The Mortgage Note

 Wednesday, March 26, 2008 8:54:22 AM

Existing home sales increased in February for the first time, recovering some of the losses from January.  The report on new home sales for February will be released today; watch for an update when that information becomes publicly available.

The March Consumer Confidence Index, which evaluates the willingness of the consumer to spend, was down to a five-year low for the month, to 64.5; it was projected to be 73.4.  This translates to good news for bonds, which translates to good news for mortgage rates overall.  However, there is still some instability in the stock market, so this week will probably be a bit of up and down for rates.

Analysts expect the February Durable Goods Orders Report from the Commerce Department to show an increase of 0.8%; a larger increase will mean increased stock activity, and decreased bond activity, which leads to increasing mortgage rates today....

Next post:  Spring Cleaning?

 Friday, March 21, 2008 9:06:57 AM

Sometimes, we see rates change multiple times per day.  Sometimes, those changes affect ALL loan programs; other times, they affect only certain types of loans.  What does that?  What can make ARMs (adjustable rate mortgages) have higher rates than fixed rates?

Loans are bundled and sold on the bond market as mortgage-backed securities, or MBS's.  At any given time, the bond market can become flooded with either type of bundle:  FRMs or ARMs.  If the market gets too fat with fixed rates and they aren't selling quickly, lenders can adjust rates on those to make them higher-yielding (increased rates for you, the borrower) to try to generate interest among buyers.  The same thing can happen with ARMs as well.  There are days, or portions of days, that certain types of ARMs are at higher rates than certain fixed rate programs.  During those times (like this past Tuesday, I believe it was), rates on some adjustable programs were considerably higher than we're accustomed to seeing them.  The reason was, that on that day, the market was flooded with MBS's backed by those types of loans and nobody was buying.

That's how the market works.  Check back for more updates, or another lesson in the mortgage marketplace....

 Wednesday, March 19, 2008 7:57:35 AM

Mortgage rates, like I said yesterday, are not directly affected by the activity of "the Fed"; they are a confusing function of stock market activity.  This is how I have come to understand what determines rates:

Stock exchanges sell both stocks and bonds; bonds include a variety of items, a significant portion of them being mortgage-backed securities.  The attraction to buying MBS's is the rate of return, which is determined by the interest rate and type of loan in the bundle(s) offered for sale.  The sales activity is the inverse of stock sales activity, because investors are looking at profits and ROI.  When stocks are strong, and activity is heavy on the trading, bond sales are low.  In order to induce investors away from the purchase of stocks and/or options, lenders will raise interest rates on the mortgages represented by the bonds offered.  If stock sales are high, the mortgage rates will increase due to decreased sales in MBS's. 

Conversely, when the stock prices begin to fall more people seek the safety of the guaranteed returns provided by MBS's.  Since sales are heavier, lenders can lower their rates and still be able to sell the bundled mortgages on the open market.  This is good news for the borrowers, because the rates they pay on money borrowed are less.  Rates change several times daily, based on the volatility of the market:  some days may have one change, while others have five or more.  (Often, changes occur after banking hours EST due to West Coast activity or activity in foreign markets.  In today's global economy, volatility in even Australia or New Zealand can cause massive change in mortgage rates in the United States.)

Coming soon:  How the Changes Can Vary Based on Type of Loan in the Bundle 

 Tuesday, March 18, 2008 2:55:28 PM

What's the good news?  The Federal Open Markets Committee (FOMC, the Federal Reserve, affectionately "the Fed") has just cut the rate by 75bps!

What does that mean in English?  The Fed has just reduced by 3/4 percentage point the rate they charge banks on overnight loans, down to 2.25%.  This is a cut of 3% since September of last year, spurred by the lagging economy and the current credit crisis.

How does this affect you?  Prime, or prime rate, is directly tied to the rate at which banks borrow money; the less they have to pay for it, the less you as a consumer are charged to use it.  This cut will lower prime to 5.25%; the cut will affect the rate of interest you pay on any credit card tied to prime (i.e., if your bankcard is at "Prime + 1", your next full billing cycle should reflect a significantly lower payment since prime is now lower!)  The payment on your home equity line of credit (HELOC) should also change on its next full billing cycle if it's tied to prime.

What about my first mortgage?  Unfortunately, the two are different animals!  I will explain what affects first mortgage rates in the next post.  STAY TUNED....