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.

John Topa, First Sunrise Mortgage, Northeast PA Mortgage Advisor. www.FirstSunriseMortgage.com

We Konw 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.

(Image courtesy: The Wall Street Journal Online)

John Topa, First Sunrise Mortgage, Northeast PA Mortgage Advisor. www.FirstSunriseMortgage.com

Simple Real Estate Definitions: Loan To Value

Loan-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:

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.

John Topa, First Sunrise Mortgage, Northeast PA Mortgage Advisor. www.FirstSunriseMortgage.com

Shopping for the best rate? Make sure you get up to the minute pricing.

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.

Looking Ahead 5/19/08

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.

Smart Money Magazine Says Renters Have Lame Excuses

It'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.

John Topa, First Sunrise Mortgage, Northeast PA Mortgage Advisor. www.FirstSunriseMortgage.com

Recession Report

Retail Sales measures total receipts at stores that sell tangible "things" and -- aside from weak demand for automobiles and automobile parts -- Retail Sales displayed surprising strength in April. 

So much strength, in fact, that many experts are changing their predictions about the U.S. economy's fate.

Several months ago, most pundits declared that a economic recession was all but inevitable.  Today, a growing number are changing their views.

Not only are stock and credit markets improving, but data such as April's Retail Sales figures suggest that their fears were overblown.

The takeaway from a story like this is that "experts" do a much better job of interpreting the past than predicting the future.  A person can make an educated guess, but it's impossible to know what the future holds for the economy, or for housing, or for mortgage rates.

Even when the outcome is "inevitable".

market review

With little economic news to influence trading and despite a late-Friday afternoon spike, mortgage rates edged lower last week.

Two weeks ago, when it lowered the Fed Funds Rate by a quarter-percent, the Federal Reserve noted two things:

1. The economy was stabilizing
2. High energy costs threatened inflation

In the days that followed, though, the U.S. dollar strengthened and crude oil prices fell. 

This positive reinforcement of the Fed's outlook spurred the stock market at the expense of the bond market. 

Mortgage rates rose during that period.

But, starting last Monday, the dollar started to soften and oil touched another all-time high.  At $126 per barrel, crude oil is now close to double its May 12, 2007 price of $69.

High oil prices are inflationary and speak directly to the Federal Reserve's concerns: Too much inflation can derail a fragile, recovering economy.

The stock market gave up its prior gains last week and that is why we saw mortgage rates improve -- it was the unwinding of the economic optimism.

This week, optimism (or pessimism) about the economy will be swayed by a number of factors including Tuesday's Retail Sales report and Friday's Consumer Sentiment survey.

The most important data point to watch, though, will be Wednesday's Consumer Price Index report.  We know we should watch it Ben Bernanke told us to watch it.  Keeping inflation in check, remember, is one of the Fed's major focal points for the economy.

In addition, this week will feature 14 public speaking appearances by Federal Reserve members.  Expect each speaker to speak plainly about the economy, its future and the Fed's current rate-cutting cycle.

When Fed speakers stump, markets listen closely so expect mortgage rates to be jumpy all week long.

(Image courtesy: The New

Northeast PA Values Are RISING, Remember Real Estate Is LOCAL

When real estate news is reported on television or in the papers, it's usually told as a national story.  Unfortunately, stories like these aren't helpful for everyday Americans because real estate is not a national market. 

Real estate is local.

The graph above was used by Fed Chairman Ben Bernanke in a speech to Columbia Business School earlier this week.  Using data from conforming mortgage fundings, it shows the change in home prices from year-to-year on a county level.

Any county not in red increased in value. 

In other words, contrary to what reporters tell us, real estate is retaining its value just fine nationwide.  Aside from a few counties and states, most areas appreciated.

Graphics like this put important real estate issues in perspective.  Home values may falling precipitously in some areas, but those neighborhoods represent just a fraction of the country overall.

In most regions, home values are up.

John Topa, First Sunrise Mortgage, Northeast PA Mortgage Advisor. www.FirstSunriseMortgage.com

You Are Not Immune, No Matter What Your Credit Score Is

Four times annually, the Federal Reserve surveys 84 different banks about general banking conditions.

One of the survey questions asks about current mortgage lending standards and whether they are loosening or tightening.

The chart at right is from the April 2008 survey and it illustrates what we already know: It's getting tougher and tougher to get approved for a home loan.

Some of the areas in which mortgage guidelines are tightening are well-known:

• More thorough income documentation
• Higher credit score requirements
• More "money in the bank" post-closing

Some areas are less well-known:

• More scrutiny of prior delinquencies
• Strict review of appraised values

Overall, getting a mortgage approval from a bank is more difficult than in months past and the tightening trend is expected to continue throughout the rest of the credit cycle.

No "class" of buyers is immune, either -- not even the "prime" ones.

Home prices may fall going forward but stricter mortgage guidelines means that fewer home buyers will be able to take advantage.  If you're unsure about your credit profile, check with your loan officer to see how additional restrictions could impact your ability to purchase (and finance!) a home.

John Topa, First Sunrise Mortgage, Northeast PA Mortgage Advisor. www.FirstSunriseMortgage.com