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Predicting mortgage rates is about as reliable as an online psychic, especially in today’s market. There are far too many factors which affect mortgage rates for even Ben Bernanke to predict what rates will do from one day to the next. The trick the Fed is facing now is lowering the Fed rates enough to boost the economy (Fed rate cuts do not always equal a cut in mortgage rates; see my blog from Feb 25th for info on this) but not so much that we weaken the dollar and head straight into a recession.

From Bloomberg.com: Federal Reserve Chairman Ben S. Bernanke’s readiness to cut interest rates to avert a recession is stoking concerns that prices will get out of hand.

“If you move aggressively to cut interest rates and stimulate the economy, then you risk fueling inflation,” Democratic Representative Greg Meeks of New York said at yesterday’s Senate Banking Committee hearing.

Senator Richard Shelby of Alabama, the Senate panel’s ranking Republican, said he wants to “make sure” the Fed “focuses on the risks associated with increasing inflation,” citing higher gold, oil and consumer prices.

The FOMC last month lowered the benchmark rate by 1.25 percentage points in nine days, the steepest reduction in two decades, to 3 percent. The two decisions each saw one dissenting vote on the Fed panel.

“They will keep cutting,” said Kurt Karl, chief U.S. economist at Swiss Reinsurance Co. in New York. “If inflation looks like it is taking off quite rapidly, or inflation expectations take off, they will have to backtrack.”

Representative Gary Miller, a California Republican, told Bernanke that with continued high oil prices, “it may be more difficult for the Fed to cut interest rates,” and he asked the Fed chief about his other options besides lowering rates.

“We do face a difficult situation,” Bernanke acknowledged. Oil and food prices have been climbing “rapidly,” and there are “slightly greater upside risks to the projections” for inflation now than a month ago.

It is a very tricky situation we presently face; below is the latest economic data which factors into what mortgage rates might do…

Driving Interest Rates — January 2008: Weak Economic Data / Falling Stock Prices / Emergency Fed Rate Cut / Regular Fed Rate Cut

Treasuries soared in January, sending yields sharply lower as weak economic data and turmoil in the financial markets spurred the Federal Reserve into making deep interest rate cuts. The benchmark, 10-Year Note saw a decline in its yield of 44 basis points. Since the end of last June, the yield had declined by 115 basis points.

The year started out with bearish news from the manufacturing sector. The Institute for Supply Management (ISM) said that its manufacturing index came in at 47.7 for December following a reading of 50.8 in November. Any reading below 50.0 indicates a general contraction of activity relative to the preceding month and December’s contraction was the first in eleven months and the weakest reading in over four-and-a-half years.

Another major sign of economic sluggishness came a few days later when the Labor Department said that nonfarm payrolls rose by just 18,000 in December. While this was the fifty-second straight month of job growth, it was the weakest of them. Besides the weak job growth, observers were startled by a jump in the unemployment rate, the percent of the active workforce without jobs. It rose from 4.7% to a two-year high of 5.0%. The jump was the largest since October of 2001.

Adding to the attraction of Treasuries was the sharp downturn in stocks. In the first five sessions of the month, the Dow lost 676 points. But stocks exhibited a technical bounce in the following two sessions, allowing bond traders to consolidate some of their profits after eight days of advances.

New supply also pressured bonds as the Treasury auctioned $8 billion in 10-Year TIPS (Treasury Inflation Protected Securities) on the 10th. TIPS differ from conventional Treasury securities in that although they have a fixed coupon (interest) rate, but their face value is regularly adjusted according to the Consumer Price Index, so the interest payout amounts fluctuate according to the changes in inflation. At maturity, the greater of the inflation-adjusted principal or the original face value is paid out.

While the auction was met with tepid demand, the bond market recovered since Federal Reserve Board Chairman Ben Bernanke had given a speech on the 10th where he noted that “in light of recent changes in the outlook for and the risks to growth, additional policy easing may well be necessary.”

Because of deteriorating economic conditions and problems in the credit market due to pricing difficulties associated with certain mortgage-backed securities, the Fed had already taken a number of dramatic actions. In August, the monetary policy committee (FOMC; the Federal Open Market Committee), in an unscheduled meeting, cut the discount rate by 0.50% to 5.75%. The discount rate is the rate charged to banks for loans directly from the Fed. In addition, it extended the payback period. In September, at the regular policy meeting, the committee cut its target for the fed funds rate (interest rate for short-term loans between banks) by 0.50% to 4.75% from 5.25%. This was the first rate cut since June of 2003. The discount rate was also cut again by 0.50% to 5.25%.

In October, the rates were cut again but by only 0.25%, bringing the fed funds rate down to 4.50% and the discount rate to 5.00%. The rates were cut again in December by 0.25% to 4.25% and 4.75%. In addition, the Fed began offering banks another direct source of funds since borrowing through the discount window had traditionally been perceived as a sign that a bank is in trouble. In December, the Fed instituted what it calls a Term Auction Facility (TAF), a temporary program whereby short-term funds can be obtained on an auction basis using a broad range of collateral including mortgage-related securities.

More weak economic news came out on the 15th. Retail sales fell in December and the weakness was broad-based. The large but volatile category of autos and light trucks declined; but even excluding the category, sales were down. And they were even lower if the volatile category of gas station sales was also excluded. The growing string of bearish economic data put further pressure on the Fed to keep cutting rates. Treasuries benefit from the prospect of lower rates since it means lower coupon rates on upcoming issues that will compete with those already in the market.

Lower rates also eventually benefit stocks by making it easier for businesses and consumers to borrow and spend money, but the grim outlook for near-term corporate earnings continued to weigh on the equities market.

Speculation that the Fed would be cutting again was strengthened on the 17th when Mr. Bernanke, speaking before the House Budget Committee said, “On the whole, despite improvements in some areas, the financial situation remains fragile, and many funding markets remain impaired. Adverse economic or financial news thus has the potential to increase financial strains and to lead to further constraints on the supply of credit to households and businesses.” He further noted that the Fed must be “prepared to act in a decisive and timely manner and, in particular, to counter any adverse dynamics that might threaten economic or financial stability.”

Action came sooner than expected. In an emergency meeting on the 22nd, the FOMC decided to cut its target for the fed funds rate by 0.75% from 4.25% to 3.50%. The discount rate was also slashed by 0.75% from 4.75% to 4.00%. The cuts were made following steep losses in global stock markets on Monday when the U.S. market was closed for Martin Luther King Day and in Tuesday trade (overnight before the U.S. markets opened).

The Fed move prevented a severe melt-down in stocks but the indices still lost ground on the 22nd. The Dow had dropped again in five straight sessions, losing 807 points. Stock rebounded in the next couple of sessions, once again allowing bond traders to take back some of their profits. Supply was again a factor as the Treasury auctioned $8 billion in 20-Year TIPS on the 24th. But a drop in stocks the next day helped Treasuries recover the next day.

In the beginning of the last week of the month, bonds were held back again by supply pressure from the monthly 2- and 5-Year Note offerings. Some uncertainty over what the Fed would do at the month’s regular meeting on the 29th and 30th also kept traders in a defensive posture. The month ended with more gains for Treasuries as the Fed once again cut the fed funds and discount rates by 0.50%. This brought the fed funds rate down to 3.00% and the discount rate to 3.50%.

Stocks closed out the month with a winning session but for the whole month, the Dow lost 614.56 points or 4.63%. The Nasdaq lost 262.42 points or 9.89%.

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Bankruptcy is a very difficult decision to make. Nobody likes to be in a position where they are forced to make that choice. Unfortunately with the current condition of the market this is a reality for many home owners. I regularly receive many questions regarding bankruptcy and what it means personally and what it will mean financially now and further down the road. I have put together a few of the most common questions I receive along with the answers. I hope this will help give you a basic idea on how the process works but do not take this as legal advice, always seek legal council when facing the choice of bankruptcy.
I am a cosigner for a debt, how does bankruptcy affect my obligation?
If the debt is a dischargeable debt then you will not have to pay it. However, the cosigner will become primarily responsible for the debt. Be sure to list the co-signer as a creditor in your schedules as they have a contingent claim against you.
Can I keep my house after bankruptcy?
Depending upon which exemption scheme is selected and your circumstances, you may exempt up to $100,000 in equity. When calculating your equity you should use a value that is based upon a forced liquidation as opposed to the best selling conditions to arrive at a value for your home. Once you know the value, subtract the amount owed plus selling and transfer costs from the value to calculate the equity. In a depressed market, liquidated properties are often valued less than what we like to think the property is worth.
Can I keep my credit cards after bankruptcy?
Under some circumstances you may keep your credit cards. There are many factors which must be considered. Some of those include the credit card balance at the time of the bankruptcy, what the credit card company is willing to do and your ability to pay the present and future credit card debt.
Will I lose my job?
No. Bankruptcy laws prohibits discrimination based upon a debtor filing for protection under the bankruptcy laws.
Can I go to jail if I file bankruptcy?
No. There are no debtor’s prisons in the United States.
Will my employer find out about my bankruptcy?
Under normal circumstances, unless your employer is a creditor, your employer will not know.
Will bankruptcy stop a wage attachment?
Yes.
Will bankruptcy stop a judgment?
Yes. Most civil judgments are stopped by bankruptcy.
Will a bankruptcy remove a lien?
Under some circumstances once the bankruptcy proceedings have started, special motion can be filed to remove certain liens. It will take a bankruptcy court order to remove them. This is a complicated area of the bankruptcy law and an attorney should be consulted.
Will bankruptcy stop an eviction action?
Perhaps. However, this will only delay the inevitable. The owner is entitled to possession of his property and at best you will be able to remain in the property until you have received your discharge from bankruptcy or the landlord obtains an order from the bankruptcy court. I must caution you that if the only reason you filed the bankruptcy is to stop an eviction then this might be considered an abuse of Chapter 7. If the bankruptcy court finds that this is true then the court can immediately dismiss the bankruptcy and impose other legal and monetary sanctions on you.
Will bankruptcy stop a foreclosure?
Yes. However, a home is an asset usually secured by a deed of trust. The mortgage company is entitled to apply to the court for relief from the automatic stay, the order preventing creditor action by virtue of the bankruptcy. Depending upon several factors, you may be able to prolong a foreclosure until you have received your discharge from bankruptcy. Usually, to keep a home that is in foreclosure you will have to make a deal with the note holder.
I am divorced, will bankruptcy wipe out my obligation to pay community debts?
In general, you will be discharged from all dischargeable community debts. However, you should discuss this with your family law attorney to understand the other implications of the filing of a bankruptcy during the pendency of a dissolution action (divorce case). Also, remember that if you are discharged from community debts, your spouse is responsible for the entire balance owing on the debt. Put another way, they shift the responsibility on to you.
Are there any debts that I can’t wipe out in bankruptcy?
Yes, there are certain debts that are NOT dischargeable in bankruptcy. Generally speaking, the following debts will not be discharged: Taxes; Spousal and Child Support; Debts arising out of willful misconduct and or malicious misconduct by the debtor; liability for injury or death from driving while intoxicated; non-dischargeable debts from a prior bankruptcy; student loans and criminal fines, penalties and forfeitures. Those debts which are secured will be discharged, however, expect the creditor to take the necessary legal steps to take back the property. In most cases if the debtor’s equity interest in the property is exempt, the debtor may retain the property by redemption or reaffirmation.
Disclaimer:
This information deals with Chapter 7 consumer bankruptcy. Each state has its own bankruptcy laws, so you need to check with your state for details. Information dealing with Chapter 13 bankruptcy and consumer debt restructuring is not discussed in the above FAQs. The information contained in the following FAQs is provided for general information purposes only and is not intended to be a legal opinion nor legal advice nor is it intended to be a complete discussion of all the issues related to the area of Chapter 7 consumer bankruptcy. Every individual’s factual situation is different and you should seek independent legal advice regarding specific information.

Interest Rate Commentary

Wednesday: 02/27/08 10:30 AM EST:

Treasuries are ahead this morning on weak economic news but supply pressure is likely to keep a lid on the upside. The news has pulled the stock indices down in early trading action but the losses are mild and this may be interpreted as a bullish indicator considering the solid gains made in the last three sessions.

In today’s economic news, the Commerce Department reported that the seasonally adjusted level of new orders for durable goods items fell in January by 5.3% following a rise in December of 4.4% (previously reported as 5.0%). The decline was larger than the 4.0% drop that forecasters were predicting.

Durable goods are defined as items meant to last three years or more. They are usually labor-intensive to produce, expensive, and therefore often financed. Because of this, the trend in orders provides some insight regarding upcoming production activity and the effect interest rates may be having on the process.

All of the key sub-categories also saw declines last month. A large but volatile category of items is transportation and orders there were down by 13.4% following a 10.2% increase in December. January’s drop was the largest in over a year. But even excluding the category, orders were down by 1.6% after a 2.0% December increase.

Another category that is usually filtered out is orders in the defense sector. This is because they are not governed by standard market forces. Defense orders were down by 16.2% but even excluding them, orders were down by 4.7%. And excluding both the defense sector and the category of commercial aircraft (a highly volatile transportation component), orders were off by 1.8% last month.

Observers also attend to the category of non-defense capital goods minus aircraft since it provides some insight on core business demand. Orders there fell by 1.4% in January after a 5.2% rise in December.

In the second major release of the day, the Commerce Department reported that the seasonally adjusted, annualized rate of new home sales fell by 2.8% in January from December’s 605,000 to 588,000. This was lower than the predictions for a 600,000 reading and was the lowest sales pace since February of 1995. The decline was widespread. Only the West saw a pickup of 2.2%. The pace fell by 10.3% in the Northeast, by 7.6% in the Midwest, and by 2.4% in the South.

With the falling demand, the inventory of new homes on the market has been dropping. In January, the seasonally adjusted, annualized level of homes on the market was 482,000, the lowest reading since August of 2005. At the prevailing sales pace, the inventory would be depleted in 9.9 months, the longest turnover time since October of 1981.

Despite flagging sales, the average new home price edged higher last month by $2,200 to $276,600. However, this was still 12.1% below the previous January’s average. The median home price fell by $9,600 last month to $216,000, the lowest since September of 2004. The price was 15.1% below the previous January’s.

In related news, the Mortgage Bankers Association of America reported that its application index fell last week by 19.2% to its lowest level in eight weeks. The data series has been quite volatile recently, possibly due in part to faulty seasonal adjustment factors associated with the year-end holidays. In the last three weeks, the index has fallen by a total of 38.8% but this followed five weeks in which the index surged by 103.5%. In the three weeks before that, the index had fallen by 34.3%.

But the latest developments also reflect rising mortgage rates which have had the strongest effect on the refinance sector. The news release said that the index for which fell by 30.4% last week to an eight-week low. Refinances accounted for 52.0% of application activity, down from 61.7% in the previous week and the lowest portion recorded so far this year.

Yet, the purchase sector has not been strong lately, either. The purchase index was little changed last week with an increase of 0.2%. Despite the rise, the reading was still the second lowest in over seven years.

The index of applications for conventional loans fell by 21.4%. The index of applications for government-backed loans fell by 3.8%. Registrations for adjustable rate mortgages rose from 12.8% to 15.0% — the highest percentage since mid-November.

This afternoon, the Treasury will be conducting its monthly auction of 2-Year Notes and the offering is the largest in almost four years. The larger size means demand is likely to be comparatively less than last months’ and last month’s issue met with generally weak demand.

In January’s auction, bids exceeded the $24 billion offer amount by 2.33 to 1, up from the 2.23 bid-to-cover ratio in December’s auction and the 2.21 ratio in November. But it was still well below the 2.86 average for the twelve auctions preceding January’s.

Noncompetitive bids, a gauge of individual investor demand, totaled $597 million, up from $525 million in December but far short of the twelve-issue average of $745 million.

Foreign demand was extremely weak. Indirect competitive bids, which include those from foreign central banks, garnered just 18.8% of the issue, down from December’s 25.4% award portion and below the twelve month average of 29.7%.

Today’s issue has a face value of $26 billion. The deadline for competitive bids is 1:00 PM Eastern Time. The deadline for noncompetitive bids is noon.

Regardless of whether the auction is successful or not, any upside move is likely to be capped by preparation for more supply coming to market tomorrow. This is the monthly 5-Year Note offering and it, too, will have the largest offering size since April of 2004.

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There are national non-profit organizations dedicated to assisting homebuyers with their down payment and closing costs. The most prominent of the nonprofit organizations that facilitate these transactions are The Nehemiah Program, AmeriDream Inc. and Partners In Charity.
Buyers can receive a free gift under these programs. Gift amounts vary with each program but are generally available in amounts of 3% with some programs, all the way up to $22,500 with others. Buyers never have to repay these gifts.
It’s easy to receive a free gift from these programs, however qualification guidelines do vary with each program. Each program requires that buyers must qualify for any eligible loan program with their lender (there are many programs that qualify).
While this is the only qualifying requirement of some programs, others have requirements such as requiring that the buyer complete a Home Ownership Counseling Course or provide 1% of their own funds for the transaction. In addition some programs have income/asset restrictions, recapture clauses, reserves required or geographic boundaries. Each program can provide you with their specific requirements and/or limitations
These programs generally participate with FHA, conforming, and jumbo loan products. Most of these programs do not underwrite the loan or add any cost in the form of points, fees, etc., they simply provide the gift for the down payment and/or closing costs.
These down payment assistance programs can be used for Single Family (1-4 unit) homes, Manufactured/Modular Homes, Condominiums, Town Homes, Existing or New Construction, Rehab and Jumbo.
There are some excellent down-payment assistant programs. There are also some dubious ones. It’s important to confirm that the nonprofit organization with which you’re dealing is of the former variety before making any commitments.
A good first step is to restrict your dealings to nonprofits that belong to the Home Gift Providers Association (HGPA). The HGPA members are required to adhere to a prescribed set of best practices and a code of ethics. Its website includes a list of member companies.

Interest Rate Commentary
Tuesday: 02/26/08 10:30 AM EST: Despite worrisome inflation data released this morning, Treasuries are ahead following losses in the last two sessions. The losses absorbed some of the negative effect from the inflation news and weak economic data is providing some support. And though all the news is overwhelmingly negative for stocks, the indices are currently only down slightly in choppy trading action.
In the main release of the day, the Labor Department reported that its Producer Price Index (PPI), a gauge of inflation at the wholesale level, rose in January by 1.0%. The jump was much larger than the 0.4% that analysts had predicted. Moreover, the core index, which excludes the volatile categories of food and energy, rose by 0.4% last month, the biggest jump in eleven months. A 0.2% increase had been anticipated.
But some bond traders had been bracing for an upside surprise since the Labor Department last Friday released revisions to past data based on new seasonal adjustments. The new data showed a 0.3% decline in the index in December instead of the originally reported decline of 0.1%. Consequently, January’s bounce turned out to be larger than predictions based on the old data.
In November, the index surged by 2.6%. This was due primarily to an 11.4% jump in energy prices — the largest in almost eighteen years. Energy prices fell by 3.0% in December and rebounded by 1.5% last month. The index for food prices slipped by 0.2% in November but rose in December by 1.4% and in January by 1.7%.

Prices further down the production pipeline also indicated an increase in inflation pressure. At the intermediate stage of production, the price index was up by 1.4% following a 0.2% decline in December. At the initial or crude stage of production, the index was up by 2.5% following a 1.1% rise in December. The core intermediate index rose by 0.8% last month after a flat reading (0.0%) in December and the crude core index rose by 4.0% following a 0.2% rise.
On a year-over-year basis, the PPI was up by 7.4%, the largest rise since October of 1981. The core index was up by 2.3% Y/Y following 2.0% increases in November and December. Intermediate prices were up by 8.8% Y/Y, the largest increase since August of 2006. Core intermediate prices were up by 4.1%, the largest Y/Y increase since December 2006. On a year-over-year basis, crude prices were up by 31.3%, the largest jump since October of 2005.
In the second major release of the day, independent research firm, the Conference Board, reported that its Consumer Confidence Index came in at a five-year low of 75.0 this month. The reading was well below the low end of the forecast range of 80.0 to 83.0 and January’s originally reported index of 87.9 was also revised down slightly to 87.3. The news release said that the index of present conditions fell to 100.6 from 114.3 (originally 115.3) and the expectations index fell to 57.9 from 69.3 (originally 69.6).
In other news, the S&P/Case-Shiller home-price index of 20 metropolitan areas fell by 2.1% in December after a same-sized decline in November. But since the data is not seasonally adjusted, the year-over-year differences are more revealing. The index was down by 9.1% in December relative to the preceding December following a 7.7% Y/Y decline in November. The latest Y/Y drop is the largest in the history of the data series going back twenty years. The declining prices reflect waning demand as credit becomes harder to obtain.
In related news, a report from the mortgage information firm, RealtyTrac, showed an 8.0% increase in foreclosure filings in January. On a year-over-year basis, they were up by 57% and lender repossessions were up by 90%.
Regarding the increase in foreclosure activity, James J. Saccacio, CEO of RealtyTrac, noted that, “the 8 percent monthly increase in January is not as precipitous as the 19 percent spike we saw in January of 2007, and several key states actually experienced decreasing foreclosure activity from the previous month. It could be that some of the efforts on the part of lenders and the government both at the state and federal level are beginning to take effect. The big question is whether those efforts are truly helping homeowners avoid foreclosure in the long term or if they are just temporarily forestalling the inevitable for many beleaguered borrowers.

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