It was enough to make any mortgage observer recall the old joke about the light at the end of the tunnel turning out to be a train. A steady drip of positive news lately was overshadowed by the news that lender GMAC Financial Services was closing 200 retail offices and laying off 5,000 employees. The move was designed to scale back the firm’s mortgage lending presence in reaction to losses in that sector.

Still, while this story grabbed the headlines, home buyers and mortgage shoppers should not lose sight of some of the more positive news:

• Mortgage rates have settled into a gentle, downward trend
• Lower oil prices are taking some of the heat off of inflation, and thus interest rates
• Mortgage application volume showed signs of life

While the GMAC story was a reminder of why economic recoveries can take so long to develop, the underlying fundamentals suggest that conditions may be getting better for the housing market.

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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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A sharp jump in mortgage rates was the week’s most significant development.

• 30-year mortgage rates rose to 6.32%, largely in response to growing inflation fears
• Federal Reserve officials may also respond to the inflation threat, as they’ve begun to hint at possible hikes in the Fed rate later this year
• The grim news on the interest rate front overshadowed what otherwise would have been a bright spot, a bounce back in mortgage application activity

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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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Mortgage rates and housing prices run on different cycles, but they are somewhat related. However, coordination between the two cycles got somewhat out of synch over the past week:

• Mortage rates broke out of their month-long holding pattern and edged upward
• New home sales declined by 13.3% for the year ending March, 2008
• Existing home sales declined by an even faster rate for the same period

From a potential home buyer’s perspective, it has been possible to sit back over the past year and watch prices steadily get cheaper. However, the tick up in mortgage rates could signal a call to action — it might be best not to wait too long before getting a mortgage.

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Mortgage news overall continued to spell opportunity for potential home buyers, but there are also signs that favorable mortgage rates might not last:

• 30-year mortgage rates posted a fifth consecutive reading between 5.85% and 5.88%
• Mortgage foreclosure rates continued to rise
• Southern California home prices reached a four-year low
• Signs are spreading that inflation is taking hold

The combination of low mortgage rates and falling home prices is great for today’s home buyers, but the inflation signals are a reminder that these conditions may not last. 

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