Market Comment
Mortgage bond prices rose last week pushing mortgage interest rates lower. On Monday morning, rates spiked higher as stocks surged and the Treasury auctions loomed. Fortunately, foreign demand for the notes was solid, helping to keep mortgage rates low. The stock markets remained volatile all week with the Dow Jones index swinging by triple digits both up and down.

For the week, interest rates improved by about 1/4 of a discount point.

The Fed meeting on Wednesday will be the most important event this week. Productivity and employment figures are likely to move the market.

Volatility Likely
The likeliness of mortgage interest rate volatility this week is very high considering the abundance of important economic releases.

Each piece of data has the ability to cause fluctuation in the financial markets. Floating ahead of the data exposes a person to a tremendous amount of risk. It is possible for interest rates to improve if the data shows weakness in the economy with few price pressures. However, any surprises will likely be bad for mortgage interest rates.

Governmental actions, in addition to the economic data, continue to weigh upon the financial markets. We are in uncharted territory with the wobbly underpinnings of the economy. Credit remains tight, as lending has become more stringent. However, funds remain available and real estate transactions continue to close.

The important thing to remember is that even the Treasury officials trying to shore the economy do not know exactly what the future holds. With this in mind, be cautious during these times of economic uncertainty. Be ready to lock just in case interest rates start to spike higher.

Market Comment
Mortgage bond prices rose last week driving mortgage rates lower. The Treasury sold 104B in bonds, which were well received by foreign central banks. The indirect bidder participation, an indication of foreign demand, was near all-time highs.

For the week, interest rates fell by over a full discount point.

The employment report Thursday will be the most important release this week. The ADP employment report will also give a glimpse into the employment situation, though the two reports are derived from different data so there could be some divergence. Strength in other economic data will not affect mortgage rates.

GSEs
Government sponsored enterprises (GSEs) are financial services created by Congress. Two of the most important GSEs in the mortgage industry are Fannie Mae and Freddie Mac. These corporations were designed to make credit available to targeted borrowers in an efficient manor. Fannie and Freddie were completely privately owned. However actions by the Treasury and Congress within the last year now blur the ownership. The credit crisis left Fannie and Freddie with huge liquidity concerns. Drastic measures were taken to prevent total failure. The Treasury placed the GSEs in conservator, increased the lines of credit to the GSEs, and infused both companies with $100 billion for an ownership stake of 79.9%. This US Government ownership of these companies leaves many unknowns. While conservatorship implies temporary control, the Treasury exit strategy has yet to be revealed.

The supply and demand characteristics of Treasury bonds and mortgage-backed securities (MBSs) issued by Fannie and Freddie traditionally differ. Treasury securities represent money needed to fund the operations of the US government. MBSs, on the other hand, represent borrowing by homeowners. Because homeowners can sell or refinance their homes, investors in 30-year mortgage-backed securities usually see principal repayment in significantly shorter periods of time. In terms of demand, Treasury securities are regarded as “risk free” investments, and often benefit from a “flight to quality” in times of financial crisis.

Market Comment
Mortgage bond prices fell last week pushing mortgage interest rates considerably higher. Inflation fears dominated trading. Philadelphia Fed President Plosser warned, “The economy may be at greater risk of inflation than conventional wisdom indicates.” A weaker US dollar, escalating oil prices, and concerns about the US debt rating also pressured mortgage bonds lower and mortgage interest rates higher.

Trading remained volatile throughout the week but most of the worsening occurred Thursday and Friday. For the week, interest rates rose by about 1/2 of a discount point.

The gross domestic product data Friday will be the most important release this week. The additional debt supply associated with the Treasury auctions will also play a critical role in any mortgage interest rate fluctuation this week.

US Credit Rating
There are global concerns that the US will lose its AAA credit rating. Standard and Poor’s recently downgraded the UK from stable to negative. Many analysts expect the UK to lose its AAA credit rating. Market participants are concerned the US will follow as deficit spending continues. Bond guru Bill Gross said it would happen in “at least three to four years, if that, but the market will recognize the problems before the rating services – just like it did today.”

Just as in the case of a consumer, a lower credit rating would mean that the government would pay higher rates to borrow money. Logically, an investor requires more return for the additional risk of possibly not being paid on their investment. This could result in interest rates rising on not only Treasuries, but also mortgages. As warned last week, it is a great time to take advantage of rates at the current levels to avoid the uncertainty of where mortgage interest rates will be in the future.

These days, finding financing for loans with low-down payments can be a difficult undertaking.

Fortunately for many buyers in today’s market, a loan program sponsored by the U.S. Government and the Federal Housing Administration (FHA) is still in place allowing for borrowers to bring as little as 3% down to the closing.

The FHA has been in place since 1934, and FHA financing is ideal for first-time homebuyers looking to purchase a condominium or single family home. All eligible developments and homes must be “FHA approved” — and all condo board declarations and bylaws may not include the board’s “right of first refusal” involving the selection of new buyers.

FHA loans require more paperwork, but borrowers are able to roll the upfront mortgage insurance (MI) premium into the loan (for which the borrower is responsible for paying the annual insurance premium). Because FHA loans are backed by the U.S. Government, lenders allow for new clients with less-than-perfect-credit to obtain competive interest rates.

FHA also allows the inclusion of energy improvement costs through the FHA Energy-Efficient Mortgage — even up to $200 for the cost of an energy inspection report.

The Department of Housing and Urban Development (HUD) has a helpful online resource center located HERE.

A recent episode of the PERL Podcast focuses exclusively on FHA financing. To learn more about obtaining an FHA loan, consult with your PERL mortgage advisor.

Rates are not the only consideration when shopping for a mortgage. But they get all the attention.

Consumers often compare mortgage rates as if they were shopping for the best deal on a DVD player or a trip to Mexico. But borrowing money is an entirely different endeavor because a consumer’s individual financial profile directly affects the terms of the loan. Banks aren’t selling 60″ plasmas, they’re investing in real estate. And like all other investments, the transaction involves a certain amount of risk. After all, when lending money, banks are looking to minimize risk.

The best loan candidates garner access to the widest variety of programs at the lowest rates - and two seemingly similar loan candidates can lock-in different rates.

Why is this?

Knowing methods lenders use to evaluate risk factors will give you a better understanding of how rates are determined - and how you can become the ideal mortgage candidate.

Credit
Lenders reward borrowers who can verify strong longstanding credit history with timely payments across several credit lines. While a 680+ score used to be the top range, lenders have raised the threshold to 720, giving even higher rewards to 740+ candidates.

Equity
Lenders offer premium rates to borrowers who are more financially vested in their property. 20% equity (or down payment) enables borrowers to forego a second loan or private mortgage insurance, and shows a solid commitment to retaining the property. 40% equity / down payment (and above) can yield an even higher reward with access to better rates.

Income
Lenders prefer borrowers with a steady paycheck. Self-employed or commission-based borrowers must furnish tax returns from the previous two years in order to demonstrate a steady stream of income. The same applies for borrowers who own their own businesses.

Escrow
Property taxes exist in the first lien position. Essentially, the government is “always at the top of the list” and must be paid first for you to maintain proper title and ownership of your property. Lenders prefer to pay your property taxes directly to the government to ensure timely payment and to protect their investment. Adding tax escrows to your mortgage payment increases your monthly balance, but it’s a stress-free way to save for your bi-annual tax payments.

Residence
Home is where the heart is – and lenders price rates on primary “owner-occupied” residences lower than those on vacation homes or rental properties. Banks minimize their risk because borrowers are more likely to maintain their immediate surroundings rather than a property they visit infrequently or rent to others.

Loan Amount
Fannie Mae and Freddie Mac insure conforming loans. In the State of Illinois, the maximum conforming loan amount is $417,000 (and has been since January 1, 2008).

Loans above $417,000 are not insured by these government agencies. While it would make sense that lenders want you to borrow “more” in order to increase their return on a larger principal, they’d actually prefer to decrease their risk and value an insured investment over a larger, more profitable loan.

Purpose
Often times, a lender will consider the “loan purpose” as a risk factor when determining lending guidelines. For example, if you’re refinancing your loan to obtain cash (i.e. a “cash-out” loan), your interest rate might be slightly higher. If you’re refinancing a first and second loan, a lender will offer slightly higher rate if your home equity line of credit or “second” loan was secured after your home purchase.

Knowing these factors will help you understand why there isn’t just a universal interest rate for every single borrower – and why you might garner a different rate than your neighbor, co-worker or even your spouse.

Consult with mortgage advisor at least once every year to review your mortgage and to learn if you can capture a better rate or adjust your program as your own financial needs change. If you’re thinking about selling or refinancing, check your credit for any erroneous claims and to ensure that your bills are up to date.