So far the only side effect we are seeing from this action is a declining dollar and increases in the prices commodities such as those mentioned above. If this goes too far we will have to become concerned about inflation. However, up to (or should I say down to) a certain point a weaker dollar actually helps our economy by making American exports cheaper for our trading partners to buy. This cheap money and cheap American exports policy is helping pull us out of the deepest recession we have had in this country since the stagflation era of the late ’70s through early ’80s.

Timing is everything. The Fed must be careful not to ease off of the stimulative actions too soon, yet they cannot wait too long to switch gears once it is clear that the economy is on the mend. The most important indication of this is in job creation as measured by increasing employment and decreasing unemployment. Since an economy as large as ours does not turn on a dime they must make their move when it is clear that the numbers are headed in the right direction but BEFORE they actually look good in order to prevent inflation from becoming a problem.

Therefore I am looking to the labor market as a way to forecast the direction of the bond market. Rates on 30 year mortgage loans will break out of the 5% to 6% range for a sustained period of time once it is clear that the recession is over, or once the Fed thinks is is over and just before the general public would perceive the economy to be back on track.

I hope I’m wrong about my current rate prediction, but we have more indications that rates will continue to go higher than lower. This is based on the performance of the stock market, the declining value of the dollar, and the assessment of several credible experts, including Fed chairman Bernanke. The Fed runs into a catch-22 problem. They will do all that they can to push rates lower to help the economy, but then once the economy picks up they switch to making sure inflation does not become a problem, which usually involves pushing rates higher. Market forces beyond the Feds’ control only complicate the matter. So only if the economy continues to be in the bad shape it is in now are rates likely to stay this low.

My answer to the question “should I lock in current rates or wait” is, I would not wait. I’d lock in now. Rates hit a low a couple months ago, dropping below 5% for well qualified borrowers. Freddie Mac’s mortgage rate records go back to 1971 and they had never been that low.

The experts aren’t always right, but most now say our economy will be growing again toward the end of this year. It would be great to have it both ways, to keep rates low while the economy grows out of recession, but that’s not the way it works. Let’s hope that our 401Ks, IRAs, home values and incomes rise faster than mortgage rates so that we’ll be ahead of the game in the long run.

We have the following market forces that are pushing rates higher:

1) The US Dollar falling in value against other major currencies.

Since Bonds are denominated in US Dollars, the true yield must be adjusted lower since the investors Bonds will be worth less if the Dollar is worth less than when they made their purchase. Therefore investors demand a higher rate of return on their bond purchases.

2) Anticipation of an increase in the rate of Inflation.

A higher rate of inflation makes the Dollar worth less, so as in the example above, a Bond investor will demand a higher rate of return to compensate for this lower real return due to inflation. We should note that at this point, we are only talking about anticipation or expectations due to the increase in the money supply. The actual inflation rate is quite low. According to the Bureau of Labor Statistics the CPI increased at a seasonally adjusted rate of 0.1 percent in May, at 0.0 percent or unchanged in April, and the index has fallen 1.3 percent over the last 12 months.

The economy is not nearly strong enough to create demand-pull inflation, and with high unemployment I cannot see the basis for cost-push inflation either. I think that the inflation fear mongers can be ignored for now. Given the Trilions of dollars of wealth that were destroyed in the crash of October 2008, much of an increase in the money supply will simply be sopped up in a system where banks must now deleverage to strengthen their balance sheets.

We have the following market forces that are pushing rates lower:

1) Strong demand for Bonds.

When the stock market crashed, many investors took what they had left and put it in safe havens like Bonds. The Fed’s strategic purchases of Treasuries has also kept demand strong, albeit at somewhat higher yields.

2) A Shrinking TED Spread.

The TED Spread is a commonly accepted measure of investors appetite for risk. A higher spread means investors demand higher rates to compensate for this perceived higher risk. A lower spread means investors are clam enough to accept a lower rate of return. The spread hit a high of 463 in October 2008. It is now at 42.

I like Investopedia’s explanation of the TED Spread so much I’ll quote them here - “The Ted spread can be used as an indicator of credit risk. This is because U.S. T-bills are considered risk free while the rate associated with the Eurodollar futures is thought to reflect the credit ratings of corporate borrowers. As the Ted spread increases, default risk is considered to be increasing, and investors will have a preference for safe investments. As the spread decreases, the default risk is considered to be decreasing.”*
* http://www.investopedia.com/terms/t/tedspread.asp

Although I believe that inflation fears are overblown, the dollar will likely remain weak until we see strong and consistent signs of an economic recovery. The catch-22 problem is, once we do, the stronger economy will create a a stronger demand for money, which will start to push up rates. The bottom line is that given the aforementioned circumstances rates are much more likely to go higher than lower. 5% - 5.25% appears to be a pretty solid floor for the foreseeable future.

The Fed has the balancing act to maintain between working to promote full employment and working to keep inflation low. The financial publications, such as CNBC, report that the Fed may extend their purchases of U.S. Treasuries when they meet next week. This will help to stimulate the economy with added liquidity, but due to investors inflation concerns an overly aggressive expansion of buying is not likely.

The steep rise in U.S. government bond yields resulted in the latest spike in mortgage rates. Rising interest rates while still in the depths of a severe recession would slow down or stall economic recovery efforts. Fortunately other measures of credit market unease, like the spread between U.S. government debt and recent corporate debt issues, have eased. This helps the Fed a lot with its delicate balancing act. They do not have to feel compelled to risk furthering inflation fears buy buying U.S. Treasuries too aggressively.

Given current and historical trends, it is likely that we saw an historic low in mortgage interest rates last month, when they were as low as 4.5% to 4.625%. Since I do not have a crystal ball, and no one can pick market tops or bottoms with absolute accuracy, I’d advise those looking to purchase or refinance a home to lock into any rate near 5%. If we see anything around 5.125% to 5.375% I’d say lock and load!

The Fed has also slowed the rate at which it has been buying up Treasuries, further reducing demand. The Fed cannot continue to buy up Treasuries forever, since to overdo it would stoke up inflation. Remember, when the Government buys bonds from itself, it does so through what is alternately called monetization or quantitative easing. Laymen would call it printing money.

You just do not know exactly when these things will play out. Mortgage Rates have been slowing trending up, but they really spiked up in the last two days. Even before this event, mortgage applications dropped 8.6% last week according to the Mortgage Broker’s Association survey released Wednesday. I don’t understand why. Not only were rates as low as most adults have ever seen, a trending up would lead many homeowners to say “hey, I better lock into these good rates while I can.” I have been emphasizing the fact that rates have been at historic lows not seen in the 38 years that Freddie Mac has been tracking mortgage rates.

I have been surprised at how many people have not understood the significance of this enough to act on it, especially with the expanded loan approval guidelines recently instituted by the Obama Administration allowing for creditworthy homeowners to borrow up to 105% of their home values to refinance down to lower rates. Is this something that is too abstract for someone outside of the industry, or someone who does not have a “head for numbers,” to grasp based on that statement alone? I have even worked the numbers for some people, showing them how they would save $200 to $300 per month, EVERY MONTH, by refinancing at these incredible rates. I’m talking about middle class people, so that’s a significant, recurring savings. In some cases it seemed like I was just talking to myself.

I do have to give one of my customers credit. This guy also happens to be a friend, and a former statistical engineer. He asked me to work up a refinance of his home a few weeks ago. I wrote up the deal, and monitored the rates. I locked him in under 5% with no points. We happened to time the bottom almost exactly. He obviously had a firm grasp of the historical significance of where the rates were at the time, apparently because he has a head for numbers.

It is said that a picture is worth a thousand words. With that in mind, I have prepared some charts based on this historic mortgage rate data. Since 38 years is a long time, one chart was way too wide, so I broke it up into four charts, one for each decade. The 1970s data for rates begins in April 1971, and for points begins in May 1971. The data ends in April 2009. To view the Historic Mortgage Rate Charts, Click the image below

Neither rates nor stock prices usually go straight up or straight down. The charts are not straight lines, they wiggle as they trend in a certain direction, with peaks and dips. There was strong demand in the auction of 7-year Treasury notes yesterday, and pressure on the Fed to keep buying Treasuries to keep rates low to help the economy in general and the housing market in particular. With that in mind I am looking for one of those dips to lock in my current customers at the best rate I can.

The market price of Treasuries is trending downward. Many are getting out of them and into stocks, as more  investors are starting to believe that the recent stock market advances may be sustainable. They do not want to miss out on an historic chance to buy low and later sell high. Since interest rates are inversely related to bond prices, this puts upward pressure on interest rates. Here is a chart of U.S. Treasuries trends on Bloomberg’s Site

The Federal Reserve is in the market, purchasing Treasuries to help prop up prices and keep rates low. This is good in the short term, but unsustainable in the long run. Why? In financial lingo, what they are doing is called “quantitative easing.” In laymen’s terms, this is called increasing the money supply, or printing money. Don’t freak out just yet. In a deflationary environment, this can be done in a controlled manner and not lead to inflation. The long term danger would be to continue to do so after it is safe or necessary.

We’ve also been lucky so far. The risk premium, which is commonly measured by what is called the “Ted Spread”*, has decreased, which has slowed the rate of increase in interest rates. The question is, how long will our luck hold out? Given that the current market rates have not been this low in 38 years, since Freddie Mac started keeping records in 1971, I’d lock in these really low rates NOW! Sites like CNBC and Bloomberg track and chart this and other data, but I happen to like Bloomberg’s chart.

As always, you can click here or select the mortgage calculator on the right hand side of any page on my website to see how much you may save on your mortgage at today’s low rates. As of the writing of this article, we’re looking at between 4.875% and 5.125% for well qualified borrowers. This usually, but not always, means high FICO credit score, low Loan to Value, either purchasing or refinancing an owner occupied single family home. Details vary depending on the Loan Program, for example, Conventional, FHA or what’s being called Refi Plus, which follows most of the guidelines of the Obama Administration’s Home Affordable Refinance Program. FHA and Refi Plus are much more lenient with respect to credit scores and LTV.

*The TED spread is the difference between the interest rates on interbank loans and short-term U.S. government debt (”T-bills”). The TED spread is an indicator of perceived credit risk in the general economy. From Wikipedia

At first look it may seem odd that mortgage applications would go up as rates go up. You might expect applications for lower rate mortgage loans to go up as rates fall, then go down as rates go up. However, we’ve seen this behavior before. Apparently as rates are falling, many people who would benefit from lower rates will not just compare the now-lower rate to their current mortgage interest rate. They are looking at how the rates are trending down, and trying to time the bottom. Once they see rates start to rise, they think “OK, rates are no longer falling. It is time to lock in a low rate.”

This type of trend analysis is also used to track stocks. It is imperfect, as no one has a crystal ball. However, in an environment where we have mortgage interest rates at or near historic lows, I think that the logic is sound. Rates might possibly go a bit lower, by maybe a fraction of a percent. Based on historic norms, rates are more likely to go up. There seems to be a bottom of between 4.5% to 5% for mortgage interest rates, but there may be no ceiling. Looking at historic data, the highest rates we’ve seen were a national average of 18.45% in October 1981.*

Here is an example of how much a typical homeowner with a $200,000 mortgage would save by refinancing a 30 Year Fixed Mortgage loan at a 7% rate down to 5%:

Monthly Principal and Interest Payment at 7% - $ 1,330.60

Monthly Principal and Interest Payment at 5% - $ 1,073.64

Monthly savings on Principal and Interest Payment - $ 256.96

Annual Savings on Principal and Interest Payments - $ 3,083.52

You can use the mortgage calculator on the right side of the page to see how much you might save by refinancing your mortgage loan. Click here if you have further questions or want a quote on current rates and fees.

*30-Year Fixed-Rate Mortgages Since 1971, FreddieMac.com

Rates are now at a record low. Interest rates on a 30 year fixed mortgage loan with no points have not been this low since Freddie Mac stared tracking the data over 38 years ago, in 1971. This is very good news for homeowners who currently have a higher interest rate on their mortgage loan. Despite talk late last year and earlier this year of the government  subsidizing loans to drive down rates even further, to 3.99% to 4.5%, they cannot drive down rates by purchasing Treasuries indefinitely. At some point the market gets worried about the inflationary effects of these purchases, and the bond market adjust prices downward to reflect the perceived inflation risk. Those in the finance industry, or who have taken a few economic courses learned that bond prices and interest rates are inversely related, so this puts upward pressure on rates, putting a floor on rates despite the efforts of the Fed. I covered how this Treasury purchasing by “quantitative Easing” works in my article ”
Market Offsetting Fed Efforts to Drive Mortgage Rates Lower.”

Rates change daily, actually with some lenders more than once a day. If your current mortgage is over 6% or so I’d highly recommend working up the numbers to see if it makes sense to reinance your mortgage loan. A person with a $200,000 mortgage balance and a 7% rate who locks in these rates at 4.875% would save $272.19 each and EVERY MONTH, or $3,266.26 a YEAR!

You can use the calculator on the right side of this page to work with your mortgage balance and current interest rate to see how much you can save by refinancing. As always, you can contact me with your mortgage related questions.

Even if you are not in danger of loosing your home, if you have large numbers of foreclosures and short sales in your neighborhood, your home price is being dragged down in this environment. Even if you do not have foreclosures or short sales in our neighborhood, the banks and the entire economy are being hurt by prices falling so quickly and deeply. Irrational exuberance caused housing prices to overshoot to the upside. Now irrational fear is causing prices to fall rapidly and deeply to the downside. That is why this stabilization plan should help stabilize the entire economy, helping us all, not just those getting help under the program.

Not every homeowner can or should be saved from foreclosure. Despite the fact that I blame Wall Street for being the enabler, allowing people with bad credit to purchase more home than they could afford, and watching them be true to their FICO score and default in large numbers, I know that you cannot save someone who is not willing or able to help save themselves. If your family income is $40,000 a year and you have a $400,000 mortgage, you have to find a more affordable home. If your FICO score is 500 and you have unpaid judgements and collections, you clearly have a long history of not paying your bills and need to establish a good payment history before a lender can be reasonably confident that you will pay THEM.

What if your family income was $120,000 and you bought a $300,000 home? That purchase was comfortably in the affordable range for you. But that was a 2 person household income, and each of you made about $60,000 a year, and one of you just got laid off. You could still afford the home by cutting back, OK, eliminating, luxuries and doing the financial equivalent of battening down the hatches. If you could refinance your mortgage that might have a note rate of 7% down to current rates as low as 5% or so, you’d save $385.44 a month. That would help a LOT. However, through no fault of your own, the home that you had 25% equity in when the market value was $300,000 is now worth $225,000. You now have NO equity in your home, so you cannot qualify under regular guidelines for a refinanced loan.

What if you bought your home at the top of the market with a no money down adjustable rate loan? That certainly sounds irresponsible today, but almost every lender was pushing such loans, there appeared to be no end in sight to rising housing prices, and everyone just KNEW that your home was the biggest wealth-creator a middle class family would have. The terms offered to borrowers were just too good to turn down. But in today’s economy, you may not only have no equity in your home, you probably are upside down, owing more than the home is worth. You could ride that out if you don’t plan on moving anytime soon, but your income is now not rising along with your note rate because the economy is so weak - which is to a large extent due to the housing crisis. You simply cannot afford to pay your mortgage under the original terms.

Families like the ones described above are the ones targeted for help under this HASP assistance. These people are not deadbeats and did not play the housing market as one might play the stock market. As long as the primary reason you cannot qualify for a new loan at a lower rates is either the drop in the value of your home, or an unforeseen problem with your family income, you can now refinance up to 105% of the home’s new, lower market valuation or get your interest rate reduced to bring your DTI ratios down to an affordable level.

The part of the assistance plan that encourages lenders to modify loan terms, bringing a borrowers interest rate below the market rate, to as low as 2%, is much more controversial than the expanded LTV approval guidelines mentioned above.  Borrowers only qualify for this assistance if they cannot qualify for a standard refinance at current market rates, even under the expanded LTV approval guidelines.

People like Rick Santelli of CNBC do not think that we should “subsidize the losers.” Apparently some think it is OK to subsidize BANKS that are losers but not the PEOPLE who left no margin for error when taking out adjustable rate loans with little money down. They were optimistic in their beliefs that their incomes would rise slowly but consistently. The banks were optimistic that housing prices would keep rising. The banks AND the borrowers were unrealistic in their optimism, but the big “moral hazzard” argument is usually made to voice opposition to helping individuals. To be fair, some are more consistent and think we should not bail out people or companies. I do not agree because this is a near depression economic crisis, but I do respect their consistency. I do not respect those who would help companies but not people directly. (If you like political satire you have to check out Jon Stewart’s response to Rick’s Rant!)

In summary, if your credit is still good and you can document your income, you can either qualify for approval of your refinance down to current market rates based on allowances for falling housing prices, resulting in expanded LTV approval guidelines, or if your DTI ratios are too high for approval under these expanded approval guidelines, you should be able to get your lender to bring down your interest rate to a level that results in your DTI ratios coming down to affordable levels.

You can contact me for help getting your loan refinanced, OR if you are not clear on what type of help you may be able to get. You should contact your lender if you already know you need your loan terms modified. Tell them to put you through their hardship test. I call this qualifying for a loan in reverse, or disqualifying yourself for your current loan, since you are showing that you CANNOT afford the current loan terms.

*LTV stands for Loan to Value. The traditional guidelines call for a borrower to have at least 20% equity in their home, with the bank loaning the other 80%.

**DTI stands for Debt to Income. The traditional guidelines call for a borrower to spend no more than 29% to 31% of their gross income on their monthly mortgage payment, and no more than 43% on all debt - housing, car note, credit cards, etc.

Since rates have not been at these levels since 1971 when Freddie Mac started keeping data on rates*, there may be no better time to buy or refinance your home loan. I’d wait no longer than Wednesday, March 4th to get off of the fence and make a decision. That is the day the Obama Administration releases details regarding who will be eligible for relief under the Homeowner Affordability and Stabilization Plan.

A one percent drop in rates can make a noticeable reduction in your monthly payments. A two percent drop can make a significant reduction. For a 30 year fixed mortgage loan, some homeowners who took out their mortgages when rates were around 7% can now save about 2%, or $128.48 per $100,000 in their loan amount. The average loan amount is just under $200,000, so the average homeowner would save almost $256.96 per month or $3,083.52 per year by refinancing to a rate 2% lower than they currently have.

Many homeowners have larger loan amounts or even higher current interest rates, or if they have ARMs soon will have higher a rate to pay on their loan balance. History tells us that we rarely see rates this low. The Federal Government will do all that they can to push rates towards 4%, but the market will fight against those efforts. Therefore if you can get a rate locked in at 5% or less, you may be locking in the best rate you will ever see in your lifetime!

As always, you can click here or select either the Rate Quote of Contact Us link on the top menu and I’ll be glad to answer your mortgage and home energy  efficiency questions.

*U.S. mortgage rates drop toward record low: Freddie