As the stock market retraced to its 1997 level, mortgage markets improved last week — but not by much.

Mortgage rates closed out the week slightly lower, but the week wasn’t without fireworks.

  1. Calls of deflation grew louder
  2. The automakers left Washington without a bailout
  3. Citigroup’s stock price fell to the equivalent of its ATM fee

Separately, each of these elements would have created confusion on Wall Street. Together, they created near chaos. Stocks traded at a pace last week that has never been equaled.

As a result, mortgage rates were volatile, too.

Over the 5-day workweek, multiple mortgage lenders issued 11 distinct rate sheets, meaning that consumer mortgage rates changed every 3 hours, 38 minutes on average last week.

This is why home buyers should rate shop quickly. Wait too long and the mortgage rate is gone. And this week doesn’t figure to be any less volatile.

To start, it’s a holiday-shortened week. Fewer traders will be working as the week moves forward, making the Price Discovery process more difficult. With fewer active buyers and sellers, wild price swings are likely and mortgage rates should feel the impact.

Next, markets will debate the Citigroup Bailout, wondering whether this will (finally) mark the market bottom. It’s a conversation about which Wall Street never tires and with each bit of optimism, money should flow into stocks to the detriment of mortgage bonds and mortgage rates.

And lastly, there are 9 economic releases crammed into Monday, Tuesday, and Wednesday of this week, including two housing reports and an inflationary gauge behind which the Fed puts a lot of credence.

Signs of stabilization should buoy both stock markets and mortgage rates — Wall Street is craving balance of some sort to carry it into the New Year.

There are no Fed speakers scheduled for this week so watch for data and market sentiment to lead the markets. For rate shoppers, this means more rate sheets.

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Business television and newspapers have made deflation a hot topic this week and, since Monday, Google has tracked 13,000 mentions of it.

Deflation is a recurring cycle in which the prices of goods and services fall. Isolated to one industry or sector, falling prices is the natural result of competition.

For example, when DVD players were first introduced, they were tagged at $800.

Today, you can buy them for less than $20.

Across many industries, however, and happening at the same time, falling prices can shut down the economy. Rather than buy things on the cheap, people stop buying anything at all. And why would they? The same items will cost less tomorrow.

And this is the problem with deflation — it halts consumer spending and consumer spending makes up two-thirds of the U.S. economy. When it stops, the economic result is dwindling corporate revenues which leads to:

  1. Layoffs of the workforce, which leads to…
  2. Less consumer spending, which leads to…
  3. Dwindling corporate revenues, which leads to…

And the spiral continues.

Deflation can be much more insidious that its expansionary counterpart — inflation. Inflation is when the prices generally rise over time and it’s an economic condition through which governments can comfortably navigate. Deflation, on the other hand, is more rare and, therefore, fewer practical control measures exist.

Whether the U.S. economy will slip into deflation is a matter of debate.

The Fed has cut the Fed Funds Rate to promote economic growth and those changes can take up to 12 months to work their way through the economy. Deflationary pressures we’re seeing today, in other words, may have already been addressed and corrected by Ben Bernanke’s 10 rate cuts in the last 14 months.

Until the market figures it out, though, expect that each mention of deflation will hurt the stock market and help the bond market — including the mortgage-backed variety. This should help lower mortgage rates and make homes more affordable.

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When it comes to housing data, there are always two questions to consider:

  1. How does this impact buyers?
  2. How does this impact sellers?

This is why housing data is rarely positive or negative on a universal level — one group of Americans is going to see benefit.

Today, it’s home sellers.

From the government, we learn that Housing Starts fell to their lowest levels since 1947 last month. A “Housing Start” is a new housing unit on which construction has started. Building permits are down, too.

This is all good news for people selling their homes in the coming months. As fewer homes are built nationwide, there is less inventory from which home buyers can choose. With fewer homes for sale shifts the supply-and-demand curve, adding a stronger support floor to home prices.

For home buyers, though, the Housing Starts data may not be as welcome.

With fewer new homes coming on the market, owners of “used” homes may feel less pressure to lower asking prices or to make other concessions. Home buyers often pay more when home supply is falling, or find that sellers are less willing to add “throw-ins” to a contract.

For all of the analysis that surrounds real estate data, in the end, home prices are based on the supply of homes versus the demand for homes. When supply outpaces demand, home prices fall, and vice verse.

Homebuilders know this and October’s Housing Starts data reflects it.

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If the presence of inflation causes mortgage rates to rise, then the absence of inflation should cause mortgage rates to fall. And, in most markets that’s true.

Today, it’s not.

Despite a deep, month-over-month dip in consumer prices not seen since 1947, mortgage rates are inching higher this morning.

The main reason why rates are rising today is that the Cost of Living didn’t just ease last month — it plunged.

In fact, the monthly drop was so severe that Wall Street now questions whether this summer’s record-breaking inflation will lead to equally-strong deflation this winter.

In economic terms, deflation is the opposite of inflation — it’s when prices and wages chase each other lower. The two can be equally bad for the economy. What’s often best for Americans are moderate, steady readings.

Because of the rapid decline, markets fear that Consumer Prices may have swung way past moderate in October and started a downward spiral. As always, however, market opinions can change quickly and when they do, they usually take mortgage rates with them.

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The FHA Loan Limits for 2009 are effective January 1, 2009In March 2008, HUD temporarily raised FHA loan limits around the country. Effective January 1, 2009, FHA loan limits revert.

FHA home loans are mortgages made by private lenders and insured by the federal government.

Historically, FHA home loans have been “easier” for which to qualify than their conforming mortgage counterparts and, therefore, tend to be associated with borrowers of tarnished credit quality.

Today, that’s the not the case.

The FHA home loan underwriting process can be as tough — or tougher — than a conforming mortgage underwrite. There is extra documentation required and the home appraisal process is often more thorough.

Where FHA home loans shine is in their limited downpayment requirements.

To purchase a home with a FHA-insured mortgage requires a 3 percent downpayment as of today; in January, it moves to 3.5 percent. Versus the typical conforming mortgage requirement of 5 percent or more, FHA serves as somewhat of a home affordability product for Americans. In addition, FHA allows larger “cash out” refinances than Fannie Mae or Freddie Mac.

The 2009 FHA loan limits (in most areas of the country) are:

  • 1-unit : $271,050
  • 2-unit : $347,000
  • 3-unit : $419,400
  • 4-unit : $521,250

Note that the loan limits don’t apply to all areas of the country equally. Higher-cost regions feature higher loan limits, based on typical home values. Homes in Los Angeles County, for example, can be FHA-insured up to $625,500 in 2009, and there are exceptions made for Alaska and Hawaii.

The official FHA announcement published all of the counties with access to higher loan limits, spread across two spreadsheets. The first spreadsheet lists each county at the $625,500 maximum; the second list is everyone else.

If your home county is on neither list, use the “base” numbers above.

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In another week of up-and-down trading, mortgage rates ended the week slightly higher last week.

Ping-pong action like this has defined mortgage markets lately. It’s increasingly common for rates to soar one day, and then come crashing down the next.

In response to market volatility, mortgage lenders issued as many as 8 distinct rate sheets in a holiday-shortened, 4-day trading week. Lately, shopping for a low mortgage rate has been as much about timing as anything else.

There wasn’t much economic news to digest last week save for Friday’s Retail Sales data.

The numbers reflected what most of us already know — consumers are not spending as freely as in the past. And, because consumer spending accounts for 70 percent of the U.S. economy, retail restraint can mean the difference between a growing economy and a slowing one.

October marked the 5th straight month of declines for Retail Sales.

This week, markets will have their hands full with new data, 7 Fed speakers, and ongoing rescue effort discussions from Washington.

From a data perspective, the two most important data points are the Producer Price Index and the Consumer Price Index. Both measure the “cost of living” as it applies to businesses and consumers, respectively, and both can signal inflation when the readings are too high.

Falling energy prices will likely cause PPI and CPI to post negative readings, but if those negative numbers post higher than expected, mortgage rates should rise in response.

Regardless, mortgage rate shoppers should standby in Ready Mode. Changes to the mortgage market — like changes to the stock market — have been furious and swift, measurable in minutes, not hours. The only way to beat a market like this is to not play in it.

Once you find a rate-and-payment combination that suits your household budget, consider locking it in with your loan officer. The risk of not committing can be too great in a market moving as quickly as this one.

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The 2010 HUD GFE Loan Summary section

To help demystify the mortgage process, the federal government is giving the much-maligned Good Faith Estimate document a makeover. Effective January 1, 2010, the current, 2-page form will be replaced by a new, easier-to-understand version, spanning 3 pages.

The biggest strength of the new Good Faith Estimate is that it uses everyday English to explain how the mortgage works. For example, in one section titled “Loan Summary”, the Good Faith Estimate specifically answers:

  • What is your interest rate?
  • Can your interest rate rise?
  • Does your loan have a prepayment penalty?

Using today’s disclosures, the answers are spread across 3 separate forms.

In addition, the new-look Good Faith Estimate identifies what charges are legally allowed change at the time of settlement, and how a mortgage applicant can opt for higher fees in exchange for a lower mortgage rate, and vice versa.

These educational elements are lacking from the current model.

But for all of its clarity, the Good Faith Estimate doesn’t address the issue of suitability. As in, is this the right loan for the right borrower? The new Good Faith Estimate won’t prevent homeowners from choosing “bad loans” — it will only educate them about the loan’s facts.

For suitable advice — as always — talk with a trusted mortgage professional who will both listen to your needs and help you make plans for them. Getting the “best terms” on an unsuitable loan can be far worse that getting great terms on a loan that fits.

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California, Florida, Arizona and Nevada accounted for more than half of the foreclosures nationwide in October 2008

Foreclosure is a hot topic among the press lately. It’s hard to turn on the television or open up a newspaper without seeing a story about it.

But what’s most interesting about foreclosures is that they appear to be concentrated in certain areas of the country.

According to the foreclosure-tracking service RealtyTrac, 4 states accounted for more than half of nation’s foreclosures last month.

And those 4 states — California, Florida, Arizona, and Nevada — share some very similar characteristics including:

  1. Their respective popularity with retirees and real estate investors
  2. Their large home value increases earlier this decade

In looking at the rest of the country’s foreclosure data, the remaining 46 states combined accounted for just 48.8 percent of October’s foreclosures.

That’s 1.06% per state on average.

Now, this isn’t meant to diminish the impact of foreclosures on the economy — quite the opposite. Foreclosures harm to the national housing market because most mortgage lenders are national. But, we highlight statistics like this to show that the foreclosure “problem” isn’t so bad in most parts of the country, relative.

Furthermore, mortgage lenders are intervening to slow the flow of defaults nationwide. Following the lead of JP Morgan and Bank of America, CitiMortgage just announced a sweeping plan to help homeowners avoid default and keep their homes.

In a way, for as good as this news is for homeowners, it’s equally bad news for home buyers. As the number of foreclosures decrease in any given market, it reduces the inventory of homes for sale. Lower supply levels often lead to higher sale prices and less room to negotiate. And this may be what the banks are trying to accomplish.

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2009 Conforming Loan Limit Table

For the 4th consecutive year, the government has set the conforming mortgage loan size limit at $417,000.

A conforming mortgage is one that, quite literally, conforms to the mortgage guidelines set forth by Fannie Mae or Freddie Mac.

The 2009 conforming loan limits, as released by the government, are:

  • 1-unit properties : $417,000
  • 2-unit properties : $533,850
  • 3-unit properties : $645,300
  • 4-unit properties : $801,950

Loans in excess of conforming loan limits are more commonly called “jumbo”, or “super jumbo” home loans, depending on their size.

Out-sized mortgages like these are often more costly than their conforming-mortgage counterparts because jumbo loans are not guaranteed by the U.S. government like Fannie Mae loans are.

There are loan limit exceptions, however.

Left over from the Economic Stimulus Act of 2008, specific, “high-cost” areas around the country have their own conforming loan limits, not to exceed $625,500. There are 59 designated high-cost regions in the U.S., most of which are in California.

Loan limits are re-assigned each year, based on “typical” housing costs around the country. Since 1980, as home prices have increased, so have conforming loan limits. As home prices have fallen in recent years nationwide, however, the conforming loan limit has not.

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Mortgage rates fell last week, marking just the second time since September that rates improved on a weekly basis.

The biggest news of the week was the U.S. Presidential Election. Markets appeared to cheer the Republican-to-Democrat transfer of power, posting large gains Tuesday, Wednesday and Thursday.

This in spite of a spate of negative economic news:

Instead, mortgage markets shrugged it off.

The general consensus among traders last week was that the Democratic White House will make every effort to ignite the economy and, if those efforts fail, it will try again. This bodes well for businesses and for the banking system and is one reason why mortgage rates dropped post-election.

This week, without much new data, markets should move on corporate earnings and momentum. It’s been a while since corporate earnings meant so much to mortgage rates.

U.S. businesses are the backbone of the economy, spending money on goods and services and employing 144 million Americans. When business is strong, more workers get hired who then, in turn, spend their money and force the hiring of even more workers.

It’s a self-reinforcing cycle so if retailers post better-than-expected numbers this week, expect stock markets to gain favor worldwide as investors chase returns. This will money to pull out from bond markets of all kinds — including mortgage-backed bonds.

Less demand for bonds causes mortgage rates to rise.

Also, look at Friday as a volatile trading day. Not only will October’s Retail Sales figures be announced, but Fed Chairman Ben Bernanke is sharing the stage with his European Central Bank counterpart, talking about monetary policy.

Word choice is a delicate matter on Wall Street so if Bernanke’s comments are viewed as too anti-inflation, or too pro-inflation, expect for mortgage rates to move by a lot. If you’re shopping for a mortgage right now, consider locking before Bernanke’s 9:00 AM speech.

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