Last Week in Review

"If you are losing a tug-of-war with a tiger, give him the rope before he gets to your arm. You can always buy a new rope." Max Gunther.

Such a sweet sentiment...but definitely not one that the markets adopted this week, as both Stocks and Bonds battled back and forth near key technical levels.

The markets were closed on Monday in honor of the Martin Luther King, Jr. holiday, but then the Bulls and the Bears in the Bond market spent the first part of the week pushing and pulling Bond prices above and below their 200-Day Moving Average. This level is important because it can often set the stage for price direction for an extended period of time. Bonds were finally able to break above this important level, which was good news for home loan rates.

And the war wasn't just being waged in Bonds...the Stock market was fighting some technical battles of its own. The Dow and the S&P both tumbled lower, falling beneath their own 50-day Moving Averages. This is very significant, as neither index has closed beneath their 50-day Moving Average since July of 2009. If Stocks are unable to regain their footing and move above this important Moving Average, we may see a continued slide lower in Stocks, which could benefit Bonds and home loan rates.

However, a possible uptick in inflation later this year and an end to the Fed's Mortgage Backed Security purchase program in March are two important factors that will likely cause home loan rates to worsen in the months ahead. While this week's Producer Price Index Report (which measures inflation at the wholesale level) was relatively tame, higher than expected inflation was reported in both the UK and India. Reports out of both countries say that they expect levels of inflation to continue higher, but not just in their own countries...they see it around the world as well. Remember, Bonds and inflation are mortal enemies. If Bonds were Superman...inflation would be Kryptonite. And when inflation does begin to tick higher here, it will send home loan rates higher as well.

It's also important to note that the Fed bought $12B in MBS in the latest week, bringing their purchase total to $1.149T, leaving $101B left to purchase before the end of March. If we have not talked yet about your own home loan situation, let's be sure to connect very soon as the current low home loan rate environment may soon be a thing of the past.

There was also housing news to note last week, as Housing Starts fell in December, due in part to bad weather throughout the country. However, a look down the road appears more positive, as Building Permits rose significantly in December, to the best level since October 2008.

After all the tug of war this week among traders, home loan rates were able to end the week slightly better than where they began.

IMPORTANT CHANGES ARE COMING TO A VERY POPULAR HOME LOAN PROGRAM...AND THEY COULD IMPACT YOU OR SOMEONE YOU KNOW. CHECK OUT THIS WEEK'S MORTGAGE MARKET VIEW FOR THE DETAILS BELOW

.
Forecast for the Week

Looking ahead, there will be plenty of news and reports this week that could lead to more tug of war in the markets. There will be big news on Wednesday as the Fed releases its policy statement after its regularly scheduled meeting of the Federal Open Market Committee. What to listen for in particular is if the Fed once again comments on their Mortgage Backed Security purchase program, which is slated to end on March 31st. The Fed has previously stated they will not extend the program, despite recent speculation otherwise. I'll be listening closely to see what the Fed has to say.

There will be a double dose of housing news this week, with Monday's Existing Home Sales Report and Wednesday's New Home Sales Report. There will also be several important reads on our economy, with Tuesday's Consumer Confidence Report, Thursday's Durable Goods Report - which is a look at consumer and business buying behavior on big ticket items that last for an extended period of time - and Friday's Gross Domestic Product Report, which is the broadest measure of economic activity.

It will also be important to keep an eye on Thursday's Initial Jobless Claims Report. Last week's Initial Jobless Claims came in at 482,000, which was significantly worse than expected and reversed the trend of lower numbers we've seen. We need to see Initial Claims below 400,000 per week to see stabilization in the Unemployment Rate.

Remember: Weak economic news normally causes money to flow out of Stocks and into Bonds, helping Bonds and home loan rates improve, while strong economic news normally has the opposite result. Bonds were able to end the week above the 200-day Moving Average. I'll be watching closely to see if this trend continues.

The Mortgage Market View...

New Lending Policies Announced by FHA

If you were listening to the housing news last week, you probably heard a number of reports about lending changes that were announced by the Federal Housing Administration (FHA). While many of the news reports were confusing, the truth is pretty clear, and isn't as bad as some people may have heard.

Overall the measures are intended to help the FHA better manage its risks and strengthen its capital reserves, while still providing home loans to the nation. The good news, as FHA Commissioner David Stevens stated recently, is that "by continuing to provide affordable, responsible mortgage products, FHA will support the housing market's recovery" and "remain the largest source of home purchase financing for underserved communities."

What's Changing?

If you or someone you know is considering an FHA loan, some of these changes may affect you. Here's a clear, concise rundown of the major changes and what they mean:

1. Increased mortgage insurance. The mortgage insurance premium (referred to as private mortgage insurance by many people) will be increased from 1.75% to 2.25%. This change will add some cost to purchasing a home, but will not overburden consumers since the mortgage insurance is paid over the life of the loan, rather than upfront at closing.

2. New down payment and credit score requirements. According to the new policy, homebuyers who have a credit score of at least 580 may still be able to purchase a home with 3.5% down, but those with credit scores of less than 580 will be required to put down at least 10%. This change is designed to help the FHA balance its risk, while still providing affordable down payments for consumers with a history of good credit and responsibility.

3. Reduced seller concession. Basically, this change means that the person selling the home will now only be able to offer the homebuyer 3% to help defray closing costs, as opposed to 6% under the previous policy.

In addition to these changes, the new policies contain a series of new measures aimed at increasing lender enforcement.

These changes will become effective on April 5, 2010. The bottom line is that the changes will impact some homebuyers more than others. But in the end, the FHA is still committed to providing affordable home loans.

If you're concerned about your credit score or are worried about what these changes may mean to your specific situation, please call or email me for a full review. There are many different programs available for homebuyers, so finding the right plan for you just requires a short discussion about your goals and financial picture.