RJ Baxter Mortgage Market Update 03-21-2011

Last Week in Review: Our thoughts continue to go out to people suffering in both Japan and the Middle East. Read on to learn how world events impacted the markets.

Forecast for the Week: The volatility is sure to continue, as will the barrage of news, including several reports that will tell us how our economic recovery is faring.

View: Have a home equity line of credit? Know if it is impacting your credit score unfairly? Check out important details below!

Last Week in Review

"It's a small world after all..." That notion was especially evident last week, with both the news in Japan and the Middle East impacting our markets. Here's what happened, and what the impact was on home loan rates.

The first thing to understand is the concept of "safe haven trading." At times of global unrest and uncertainty, like with last week's nuclear crisis in Japan and the ongoing fighting in Libya, Traders will park their money in "safe" investments like our Bonds. And since Bonds such as Mortgage Backed Securities (MBS) are tied to home loan rates, when Bond pricing improves, our home loan rates can improve... which is what we saw last week.

But it's also important to understand how incredibly volatile this situation is. A "safe haven trade" is just that... a trade, which is short-term. Should events around the world become more stable, this safe haven trade can unwind very quickly... with Bond prices and home loan rates worsening as a result. This is similar to how the market reacted at the end of last week, when Libya declared a cease fire to fighting after the United Nations declared a no-fly zone.

Another thing to note is that Bonds and home loan rates are facing some additional headwinds that could hamper their improvement. First, if Japan sells some of their Treasury holdings to help finance the recovery and reconstruction, like they did in 1995 after the Kobe earthquake, this could spur a sell-off in Bonds overall, which would cause Bonds and home loan rates to worsen.

Second, we cannot overlook the impact of inflation... which is the arch enemy of Bonds and home loan rates... both here and overseas. Not only is China struggling with inflation even though they have raised rates and tightened lending requirements multiple times over the past few months, but last week both our Producer Price Index (which measures inflation at the wholesale level) and our Consumer Price Index were hotter than expected.

The bottom line: If inflation is allowed to grow, it can be very difficult to rein in and control... and this will hinder improvement in home loan rates. And, if the situations in Japan and the Middle East stabilize or improve, we could see further unwinding of the "safe-haven" buying of US Bonds... which will also hinder improvement in home loan rates.

If you have been thinking about purchasing or refinancing a home, call or email me to learn more about how you can benefit. Or forward this newsletter on to someone you know who may benefit from today's historically low rates.

Forecast for the Week

Continuing developments in world events are sure to impact the markets this week, but there are some important US economic reports to look for, too, including:

• Monday's Existing Home Sales Report and Wednesday's New Home Sales Report for February - will they show improvement in the housing market?
• We'll get a read on the economic recovery with the Durable Goods Report on Thursday, which gives us an update on consumer and business buying behavior on big-ticket items that are designed to last for an extended period of time (i.e. televisions, appliances, vehicles, etc). It's an interesting report, as people tend to hold back on these types of purchases when they are feeling a need to be extra conservative with their finances or feel insecure about their employment.
• We'll also get a read on the labor market with Thursday's weekly Initial and Continuing Jobless Claims Report. Last week's Initial Jobless Claims were reported at 385,000, right smack at expectations, and show that the labor market is continuing to improve.
• Friday will bring two additional reads on our economic recovery: The Consumer Sentiment Index and the Gross Domestic Product Report, which is the broadest measure of economic activity.

Remember: Weak economic news normally causes money to flow out of Stocks and into Bonds, helping Bonds and home loan rates improve, while strong economic news normally has the opposite result.

As you can see in the chart below, Bonds and home loan rates improved due to the turmoil around the world, but they were unable to improve above a key technical level. I'll be watching to see which way the markets move this week.

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The Mortgage Market Guide View...

Home Equity Lines of Credit and Your Credit Score

What You Need to Know and Do

Credit reports have always been important, but they've grown even more important in recent years. Now more than ever, you need to make sure you understand what's on your credit report - and you need to know what steps you can take to improve your score.

For example, did you know that a Home Equity Line of Credit (HELOC) can impact your credit score quite dramatically... and sometimes unfairly... depending on how it is reported?

Here's What You Need to Know... and Do!

First, you need to know that HELOC's are commonly reported by the three credit bureaus as revolving accounts. In reality however, they do not fall under the typical revolving terms, even though they are set up in the same way as a revolving account. That's because HELOC's are secured by an asset.

Here's the Good News...

The Fair Credit Reporting act requires reporting agencies to report true and accurate information. So when a HELOC is reported as a revolving account, you can actually send a letter to the three credit bureaus asking them to change the type of account from "Revolving" to "Line of Credit" or "Other."

This way, the account will not be rated by the scoring system using the "Balance to Limit" ratio scenario - which can drop a credit score by as much as 75 points if the HELOC is maxed out to the limit of the available credit line.

A Final Word of Advice

If you do decide to send a letter, you should send it as a Certified Letter, along with a copy of the HELOC agreement. You may have to send the letters more than once, but persistence is the key to accomplishing a positive result with the bureaus.

This article was adapted from information provided by national credit expert Linda Ferrari, author of "THE BIG SCORE: Getting It and Keeping It, Buying Power for Life." Learn more and check out her credit resources at www.lindaferrari.com

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Economic Calendar for the Week of March 21-25, 2011

Remember, as a general rule, weaker than expected economic data is good for rates, while positive data causes rates to rise.

Economic Calendar for the Week of March 21 - March 25

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