In a week in which mortgage markets struggled to find direction, mortgage rates edged higher overall.  The weekly increase was the first since mid-November and it may signal higher rates as we head into 2009.

The week's most talked-about story hit the wires Friday. 

According to the government, the U.S. economy shed 533,000 jobs last month and the national Unemployment Rate rose to 6.7%.  This was the largest number of jobs lost in any one month since the recession of 1974.

In a normal market, job losses of this magnitude would have caused stock markets and mortgage rates to fall.  But stocks and rates didn't fall Friday.  To the contrary, both rose.  This is because -- while the jobs reports was the most talked-about story last week -- it wasn't the most important one.  That story had already been told.

Last Monday -- officially -- we learned that U.S. economy is in recession.

Although most of Wall Street knew it already, the official determination was an acknowledgement that "bad economic data" is not only acceptable, but normal given the current conditions. 

In other words, when the jobs data was released Friday morning, one reason why mortgage rates rose was because markets somewhat shrugged off the data, saying: "Yeah, of course job losses are up -- we're in a recession, after all."

This is an unfortunate development for rate shoppers because bad data usually anchors mortgage rates lower.  Going forward, that won't likely be the case -- at least until the recession is declared to be over.

This week, without much new data being released, markets should trade largely on news of federal intervention and expectations for the U.S. economy.  As retail sales figures drip in from the weekend, be wary of stronger-than-expected numbers as that could pull mortgage rates higher.  The same goes for Friday's official Retail Sales data for November.

Either way, expect volatility throughout the week -- same as we've seen all year long.

Earlier this year and under pressure from the government, mortgage lenders made more than 200,000 loan modifications to delinquent homeowners.

The modifications came in one of three forms, or a combination:

1. Interest rate reduction
2. Loan term extension
3. Principal forgiveness

But despite the modifications, as of October 1, more than half of the homeowners that received assistance were already two months behind on theirmodified monthly payments. 

This late-pay statistic was a focal point on Capitol Hill yesterday as the government admitted delinquencies "were larger than [they] thought they'd be".  Loan modifications are proving inadequate at slowing foreclosures and yesterday's session opened the door to more effective foreclosure prevention measures.

However, of all of the statistics published, there was one of particular interest.   

Based on its loan modifications to-date, the FDIC has found that modified borrowers default far less when new monthly payments are less than 38 percent of monthly household income.  This is important because Freddie Mac guidelines for ordinary mortgage applicants currently cap that rate at 45 percent.

If the 38 percent figure holds up long-term, it may lead mortgage lenders to permenantly reduce maximum debt-to-income allowances.  Already, mortgage insurers have taken this step so it's not out of the question for lenders.  Tighter guidelines mean fewer mortgage approvals.

If you're unsure of whether now is a good time to buy a home, consider that mortgage rates are low, mortgage guidelines are tightening, and foreclosure prevention efforts reduce the supply of available homes.

Prices may not have bottomed, but the market is giving everyone a lot of reasons to consider buying now.

For most Americans, mortgage interest paid on a home loan is tax-deductible in the year in which it was paid. 

With advance planning, therefore, homeowners can increase their 2008 tax deductions and limit their tax liability on April 15.

The key is to make the January 2009 mortgage payment before the New Year begins.

In making the payment in 2008, the payment's mortgage interest is applied against thisyear's tax deductions instead of next year's.  And lest you think you're paying "in advance", remember that mortgage interest is paid in arrears; a payment due January 1 accounts for interest that accumulated in December 2008 anyway. 

Tax planning is a complicated issue and not all homeowners will qualify for mortgage interest tax deductions. Check with your tax professional before making tax planning decisions.

If you don't have an accountant you trust, call or email me anytime; I'm happy to make a recommendation to you.

Business television and newspapers have made deflation a hot topic this week and, since Monday, Google has tracked 13,000 mentions of it.

Deflation is a recurring cycle in which the prices of goods and services fall. Isolated to one industry or sector, falling prices is the natural result of competition. 

For example, when DVD players were first introduced, they were tagged at $800. 

Today, you can buy them for less than $20. 

Across many industries, however, and happening at the same time, falling prices can shut down the economy.  Rather than buy things on the cheap, people stop buying anything at all.  And why would they?  The same items will cost less tomorrow.

And this is the problem with deflation -- it halts consumer spending and consumer spending makes up two-thirds of the U.S. economy.  When it stops, the economic result is dwindling corporate revenues which leads to:

1. Layoffs of the workforce, which leads to...
2. Less consumer spending, which leads to...
3. Dwindling corporate revenues, which leads to...

And the spiral continues. 

Deflation can be much more insidious that its expansionary counterpart -- inflation.  Inflation is when the prices generally rise over time and it's an economic condition through which governments can comfortably navigate.  Deflation, on the other hand, is more rare and, therefore, fewer practical control measures exist.

Whether the U.S. economy will slip into deflation is a matter of debate. 

The Fed has cut the Fed Funds Rate to promote economic growth and those changes can take up to 12 months to work their way through the economy.  Deflationary pressures we're seeing today, in other words, may have already been addressed and corrected by Ben Bernanke's 10 rate cuts in the last 14 months.

Until the market figures it out, though, expect that each mention of deflation will hurt the stock market and help the bond market -- including the mortgage-backed variety.  This should help lower mortgage rates and make homes more affordable.

For the 78th consecutive day, gas prices fell nationwide yesterday.  At $1.81 per gallon, the average price at the pump is less than half what it was at its peak in July.

And although gas prices vary by locale, the cost of a fill-up is worthy of national news.

The main reason why national gas prices matter is because of something called the Wealth Effect -- people's tendency to spend more money when they have a perceived feeling of being worth more.

Low gas prices can amplify the Wealth Effect, leading to higher levels of consumer spending nationwide -- the primary driver of the U.S. economy.

But more important than the Wealth Effect is the reverse Wealth Effect.  That's when consumers have a perceived feeling of being worth lessand their spending reflects it.  This past summer is a terrific example of it. 

Soaring gas prices, Wall Street troubles, and negative campaigning constantly reminded Americans of what was wrong with the economy.  It follows, therefore, that retail sales figures plunged in September and October.  Once the election passed, however, and gas prices fell, a gentle optimism returned.

Not surprisingly, consumer confidence rose in November.

All of this matters to real estate because as Americans regain their confidence and feel more "wealthy", they will be more likely to make "move up" purchase, buy new home appliances, and take other actions that propel the economy forward. 

Oh, and mortgage rates trolling at 3-year lows certainly helps, too.

More than a handful would-be home buyers stayed on the sidelines this year, waiting for Election Day to pass. 

The prevailing thought was that once the new President-Elect was identified, credit markets will systemically unfreeze and housing markets will return to normal.

If history is a guide, this is an unlikely scenario.

Election Day doesn't figure to alter markets any more in 2008 than it did after the four previous presidential elections. 

If anything, post-Election Day market reaction has been muted:

• 1992 : Dow closes down 0.9 percent the day after Election Day
• 1996 : Dow closes up 1.6 percent the day after Election Day
• 2000 : Dow closes down 0.4 percent the day after Election Day
• 2004 : Dow closes up 1.0 percent the day after Election Day

But just because the stock market has a history of idling on the day after the election doesn't mean that mortgage rates will rest easy this week.  The likely outcome is the opposite, actually. 

If investors believe the President-elect will successfully stimulate the economy, stock markets would likely rally, causing mortgage bonds to sell off and mortgage rates to rise.

Or, if investors think the winning candidate will fail to revive the economy, money would flock to government bonds as a place of safety.  This dollar flow would occur at the expense of the mortgage market, causing rates to rise in this scenario, too.

Of course, it's as difficult to predict post-Election market conditions as it is to predict the election itself but one thing is for certain -- rates may rise and fall before the week is out, but credit guidelines will remain extra-tight.  Getting approved for a mortgage won't be any easier -- no matter which party wins the Presidential Election.

As household budgets get pinched and credit markets tighten, a growing number of Americans are making "hardship withdrawals" from their 401(k) plans. 

One major fund group cites a 15 percent increase in activity from this time last year for various reasons including staving off foreclosure and medical emergency.

However, 401(k) loans should only be made with careful consideration.

On the positive side, 401(k) loans don't require a credit check.  This is helpful feature for people deep in debt, and who may have missed a payment or two to their creditors.  With no credit score requirement, a poor payment history won't disqualify a plan participant.

In addition, most 401(k) loans can be arranged with just a phone call and a small stack of paperwork.  There's no "qualification process" like applying for a credit card or a mortgage.  Money can be available, therefore, in as little as a day.

But there are negatives to 401(k) loans and the biggest one relates to taxation. 

If you take a 401(k) loan and can't repay according to its terms, the IRS taxes the loan as ordinary income and slaps on a 10 percent penalty if you're under 59 1/2.  That can be very costly for a lot of people. 

But, even if you do repay the loan on time, it's still gets expensive.  This is because 401(k) loan repayments are subject to double-taxation. 

The first taxation occurs when the loan is repaid because the payback is made with post-tax paycheck dollars.  A person in the 25% tax bracket, for example, would need a $1,333 paycheck to repay a $1,000 loan -- the missing $333 goes to taxes.

And the second taxation occurs at retirement when the funds are finally withdrawn.  The IRS taxes that money as ordinary income.

Now, this isn't to say that taking a loan against your 401(k) is bad, it just may not be the best possible route for a person in trouble.  Especially because of the costs.  If you're planning to withdraw from your 401(k) for hardship, be sure to talk with a qualified financial professional first. 

If you'd like a referral to a trusted professional, call or email me anytime.

When the government nationalized mortgage lending in September, housing analysts predicted lower mortgage rates. For a brief two-week stint, they were right -- post-takeover, the 30-year, fixed rate mortgage fell below 6.000 percent nationally for the first time in 7 months. Since then, however, mortgage markets have reversed. Rates are now at pre-takeover levels. Now, this isn't to say that the nationalization was a failure -- far from it. The government's takeover of Fannie Mae and Freddie Mac accomplished two very important goals: It restored failing confidence in the U.S. mortgage markets It opened legislative channels for faster, more relevant housing reform And, long-term, most people agree, these are essential elements for a U.S. economic recovery. Over the short-term, however, the plan has not delivered the sustained low mortgage rate environment that was envisioned.

The biggest reason why rates are higher is because of Wall Street's manic trading behavior. When the economic outlook shows hints of sun, investors sprint to risky stock markets; when it shows signs of gloom, they flee in favor of ultra-safe treasuries. The buy-sell patterns have led to some of the wildest trading days on record and it's not what the Treasury expected. See, when the takeover was first announced, mortgage-backed bonds were elevated to "government status". This created new demand for mortgage bonds which helped to push down rates. But, in the weeks that followed, the world's credit markets unraveled and traders sought the dual comfort of safety and liquidity in their portfolios. That's a combination that only U.S. treasuries can provide. Versus "true" government bonds, mortgage-backed securities are just quasi. We can't know where mortgage rates will move for certain but, for now at least, the 4 percent range some had predicted is out of reach. Until credit order is restored globally, expect volatility to continue and rates to remain up.

In an effort to limit risky borrower behavior, Fannie Mae announced a new round of mortgage guideline changes.

Unlike its previous 20-plus updates that raised income requirements and minimum credit scores (among other changes), Fannie's latest guideline tweaks focus on the value of its underlying mortgage assets -- home equity.

Effective December 13, 2008, Fannie Mae will require larger equity positions on some of its insured purchases and refinances. 

A few of the updates include:

• Limiting primary residence, cash out refinances to 85% loan-to-value
• Requiring 10% downpayments on second/vacation homes
• Requiring a 25% equity position on all investment property refinances

And, while the above changes represent 5 percent equity increases over the current mortgage guidelines, some of the other updates call for increases of as much as 20 percent.

As we head into the election and Congress mulls over another economic stimulus package, it's unclear if mortgage rates will move higher or lower as we close out the year.  We do know, however, that getting approved for a conforming mortgage will, in general, be harder come December 13, 2008.

If you're finding yourself on the fence about your next move -- whether it's to buy or to refinance -- consider taking the necessary steps before the guidelines change. 

Low, low mortgage rates don't mean much if you don't have enough home equity to get a home loan approval.

The Federal Open Market Committee voted to cut the Fed Funds Rate by one-half percent today.  The benchmark rate now stands at 1.000 percent.

In its press release, the Fed wasted no time addressing the key issue at-hand, stating that economic activity has "slowed markedly", pointing to three main causes:

1. Consumer spending is falling
2. Business equipment spending is falling
3. Slowing foreign economies are hurting U.S. businesses

Furthermore, the voting FOMC members are wary of an "intensification" of the current financial market turmoil.

The announcement's 4th paragraph is noteworthy, too.  It lists the plethora of growth-stimulating steps that the Fed has taken so far this year and concludes that credit conditions should improve in time.  It does note, however, that if markets don't improve in good time, the committee will "act as needed".

In the wake of the announcement, stock markets rallied.  Investors liked what the Fed had to say and it drew funds into the stock market from all corners of Wall Street.  Unfortunately for mortgage rate shoppers, one of those corners happened to be the mortgage bond market.

The exodus from bonds caused mortgage rates to rise.

It's a common misconception that the Federal Reserve controls mortgage rates and today's market action should help dispel that myth.  As the Fed Funds Rate falls back near its 50-year low, mortgage rates are bumping up against a 3-year high.