Wednesday, February 27, 2008

Conforming Loan Limts For 2008 - Market Chatter 2/26/08

A little less excitement over jumbo/conforming loan limit changes as the reality drags on. I have heard of buyers trying to delay close of escrow to wait for the new limits, but we still really do not know how its going to look. But I do still expect it to offer some significant help to some people in the 417-729k range, especially where equity is below 20%

From A Colleague:

During a recent teleconference with the U.S. Department of Housing and Urban Development (“HUD”), NAMB learned that HUD plans to publish the new FHA loan limits in a Mortgagee Letter to be issued during the first week of March. HUD will publish separate lists for the FHA program and the GSEs. Additionally, HUD will be recalculating the median home prices which are used to calculate the loan limits. The new loan limits will be based on 125% of the median home price in counties across the country, and will be capped at $729,750. The floor for FHA loans will be raised from $201,060 to $271,050, and originators can begin processing applications now for any loan that was assigned an FHA case number after February 13th (the date the bill was enacted). These changes are a result of the Economic Stimulus Package signed by Pres Bush on February 13th, and will expire after one year. However, HUD officials participating on the teleconference indicated that more comprehensive FHA reform should be moving through Congress in the coming weeks.

Thursday, February 21, 2008

Conforming Loan Limts For 2008 - Market Chatter 2/21/08

Capital Markets Analyst:

HUD has 30 days from the day the President signed the package into law to identify the impacted Metropolitan Statistical Areas, so it may be sometime in mid-March before all lenders receive the official pricing notification. At this point anything else is pure conjecture. Although several mortgage lenders have promoted lists of what they believe the new limits will be, these are only estimates because HUD has yet to determine the higher loan limits. HUD will determine the new loan limits based on the median area sales prices – but which ones? 2007? The fourth quarter of 2007? The third quarter? Median area sales prices may be dramatically different throughout the year, so the timeframe used by HUD to determine the higher loan limits is very important.

Tuesday, February 19, 2008

Conforming Loan Limts For 2008 - Market Chatter 2/19/08

Some of this may be tough to follow. If you have questions, email me.

From A Colleague:

The Secretary of HUD, and OMB, have 30 days from the signing the bill to provide suggested guidelines for loan types, units, etc. to OFHEO. After that, OFHEO will make recommendations to FNMA & FHLMC, who in turn will make recommendations to large investors (Citi, Wells, Countrywide, Chase, etc.) regarding the types of loans, fixed or adjustable, number of units, etc. No one is sure of the exact schedule.

Statistical areas are manipulated by various federal agencies, depending on their wants. For example, the EPA may put a county like Sonoma or Napa into the San Francisco Metropolitan Statistical Area, in spite of Napa & Sonoma Counties being their own “micro” statistical area, whereas the OMB may split them out. A combinations of areas is called a “CSA”, or Combined Statistical Area. The National Housing Act provides formulas for HUD to determine maximum mortgage limits for loans insured by FHA. These limits are determined by the county in which the property is located. You can view all local FHA Mortgage Limits at this website. The bill that was signed by the President did not specifically address the areas that will be affected, as mentioned above. You can keep checking the attached website periodically to find out what the increase will be.

READ THIS PART 2X (JG)

The Securities Industry and Financial Markets Association (SIFMA), publishes “Good Delivery Guidelines” for To-Be-Announced (TBA) trading of Mortgage-backed Securities (MBS) pools issued by Government Sponsored Enterprises (GSEs) and Ginnie Mae. The TBA market facilitates the forward trading of MBS issued by GSEs and Ginnie Mae by creating parameters under which mortgage pools can be considered fungible and thus do not need to be explicitly known at the time a trade is initiated – hence the name “To Be Announced.” The TBA market is the most liquid, and consequently the most important secondary market for mortgage loans. SIFMA will keep the maximum TBA eligible original loan balance at current levels and clarify several long standing market practices for good delivery. The current maximum original balance allowable for a loan on a one family property in a TBA eligible Fannie Mae or Freddie Mac pool is $417,000 in most states. However, in Alaska, Hawaii, Guam and the U.S. Virgin Islands the limit rises to $625,500. Higher balance loans which are now temporarily eligible for Federal Housing Authority (FHA) and GSE guarantee programs under H.R. 5140, the Stimulus Package, will not be eligible for inclusion in TBA-eligible pools. They are instead expected to be securitized under unique pool codes for trading on a “specified pool” basis or inclusion in Real Estate Mortgage Investment Conduit (REMIC) transactions.

Friday, February 15, 2008

Conforming Loan Limts For 2008 - Market Chatter 02/15/08

From A Colleague:

Speaking of different areas of the country, most people think in terms of country, state, county, town, street, even zip code. But “MSA”? The new conforming loan limits discuss Metropolitan Statistical Areas. For the complete list, which also shows the counties included in each MSA, click here. Remember that OFHEO, to the best of my knowledge, has not ruled on whether or not ARM loans are included, nor 2-4 units, nor IO loans. And therefore neither have Freddie Mac or Fannie Mae, and therefore neither have any investors.

“Median”: the middle number in a given sequence of numbers. (4 is the median of 1, 3, 4, 80, 90). Speaking of MSA’s, here in California, the median income (half below, half above) was $64,563 in 2006. The top county – Marin – had a median income of $99,713. So it would appear that, to take advantage of the new limits, loan agents will be focusing on borrowers with much higher incomes than the median. In a full doc scenario, with reasonable debt-to-income levels, a borrower earning $100k per year may not qualify for a $700k loan. Perhaps an income, under the most generic of underwriting & borrower criteria, of something above $125k would be needed to get a DU approval for the new loan amounts.

Doug Duncan, chief economist for the Mortgage Bankers Association, says it will take lenders three to six months to make technical changes so their systems can process the larger loans. And after that, Wall Street investors still must determine the risk of buying these bigger loans. Doesn’t that put us into 2009? So interest rates might not come down as much as some hope, Duncan cautioned. "On balance (the stimulus package) is a plus," he says, "but I would not expect immediate or dramatic change in the near term."

What’s the big deal with FHA loans? Currently the FHA program has no declining value adjustments at the government level, has low down payment and loan to values as high as 97%, cash out refinances allowed to 85%, rate and tern refinances to 97%, total down payment can be a gift, no credit score requirements, no income limits or sales price restrictions, FHA loans are assumable, seller concessions may be as high as 6%, no cash reserves required, non-occupying borrowers are allowed with blended ratios (SFR only), non taxable income (including child support) may be grossed up, and bankruptcies allowed after 2 years. We’ll see if investors continue allowing all of these with $729 loan amounts, of if they add “overlays” to restrict underwriting.

Quetions? a me.

Wednesday, February 13, 2008

Conforming Loan Limts For 2008 - Market Chatter 2/14/08

From A Colleague:

The two major questions on the new conforming & FHA loans rage on: when and how? The President is expected to sign the bill this afternoon. However, James Lockhart, OFHEO Director (the regulator for Fannie Mae and Freddie Mac) indicated that any increase in the GSE limits would require “new product approval process” to evaluate credit risk, concerns about geographic concentration in high risk markets and prepayment risk associated with jumbo purchases. He went on to say that implementation could take between one and up to three months for enactment, and that operational issues including system changes could delay implementation. Since FNMA & FHLMC follow OFHEO’s lead, these comments must be taken seriously, especially since he was opposed to the mortgage limit increase.

questions? Email me.

Stay tuned...

Tuesday, February 12, 2008

Conforming Loan Limts For 2008 - Market Chatter Now WITH VISUAL!

From a colleague:

Please see the graph below, from UBS. The spread saw a dramatic widening in August, narrowed slightly in September, but then widened out (and stayed there) in November. It is widely hoped that spreads will narrow, but many analysts feel that the change in conforming limits will actually have a negative impact on loan amounts above $730,000, due to the perceived higher risk.


Conforming & Jumbo Loan Limts For 2008l: Market Chatter XVI

From Goldman Sachs:

Fiscal Stimulus- Becomes law this week; the first checks will be mailed in mid-May

On Wednesday, President Bush is likely to sign into law the recently passed economic stimulus bill.

Loan limits: The legislation raises the limit on the size of mortgage that Fannie Mae and Freddie Mac may purchase and that the Federal Housing Administration (FHA) may insure. In both cases, the increases are temporary and apply only to loans originated by the end of 2008. Under the bill, Fannie and Freddie may purchase loans up to 125% of the median home price in an area, up to a national limit of $730,000. FHA limits would see the same increase. In addition, the floor on FHA limits would be raised so that larger FHA-insured loans would become available in low-cost areas. Area-specific loan limits for the GSEs and FHA should be issued by mid-March. These provisions should benefit borrowers, but the effect may be modest. Jumbo rates have been higher than the present conforming rate (30 yr fixed) of roughly 5.5% since only mid-2005, and the rate on these new conforming-jumbo loans may not come down as far as the traditional conforming rate. Also, of those who originated loans in late 2005 through 2007, most have lost equity in their homes since. In virtually every city in which the increased limits are likely to apply, the Case-Shiller index now stands below its late 2005 levels.

ALSO TODAY WELLS FARGO Released a memo stating that they do not intend to accept applications based on the new loan limits until all details have been unveiled, and GSEs have responded with their impact studies, etc.

Talk about a wet blanket!

I'll post more as I receive...

Friday, February 08, 2008

Changes To Conforming & Jumbo Loan Limts For 2008 - More Market Chatter AGAIN!

Chatter from today:

As I have noted for some time, many experts believe that FNMA & FHLMC being able to buy higher loan balances won’t cause a total reversal of the mortgage-banking slump. The higher loans could have fee adjustments, it may expire at the end of the year, and it won’t correct the guideline changes or cause their property value to increase, giving many much-needed equity. The Department of Housing and Urban Development will calculate the new loan ceilings and determine the geographic areas impacted, although most likely they will be based on MSA (Metropolitan Statistical Area). And investors still don’t know what to charge for the higher loan balances, which will be based on whether or not the loans can go into mortgage-backed securities. Regardless, yesterday’s vote was a shot of perceived good news for an industry that hasn’t had much to crow about in the last year.

And Then...

H.R.5140
Economic Stimulus Act of 2008 (Enrolled as Agreed to or Passed by Both House and Senate)

SEC. 202. TEMPORARY LOAN LIMIT INCREASE FOR FHA.

(a) Increase of High-Cost Area Limit- For mortgages for which the mortgagee has issued credit approval for the borrower on or before December 31, 2008, subparagraph (A) of section 203(b)(2) of the National Housing Act (12 U.S.C. 1709(b)(2)(A)) shall be considered (except for purposes of section 255(g) of such Act (12 U.S.C. 1715z-20(g))) to require that a mortgage shall involve a principal obligation in an amount that does not exceed the lesser of--

(1) in the case of a 1-family residence, 125 percent of the median 1-family house price in the area, as determined by the Secretary; and in the case of a 2-, 3-, or 4-family residence, the percentage of such median price that bears the same ratio to such median price as the dollar amount limitation determined for 2008 under section 305(a)(2) of the Federal Home Loan Mortgage Corporation Act (12 U.S.C. 1454(a)(2)) for a 2-, 3-, or 4-family residence, respectively, bears to the dollar amount limitation determined for 2008 under such section for a 1-family residence; or

(2) 175 percent of the dollar amount limitation determined for 2008 under such section 305(a)(2) for a residence of the applicable size (without regard to any authority to increase such limitation with respect to properties located in Alaska, Guam, Hawaii, or the Virgin Islands); except that the dollar amount limitation in effect under this subsection for any size residence for any area shall not be less than the greater of: (A) the dollar amount limitation in effect under such section 203(b)(2) for the area on October 21, 1998; or (B) 65 percent of the dollar amount limitation determined for 2008 under such section 305(a)(2) for a residence of the applicable size. Any reference in this subsection to dollar amount limitations in effect under section 305(a)(2) of the Federal Home Loan Mortgage Corporation Act means such limitations as in effect without regard to any increase in such limitation pursuant to section 201 of this title.

(b) Discretionary Authority- If the Secretary of Housing and Urban Development determines that market conditions warrant such an increase, the Secretary may, for the period that begins upon the date of the enactment of this Act and ends at the end of the date specified in subsection (a), increase the maximum dollar amount limitation determined pursuant to subsection (a) with respect to any particular size or sizes of residences, or with respect to residences located in any particular area or areas, to an amount that does not exceed the maximum dollar amount then otherwise in effect pursuant to subsection (a) for such size residence, or for such area (if applicable), by not more than $100,000.

(c) Publication of Area Median Prices and Loan Limits- The Secretary of Housing and Urban Development shall publish the median house prices and mortgage principal obligation limits, as revised pursuant to this section, for all areas as soon as practicable, but in no case more than 30 days after the date of the enactment of this Act. With respect to existing areas for which the Secretary has not established area median prices before such date of enactment, the Secretary may rely on existing commercial data in determining area median prices and calculating such revised principal obligation limits.

AND FINALLY... some color from a colleague:

How will the new amounts be priced? The law impacts loans originated after July 1 of last year. So do you remember all those jumbo loans for $500 or $600 or $700k that were purchased by Citi, Chase, Wells, etc.? Per the proposed law, these loans can now fall under FNMA & FHLMC guidance. Owners of these mortgages are “testing the waters” in terms of pricing in the secondary market. If there is little investor acceptance, rates will stay high. If there is investor appetite, rates on these high-balance loans will improve. It is anyone’s guess. Please note that the law “encourages” these loans to be securitized – it does not require it! So no one knows the answer yet. As soon as they hear, we will pass it along.

What is the schedule? President Bush needs to sign the legislation. That may happen this weekend, or sometime next week. I doubt any large investors will announce a policy until he actually signs the document. And even after that, pricing may be unknown due to questionable investor acceptance.

In the text of the proposed law, it mentions section 302(b)(2) of FNMA’s charter. If you are curious, here it is: http://www.ofheo.gov/Media/Archive/docs/reports/fnma.pdf

Here is the exact text of the law:

SEC. 201. TEMPORARY CONFORMING LOAN LIMIT INCREASE FOR FANNIE MAE AND FREDDIE MAC.
(a) Increase of High Cost Areas Limits for Housing GSEs- For mortgages originated during the period beginning on July 1, 2007, and ending at the end of December 31, 2008:

(1) FANNIE MAE- With respect to the Federal National Mortgage Association, notwithstanding section 302(b)(2) of the Federal National Mortgage Association Charter Act (12 U.S.C. 1717(b)(2)), the limitation on the maximum original principal obligation of a mortgage that may be purchased by the Association shall be the higher of--

(A) the limitation for 2008 determined under such section 302(b)(2) for a residence of the applicable size; or

(B) 125 percent of the area median price for a residence of the applicable size, but in no case to exceed 175 percent of the limitation for 2008 determined under such section 302(b)(2) for a residence of the applicable size.

(2) FREDDIE MAC- With respect to the Federal Home Loan Mortgage Corporation, notwithstanding section 305(a)(2) of the Federal Home Loan Mortgage Corporation Act (12 U.S.C. 1454(a)(2)), the limitation on the maximum original principal obligation of a mortgage that may be purchased by the Corporation shall be the higher of--

(A) the limitation determined for 2008 under such section 305(a)(2) for a residence of the applicable size; or

(B) 125 percent of the area median price for a residence of the applicable size, but in no case to exceed 175 percent of the limitation determined for 2008 under such section 305(a)(2) for a residence of the applicable size.

(b) Determination of Limits- The areas and area median prices used for purposes of the determinations under subsection (a) shall be the areas and area median prices used by the Secretary of Housing and Urban Development in determining the applicable limits under section 202 of this title.

(c) Rule of Construction- A mortgage originated during the period referred to in subsection (a) that is eligible for purchase by the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation pursuant to this section shall be eligible for such purchase for the duration of the term of the mortgage, notwithstanding that such purchase occurs after the expiration of such period.

(d) Effect on Housing Goals- Notwithstanding any other provision of law, mortgages purchased in accordance with the increased maximum original principal obligation limitations determined pursuant to this section shall not be considered in determining performance with respect to any of the housing goals established under section 1332, 1333, or 1334 of the Housing and Community Development Act of 1992 (12 U.S.C. 4562-4), and shall not be considered in determining compliance with such goals pursuant to section 1336 of such Act (12 U.S.C. 4566) and regulations, orders, or guidelines issued thereunder.

(e) Sense of Congress- It is the sense of the Congress that the securitization of mortgages by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation plays an important role in providing liquidity to the United States housing markets. Therefore, the Congress encourages the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation to securitize mortgages acquired under the increased conforming loan limits established in this section, to the extent that such securitizations can be effected in a timely and efficient manner that does not impose additional costs for mortgages originated, purchased, or securitized under the existing limits or interfere with the goal of adding liquidity to the market.


Thursday, February 07, 2008

Changes To Conforming & Jumbo Loan Limts For 2008 - More Market Chatter AGAIN!

From a colleague:

The economic stimulus plan drafted by Senate Democrats was blocked by a Republican filibuster last night when the Senate fell a single vote short of the 60 needed to consider the measure. Now what? Since it is so close, experts believe that it nearly ensures passage of the House’s less expensive stimulus plan, though the Senate may make some changes. The Senate version was backed by automakers, home builders, realtors and mortgage bankers, and the AARP. Senate Republican leader Mitch McConnell of Kentucky said the Democratic stimulus bill passed by the Senate Finance Committee was "a Christmas tree of legislative goodies'' that Bush might not sign. The alternative proposal passed by the House last week could be approved quickly and would be signed, he said, but Democrats face an uphill battle to get the 60 votes necessary to advance the more expansive Senate package in a procedural vote expected today. An interesting civics lesson, since I have forgotten most of what I learned in high school…

From Goldman Sachs:

The Senate failed to pass its fiscal stimulus bill last night, coming up one vote short. This was not a surprising development, and we suggested this outcome in our note on Monday (link below). Despite these negative headlines, the process is still on track – in fact last night’s developments may speed enactment – and still expect stimulus legislation to become law soon. Tax rebates, bonus depreciation for businesses, and a GSE/FHA loan limit increase are very likely to be enacted, perhaps as soon as late next week.

1. The Senate's failure to pass a much different version of stimulus legislation may speed the process up. This is because reconciling differences between competing House and Senate versions would have taken days if not weeks. The House-passed bill was a slimmed down measure including only tax rebates, bonus depreciation for businesses, and increased loan limits (up to $730k) for Fannie, Freddie, and the Federal Housing Administration. By contrast, the Senate included all these things plus additional spending and even more tax breaks for businesses, some targeted at specific industries.

2. The House bill, or something close to it, looks likely to become law. The Senate is likely to pass the House-passed legislation, now that it has failed to pass its own. Before the Senate passes the House bill, one change looks likely: the Senate may add rebates for certain individuals with 'unearned' income. This would increase the amount of rebates in 2008 from $100 billion to $115 billion. Along with bonus depreciation, this brings the likely total cost to around $160 billion.

3. The Senate is likely to pass stimulus legislation by the end of the week. Senate Majority Leader Reid (D-NV) has said he may try to force one more vote on the Senate's stimulus measure in the hope of finding one extra vote. This is possible, but these efforts usually don't succeed, so we would expect the Senate to cast its final vote on stimulus legislation it will pass by the end of this week (possibly today). Majority Leader Reid will announce next steps at around 10:30am today.

4. Stimulus could still be enacted by the end of next week. If the Senate manages to send the House a bill by the end of the week, the House will pass the slightly revised version in the middle of next week and then send it to President Bush for signature. The only risk to this timing is if Democratic leaders attempt to make further changes to the bill, which could result in further delays in the Senate.

5. The legislative wrangling has little impact on timing of stimulus. We don't expect a significant delay. But even if the bill is held up in negotiations, the IRS has made it clear that there is little it can do to process rebates before the tax filing season ends on April 15. This means rebates aren't likely to make it to consumers until sometime in mid- to late May. A long delay could affect the timing of rebates, but a delay of a couple of weeks would be unlikely to make a difference in when rebates are mailed.

6. The differences between the House and Senate are of most interest to certain industries. Homebuilders and alternative energy manufacturers would have benefited from tax provisions that only the Senate bill included. These now look less likely to make it into the final version. Also, only the Senate bill would extend unemployment insurance (UI). While the final stimulus bill looks likely to omit this provision, an extension later this year looks likely, assuming unemployment rises as we expect. For more on the details of the House and Senate versions, see Politics & Policy 08/07

Tuesday, February 05, 2008

1031 Exchange Sees 180 Day Rule Challenged

If you have ever dealt with a 1031 Exchange, you are familiar with the 180 day term. If you have not, the basic gist is as follows:

A person selling real estate can roll over the proceeds into a new like-kind investment and defer taxation on the gain, but the replacement property needs to be identified within 45 days of sale, and the investor needs to take ownership of the new property within 180 days after the sale.

The Mortgage Meltdown/Credit Crisis/Credit Crunch/Subprime Meltdown/whatever you want to call it has officially sucked the 1031 market into its vortex, and according to the 10/19/07 Kiplinger Tax Letter, the IRS is considering soft enforcement of this 180 day rule. 1031 Exchanges involve an 'intermediary' to handle the exchange, and because so many of these entities have gone into bankruptcy, the cash involved in the exchanges has been tied up in court, hampering the ability of the investors to settle within 180 days.

In previous cases where an intermediary caused such a delay, the IRS claimed they were powerless to extend the deadline. This current attitude may be reflective of a 'bail-out' friendly attitude in various parts of our government.

Please consult your tax advisor for more specifics, or contact me if you need a referral to one.

Income Taxes Of The Rich And Famous (redux)

2005's tax analysis is in! You can read the summary from the 2004 figures here for a comparison.

  • The top 1% of filers paid 39.4% of all income taxes on 21.% of total adjusted gross income
  • Minimum income needed to be in the top 1% of filers: $364,000 (AGI)
  • The top 5% of filers paid 59.7% of all income taxes on 36% of total AGI
  • Minimum income needed to be in the top 5% of filers: $145,300
  • The top 10% of filers paid 70% of all income taxes on 46% of total AGI
  • Minimum income needed to be in the top 10% of filers: $103,900
  • Bottom 50% of filers shouldered 3.1% of total income tax
Today is Super Tuesday. Who did you vote for?

Let me know if you need some ideas about how mortgage planning can lead you to a more tax efficient balance sheet.

Anatomy Of A Recession

The following is a copy of one of the best recent blurbs I have seen to describe the prospects of recession here in the US, and it comes from Paul Kasriel of Northern Trust. You can follow his work here.

"The financial sector, especially the banking system, is the transmission mechanism between the Federal Reserve and the private sector of the economy. If the financial transmission is not functioning properly, the Federal Reserve can mash on the monetary accelerator but little power gets transmitted to thet "wheels" of the economy."

The "wheels" he refers to is consumer spending. Recent bank losses are going to prevent these institutions from making use of the lower Fed Funds rates for some time, as they are still trying to stop the bleeding. We will not see the effects play through to the consumer accordingly. Kasriel thinks we are in a recession, and that it will mimic the one we experienced in 1991, citing that the above analogy applied then as it does now. Very interesting piece, I recommend reading it.

Friday, February 01, 2008

It's A Good Time To Review The Correlation Between Fed Funds And Mortgage Rates

Here is a common question over the past few weeks:

“If rates were cut .500%, is my 30 year fixed going to be .500% lower?”

The answer is different than you may think, and while I do agree that we tend to see declining interest rates in mortgages when the Federal Reserve is in the cut-side of the rate cycle, the subtle relationship between Fed Funds and Mortgage Rates needs to be understood if you are engaged in a purchase or refinance transaction involving money borrowed from a bank. Failure to understand this means you may get caught on the wrong side of a timing bet.

Remember “Fed Funds” is the rate that banks can borrow money from each other to keep their reserve amounts in line. The “Discount Rate” is the interest rate at which an eligible financial institution may borrow funds directly from the Federal Reserve when their reserves dip below the reserve requirement. It's considered the last resort for banks, which usually borrow from each other. The Federal Reserve can change either – but they can’t change mortgage rates!

Check out this chart for an illustration. You'll notice some basic tendencies that are similar, but by no means is there a basis point to basis point connection. In fact, when the Fed cuts rates, there is often a spike in mortgage rates based on the perceived threat of inflation associated with lower borrowing costs at the institutional level. Mortgage rates are based on long term fixed income investment vehicles, aka bond instruments, which hate inflation. Inflation eats away at the value of that income over time.

Looking back at the markets when the Fed threw in a surprise .750% rate cut, I believe it was the news about the rogue trades made by Societe Generale to the tune of MINUS 7.1 BILLION DOLLARS that caused the Fed to throw in the emergency towel and caused domestic money to pile into safe fixed income investments – like mortgage bonds. This pushed mortgage rates down quickly. It was not the Fed action directly causing mortgage rates to improve, but both were reacting to the same news in their own way for different reasons. In the days that followed, the mortgage bonds quickly reversed and went the other direction, suggesting that the Fed action ultimately caused rates to worsen when you look at the net of the 2-7 days that followed the news... Again, lower Fed rates invites inflation, arch enemy of fixed investments.

This does not mean that I expect to see rates rise steadily as the Fed continues this cutting cycle - and I expect to see the Fed go another 100 basis points over the coming year. Mortgage rates will also come under pressure based on the same economic data that the Fed is responding to. The important lesson here is to understand that the Fed is trying to achieve balance between price stability and economic growth. Cutting rates threatens price stability by inviting inflation. But raising rates to fight inflation chokes off growth. This is why they constantly tamper with the Fed Funds rate. The bond market reacts to their policy decisions and jumps back and forth based on how effectively it views the Fed to be at maintaining that balance.

It may not be simple to understand. But if you are in a mortgage transaction, or about to consider one, you best make sure that you're working with a professional who gets this. Waiting to lock because we expect the Fed to cut rates has been bad advice at every single cut since the Fed began easing in this cycle.