The Fed lowered the Fed Funds Rate by 0.500% to 3.000% yesterday. The move was widely anticipated and so Wall Street’s reaction was muted.

Because it is tied to the Fed Funds Rate, Prime Rate also fell by 0.500% yesterday. Holders of home equity lines of credit and credit card debt benefited from the change and will see lower interest costs in next month’s statements.

In the statement above — as explained by The Wall Street Journal — the Fed expresses concern about the housing and jobs markets, while noting that inflation is less of a worry. This leaves the possibility of future Fed Funds Rate cuts open.

Source
Parsing the Fed Statement
The Wall Street Journal Online
January 30, 2008
http://online.wsj.com/public/resources/documents/info-fedparse0801b.html

When the Federal Open Market Committee adjourns from its two-day meeting today, it is widely expected to lower the Fed Funds Rate.

This does not mean that mortgage rates will fall.

In fact, using history as an indicator, we should expect mortgage rates to rise if the Fed Funds Rate falls.

Remember: The Fed Funds Rate is an overnight interest rate between banks; mortgage rates are long-term rates based on the bond market. These are two very different animals.

The FOMC’s press release hits the wires at 2:15 P.M. ET.

If you only read headlines this past week, you may have missed two very important points.

The first story relates to Housing Starts. Housing Starts measure the number of new homes entering the construction phase. The headline blared “Housing starts plunge to 16-year low“.

If you are a homeowner, this is terrific news.

Because home values are governed by Supply and Demand, fewer homes built means that home demand has a chance to rebalance against home supply.

This places upward pressure on home prices nationwide.

When Housing Starts drop, it says more about weakness in builder sentiment that it does about the state of the housing nationwide. Housing Starts are at all-time lows because builders want to sell the product they have before putting more product on the market.

The second story was yesterday’s New Home Sales figures.

The headline read that “US new-home sales slide in record plunge” but, again, let’s look a little deeper.

New Home Sales are defined as homes that are newly built. Stated differently, it specifically counts the number of homes sold that were once classified as “Housing Starts”.

If Housing Starts falls, therefore, we can expect New Home Sales to fall, too. The two data points count the same housing inventory at two different points along a timeline.

These two stories are related but neither should be construed as bad news. As builders cut back on the supply of homes, it should create an increase in relative demand.

For homeowners, this is a positive development.

When the Federal Reserve lowers the Fed Funds Rate, Prime Rate falls by the same amount.

This is because (Prime Rate) = (Fed Funds Rate + 3.000%).

The Federal Reserve has lowered the Fed Funds Rate by 1.75% since last summer, dropping Prime Rate from 8.250% to 6.500%.

It figures to drop further this week.

After its 2-day meeting concludes Wednesday, the Federal Open Market Committee will issue a statement at 2:15 P.M. ET in which many expect another cut.

For consumers, this means cheaper credit card debt and home equity lines of credit because both are based on Prime Rate. Every 0.250% reduction reduces interest expenses by $25 per $10,000 annually.

This is one way by which cuts to the Fed Funds Rate spur the economy. With less money spent on interest, more money is available to spend on “life”.

Assuming $2.5 trillion in consumer credit card debt, the Fed’s recent cuts have put $43 billion back into consumers’ pockets before factoring in the impact on home equity credit lines.

Carbon Monoxide is produced when fuel in not burned completely because of low oxygen flow. Wood-burning fireplaces and charcoal grills are main sources, as are damaged heating and water systems.

Now that it’s heating season, take a few steps to protect your health:

1. Have all fuel-burning appliances inspected by a trained professional
2. Don’t use a gas oven to heat your home — even in an emergency
3. Don’t idle a car in the garage — even with the garage open

The symptoms of carbon monoxide poisoning include severe headaches, dizziness and mental confusion. And even low levels of toxins can cause shortness of breath or mild nausea.

This is why many people confuse carbon monoxide poisoning with the flu, often with fatal consequences.

According to the EPA, store-bought carbon monoxide detectors are a good supplement to routine care of fuel-burning systems, but should not used as a substitute.

Purchase Carbon Monoxide detectors at Lowe’s or any hardware store near you.

The Dow Jones Industrial Average surged 631.86 points in the last three hours of trading yesterday as traders piled into equities.

Fueling the rally? The bond market.

For as much as stocks gained today, bonds lost. Including mortgage bonds.

The dramatic sell-off created a huge swing in mortgage rates and erased nearly all of 2008’s rate improvements.

This is one reason why it pays to be aware of your home loan. That way, when markets change and a doorway to payment reduction opens, you can quickly step through it.

As yesterday illustrated, with mortgage rates, opportunity is often fleeting.

With stocks poised to rise again today, it should likely happen at the expense of bonds. Mortgage rates are trending higher, too.

When the Federal Reserve lowered the Fed Funds Rate by 0.75% yesterday, it was in response to economic weakness that mounted since its last meeting December 11, 2007.

By contrast, the mortgage markets meet every day.

Because of this, mortgage rates had already “priced in” the weakness to which the Fed was reacting.

This is why mortgage rates did not fall by the same 0.75% yesterday — they only fell slightly.

Two important rates that did fall, though, were the 6-month LIBOR and the 1-year constant maturity treasury (CMT).

These are two popular interest rates used in adjustable-rate mortgages.

When an ARM adjusts, it adjusts according to a simple math formula:

(New Interest Rate) = (Index) + (Margin)

Where:

Index: A variable, usually 6-month LIBOR or the 1-year CMT.
Margin: A constant, usually ranging from 1.500% to 6.999%

So, if the indices move lower — as we saw yesterday — the adjusted interest rate on a mortgage is going be lower, too.

As an example, LIBOR fell percentage point over the last month from 4.83% to 3.83%. This means that mortgage rates tied to LIBOR will adjust 1 percent lower than they would have in December 2007.

For every $100,000 in a principal + interest loan, this yields $65 per month in savings.

Of course, each mortgage has unique index, margin and rate characteristics so talk to your loan officer about how your ARM operates.

The Federal Reserve made a surprise 0.750% rate cut this morning.

Mortgage rates are falling in response, but not because of what the Fed did as much as what the Fed implied by doing it.

The chart above dated from last week and illustrates what traders thought the Fed would do to the Fed Funds Rate at its 2-day meeting January 29-30.

Note that over a two-month span, the market expectation changed. The blue line (4.250%) represents the Fed Funds Rate prior to this morning.

Two months ago, markets overwhelmingly expected a 0.250% rate cut this January (as represented by the white line). As of last Friday, they split between 0.500% and 0.750%.

When the economy is weak, this sort of shift tends to happen. It’s the same expectation of weakness that drives mortgage rates down over time, too.

This is why both the Fed Funds Rate and mortgage rates tend to fall during times of economic weakness.

So, after the Federal Reserve’s surprise move this morning, we can infer that the Fed sees dramatic weakness in the economy — enough that a half-point cut to 3.750% may have just been too little.

And this is why mortgage rates are falling this morning. Prior to today, only half of the market had expected such weakness that a three-quarter point adjustment would have been required.

This morning, mortgage markets are resetting their bets about the economy by purchasing more mortgage bonds. The added demand is causing rates to fall, but not anywhere near the three-quarter percent levels by which the Fed cut the Fed Funds Rate.

Mortgage rates are down slightly.

(Image courtesy: Federal Reserve Bank of Cleveland)

Overall, mortgage rates are at their lowest levels since late-2005.

Despite rates falling, however, not everyone can take advantage.

This is because mortgage lenders started to tighten the guidelines of what they will lend and to whom, also beginning in late-2005.

In other words, the chart at right doesn’t apply to all homeowners equally.

If you are new in your home, or have refinanced your mortgage within the last 24 months, make a call or send an email your loan officer to ask about today’s low-interest-rate environment.

(Source: Bankrate.com)

It’s a point that’s always worth repeating:

Ben Bernanke and the Federal Reserve do not control mortgage rates

This is particularly relevant today as newspapers, television programs, and market pundits posit that the U.S. is in the midst of a recession.

The latest evidence supporting that assertion is that Retail Sales grew at its slowest pace since 2002 — the last time the U.S. was in a recession.

Many people fear recessions, but they are natural parts of a business cycle. As the nation’s protector of the economy, though, the Federal Reserve can weaken a recession’s impact on the economy by lowering the Fed Funds Rate.

When the FFR is lower, businesses and consumers pay less interest on business debt and consumer debt, respectively. This leaves more money available to spend on goods and services, thereby providing a subtle boost the economy.

This is why the Fed Funds Rate is integral to financial markets and why it gets so much attention in the press. It’s also why some people are calling for a drastic rate cut at the Fed’s next meeting — many believe that the economy is hurting pretty badly.

It’s not a coincidence that this outlook is causing mortgage rates to fall.

When Corporate America is struggling (or expected to struggle), investors don’t like to be over-exposed to the stock market because of its variable nature. By contrast, the fixed returns of the bond market provides a little bit more safety.

As demand for stocks wanes during a recession, therefore, demand for bonds can pick up.

Mortgage rates can fall at times like this because rates are “born” from the price of mortgage bonds. The higher the price, the lower the corresponding rate.

So, as investors leave the stock market and buy bonds — including mortgage bonds — the increased demand raises prices and pushes mortgage rates lower.

All of this happens independent of the Federal Reserve — it’s a natural function of the stock and bond markets.

The Federal Reserve does not control mortgage rates but it does control the Fed Funds Rate. And both tend to respond to economic weakness.

For all that’s been said about the proposed Bank of America-Countrywide merger, what’s not getting talked about is how the merger will impact existing Countrywide customers.

The short answer is that it won’t.

A mortgage (and its corresponding note) is a legal contract between the lender and the lendee, signed on the date of closing. It is binding and cannot be altered by either party, even if the mortgage is transferred between lenders.

As a homeowner, the only way to “end” the contract is to satisfy the home loan with a full repayment. That can happen one of three ways:

1. The home is sold and the mortgage is repaid
2. The home is refinanced and the mortgage is repaid
3. The home loan is paid down to $0 balance by the homeowners

Mortgage payment servicers commonly transfer home loans between each other. This happens on an everyday-basis — not just when there’s a merger, or a closure.

When mortgages are transferred, HUD requires the former lender to send a 15-day advance notice to its lendee; the new lender is required to send a similar notice.

So, for homeowners that write their mortgage checks to Countrywide every month, it’s possible that the address to which you mail your payment may change, but the terms of your mortgage cannot.

(Pronounced: NEGH-ah-tive am-ohr-tih-ZAY-shun)

Negative amortization is the process by which a loan’s principal balance increases on a month-over-month basis.

This is in contrast to a “typical” amortization schedule in which the principal balance decreases.

Negative amortization is an optional feature on some home loans.

These mortgages are usually referred to by the brand names “Option ARM”, “Pick-a-Payment”, or “Payment Option ARM”.

Many industry veterans collectively call refer to these types of mortgages as “Neg-Am” loans.

When a Neg-Am mortgage statement arrives each month, the homeowner can choose his preferred payment structure.

1. Pay the minimum balance due only
2. Pay the interest due only
3. Pay the principal + interest payment on a 30-year amortization schedule
4. Pay the principal + interest payment on a 15-year amortization schedule

Choice #1 is like making a “minimum payment” on a credit card. It is the only option that adds to the principal balance so, therefore, it is the only negative amortization option of the four payment choices.

In this sense, negative amortization is a choice and not a certainty.

In the early 2000s, Neg-Am loans grew popular as home affordability products. Many homeowners made the minimum payment each month and found that their mortgage balance had swelled.

Some of these homeowners lost their homes.

Because of their complex structure and potentially devasting consequences, NegAm home loans have been dubbed “nightmares” by several media publications.

However, many sophisticated homeowners have successfully applied NegAm loans to help meet their financial goals.

Like all home loans, NegAm products are a better fit for some homeowners than others. Some likely candidates include:

• 100%-commissioned salesperson who want better control over tax deductions
• Owners of multiple investment properties who want better control over cash flow
• Investors who seek leverage in real estate and who clearly understand market risk

Homeowners with questions about negative amortization loans should seek counsel from a qualified mortgage professional.

Clipped from NBC’s Today Show, real estate maven Barbara Corcoran talks about preparing your home for sale. As usual, her remarks are spot-on.

Some highlights from the 5-minute video:

1. Go online and shop for your own home first
2. Empty your home of two-thirds of the “stuff”
3. Keep your home immaculately clean

Corcoran also offers pricing tips that can help get your home sold faster.

Watch the entire interview at MSNBC.

Private Mortgage Insurance (PMI) is an insurance policy paid to a lender in the event that a homeowner defaults on his home loan.

These defaults are up 35 percent over last year, according to an industry group — bad news for all homeowners requiring PMI with their mortgage.

Much like home insurers adjust premiums after a worse-than-expected Hurricane Season, PMI insurers are raising mortgage insurance rate for all homeowners, regardless of credit history.

And it comes at a time when PMI is in higher demand.

Because second mortgages are not as available as in recent years, using PMI is the only way for some homeowners to get approved for home loans with a less-than-20-percent downpayment.

PMI rates are higher than they were six months ago and additional defaults make it likely that PMI rates will rise again in 2008. As PMI rates increase, so does the cost of homeownership for people whose lenders require it.

Source
Mortgage-Insurer Defaults Hit Record
Associated Press
December 31, 2007. 12:30. P.M.
http://biz.yahoo.com/ap/071231/mortgage_insurers_defaults.html?.v=1

Some quick statistics:

• 13% of Americans will die before age 65
• 28% of Americans will face a long-term disability before age 65 and be unable to work and/or earn an income

Despite these facts, Americans are twice as likely to be insured on their lives as on their long-term health.

Life insurance is important, but is much less likely to be redeemed than a suitable long-term disability insurance contract.

Consider that 1 in 2 personal bankruptcies is the result of costly medical bills from years of medical treatments.

Then, consider that 75 percent of those bankrupted families actually had health insurance coverage. At some point, health insurance companies stop paying for long-term care, shifting the burden to the injured.

A person with a long-term disability cannot work his “normal” job and cannot earn his “normal” income. Financial distress usually follows.

Many employers offer long-term disability insurance that can help protect against a long-term medical crisis. Do some homework and then verify your finding with a qualified financial planner. Long-term disability comes in many flavors and it’s important that your individual coverage suit your long- and short-term financial goals.

Many families go broke because of long-term health issues and a large percentage lose their home to foreclosure. Adequate long-term disability insurance can help prevent both of these scenarios.

Source
6 Money Fears
David Futrelle
Money Magazine, December 15, 2005
http://money.cnn.com/2005/09/13/pf/fears_dieyoung/index.htm