The connection between the world's political events and mortgage rates here at home is not always clear, but Russia's invasion of Georgia provides a strong working lesson.

Georgia is a former Soviet republic on the eastern shores of the Black Sea.  Oil pipelines within its territory supply about 1 percent of the world's daily oil needs, mostly to ports in Western Europe.

Last week, Russia bombed Georgia's oil and natural gas transport systems.  None of the bombs struck the pipelines, but several exploded close to it.  Pipeline part-owner BP shut down two of its oil lines as a precaution, but Russia is reported to have struck one of BP's other pipelines this morning.

The cost of oil is generally based on the normal economics of supply and demand so when oil supplies are threatened, damaged, or shutdown -- because of war, weather or otherwise -- oil prices respond by moving higher.

Higher oil prices, of course, are considered inflationary and that causes mortgage rates to rise here in the United States.  High oil prices, for example, are one reason why mortgage rates spiked throughout June and July of this year.  And as oil prices have settled, rates have calmed a bit, too.

It's easy to ignore politics and news when it's not happening in your own country, let alone your own hometown.  But that doesn't make it any less important.

When you're buying a home, or thinking of refinancing one, you'll likely need a mortgage and the rate you pay on that mortgage will be influenced by every geopolitical event in the world.

Especially when the event involves oil.

Source
Russia-Georgia conflict raises worries over oil and gas pipelines
Elizabeth Douglass
Los Angeles Times, August 13, 2008

It's not your imagination -- getting approved for a home loan is becoming increasingly more difficult.

Taken from the Federal Reserve's quarterly survey of 84 banks, it illustrates the changing dynamic of mortgage guidelines.

Most notable is the steep curve for "prime" mortgages, a type of home loan given to applicants exhibiting:

• A well-documented credit history
• High credit scores
• Low debt-to-incomes

Americans have come to expect sub-prime loans to be tougher, but it's the sharp tightening of prime guidelines shows us that nobody is exempt from the newfound underwriting prudence that banks are exhibiting right now.

If you plan to buy or remortgage a home over the next year, consider a popular expression in financial circles -- the trend is your friend. 

Know that mortgage guidelines will get tougher before they get easier and applicants on the cusp of being approved today will almost certainly be denied a mortgage three months down the road.

Owning real estate and making sound financial decisions requires a tremendous amount of advance planning and, sometimes, looking at the past is the best way to prepare for what's coming ahead. 

According to the Federal Reserve's survey, what's coming ahead more mortgage application scrutiny.

It's a terrific time to buy a home, but not because homes happen to affordable.

It's a terrific time to buy because the variety of mortgage products available to home buyers looks poised to shrink.

Monday, Alt-A mortgage lender IndyMac Bank stopped accepting mortgage applications and it's likely that other Alt-A lenders will likely follow suit.   

Alt-A loans are ones in which borrowers can't (or won't) verify one of two major underwriting criteria:

• Evidence of income
• Evidence of assets

Since the Credit Crunch began last July, Alt-A mortgages have been a steady source of funds for "in-between" borrowers -- those that are not quite prime, and not quite sub-prime.  IndyMac was among the largest lenders of its type and had outlasted many of its peers. 

Its position as a market leader and subsequent exit from lending means that the remaining Alt-A lenders will likely make one of two choices in the coming weeks:

1. Raise rates and fees because of greater Alt-A mortgage risk, or
2. Follow IndyMac's lead and exit mortgage lending altogether

Both outcomes would be harsh for home buyers of all types because when any large bank takes mortgage-related losses like IndyMac just did, it tends to create major risk aversion in the market.

Risk aversion impacts everyone -- even the "good" borrowers. 

Banks have been nervous about lending for several months and so they'd rather pass on an "average" mortgage application rather than risk getting stuck with a potentially "bad" one.  IndyMac's exit may cause fewer mortgages to get approved.

In other words, buyers eligible for financing today may be ineligible tomorrow. 

Therefore, if you're a home buyer and you know your credit profile is less-than-ideal, consider writing a purchase contract sooner rather than later.  Your mortgage options may be thinning, and the ones you have may be getting more expensive.

More commonly called "points", discount points are up-front fees charged by mortgage lenders in exchange for lower mortgage rates. 

The cost of one point is one percent on the loan size and discount points appear on Line 802 of the HUD-1 Settlement Statement.

As a general guideline, each point paid lowers a mortgage lender's offered interest rate by 0.250%. 

For example, a $200,000 home loan offered at 6.000% can be had for 5.750% if the borrower agrees to make an up-front payment of one point ($2,000).

In addition to lowering your interest rate, discount points are usually tax-deductible, too.  Therefore, be sure to provide any settlement statements from the previous calendar year to your accountant during Tax Season.

Lastly, as an added note: discount points should not be confused with origination points, a one-time charge for the lender's service appearing on Line 801 of the HUD-1 Settlement Statement.  Origination points are not tax-deductible.

Mortgage rates were up last week on weak housing data and a growing nervousness about mortgage bond quality. 

Rates would have been up more if not for a tame inflation reading Friday. 

The Personal Consumption Expenditures report fell Friday to 2.0% year-over-year, putting it back within the Federal Reserve's comfort zone of 1-2 percent. 

PCE is the Fed's preferred inflation gauge and with inflation in check, Ben Bernanke & Co. can focus on other elements of the economy such as housing and employment.

Mortgage rates figure to be volatile (again) this week.

The first major event to strike markets is today's release of a 200-page, government-written plan outlining sweeping reforms for the financial industry. 

If markets interpret the government's plan to be bad for bond markets, expect mortgage rates to rise as demand for bonds falls.  Conversely, if the reforms are expected to benefit bonds, mortgage rates should fall.

Then, Wednesday, Fed Chairman Ben Bernanke testifies to Congress about the U.S. economy. 

Expect the Fed Chief to stay on message, but mortgage rates will respond to his word choice and tone -- especially in remarks about large banks and their ability to survive the current market.  Traders are already on edge and will take Bernanke's testimony very seriously.

And lastly, also moving markets this week is the March jobs report, due Friday.

Remember that job growth was negative in January and February so with a third negative month in March, the calls of recession will grow louder; the expectation is the economy shed 40,000 jobs last month.  Whether a negative number will be good or bad for mortgage rates, though, will depend on the bond traders' mood come Friday morning.

Either way, though, if the actual jobs number deviates from the expected jobs number of 40,000, mortgage rates will swing wildly starting at market open Friday and continuing into the weekend.

(Image courtesy: The New York Times)

Each quarter, the Census Bureau releases the Homeowner Vacancy Rate, a housing statistic the measures the percentage of homes for sale that are vacant. 

A home listed for sale may be vacant for several reasons including:

1. The home has been foreclosed and the owner has moved out
2. The home seller moved into a new home and not sold his former home
3. The home was a rental property and is being sold without a tenant

In Q4 2007, the Homeowner Vacancy Rate matched its all-time high of 2.8 percent.

The statistic can be misleading, however, because Homeowner Vacancy Rates appear to be seasonal and the fourth quarter is more prone to high figures. 

As evidence: In 6 of the last 7 years, Q4 posted higher vacancy rates than for the preceding three quarters.

Vacancy rates may increase in the fall because homesellers without a "need" to sell tend to take their properties off the market during the Holiday Season.  That leaves an over-weighting of empty homes for sale -- precisely what the Homeowner Vacancy Rate measures.

For an interactive version of the chart above, visit the Wall Street Journal Online.

Source
Housing Markets: A Vacant Look
The Wall Street Journal Online
March 21, 2008
http://online.wsj.com/public/resources/documents/retro-VACANCY08.html

Conforming mortgage rates edged slightly lower for the second week in a row. 

Mortgage rates fell for two main reasons:

1. The Federal Reserve offered fiscal support for troubled mortgage-backed securities
2. A government group gave Fannie Mae and Freddie Mac permission to lend more of money to American homeowners

These two actions combined to make mortgage-backed securities safer for mortgage bond investors and when mortgage bonds are safer, their required rate of return (i.e. interest rate) comes down. 

This is the financial concept of Risk vs. Reward in action.

Expect mortgage rates to be in flux and highly volatile again this week, however.

Aside from housing and consumer confidence data, markets will respond to Friday's Personal Consumption Expenditures data.  PCE is a "Cost of Living" index that the Federal Reserve watches very closely. 

PCE is different from other Cost of Living indices because it accounts for "substitutes".  For example, if beef is getting too expensive, PCE will substitute chicken -- much like a regular person would. 

In this way, PCE better reflects the true cost of living for the average American.

PCE is expected to show 2 percent growth year-over-year.  If the actual figure is higher, expect mortgage rates to rise on inflation concerns.

Since December 2007, mortgage lending guidelines have changed very quickly and often without notice. 

Some of the more well-known changes include:

• Broad restrictions on stated income home loans
• Broad restrictions on 100 percent financing
• "Risk-based fees" for credit scores under 740

Some of the lesser-known restrictions relate to property type and occupancy status as well as debt-to-income levels and mortgage payment histories.

Because of the number of changes and their collective scope, home buyers should be prudent and get re-pre-approved for their home loan.

Even if you last spoke with your loan officer four weeks ago, it's important to know how market changes could ultimately impact your home loan approval.

The market really is that different.  Talk to your loan officer about a re-pre-approval today.

The Federal Open Market Committee meets today and will issue a press release in addition to cutting the Fed Funds Rate at 2:15 P.M. ET.

The verbiage of the press release will be as widely watched as the rate cut itself because markets are curious about how far the Federal Reserve will go to lessen the impact of an economic recession.

With every Fed Funds Rate cut, recession becomes less likely, but the other side of the equation is that the probability of long-term inflation grows. 

Like recession, inflation can be bad for the economy, too.

The Fed Funds Rate now stands at 3.000% this morning and the FOMC is expected to lower it by 0.750% or more this afternoon.

Mortgage rates are rising today because cuts to the Fed Funds Rate weaken the U.S. dollar which, in turn, makes mortgage re-payments less valuable to investors.

Mortgage rates fell last week on growing evidence of a recession, but far fewer Americans were eligible to take advantage. 

Mortgage lenders continue to reduce product menus and that is leaving homeowners with fewer mortgage financing options than before.

As an added hurdle, Fannie Mae and Freddie Mac recently added "risk-based" fees on all conforming home loans, subjecting mortgage applicants to higher mortgage rates based upon:

1. Property Type
2. Credit Score
3. Loan-to-Value

So, even though mortgage rates moved lower last week, for many homeowners, the cost of homeownership did not.

This week, the biggest scheduled news is the Federal Open Market Committee's Tuesday meeting. 

It's widely expected that the Federal Reserve will lower the Fed Funds Rate by 0.75%, lowering Prime Rate to 2.250%. 

This is good news for Americans carrying revolving consumer debt because those credit types are often tied to Prime Rate.  Two popular types of revolving consumer debt are:

1. Home equity lines of credit
2. Credit cards

Meanwhile, a cut in the Fed Funds Rate should push mortgage rates up because Fed Funds Rate cuts can lead to inflation. 

Since September 2007 -- when the Fed started to cut its benchmark rate --  the Fed Funds Rate is down 2.250% but mortgage rates are slightly higher.  This is a normal occurrence and should happen again this week.

Markets will be closed for Good Friday this week.