Upon Closer Inspection, The Federal Reserve Isn't 100% Positive About The Future Of The Economy

Both mortgage rates and home affordability took a turn for the better in Philadelphia and surrounding areas last Wednesday after the Federal Reserve released its December 15-16, 2009 meeting minutes.

The Fed Minutes is a follow-up piece to the post-FOMC meeting press release. But whereas the press release is succinct and to-the-point, the minutes are lengthy and often meandering.

As a comparison, December's press release contained 535 words. December's minutes had 6,260.

But these "extra words" aren't superfluous. They're actually very important to homeowners. Because the Federal Reserve's internal debates help to shape Wall Street expectations, it doesn't take much for those conversations to have a trickle-down effect on Main Street.

For example, after the December meeting, the Fed said that economic growth is steady, inflation is in check, and an orderly wind-down of mortgage market support was underway. A look at the minutes, though, showed some disconnect.

Some Fed members believe rising commodity prices could lead to stronger-than-expected, and others think that improvement is housing could be "undercut" by a pull-back in government stimulus.

Overall, the Fed appears optimistic about the economy, but not as optimistic as on December 16. Mortgage markets responded favorably to the minutes and mortgage pricing improved.

Although rates remain higher as compared to early-December, pricing has been on a good run this week. If you're under contract for a home in Pennsylvania or just looking to refinance, now may be a good time to lock.

Follow the Bouncing Mortgager Rates

For the fifth time in a year, rate shoppers learned an important lesson this week: When mortgage rates plummet unexpectedly, they often recover just as fast.

Wednesday, the Federal Reserve's newest $750 billion mortgage market pledge helped to push conforming mortgage rates near their lowest levels since WWII.

24 hours later, however, those rates were expired.

After considering the long-term implications of the Federal Reserve -- literally -- printing new money to service the recession, markets grew fearful that the Fed's interventions will eventually lead to inflation. Inflation, of course, is the enemy of mortgage rates.

So, if you're looking for the explanation of why rates rose as suddenly Thursday as they fell the day prior, this is it. And, in hindsight, rate shoppers might have seen it coming, if only because we've seen the exact pattern 4 other times:

1. After the Fed's "surprise" rate cut in January 2008


2. After the Fannie Mae and Freddie Mac takeovers in September 2008


3. After the Fed announced its first $500 in support in November 2008


4. After the Fed zeroed out the Fed Funds Rate in December 2008

Sharp drops in mortgage rate, it seems, are followed by immediate bounce-backs.

Unfortunately, not every would-be refinancing homeowner saw the increase coming. People that locked Wednesday captured the lowest rates in 6 decades. Everyone else wishes they had.

From day-to-day, we don't know if mortgage rates will rise or fall. Nobody knows that. But, we do know that mortgage rates tend to follow patterns and we've seen the above pattern 5 times now.

When mortgage rates plunge like they did Wednesday, they rarely low for long. When you find a rate you like, get in and get locked as soon as possible. By tomorrow, it's likely to be gone.

In a market like ours, where prices are stable with little decline, even in this most difficult of economies, the low interest rate still is the buyer's best friend. And if you buy for solid reasons, even the rate shifts like these don;t impact you really poorly. As always, It remains better to buy real estate and wait than it is to wait and buy real estate!

RE-FIs May Slow CLosings on Sales

In late-November, the Federal Reserve pledged $600 billion to buy mortgage-backed securities. The announcement drove down mortgage rates and started the Refi Boom.

Then, the Federal Reserve made a second series of statements after its scheduled meeting last Tuesday, causing mortgage rates to plunge again. This started the Refi Boom's second wave.

Because of the surge in refinance activity, mortgage lenders are "backed up"; initial file reviews are taking up to 12 business days in some cases.

Typically, this process takes 2 days.

Underwriting delays are problem for refinancing Americans because when a mortgage rate is locked, it's most often locked for 30 calendar days -- the standard Rate Lock Agreement contract length. If the mortgage doesn't close within those 30 days, the applicant must either pay an "extension fee" to preserve the lock, or risk losing the rate altogether.

30 days may seem like a long time, but let's consider a few external variables:

• December 24, 25, and 26 plus January 1 and 2 are lost to holiday
• December 27, 28 plus January 3, 4, 10, 11, 17, and 18 are lost to weekends
• January 19 is lost to federal holiday
• 3 days are lost to the Right To Cancel clause

This leaves 13 days to get from Application to Closing, and of those 13 days, 12 of them are being spent on the initial review. 30-day rate locks, therefore, may be inadequate with some mortgage lenders. A 45-day agreement may be required instead.

Typically, 45-day rate locks carry higher rates or higher fees, versus their 30-day counterparts. This amounts to a "tax" on borrowers, a result of the nation's rush to refinance en masse. It also may preclude a homebuyer's ability to close in 30 days.

As always, the best way to preserve a rate lock is to be as responsive as possible to the process. Return paperwork when asked, schedule appraisals immediately, and arrange to signing closing paperwork on the first available day.

With mortgage rates low, application volume -- and underwriting turntimes -- should remain high into early-2009, so the actual impact on sellers is probably going to be minimal, but should be considered by sellers and buyers.

Get your Mortgage Now - Not Later!

The Federal Reserve confirmed what most of us already knew -- getting qualified for a "prime mortgage" is increasingly more difficult.

In a quartely survey of 84 banks, 75 percent of respondant banks tightened mortgage guidelines over the last 3 months for the most qualified of home loan applicants.

"Prime" is a vague term when it comes to mortgages, but, historically, a prime borrower is one that can document:

• A well-documented credit history
• Very high credit scores
• Very low debt-to-incomes

Historically, banks bent over backwards to lend money to this class of borrower. Today, they're thinking twice.

The chart's steep ascent reinforces that members of all tax brackets face consequences from the current credit market turmoil. And, although some corners of credit looked poised to recover -- interbank lending, for one -- the mortgage market is yet unaffected and should be among the last to thaw.

All prospective home buyers should prepare for the likelihood that mortgage guidelines continue to toughen before they start to ease. Mortgage applicants on the cusp of being approved today will almost certainly be turned down for a mortgage in 2009.

Owning real estate can require a tremendous amount of advance planning and, sometimes, looking at the past is the best way to prepare for what's coming ahead.

According to the Federal Reserve's survey, what's coming ahead is more mortgage application scrutiny.

How Unemployment May Make your House More Affordable

On the first Friday of every month, the Bureau of Labor Statistics releases its Non-Farm Payrolls report.

More commonly, it's called the "jobs report" and the October's data is trending with the rest of 2008.

After shedding another 240,000 jobs last month, the economy has now put 1.2 million Americans out of work this year and unemployment rates have climbed to 14-year highs.

As a strange twist, though, today's weak jobs data may lead to a positive turn for the economy and for housing in 2009.

In the wake of the jobs report, members of Congress are already calling for both tax cuts and direct stimulus to reverse the course of the economy. Both of these actions would put money back into U.S. citizens' household budgets, spurring consumer spending nationwide.

Because consumer spending accounts for 70 percent of the economy, this would be expected to push the economy forward at a time when it natural forces are slowing it down.

In addition, markets are betting that the Federal Reserve will cut the Fed Funds Rate below its current 1.000 percent level. This, too, would spur spending because the Fed Funds Rate is directly tied to consumer credit card rates and business credit lines.

Expectations for stimulus are one reason why mortgage rates have not risen today as high as they otherwise would have if this were a "normal" market.

Mortgage rates are slightly elevated as we head into the weekend, but don't be surprised if there's a late-afternoon push that brings them lower. For active home buyers, this could help home affordability as we cruise towards the holiday season.

(Image courtesy: USA Today)