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.”

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.

The Federal Reserve’s Federal Open Market Committee meets again this Tuesday and Wednesday to decide the fate of its target interest rate, currently set at the range of zero to 0.25 percent. There is very little concern that the Fed will raise its rates this week, as the economy continues to teeter. Here’s what committee members have been saying recently according to Reuters:

• NEW YORK FED PRESIDENT WILLIAM DUDLEY, JULY 29:

 ”Credit availability will be constrained for some time to come, and this will serve to limit the pace of the recovery. “

• SAN FRANCISCO FED PRESIDENT JANET YELLEN, JULY 28:

 ”We glimpse the first solid signs that economic growth may be poised to resume. Indeed, I expect that to happen some time this year … I can assure you that we will act decisively and appropriately to tighten the stance of monetary policy and maintain price stability.”

•  FED CHAIRMAN BEN BERNANKE, JULY 21:

“Accommodative policies will likely be warranted for an extended period. At some point, however, as economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road.”

• ATLANTA FED PRESIDENT DENNIS LOCKHART, JULY 20:

“The recovery will be weak because the economy must make structural adjustments before the healthiest possible rate of growth can be achieved. While this adjustment process is going on in the medium term, I believe inflation and deflation are roughly equal risks and require careful monitoring.”

So will a decision to do nothing affect mortgage interest rates this week? It just might, based on the Fed’s meeting comments.  If the group says it is worried about inflation, rates could rise. If it seems pessimistic about the economy’s next six weeks, rates might drop.

Which direction can we expect long-term mortgage interest rates to move this week, the week of July 13? It’s almost impossible to predict, but here are the important reports coming out that will be the major determiners of any shift in rates:

Tuesday

• June Retail Sales – released by the Commerce Department, retail sales are expected to rise by less than one percent this week. Anything stronger than that may mean higher interest rates.
• June Producer Price Index – released by the Labor Department, this figure is predicted to make a very minimal increase, which would hold rates steady this week.
• Quarterly Earnings Report – released by Goldman Sachs, this is the first of several major companies’ reports on their earnings for the second quarter of this year. If the report shows the company to be healthy and thriving, mortgage rates may increase. Otherwise they may stay relatively the same. This goes for the rest of the company reports due this week. Thomson Reuters  is  predicting that S&P 500 companies are likely to see earnings fall by an average of 36 percent, a circumstance that would certainly keep rates from rising.

Wednesday

• June Consumer Price Index – released by the Labor Department, the prices for June likely increased by less than half a percentage point, meaning rates would be probably remain unchanged.
• Federal Open Market Committee Meeting Minutes– released by the Federal Reserve, these are the reasons behind the latest Fed rate decision and help give an idea of how the economy is doing according to the Fed. The Fed often tries to cloak its true outlook on the markets to avoid causing big swings in home loan rates and other financial determinants.

Thursday

• Weekly Jobless Claims – released by the Labor Department, this week’s total jobless claims are expected to rise by 10,000, but that is not large enough to cause a stir in interest rates.
• JPMorgan chase Quarterly Earnings Report

Friday

• Bank of America Quarterly Earnings Report
• Citigroup Quarterly Earnings Report

Very few major improvements in the overall economy are expected this week, but you never know what surprises the markets may have up their sleeves.

The average rate on a 30-year fixed rate loan dipped to a six-week low of 5.20 percent, down from 5.32 percent the previous week.

• Freddie Mac  chief economist Frank Nothaft: “Interest rates for 30-year fixed-rate mortgages fell for the second week in a row to the lowest level in six weeks amid market concerns over a weakening labor market.”

More people are applying for government-insured mortgage loans now than they have for almost the past 20 years. In June, the government loans like FHA and VA loans made up 35.9 percent of all mortgage applications.

• Orawin Velz, Mortgage Bankers Association, associate vice president of economic forecasting: “A primary reason government-insured loans have retained a high share of the purchase market is that these loans typically require lower down payments than conventional loans. In addition, lending standards tend to be tighter for conventional loans, especially for loans that require private mortgage insurance.”

The FBI reported that mortgage fraud activity increased 36 percent in 2008, with the hardest hit states being California, Florida, Georgia, Illinois, and Michigan.

• FBI statement: “Several of these schemes have the potential to spread if the current economic downward trend, as expected, continues into 2009 and beyond” and “While the amount of mortgage fraud cannot be precisely determined, industry experts agree that there is a direct correlation between fraud and distressed real estate markets.”

A new report says foreclosures were down 11 percent in the second quarter of 2009, while pre-foreclosures or delinquencies were down 10 percent.

• Alexis McGee, president of ForeclosureS.com : “These huge drops—double-digit in many parts of the nation—are a sigh of relief for the economy and housing markets as they bump along toward recovery. Despite higher unemployment rates, industry and government stimuli are making a difference. It’s not just depressed properties that are selling anymore.”

The Federal Reserve decided to keep its benchmark interest rate at is current 0 to 0.25 percent range for the coming six weeks, and long-term mortgage rates posted little movement this week as well, according to mortgage financier Freddie Mac Thursday.

Average rates on 30-yaer fixed rate loans inched up to 5.42 percent, excluding points, during the week ended June 25, from 5.38 percent the week before.  Freddie’s VP and chief economist Frank Nothaft explained that “mixed economic reports” were the cause for the timid rate movement. He cited an increase in existing home sales contrasted by a dip in new home sales and national median prices.
Meanwhile, during its bi-monthly meeting the Fed held its rate steady as risks of deflation have dropped and many other pieces of the economy seem to be falling back into place.

The Fed is still plan to pump billions of dollars into buying Treasury bonds and toxic mortgage-backed securities, but have started to slow down the rate of their purchases. The immediate result seemed to be a rise in mortgage rates, and some think that could stymie the economy from recovering soon.  From Fed Chairman Ben Bernanke’s recent comments, it sounds like inflation is the bigger issue for the central bankers.

“The key issue here is can we unwind this money creation and low interest rates in time to head off inflation when the economy begins to recover?” Bernanke said in remarks before the House Oversight and Government Reform Committee. “We have all the tools we need to do that. We believe we can do that. We will certainly remove that stimulus in time, and we are committed to price stability and we will make sure that it happens.”

Is now the right time to jump into the housing market? There are certainly some great perks to buying in a down market. But the question always remains: Could I score a better deal by waiting just a few more months?  Right now the answer is ‘possibly’ according to a recent report from the Mortgage Bankers Association.

The MBA reported Monday that it had revised its prediction for total yearly mortgage loan volume downward this month thanks to rising interest rates and Treasury yields. The group now expects mortgage originations in 2009 to amount to $2.03 trillion, more than $700 billion lower than the March forecast.

Mortgage interest rates have jumped up in recent weeks, but with the 30-year fixed rate loan at 5.38 percent last week, according to Freddie Mac, they are still relatively low, historically speaking. So now may be the best time to buy before rates move any higher.

Yet, the MBA also predicted that home prices will continue to fall this year, until they are at least 10 percent lower than the median prices in 2008. So waiting another couple months might mean higher loan rates but lower sales prices. But also on any buyer’s side is the MBA’s forecast that both new and existing home sales will decrease, with existing homes slated to drop by 1.2 percent from last year and new home sales to plunge 27 percent. When sales are down, sellers are always more desperate and willing to negotiate in order to close the deal.

And of course, whether you can even buy now, depends largely on your credit score these days. If your credit isn’t up to snuff, you may want to wait several months anyway to try to improve it and increase your chances of getting approved.

After jumping to a seven-month high, rates on long-term mortgage rates dropped back down in the latest week. According to mortgage giant Freddie Mac, during the week ended June 18, 2009, the average rate dropped to 5.38 percent, excluding points, from 5.59 percent the week before, and down from 6.42 percent one year ago.

Why did rates fall? Freddie Mac credited slowed inflation growth for the declining mortgage rates. Many on Wall Street believed inflation would rise by more than it did in May. Most dramatically, producer prices dropped by 5.0 percent from the previous year, the biggest decrease since 1950.

Based on all the recent reports, Frank Nothaft, Freddie Mac vice president and chief economist commented, “It’s still too early to tell whether the decline in housing market activity has hit bottom yet.”
Meanwhile, in an interview on CNBC today, Forbes CEO Steve Forbes blamed the Federal Reserve for the current housing market troubles. As quoted on the dailyfinance.com blog, Forbes said he thinks the Fed “should announce first they’re not going to buy any more Treasury securities. Cash in the banking system is not the problem, the problem is that parts of the credit economy are still not working.” What the Fed should do, he added, is to aggressively buy up mortgage-backed securities as well as packages of credit car, car, and other consumer credit loans.

Forbes also decried the Obama administration’s decision to give the Fed greater regulatory powers over the country’s financial institutions.

“In terms of regulation,” he said, “it is a bit ironic they’re still going to put new powers in the Federal Reserve, which is an agency that, one, didn’t exercise proper oversight over the banking system that it had already under its purview and [two,] its lousy monetary policy in 2003 and 2004, when it printed all this excess money, made the bubble possible.”
Amen.

After rising for two months, homebuilder confidence sipped down in June as mortgage rates skyrocketed up.
The National Association of Homebuilders’ housing market index, a measure of builder confidence fell to 15 this month, down from 16 in May. Anything below 50 indicates that more builders view the housing market conditions  as poor rather than favorable. So obviously even last month no one was jumping up and down for joy about the market, but they were cautiously increasing in their optimism that the housing bust would be shorter than expected. The latest developments have builders worried that the end is not yet in sight.

“The housing market continues to bump along trying to find a bottom,” NAHB chief economist David Crowe said. “Builders are taking their cue from consumers, who remain uncertain about the economy and their own situation. Builders are also finding it difficult to complete a sale because customers cannot sell their existing homes.”

Mortgage rates have jumped up to 5.59 percent according to recent data from Freddie Mac, a dramatic leap from rates well below 5 percent just a few weeks ago. Rates often move upward as economic conditions improve, and several reports over the past weeks and months have indicated some positive movement. For instance, new-home sales have grown during two of the last three months, and even though prices have dropped, home affordability is on the rise. 

Yet higher mortgage rates have home builders and others worried about a decrease in buyers. Where does the cycle end?