Archive for May, 2008

Comments Off on The Impact Of Falling Oil Prices On Mortgage Rates

The Impact Of Falling Oil Prices On Mortgage Rates


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.

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

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


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.

Comments Off on 18 of 20 Real Estate Markets Show Signs Of Improvement

18 of 20 Real Estate Markets Show Signs Of Improvement


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.

Comments Off on Looking Back And Looking Ahead : May 27, 2008

Looking Back And Looking Ahead : May 27, 2008


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.

Comments Off on How Spiking Oil Prices Have Mortgage Rates In Tow

How Spiking Oil Prices Have Mortgage Rates In Tow


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.

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

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


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.

Comments Off on Simple Real Estate Definitions : Loan-to-Value

Simple Real Estate Definitions : Loan-to-Value


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.

Comments Off on Did You Ask: “Has There Been A Mortgage Rate Reprice In The Last Hour?”

Did You Ask: “Has There Been A Mortgage Rate Reprice In The Last Hour?”


Yesterday, several mortgage lenders issued three separate “rate sheets” in response to the changing mortgage market.

It was the fourth time in the last 6 trading days that mortgage lenders issued multiple rate sheets in a day, and continued the trend that started in mid-January.

The yo-yo nature of mortgage rates underscores the importance of making mortgage rate comparisons within a limited time frame.

Multiple quotes should be gathered with an hour of each other and, even then, it’s prudent to ask your lender: “Has there been a mortgage rate reprice in the last hour?”

The current market volatility is in contrast to the “normal” environment of one-rate-sheet-per-day to which mortgage rate shoppers have been accustomed. But with the changing economy, we all have to adapt.

Mortgage rate quotes from this morning won’t necessarily be valid this afternoon so if you’re in the market for a home loan, be sure to do your shopping in a limited timeframe and don’t forget to ask about the reprice.

Comments Off on Looking Back And Looking Ahead : May 19, 2008

Looking Back And Looking Ahead : May 19, 2008


Optimism ruled the markets last week — optimism about employment, optimism about housing, and optimism about inflation.

Mortgage rates edged lower overall.

Despite the positive sentiment from Wall Street, consumer confidence in the economy reached a 28-year low.

This is a normal divergence because investors live in the “future” of markets while Americans live in the “right now” of life where food prices are high, gas prices are still rising, and job prospects are somewhat weak.

Consumer confidence surveys have to be taken at face value, though. Yes, Americans are nervous about the economy and their household budgets, but that rarely deters them from spending.

In April, for example, Retail Sales (excluded autos) were up 0.5 percent — more than double analyst expectations. And this was before economic stimulus checks showed up in tax-filers’ mailboxes.

Perhaps this is one more reason why markets were so pleased last week.

This week, there isn’t much economic information to sway markets. On Tuesday, we’ll see the Producer Price Index which is like a Cost of Living for Business measurement and on Friday we’ll see the Existing Home Sales report.

Strength in either will be good for economy and should benefit both stocks and bonds, and should lower mortgage rates. Weakness will have the opposite impact.

Comments Off on Smart Money Magazine Says Renters Have Lame Excuses

Smart Money Magazine Says Renters Have Lame Excuses


5 (Lame) Excuses for Not Buying a Home from Smart Money MagazineIt’s not often that a mainstream media publication taunts renters into buying homes, but that’s exactly what Smart Money does in its latest issue.

The Smart Money Web site “lead-in” reads 5 (Lame) Excuses for Not Buying a Home. That’s a forceful title!

It’s unfortunate that renters could feel antagonized by the author’s tone because the article raises very good counter-points to the more popular reasons why renters avoid homeownership.

Owning a home is a serious responsibility and does require commitment. However, a renter should not feel bullied or hurried into buying because for as much as personal economics are at play, personal emotions are at play, too. Both deserve respect.

So, renters: Put your blinders on and give the Smart Money article a read. There’s good advice in there once you get past the author’s bias.