What Moves Interest Rates

Consumers are often misled when it comes to the subject of the Federal Reserve and how it affects mortgage interest rates. Often the media is the culprit causing the confusion. In the last few years, the Fed has taken action that caused mortgage interest rates to move in a direction other than what consumers expected, because the media provided weak reporting on the subject.The Federal Reserve affects short-term interest rate maturities, the Fed Funds rate, and the Overnight Lending rate. These factors have a direct impact on the Prime rate. If you took only this into consideration, you may mistakenly conclude that changes made by the Fed will cause a similar movement in mortgage interest rates. However, mortgage interest rates are dictated by the trading of mortgage-backed securities, which trade on a daily basis. The real dynamic at the heart of interest rate movement is the relationship between stocks and bonds.

Stocks and bonds compete for the same investment dollar on a daily basis. There is literally only so much money to be invested. When the Federal Reserve feels that interest rates need to be decreased in an effort to stimulate the economy, this reduction in rates can often cause a stock market rally. When the market becomes bullish, the money to invest in stocks comes from the selling of mortgage-backed securities.

Unfortunately, selling mortgage-backed securities to fuel stock market rallies causes interest rates to go up, not down.

Historically, there have been many times when the Federal Reserve has increased interest rates. Stocks then sell off in fear that the increase will affect corporate profit margins, and the liquidated stock assets need a place to park until the next rally comes along. The safe haven is found in mortgage-backed securities which cause mortgage rates to drop.

The daily ebb and flow of money is what matters most when it comes to the movement of mortgage interest rates. I make it a point to continuously monitor interest rates for my clients, and advise them of opportunities to manage their mortgage debt at a better rate.

More Thursday Trivia

Well if the rest of the country isn’t in recession at this point; it sure feels like Philadelphia is!

The Philly Fed index plummets to -24, the lowest reading since February 2001. The economy moved into recession two months later. This is the fifth month of decline in the Philly Index after the most recent peak of 9.2 in September, and the third month of negative reports after turning into the red in December with a level of -1.6. The six-month average has fallen to -3.6

The breakdown: The weakness was widespread across almost all sectors. New orders dropped to -10.9, on the heels of -15.2 in January, while shipments fell to -12.2 from -2.3 last month. Unfilled orders dropped to -10.9, the 6th consecutive, negative monthly report. Delivery time and inventories also fell further into negative territory; prices paid came down from 49.8 to 46.6 and prices received fell from 32.0 to 24.3.

Bottom line: The Philly Fed is a regional and volatile index but offers the market an indication of where the nation may be headed. Coupled with high unemployment claims also reported this morning, it seems the Fed is on the right track to focus on stimulating growth at this point, leaving inflation concerns on the sidelines for the unforeseeable future (despite stagflation headlines in every major metropolitan daily this morning).

How the Affluent Manage Home Equity

If you had enough money to pay off your mortgage right now, would you? Many people would. In fact, the ‘American Dream’ is to own your own home, and to own it outright, with no mortgage. If the American Dream is so wonderful, how can we explain the fact that thousands of financially successful people, who have more than enough money to pay off their mortgage, refuse to do so.

The answer? Most of what we believe about mortgages and home equity, which we learned from our parents and grandparents, is wrong. They taught us to make a big down payment, get a fixed rate mortgage, and make extra principle payments in order to pay off your loan as early as you can. Mortgages, they said, are a necessary evil at best.  

The problem with this rationale is it has become outdated. The rules of money have changed. Unlike our grandparents, we will no longer have the same job for 30 years. In many cases people will switch careers five or six times. Also, unlike our grandparents, we will no longer live in the same home for 30 years. Statistics show that the average homeowner lives in their home for only seven years. And unlike our grandparents, we will no longer keep the same mortgage for 30 years. According to the Federal National Mortgage Association, or Fannie Mae, the average American mortgage lasts 4.2 years.  

Given these statistics, more middle class homeowners are choosing to use their mortgage as a tool just like the wealthy — those with the ability to pay off their mortgage but refuse to do so. Will you be one of those who create a new, liquid, financially secure dream?

How to Determine Whether Your Loan Officer is Reputable

 In slower markets, some loan officers may feel pressured to close deals that aren’t in the homeowner’s best interest.  In order to avoid getting into difficult and financially compromised positions with their mortgages, borrowers are well advised to be acutely aware of the signs of a responsible loan officer when selecting a mortgage professional.     

First, look for a Mortgage Planner whose values are focused on helping individuals to achieve their financial goals in both the fastest and the safest way possible.  A reputable Mortgage Planner will show you the numbers associated with the proposed loan and provide you with concrete information that backs up his or her claims. Review all of the numbers. If they don’t add up, ask for clarification.  If your loan officer can’t or won’t answer your questions, move on–without the loan. 

 

Secondly, a responsible Mortgage Planner will present you with financial information that goes beyond the point of the transaction, and will illustrate the total cost of the loan over time.  If your loan officer is focusing only on rates and fees, you may be working with someone who’s looking out for his or her own best interests, not yours. 

 

Responsible Mortgage Planners will also tailor their strategies to fit your unique situation. In other words, they always take your personal financial goals into account.  No one should try to place you into a loan without knowing the intricacies of your personal financial situation.

 

Finally, if your loan officer is advising you on issues other than mortgages, you could be working with someone who is compromising your best interests. Issues like investment rates of return and real estate appreciation aren’t the areas of expertise for the vast majority of mortgage professionals and should be left to the professionals who have training and direct experience in those areas.

 

When seeking a loan officer, look for someone who specializes in mortgage planning, which is the process of evaluating a borrower’s unique financial situation and advising the borrower on a loan that best suits his or her individual needs and goals. If your loan officer is trying to put you into a loan without evaluating how that loan will effect your entire financial situation–including debt management, tax benefits, investment goals and net worth–it’s quite possible that you’re only getting half of the picture.

 

The bottom line is that your mortgage representative should always be looking out for your best interests, regardless of market conditions.

 

President’s Day Post

It has been quite a while since I have posted on this site and there has been a lot of activity on the financial markets.  The ml-implode site continues to tally the “dead” and the number now stands at 226 mortgage lending institutions or divisions that have called it quits!  The company I represent, First Horizon Home Loans, has been the subject of a number of rumors lately, most of them false.  We are still standing and originating and closing loans for current and perspective home owners.

Our company went conservative well ahead of the curve back in late fall of 2006.  While it proved to be frustrating at the time for the production team, it retrospect it was a smart move that shielded us from the pain felt by many of our competitors.  We have been able to hang in where others have not.

Construction lending is a great example.  We still are running our retail custom home construction (OTC) program whereas competitors such as Indymac, Washington Mutual, and Bank of America have recently thrown in the towel.  The future is still dicey for our industry but the prospect of lower rates and the economic stimulus package increasing the FHA and conforming limits in high cost markets should be a big boost for our industry.

I hope that this President’s Day finds you not working and taking some deserved R & R!