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Separating What Matters from What’s Hype

There has been no shortage of mortgage news in recent weeks. The real challenge is not so much finding information on the mortgage market as it is sorting and processing that information to figure out what really matters to the average mortgage consumer. This blog will act as a filter, screening out as much of the noise as possible to distill mortgage news down to what will really affect people.For example, it would surprise a lot of people to know that this is actually not a bad time to be shopping for a house and a mortgage. To understand why, it is important to separate the hype from what matters about recent mortgage news.

Mortgage Hype

  • Hype item #1: Mortgage Reform Regulations. Congress and the Federal Reserve are racing to enact new mortgage reform regulations. This continues a long government tradition of locking the barn door after the horse has been stolen. Not for nothing, but there were plenty of mortgage regulations in place already; but as always during the optimistic phase of a boom-and-bust cycle, enforcement got lax, and common sense took a holiday. So, for example, Congress wants to require more disclosure information when a loan is made. The Truth in Lending Act already required a litany of disclosures — does anyone outside of Congress think that making these documents longer would get more people to read them? As the old saying goes, sunlight is the best disinfectant. Now that the most questionable lending practices have blown up, consumers know to be a little more careful, and for the time being, lenders are likely to be on their best behavior, if only for their own self interest.
  • Hype item #2: The Federal Reserve Lowers Interest Rates. Oh boy! This will make mortgages cheaper, right? Wrong. The short-term, institutional interest rates the Federal Reserve controls are only distant relatives of the long-term, personal loan rates that mortgages represent. While there is a tendancy for one to have some affect on the other, the truth is that the Fed doesn’t really control mortgage rates. Fortunately, however, mortgage rates began to trend downward even before the Fed first started lowering its rates in August.

What Matters

  • News that Matters #1: Mortgage Rates Trend Downward. Both 15-year and 30-year mortgage rates peaked in June of 2007, and have been trending downward ever since. Those rates are also low relative to historical norms. If you polled the average American, he or she would probably tell you that this was a lousy time to be getting a mortgage, based on all the negative news coverage. In reality, it’s a pretty good time, because mortgage rates have gotten cheaper.
  • News that Matters #2: Housing Prices Fall. When it comes to consumer goods, everybody loves a bargain. Only when dealing with assets, such as stocks or real estate, are people turned off by falling prices. Economic cycles are somewhat self-correcting, and one thing that is going to help the housing crisis is for housing to become more affordable.

Again, there has been no shortage of mortgage news — there’s been an overload of information, in fact. However, apply a little common sense as a filter for the news, and it starts to make more sense.

Sources: Office of the Speaker of the U.S. House of Representatives; Federal Reserve; Freddie Mac; Standard & Poors

3 Responses to “Separating What Matters from What’s Hype”

  1. Ksenia Says:

    This is great. I think that so many consumers assume that if the Fed lowers the interest rate that it will have a direct impact on their mortgage. The fact that there is no direct correlation between Fed’s rates and mortgage rates is very useful to know. As consumers shop for mortgages post Fed announcements, they may not see the decrease in rates that they were expecting and assume that the lending company that they are talking is trying to take advantage of them. This may help to resolve this situation and provide better information for the average consumer (like me).

  2. The Queen Says:

    According the Mortgage Goddess, the Fed’s changing the interest rate affects short term financing. Mortgages are long term loans and so aren’t directly affected by a change. However, mortgages are driven by changes to the economy. What often happens is that the Fed lowers rates in response to unrest in stock markets. At the same time, unrest in equities often fuels a “flight to quality” or people investing in Treasury securities. When more people invest in these bonds, it drives interest rates down. So Fed rates and mortgage rates often move at roughly the same time, but are both in response to changes in the stock market. One does not cause the other.

  3. richard Says:

    Far be it from me to differ with a Queen, let alone a Goddess, so let me note that I think we are basically in agreement — that it is not the Fed driving down mortgage rates. That’s why the Fed’s action was one of my “hype” items. For more on the relationship between mortgage rates and the Fed — including the “flight to quality” that you mention — see last week’s posting, “Whether or Not They Help the Economy, Lower Rates Are An Opportunity for Individuals”. To link directly, go to: http://www.loanbiz.com/blog/2008/01/24/whether-or-not-they-help-the-economy-lower-rates-are-an-opportunity-for-individuals/#more-19

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