The Federal Reserve has cut interest rates six straight times since September 2007. Most analysts are predicting that the Fed will cut rates even further when it meets at the end of this month. And yet, despite a full 3% in interest rate cuts during this time, mortgage rates are significantly higher now than they were just three months ago. How is that possible? Don’t rate cuts equal lower mortgage rates? Read on as the team at YOU Magazine goes behind the headlines to show you how these Fed cuts do and don’t affect your mortgage.

Here’s the straight story: Mortgage interest rates are dictated by one thing and one thing only — the performance of mortgage-backed securities. Despite what you may have heard in the media, interest rate cuts from the Federal Reserve have no direct effect on long-term mortgage rates.

The True Role of the Federal Reserve
The Federal Reserve, our nation’s central banking system, was put in place to help avoid major financial collapses like the Depression. The Fed has two specific duties: to keep inflation in check and regulate the nation’s financial institutions. And while it has some regulatory power over how the mortgage industry operates, in its 95-year history, the Federal Reserve has never once set or reset mortgage interest rates. It simply has no authority to do so.

But, to control inflation, the Fed has several tools at its disposal, including the ability to adjust the Discount Rate and the Fed Funds Rate, which are very different from mortgage interest rates. By increasing or decreasing these interest rates, the Fed can manage inflation and economic growth according to its financial policy. While movement in these interest rates does affect the Prime Interest Rate – which directly affect things like credit cards, home equity lines of credit (HELOCs), and adjustable-rate mortgages – long-term mortgage rates do not always follow suit.

In the following chart, mortgage rates are shown to have actually increased from March 2007 to March 2008, even though the Federal Reserve cut interests rates six consecutive times, slashing three full percentage points in the process.

What Really Moves Mortgage Rates?
Mortgage rates are set daily by individual lending institutions and are based solely on the trading activity of mortgage-backed securities (MBS), a type of bond that investors trade daily.

Without getting too technical, MBS are bonds that represent mortgages currently in place. For instance, let’s say you have a 30-year fixed rate mortgage of $200,000 at an interest rate of 6%. That loan isn’t worth anything right now, but over a 30-year period, it represents a profit of 6% or up to $12,000 every year for the bank that owns the loan, provided you make all of your payments.

However, instead of waiting 30 years to collect on that profit, your loan is “sold” to a bank where it is bundled together with other similar loans. It’s like winning the lottery and choosing the cash value prize instead of accepting full payments that are spread over 20 years. Of course, you get less money than the total value of the prize if you choose the cash upfront, but you don’t have to wait twenty years to collect it all.

This group of bundled loans then, just like a public company, is split into smaller units or bonds and sold just like stocks in a company to investors. These bonds, secured or backed by the profits from the loans, are called mortgage-backed securities. And just like stocks, investors like you and me can buy and sell them every day.

And it’s the performance of these specific bonds that lending institutions use to set mortgage rates.

The real dynamic at the heart of interest rate movement, then, is the complex relationship between stocks and bonds, supply and demand, inflation, news that moves markets, the economy, employment levels, political events, gross domestic product, and any number of other factors.

And while there exist a number of somewhat reliable economic indicators, if anyone tells you that he or she has the secret formula for predicting these movements exactly, it’s just not true. There is no magic formula, no index, no rate cuts or Fed activities that work 100% of the time.

The best you can hope for is an experienced mortgage professional who truly understands mortgage-backed securities and how they trade. He or she can utilize specific market knowledge and experience to take advantage of daily fluctuations and lock in a rate that could save you thousands of dollars throughout the life of your loan.

If you’re waiting for the Federal Reserve – or worse, the media – to create refinance or new home buying opportunities for you, don’t count on it. Call an experienced mortgage professional and get the facts.

The headlines report that Half-priced homes are attracting a bevy of buyers. But, you don’t want to sell your home. However, the balance of your mortgage is greater than the value of your home. What to do?The first question to be answered is how much more is that balance: 5%, 10%, 20%… It may boil down to strictly a financial decision on whether it is a prudent move to stay in or move out of your home, and let the chips fall where they may. Today’s Economic Update will present those two alternatives with the steps for you to follow. If you want to stay in your home1. Review the loan documents you signed when you purchased or refinanced your home to ensure that the lender dotted all the “i’s” and crossed all the “t’s” from a compliance perspective. If there were errors (e.g. 3 day right of recession, lack of other disclosures…) then the lender will be at your mercy to negotiate a change in the terms of your loan to your benefit. 2. Refinance. The FHA is now offering the FHASecure loan program. Even if you are delinquent in your current mortgage payments, you may be able to refinance 97% of your home’s value under this government insured loan program. And, if your current mortgage balance is greater than 97% of your home’s value, the lender may forgive the difference. Call me for more information, to see if this refinance option is doable for you.3. Modifying the terms of your loan. The cost to a lender to foreclose on your loan can be 20%-25% of the principal balance. Use this to your advantage. If there were no errors in your loan documents and you cannot refinance your mortgage, then you should write a compelling letter to your lender explaining why you cannot continue to make the mortgage payment. Sit down, face-to-face, with your lender to come to a mutual agreement in modifying the terms (monthly payment) of your mortgage. You would be surprised at how receptive your lender will be. In addition to avoiding the costs of foreclosure, with the unfortunately large number of potential foreclosure lenders are facing at this time, they are in a much more favorable mood to negotiate with you. If you are behind on your mortgage payments, you should ask the lender for some forbearance on the amount past due (add the delinquent payment amount to the mortgage balance). However, you still want to pursue a loan modification to reduce the monthly payment, so as you do not continue to get behind (forbearance is a one-time option). If your decision is not to stay in your home, then your choices are:1. A Deed in lieu of Foreclosure. Asking the lender to take the home (the security of the mortgage), and release you from the mortgage obligation. 2. A short sale. Trying to sell your home by taking an offer on it for less than the mortgage balance. When you receive an offer on your home the real estate agent would open negotiations with the lender to persuade them to accept this lower purchase amount. This will take some time (60+ days) to complete. 3. Foreclosure. If you cannot afford to make the mortgage payments any longer and a notice of default is issued, then the lender may elect to foreclose on your home and take it from you. I know none of these options sound simple. If you are having problems with your current mortgage then the first thing you should do is contact a HUD Approved Housing Counselor (1-888-995-HOPE). There is a unique office set up in San Diego to help distressed homeowners. It is the Housing Opportunities Collaborative (www.housingcollaborative.org) where I attending a seminar just last week. Don’t be shy to call me or them for assistance.

Another classic Yogi Berra-ism is, “I never said most of the things I said.” Luckily, the Fed can’t make the same claim. This coming Tuesday, the “Meeting Minutes” or open commentary of the Fed’s last monetary policy meeting will be released to the public. If there are inflammatory comments, the market could respond quickly.

Remember, when Bond prices move higher, home loan rates move lower. And as you can see in the chart below, Bonds have rebounded higher off of their key 50-day moving average support level, and are moving back toward the upper portion of their current trading range. This means if Bond prices continue to move toward the upper boundary of the range, we could see home loan rates improve slightly.

Chart: Fannie Mae 5.5% Mortgage Bond (Friday Apr 04, 2008)

“I KNEW THE RECORD WOULD STAND UNTIL IT WAS BROKEN.” ~ Yogi Berra A record was broken on the job front last Friday as the Labor Department reported a much worse than expected loss of 80,000 jobs in March - the greatest jobs loss reported in five years. In addition, revisions to both January and February’s Jobs Report delivered an additional loss of 67,000 jobs - that’s on top of the previously reported loss of 85,000 jobs for that two-month period.

And…the story might be even a bit gloomier than it already appears. The Labor Department uses a lot of averaging to help it come up with its numbers more quickly, but this practice can skew the current picture significantly. Think of it this way - and because it’s now baseball season, here’s a Baseball analogy - let’s say that mid-way through the season, a red-hot hitter with a batting average of 340 declines into a bad slump for several weeks. While he now can’t even hit a basketball thrown underhand to him, his average - while lower to 300 - is still very strong due to his previous hot performance. So someone looking at just the statistics may think that this batter is still absolutely terrific, but he is really someone the fans are booing as he approaches the plate. This is not very different from current numbers being reported by the Labor Department - previous averaging is likely causing an understating of the ACTUAL number of job losses…which somewhat masks how bad the job market really is.

This bleak Jobs Report greatly boosts the odds of not only a first-quarter recession, but perhaps a worse economic downturn than many economists fear. The Federal Reserve may respond to this increasing trend in job losses with additional interest rate cuts when they next meet to determine monetary policy on April 30 and June 25. As we’ve seen in the past though, such rate cuts do not translate into lower long-term rates for mortgages, so there is no better time than right now to refinance an existing mortgage or to structure a new one. Let’s work together to make sure your current financing is a home run!

NEW YORK : Wall Street stocks rocketed on Tuesday as hopes mounted that stressed banks are starting to put housing-related investment losses behind them and come clean about outstanding mortgage loan write-offs.

Stocks gained after the US investment bank Lehman Brothers said it had raised fresh capital totalling four billion dollars and as Swiss banking giant UBS divulged fresh losses, but raised hopes it was getting a grip on its stricken balance sheet.
The leading blue-chip Dow Jones Industrial Average closed up a large 391.47 points (3.19 percent) at 12,654.36.

The Nasdaq tech-heavy composite index jumped 83.65 points (3.67 percent) to 2,362.75 while the Standard & Poor’s 500 index surged 47.48 points (3.59 percent) to close at 1,370.18.

Lehman Brothers said it had raised fresh capital of four billion dollars in a special share offering to help bolster its finances which have been squeezed by mounting mortgage investment losses and a related credit crunch.

“The significant oversubscription for this deal demonstrates the confidence that investors have in Lehman Brothers,” Lehman’s chief financial officer, Erin Callan.

Lehman executives said they had increased the number of special shares offered to four million because of heightened demand from investors seeking to snap up the shares.

Lehman’s shares spiked 10.8 percent to close at 41.64 dollars.

UBS, the biggest Swiss bank, meanwhile revealed further hefty write-downs of 19 billion dollars on mortgage investments tied to sub-prime US home loans granted to Americans with poor credit.

The bank wrote off 18.4 billion dollars in such investments last year, but said on Tuesday it plans to raise almost 15 billion dollars in fresh capital as it ousted its embattled chairman, Marcel Ospel.

Market analysts said investors were looking further ahead and expressed increased confidence that the banking sector might be regaining its footing.

“The equity markets continue to be hit almost daily with some new worry over the sub-prime fallout and its impact on the housing industry and the economy in general,” said John Wilson, a co-director of equity strategy at Morgan Keegan.

“The market appears to be looking through the trough, though, if the behaviour of the housing and transportation stocks is any indicator,” Wilson said.

Although the two-year-old US housing downtown is showing scant signs of stabilising and many economists believe the economy has fallen into a recession, some investors are hopeful that the worst may soon be over particularly as the Federal Reserve has slashed three percentage points off interest rates in recent months.

Such rate cuts, under more settled economic times, would be expected to spur economic growth.

Other banking and financial shares also surged as hopes mounted that the industry was beginning to put its mortgage losses behind it.

Citigroup, which has also seen its finances buffeted by mortgage-related losses, closed up 11.3 percent at 23.84 dollars.

Merrill Lynch was 12.9 percent higher at 46.02 dollars and JPMorgan Chase finished up 9.4 percent at 47.00 dollars.

Bond prices dropped as money flows moved back into equities.

The yield on the 10-year US Treasury bond rose to 3.545 percent from 3.432 percent on Monday and that on the 30-year bond increased to 4.382 percent from 4.306 percent. Bond yields and prices move in opposite directions.

European share markets also benefited from a confidence boost as overseas investors also bet that the global financial crunch could be nearing an end.

In London the FTSE 100 index gained 2.64 percent, the Paris CAC 40 shot up 3.38 percent and the Frankfurt Dax added 2.84 percent. - AFP/de