Speaking at the Economic Club of New York today, Federal Reserve Chairman Ben Bernanke seemed to imply that the mortgage markets may need the Fed’s help longer than he previously expected.

Bernanke made it clear that the state of the U.S. economy is still frail. “The flow of credit remains constrained, economic activity weak, and unemployment much too high. Future setbacks are possible.”

He also said, “Unfortunately, reduced bank lending may well slow the recovery.” According to the numbers, that has been true in recent past. The Fed’s senior loan officer survey from October reported that 25 percent of lenders had tightened their mortgage standards of single-family prime loans since the last survey in July. Not a good sign for the mortgage markets when things are looking so tenuous.

“We continue to encourage banks to raise additional capital to support their lending. And we continue to facilitate securitizing through our Term Asset-Backed Securities Loan Facility (TALF) and to support home lending through our purchases of mortgage-backed securities,” Bernanke said.

So, the Fed will almost definitely be leaving its target interest rate alone, meaning mortgage interest rates have a shot at staying low and close to the five percent mark. Record low rates have been one of the only consistently positive indicators in the market for the past year.

On the overall future of the economy Bernanke summarized, “My own view is that the recent pickup reflects more than purely temporary factors and that continued growth next year is likely. However, some important headwinds-in particular, constrained bank lending and a weak job market-likely will prevent the expansion from being as robust as we would hope.”

The tables have really turned in the past couple years in terms of why American homeowners are refinancing. During the height of the housing boom, homeowners were borrowing against their equity like crazy, as their home values appeared to be headed quickly upward indefinitely.

Now, however, Americans are house poor and many are and have been at the mercy of high adjustable interest rates. In the most recent study from mortgage finance giant Freddie Mac, it looks like homeowners are overwhelmingly using refinance loans to lower those rates and cut their monthly payments.

Freddie Mac reported that in the third quarter of 2009, refinanced loans netted up to a total $3 billion in payment savings for the first year of the new mortgages for participating homeowners. One half of all those who refinanced conventional mortgages lowered their annual mortgage interest rate by 17 percent or more!

“Homeowners are benefiting from an extended period of very low interest rates. In the first nine months of 2009, interest rates on 30-year fixed-rate mortgages have averaged 5.1, the lowest such average in the 38-year history of Freddie Mac’s Primary Mortgage Market Survey,” noted Frank Nothaft, Freddie Mac vice president and chief economist. “At the beginning of the year, only borrowers who still had a solid equity cushion could take advantage of the low mortgage rates, but through the Homeownership Affordability Refinance Program that got underway in April, borrowers who have a loan owned by Freddie Mac or Fannie Mae can refinance that loan even if they have no home equity. As of August 31st, over 93,000 borrowers had taken advantage of this opportunity according to the Federal Housing Finance Agency, with the bulk of those occurring in July and August.”

And 64 percent of prime (good credit) borrowers who refinanced conventional loans in the third quarter retained the same principal balance or actually reduced it. That is the highest recorded percentage in six years. Only 36 percent of borrowers refinanced with “cash-out” loans. In total they pulled out $20 billion of home equity, the lowest amount in almost a decade.

Bottom line: If you can qualify, refinance now for payment savings. Interest rates are likely to rise starting sometime in 2010 and may not reach today’s lows for a long time to come.

Mortgage interest rates moved a little higher during the past week, but overall this has been a great year for rates according to mortgage finance giant Freddie Mac on Thursday.

The average rate on a 30-year fixed rate mortgage inched up to 5.03 percent, excluding points, from 5.00 percent the week before. One year ago, however, the average rate was more than a point and a half higher at 6.46 percent.

The average rate on a 15-year FRM grew to 4.46 percent, up from 4.43 percent last week and one-year adjustable rate mortgages carried an average rate of 4.57 percent, up slightly from 4.54 percent.

“Interest rates for 30-year fixed mortgages have averaged just below 5 percent this year, which is the lowest 10-month average since the survey began in 1971,” said Frank Nothaft, Freddie Mac vice president and chief economist. “As a result, refinance activity has accounted for almost seven out of ten mortgage applications on average this year.”

So why didn’t rates move much this week? According to a survey from BankRate.com, the incoming economic data sent mixed signals to the mortgage markets, as investors quickly bought up securities at a government debt auction early in the week, then consumer confidence and new home sales were down.  But then again, existing home sales showed strong gains, jumping up 9.4 percent in September from the previous month.

And although it is anyone’s guess what will happen to interest rates in the coming week and month, by historical standards there is no doubt that rates are fabulously low. If you are a potential homebuyer sitting on the fence, pre-boom home prices coupled with today’s rates make now a really good time to buy.

Home buyers again saw mortgage rates rise this week alongside word that the economy is beginning to improve. According to the Wall Street Journal, rates for a 30-year home loan rose above 5 percent for the first time since September, rising to 5.03 percent. Rates for 15-year fixed rate and five and one-year adjustable rate loans also saw a rise in numbers. 15-year fixed rate mortgages climbed from 4.43 percent to 4.46 percent, while five-year adjustable rate loans rose from 4.42 percent to 4.40 percent. The rates for one-year adjustable rate mortgages are at 4.57 percent, up from 4.54 percent a week ago.

While the fact that the Federal Reserve felt confident enough to raise the rates is encouraging, the drop in mortgage applications and refinances put a damper on this news. According to the Washington Post, new home purchases dropped to a 402,000 annual pace, or 3.6 percent, in September. It was the first time since March that new home sales declined from month-to-month. The number of mortgage applications fell 5.2 percent in the third week of October, while lenders saw a 16 percent drop in applications from homeowners looking to refinance.

The news of the decline in mortgage applications for new home purchases is a bit discouraging for the housing industry. The $8,000 tax credit for first-time home buyers had helped provide an incentive to purchasers and drive new home purchases. However, with the tax credit ending and no definite word yet on an extension combined with the continuing rise in mortgage rates, the numbers may not improve for a while.

Rising home prices may also be playing a part in the declining number of applications. While an increase in home prices does signal growing buyer confidence and an economic upswing, it may be discouraging some buyers from purchasing a new home. Even as economists state they are beginning to see improvement in the economy, the public has not yet tended to agree, and rising home prices are likely to play a contributing factor in the decline of buyers applying for mortgage loans.

The mortgage rates for this week are still significantly below where they were a year ago, and are considered to be very low when compared to longer-term historical numbers. The low mortgage rates are a positive for the housing industry as buyers lock in their loans at lower rates. Unfortunately, with consumer confidence still not lining up with increasing economist confidence, the rise in rates may mean a dip in sales until confidence increases.

International credit ratings agency Fitch Ratings improved its outlook on the U.S. housing market in its recent “Chalk Line” report, but that’s not saying much considering it still expects housing starts and new home sales to continue to plunge downward through the end of the year.

“During the first 12-15 months off the bottom, the housing recovery may appear jaw-toothed as substantial foreclosures now in the pipeline surface as distressed sales, while meaningful new foreclosures arise from Alt-A and option adjustable-rate mortgage resets,” wrote managing director and lead U.S. homebuilding analyst Bob Curran.

The new forecast includes a 36.7 percent decrease in total housing starts in 2009, up from a previous prediction of 43.3 percent. The new projection calls for a 21 percent decline in new home sales, up from the earlier forecast of 30 percent. And existing home sales are now expected to move up 1.1 percent this year to almost 5 million, a change from Fitch’s last prediction of flat sales.

Why the more “upbeat” outlook? Fitch says it took into consideration increased affordability, a slowing of builder cancellation rates, shrunken builder inventories, an uptick in consumer confidence and an increased demand for new homes from those who have been sitting on the sidelines.

Why are the numbers still trending downward though? According to Fitch there is still a great risk of a new wave of foreclosures on the way, home prices continue to decline, and the first-time homebuyers tax credit that has artificially inflated sales for the past two quarters is due to expire in December.

“There is also a negative psychology that remains relatively pervasive. For many, the expectation or fear is that home prices are vulnerable to further declines and buying now might be a mistake,” Curran wrote. “This psychology applies to all types of buyers but especially applies to trade-up and second-home buyers.”

So, we may be in for many more ups and downs across the market for at least the foreseeable future!

It sounds like an oxymoron: “US recession over, unemployment seen at 10 pct” was the title of a Reuters article today. I know that a recession is technically defined by two consecutive quarters of real GDP decline, but it just doesn’t seem like a recession should be “over” until most Americans feel like it is over. The article reported the findings of a recent survey from the National Association for Business Economics (NABE) that polled 44 professional forecasters, with 80 percent of them saying they believed that the economy had grown in the third quarter, effectively “ending” the recession.

“The great recession is over,” NABE President-Elect Lynn Reaser said. “The vast majority of business economists believe that the recession has ended, but that the economic recovery is likely to be more moderate than those typically experienced following steep declines.”

Yet most of those same analysts believe that “ordinary Americans will probably not see much difference as unemployment will remain high well into 2010.”

Here’s what they think will happen with the housing market: the downturn is almost over and two-thirds of the survey respondents believe that home prices will bottom out this year. They expect the Fed to leave its target interest rate alone until late spring 2010, with the rate only rising to 1 percent by the end of next year.

Well, at least that should help keep mortgage rates low. Or at least give them the potential to remain low.

I don’t know how effective these professional forecasters are at foretelling the future (I guess they are good enough to make a living at it), but good news and increased confidence tend to have a positive impact on the markets regardless of whether or not they are based on reality. So here’s to faking it until we make it!

Rates on 30-year fixed rate mortgages dropped below 5 percent last week and continued to fall this week, creating a dramatic stir in refinancing.

According to mortgage finance company Freddie Mac, the average rate on a 30-year FRM sank to 4.87 percent, excluding points, during the week ending Thursday, down from 4.94 percent. The 15-year FRM rate also dropped, falling to 4.33 percent from 4.36 percent, and the one-year adjustable rate mortgage averaged 4.53 percent, up from 4.49 percent.

There seems to be something special about long-term rates under 5 percent, as refinance activity has surged up 38 percent during the three weeks ending October 2 when rates were below that threshold. The same thing happened in May when rates were under 5 percent for several weeks. Some estimate that refinance requests rose by as much as 30 percent at that time.

It must be something about hearing that rates are near “record lows” that stirs homeowners to take the initiative to refinance into better loan terms and lower monthly payments.

“The wave of homeowners taking advantage of low rates by refinancing is a smart move on the individual level, and it’s possible these refinances could help the housing market in the long term,” said Stan Humphries, chief economist at Zillow.com, based in Seattle, Washington as quoted in a Reuters article. “If homeowners are getting out of risky mortgage products and into more traditional products, that could help stem future foreclosures marginally.”

The rates are still only helpful for those who qualify for refinances, and approximately one in four homeowners today are underwater in their mortgages, often keeping them from taking advantage of the falling rates.

Home purchases do not seem to be as affected by the drop in rates, as they only rose 13.2 percent in the latest week according to the Mortgage Bankers Association.

Former Federal Reserve Chairman Alan Greenspan is saying that the U.S. unemployment rate is going to break the 10 percent mark before long and hover there for awhile before the trend reverses.

Speaking with George Stephanopoulos Sunday on ABC’s “This Week,” Greenspan said

“…At some point, we’re going to start to see an improvement in employment, but remember that unless there is a monthly increase of more than 100,000 a month, you’ve still got the unemployment rate continuing to rise.”

“My own suspicion is that we’re going to penetrate the 10 percent barrier and stay there for a while before we start down,” he said.

His predictions are not all that shocking considering the Labor Department announced on Friday that the current unemployment rate has reached 9.8 percent.

Yet even as jobs continue to be slashed, the housing market seems to be doing just fine. Of course, the government tax credit for first-time home buyers might have a thing or two to do with that.

The National Association of Realtors announced last week that its pending home sales index rose 6.4 percent in August for the seventh straight month. Pending home sales are a loose predictor of actual home sales as they track signed contracts. And while actual sales have been on the rise, they have not matched the pending home sales pace as a certain percentage of buyers back out and as plenty of short sales are rejected by banks before closing.

And the tax credit set to expire December 1 has been a big contributor to the upswing in real sales over the past few months. One survey found that 43 percent of buyers in August were first-timers.

“No doubt many first-time buyers are rushing to beat the deadline for the $8,000 tax credit, which expires at the end of next month,” said NAR chief economist Lawrence Yun. “Sales will decline when the tax credit expires because we are not yet on a self-sustaining recovery path. It also raises a risk of a double-dip recession. Extending and expanding the tax credit is the best tool in our arsenal to encourage financially qualified buyers to stimulate the economy and help reduce the budget deficit.”

If the tax credit is extended, things could continue to look strong in the housing market as long-term mortgage interest rates fell below 5 percent again last week. I guess the question is whether the housing market can find a sustainable level of growth before unemployment figures level off.

For the first time since May, interest rates on long-term mortgage loans dropped below 5 percent this week, reaching near-record lows, according to mortgage financier Freddie Mac. The average rate on a 30-year fixed rate mortgage (FRM) plunged to 4.94 percent, excluding points, for the week ending Thursday, from 5.04 percent last week. Rates have not been that low since the week ended May 28 when it was 4.91 percent. Last year at this time, the average rate was much higher at 6.10 percent.

Other rates also fell significantly with the average on a 15-year FRM dropping to 4.36 percent from 4.46 percent, and the average on a one-year adjustable rate mortgage (ARM) dipping to 4.49 percent from 4.52 percent.

Freddie Mac says this is great for the housing market.

“Low mortgage rates are helping to stabilize home sales,” said Frank Nothaft, Freddie Mac vice president and chief economist. “New home sales in August rose to the highest annualized pace since September 2008 and the inventory of unsold houses fell to the lowest level since February 1983. Although existing home sales fell somewhat in August, it was still the second strongest showing in 23 months.”

Apparently the low rates from the past week were not enough to entice borrowers to the mortgage table, though. The Mortgage Bankers Association reported Wednesday that refinance applications were down by 0.8 percent for the week and home purchase applications were down 6.2 percent.

Even though rates are phenomenally low, the problem may continue to be that many potential borrowers just don’t have the credit to qualify these days. Those who really need to refinance are often behind in their payments or even underwater in their loans and are unable to take advantage of the rates. Others, like many potential first-time home buyers, may not have the down payment money or credit scores to get into a low rate home loan right now. Still, rock bottom rates are probably the best thing for the market until unemployment and foreclosure numbers start to stabilize.

The Federal Reserve governor made statements Friday that left the markets wondering if the Fed will drastically tighten interest rates when the time comes, instead of gradually increasing them.

Even though Fed Governor Kevin Warsh voted Wednesday along with the unanimous Federal Open Market Committee decision to keep the fed funds rate at “exceptionally low levels …for an extended period”, his comments in a speech yesterday to an international bankers convention in Chicago show he can conceive of the need for quick action in the future.

“The Federal Reserve acted preemptively in providing monetary stimulus, especially in early 2008 when the economy appeared on an uneven, uncertain trajectory. If the economy were to turn up smartly and durably, policy might need to be unwound with the resolve equal to that in the accommodation phase. That is, the speed and force of the action ahead may bear some corresponding symmetry to the path that preceded it.”

He added in a Wall Street Journal opinion piece Friday that, “prudent risk management indicates that policy likely will need to begin normalization before it is obvious that it is necessary, possibly with greater force than is customary.’

His Chicago speech echoed such thoughts that the Fed might need to start fighting inflation with rate hikes even before the economy fully recovers.

“If policymakers insist on waiting until the level of real activity [GDP] has plainly and substantially returned to normal-and the economy has returned to self-sustaining trend growth-they will almost certainly have waited too long.”

I doubt that Warsh was speaking on behalf of all the Fed board members in his remarks and writing, but if any of his colleagues share his opinions, we may see mortgage interest rates jumping up much sooner and more significantly than many economists have been predicting.