As congress debated the Wall Street bailout, there seemed to be an underlying assumption that some kind of package was necessary to put liquidity back into the mortgage lending industry. The general impression is that tougher lending standards have made mortgages scarce, and indeed, the number of existing home sales continued to slip in August. Taken at face value, these stories might be enough to scare potential home buyers out of the market, at least long enough for the bailout package to kick in. However, before heading to the sidelines, those potential home buyers would do well to ask two key questions:

• Are new mortgages really that scarce?
• Will things be better or worse once government rescue efforts take hold?

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The past week saw more symptoms that the mortgage crisis is likely to drag on: 

• Stocks in mortgage financers Fannie Mae and Freddie Mac took a tumble, as investors questioned their long-term viability
• The problems of Fannie Mae and Freddie Mac are already evident to mortgage borrowers in the form of higher fees, tougher approval standards, and higher interest rates
• Mortgage experts warned that the impact of so-called “liar loans” has yet to fully play out
• Not surprisingly, with these and other woes, mortgage application volume continued to slip

For prospective homebuyers, these symptoms of long-term consequences of the mortgage crisis signal that waiting for the storm to blow over may not be the best strategy.

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Mortgage news was dominated by two items this week:

• President George W. Bush signed the mortgage relief bill, designed to help troubled home owners stave off foreclosure
• A prominent home price index reported a 15.8% decline for the year ending May 31, 2008, the biggest year-over-year decline so far

On the surface, the first would seem to be a highlight, and the second a lowlight, of the week’s mortgage and housing news. Reading between the lines, though, reveals that the first item may not be as good as it’s been reported, but the second item may not be as bad.

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With all the mortgage news coming out these days, it is important for new home buyers to distinguish between stories which primarily affect existing home owners and borrowers, and those which will impact future buyers.

As an example of the range of stories over the past week:

• Existing home sales suffered a setback in June, after showing signs of growth in May 
• The long-awaited housing bill continued to inch toward passage
• 30-year mortgage rates took their biggest jump of 2008
• Oil prices took a welcome drop from their recent all-time high

New home buyers should have a different take on these stories than the angles widely reported by the media.

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There were mixed messages for borrowers in this week’s mortgage news, but there was certainly no shortage of headline-worthy stories:

• The U.S. Federal Reserve Board released a new set of mortgage lending guidelines on July 14th, designed to reform some practices that have been associated with the current lending crisis
• Leading government-sponsored mortgage financers Fannie Mae and Freddie Mac struggled to fend of rumors that they did not have enough liquidity to survive without a bail-out
• Perhaps more quietly — but of grave concern with regard to mortgage rates — inflation continued to surge, with very high readings for both wholesale and consumer price increases in June

The message on balance was that potential mortgage borrowers may not want to delay exploring their options, as long as they make educated choices about their loans.

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It was an ugly headline, even by the standards of the mortgage crisis:

• “US foreclosure filings surge 53 percent in June“

Looking a little closer though, it turns out the numbers aren’t nearly as bad as that Associated Press headline would suggest. Another example of the media piling on with a negative spin was a story suggesting that loan modification programs were simply extending mortgage pain.

Meanwhile, there were two positive signs for the mortgage market:

• Mortgage application activity rose for the second consecutive week
• Mortgage rates eased a bit in early July, after rising significantly in June

In large part, the conclusion drawn from the above depends on whether one is taking a forward-looking or backward-looking view of the market.

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Mortgage news this week painted a picture of a variety of ways people are attempting to cope with the mortgage slump:

• While the housing bill continues to meander its way through Congress, it apparently was not an urgent enough issue to get done before Congress adjourned for its Fourth of July recess
• Hope Now, a mortgage industry alliance, reported that it helped 170,000 homeowners avoid foreclosure in the month of May
• Further evidence that falling behind on a mortgage need not be permanent was seen in the fact that more that 40,000 borrowers who had been behind on their mortgages caught up in May
• The week ending June 27 offered a small sign of broader resiliency in the mortgage market, as mortgage application volume recovered slightly from the year-to-date low set during the prior week

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What’s striking about recent mortgage news is how much of it is dominated by stories about investigations and indictments related to mortgage scams. Federal authorities have announced a nationwide crackdown, and local authorities have been active in many communities as well.

There were other, less dramatic stories on the mortgage front:

• Mortgage application activity stalled as mortgage rates rose
• The Hope Now Alliance, a mortgage industry group, announced plans to help streamline work-out plans for troubled borrowers
• A long-awaited mortgage bill became bogged down in the Senate due to controversy stemming from favorable mortgage rates received by two Senators

These other stories are worth reviewing, but ultimatly they are best put in context by the crackdown on mortgage scams.

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A possible Senate compromise on a mortgage relief bill took most of the mortgage headlines this week, but potential borrowers would do well to keep their eyes on the inflation front, where a new surge in oil prices threatened to drive interest rates higher.

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Mortgage rates remained just above 6.0% for the third consecutive week. Some other headlines from the week offer a hint of what’s behind the recent creep upward in those rates:

• Oil and gas prices surged to new record highs, after oil had looked like easing during the previous week
• Retail sales showed unexpected strength in April
• New jobless claims declined in the latest weekly data
• Productivity gains were surprisingly strong in the first quarter

For potential mortgage borrowers, the level of mortgage rates might be the only headline that draws attention, but the broader economic developments can provide some clue as to what to expect in the mortgage market during the weeks and months ahead.

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