET, Fed Chairman Ben Bernanke is scheduled to speak about liquidity provisions at a risk transfer mechanism conference in Basel, Switzerland. This speech could potentially move the markets.

Why It Will Be Easier To Get A Mortgage Approval Today Than Monday

David Kosmecki | in Uncategorized | Comments (0)

Mortgage financier Fannie Mae is toughening its mortgage application decision-making process effective Monday, June 2Mortgage financier Fannie Mae is toughening its mortgage application decision-making process effective Monday, June 2, 2008.

The new guidelines will force many Americans to face higher mortgage rates, higher loan fees, or to be shut out from “prime” mortgage rates altogether.

The new “mortgage rules” include the following changes:

  1. Higher income levels required for basic approvals
  2. Interest only loans are now considered high-risk
  3. Condos are now considered high-risk
  4. 60-day mortgage lates within 6 months are a major red flag

Not all of the changes are for the worse, though.

In the new guidelines, self-employed borrowers will no longer be viewed as more risky than a W-2 employee. This will help small business owners and commission salespeople get more mortgage approvals than in the past.

Fannie Mae agreed to honor all mortgage approvals granted prior to its changes, so if you’ve been putting off that pre-approval, consider talking to your loan officer before the weekend starts.

Your mortgage approval will be much more lenient today than if you wait until Monday.

18 of 20 Real Estate Markets Show Signs Of Improvement

David Kosmecki | May 28, 2008 in Uncategorized | Comments (0)

The monthly Case-Shiller Housing Price Index is a popular and often-quoted measurement of the housing market’s health. The chart above is sourced from its report published yesterday.

In 18 of the 20 largest metropolitan areas, home values declined at a slower pace than in the previously measured month. The report also showed that national home prices are down 14.4 percent from March 2007.

Unfortunately, it’s the more sensation “14.4″ figure that newspapers chose to report this morning. If you never went further than the headline, you’d miss a key piece of analysis.

Comparing today’s market to last year’s market is a lot less valuable than comparing it to last month’s market. That’s a better way to analyze the market’s health.

If we look beyond the headline and examine the data behind it, we see that housing may still be sagging in some areas, but it’s not sagging nearly as much as it used to.

Market Update – May 27, 2008

David Kosmecki | May 27, 2008 in Uncategorized | Comments (0)

Risks favor: Still Locking

Current Price of FNMA 5.5% Bond: $100.03, -31bp

Consumer Confidence for April was reported at 57.2, well below expectations of 61 and the lowest reading in 16 years. Within the report, consumer inflation expectations are at an all-time high, meaning that consumers are seeing inflation as a real threat. This inflationary concern within the Consumer Confidence Report is pushing Mortgage Bonds lower.

New Home Sales for April were reported at 526,000, just a shade above expectations of 520,000. The inventory of unsold new homes fell slightly to a 10.6 month level from last month’s 11.1 reading. This mildly positive report has given Stocks a boost and even more selling pressure on Mortgage Bonds.

U.S. single-family homes showed a price decline of 14.1% at the end of the first quarter from a year earlier, according to the Standard & Poor’s/Case Shiller national home price index reported on Tuesday. The S&P/Case Shiller composite index of 20 metropolitan areas fell 2.2% in March from February and dropped 14.4% from March 2007.

There are inflation concerns abroad as the European Central Bank, ECB has reported their annual rate of inflation at 3.6%, the fastest pace in almost 16 years. June 1st will mark the 10th anniversary of the ECB and in each of the last 8 years it has failed to bring inflation under an ideal target of 2%. This is very interesting and makes you appreciate the tough job the Fed has in maintaining price stability. If you think as a global bond investor, Bond yields across the globe, may rise further to offset the rise of inflation.

Bonds have drifted well below a layer of resistance at the 25, 50 and 100-day Moving Averages. It now appears as though prices are destined to test support at the 200-day MA, about 60bp beneath present levels. We will maintain our locking bias.

Looking Back And Looking Ahead : May 27, 2008

David Kosmecki | in Uncategorized | Comments (0)

The market optimism that had pushed mortgage rates lower since late-March reversed last week on ever-rising oil prices and a bleak outlook from the Federal Reserve.

When gas prices reached $3.93 Friday, it re-ignited inflation concerns and inflation, you’ll remember, is the enemy of mortgage rates.

As expected, mortgage rates spiked into Friday’s market close.

Markets were closed for Memorial Day but re-open this morning with traders feeling apprehensive about mortgage market investments. There are many reasons to park money elsewhere, after all.

  1. The U.S. dollar is trolling near all-time lows against the Euro
  2. Oil markets are returning incredibly high rates of return
  3. Big banks are still writing off large mortgage losses

All three of these reasons reduce demand for mortgage bonds and — because mortgage rates move in the opposite direction of mortgage bond prices — mortgage rates rise.

This week, a few inflation-related data points will cross the wires including the Fed’s preferred inflation gauge — PCE.

PCE stands for Personal Consumption Expenditures and it measures the cost of living for ordinary people. It’s the Fed’s preferred measurement because PCE accounts for Americans buying more chicken when meat gets expensive, or buying more fruits when vegetables get expensive, et cetera.

PCE is different from the Consumer Price Index because CPI is a “fixed” basket of products.

If PCE is running high, expect the exodus from mortgage bonds to continue and rates to run higher. If PCE is flat or lower, mortgage rates should fall.

How Spiking Oil Prices Have Mortgage Rates In Tow

David Kosmecki | May 23, 2008 in Uncategorized | Comments (0)

High oil prices are derailing the mortgage market this week, taking an almost-vertical path higher.

Since mid-February, prices are up by 50 percent.

Rising oil prices can be a threat the U.S. economy because with every extra dollar that Americans pay to energy companies, there is less money available for every other company that makes up our national economy.

Strangely, it comes at a time when the “other” companies need it the most — their costs of operating are rising, too.

So, businesses are faced with a tough choice and both option prove poor for mortgage rates.

  1. Keep prices level and suffer smaller margins (and profits)
  2. Pass higher costs onto consumers in the form of higher prices

If profits suffer, job cuts and a weak corporate spending can undermine an economic recovery. If higher costs are passed on, it leads to inflation and that devalues the U.S. dollar and mortgage bonds.

This is why mortgage rates have spiked along with oil prices this week. And, when oil prices level off a bit, we can expect that mortgage rates will, too.

Crude oil is up 1.8 percent this morning.

How We Know That Prime Rate Will Likely Rise Before It Falls

David Kosmecki | May 22, 2008 in Uncategorized | Comments (0)

Three weeks after adjourning, Federal Reserve officials release detailed minutes of their most recent meeting.

The April 30, 2008 minutes were released Wednesday and it affirmed traders’ beliefs that the Federal Reserve will not be in a hurry to lower the Fed Funds Rate again.

This is bad news for two groups of people whose borrowing costs are tied to Prime Rate, the interest rate that is 3 percentage points higher than the Fed Funds Rate:

  1. Homeowners with home equity lines of credit
  2. Americans with credit card debt

Because Prime Rate moves in lock-step with the Fed Funds Rate, it, too, has fallen by 3.25 percent since September and now rests at 5.000 percent.

With the release of the April FOMC Minutes, though, it appears that Prime Rate is more likely to increase than to decrease moving forward.

If your home equity line of credit offers a “convert-to-fixed-rate” option, now may be a good time to consider switching over. Be sure to talk with your loan officer first, though — he/she may have alternate options for you.

Market Update – May 21, 2008

David Kosmecki | May 21, 2008 in Uncategorized | Comments (0)

Current Price of FNMA 5.5% Bond: $100.62, -22bp

Mortgage Bonds are trading lower this morning after an impressive 150bp rise over the past five days.

There are no economic reports scheduled for release today, but Traders will have something to react on at 2pm ET, when the Fed releases their Minutes from the April 30 meeting. At that meeting, the Fed cut rates by .25% bringing the Fed Funds Rate to 2%. The vote to cut wasn’t unanimous as both Richard “Loose Lips” Fisher and “Three Swing” Charlie Plosser preferred no change to rates. And the policy statement had some verbiage, which led the financial markets at the time, to believe the Fed may be done cutting rates. So the Minutes may provide some color as to the Fed’s most recent rate cut and the possibility of future cuts. As of this moment, the Fed Funds Futures are pricing no chance of a Fed rate cut at the next meeting on June 25th.

The Fed has a growing concern on its hands, as energy prices continue to skyrocket. Oil hit another record high of $130.47 per barrel today. Unless these prices pull back, it is hard to imagine it not having a negative effect on the consumer, inflation and the economy overall.

In news across the pond, The Bank of England voted 8-1 to keep the interest rates at 5% this month as the majority of policy makers argued that a reduction risked letting inflation get out of control.

Simple Real Estate Definitions : Loan-to-Value

David Kosmecki | in Uncategorized | Comments (0)

Loan-to-value is often abbreviated as 'LTV' and is one of the many factors that lenders consider when underwriting a mortgage applicationLoan-to-value is a math formula that represents the relationship between how much a home is “worth” and how much money is borrowed against it.

Loan-to-value is often abbreviated as “LTV” and is one of the many factors that lenders consider when underwriting a mortgage application.

The math formula is straightforward:

Loan-to-value calculation

In the LTV equation, Loan Size is the amount of money borrowed from the bank and Home Value is the lower of the home’s purchase price or appraised value.

Home loans with low loan-to-value ratios are usually less risky for banks. This is one reason why mortgage rates tend to be more favorable for home buyers and homeowners when their respective LTVs are low.

Typically, a “low” LTV loan is one in which the loan-to-value is 80 percent or less. In some instances, however, 70 percent is considered “low”. The cut-off point depends on the mortgage lender and the mortgage product.

On a home purchase, the one way to lower LTV is to make a larger downpayment, thereby reducing the LTV equation’s numerator. Buying a home for below-market value would not reduce LTV, for example, because the purchase price would be used as the equation’s denominator.

On a home loan refinance, the denominator is always the home’s appraised value.