20071201 - Rates Improve

30 yr - 6.10% w/ 0.5% in fees. DOWN from 6.20%. 1 yr ago - 6.14%
15 yr – 5.73% w/ 0.5% in fees. DOWN from 5.83%. 1 yr ago – 5.70%
5/1 ARM – 5.86% w/ 0.5% in fees. DOWN from 5.88%. 1 yr ago – 5.95%
1 yr ARM - 5.43% w/ 0.7% in fees. UP from 5.42%. 1 yr ago – 5.46%
(Average mortgage rates according to Freddie Mac’s Primary Mortgage Market Survey®, as of 11-29-07)
Note: These rates should be used for trend line analysis only, NOT for comparison shopping. Your rate will vary depending on multiple factors. In general, this simply helps demonstrate which direction mortgage rates have moved from week to week.

Summary: Interest rates have been drifting lower this month as the “market” is concerned that the housing slump and changing credit markets could slow future economic growth.

Mortgage Industry: The mortgage industry and underlying credit markets continued get their shorts handed to them. The loose money from the past years is CONTINUING to reveal itself in reports, layoffs, bankruptcies and just plain turmoil in the lending arena.

While I don’t like to see bad things happen, I think this is a case of lenders getting what they deserve as compared to getting what they expected. Lenders ALWAYS do this, and why not, the government always bails them out. This is no different. Look back at history…they lend money to unqualified borrowers and then whine and cry when they don’t get paid, whether it’s the current mortgage meltdown, or billions to 3rd world countries. If they can’t pay, don’t give them the money! What happens next, the government comes in and tries to “save” everyone with programs and gizmos designed to save the banks instead of letting “the markets” work themselves out on their own. The banks get bailed out at the cost of the taxpayers.

That’s what the new, looser, FHA loan programs are designed to do. Banks can refinance “trouble” loans (those in default or late), shift them into an FHA insured loan so that when it does belly-up, the government will pay the bank the money anyway…after-all, its government insured. It looks good on the surface; “Look at what the government is doing to help Mom and Pop America. You know, letting them stay in their homes, blah, blah, blah”. And the taxpayer gets it in the shorts and the bank get away with their lending practices and don’t learn from their loose lending practices. Always has been, always will be. Look back at history. OK, off my soapbox.

Mortgage Industry II: Losses in the mortgage markets have also caught to even Freddie Mac which posted a $2 billion loss in the third quarter. Of course, the stock price fell about 30% after the announcement. A report this week also revealed that pension funds are starting to feel it as well. Orange County, Florida, removed its entire $370 million from the state-run investment pool, 2 days after learning the money market fund contained more than $700 million in defaulted debt? And Orange County isn't the only local government to pull funds... Dade County and Pompano Beach also made withdrawals.

This just in: 2 days later, the Florida Agency running the Investment Pool, suspended withdrawals! The Investment Pool was experiencing a "run" on their financial institutions! WOW! This is the tip of a crisis iceberg folks.... And it will only worsen.

What to do? check out your investments and determine your exposure.

I know this is sounds like all bad news. The good news. If you have good credit and need to borrow money, sign up and take advantage of the incredible buying opportunities in the residential housing markets and the super cheap money. If you borrow it, borrow it long term. These rates may not continue for very long.


Home Builders: The National Association of Home Builders released their sentiment index of members for November. While the reading of 19 was equally as bleak as was October's number, it's important not to overlook the fact that for the first time since February, the index didn't go down. Maybe the joy of the holiday season helped their moods, or maybe it was that Housing Starts posted an increase of 3% during October. While more expensive single-family home starts slumped another 7.3% during a tough month, more apartment buildings, townhouses and condos were started. Maybe housing is turning the corner. Hmmmm?

Consumer Sentiment: The University of Michigan index of Consumer Sentiment fell to a reading of 76.1 in the month of November, down from 80.9 in October. The weekly ABC News / Washington Post poll of Consumer Comfort fell two ticks to -19. Rising gas prices, a volatile stock market and $100/barrel oil seem to be unsettling.

Unemployment: New claims for unemployment benefits were 330,000 for the week ending November 17. Claims are near the highest levels of 2007.

Federal Reserve: The release of the minutes (what they said) from the October 30-31 Fed Open Market Committee (FOMC) meeting revealed part of the decision-making process which led to the recent ¼ percent cut in the Federal Funds and Discount Rates. There was one dissenting vote. Most participants expressed concerns about inflation pressures, particularly in light of rising commodity and energy costs and the falling dollar. If inflation isn’t controlled, the Fed will need to RAISE rates.

Bond Markets: Traditionally, in volatile stock markets, investors make a “flight to quality”, which means they sell their stocks and put money into bonds. This increased demand moves bonds prices up, which means….rates come down. (Long time readers already know about the inverse relationship between bond prices and rates…so anything that causes bond prices to go up will cause rates to go down). US Treasury bonds are the recipient of this flight to quality, while demand of mortgage investments (mortgage backed securities) is certainly lackluster. While mortgage rates have certainly loved lower, they haven’t dropped as rapidly as other, more desirable bonds. The traditional spread, or difference, between mortgage rates and treasury rates has increased over the recent mortgage market meltdown. Investors aren’t stupid…if they are to invest in mortgage securities, they want to get compensated for the obvious additional risk, thus rates remain elevated as compared to the safer US treasury bonds.

Outlook: Rates are super low and don’t have much room to fall any further.

Thought of the Week: “Decisiveness is a characteristic of high-performing men and women. Almost any decision is better than no decision at all.” Brian Tracy