As expected, mortgage rates continued their manic behavior, heading downward this week as focus shifted to the likelihood of recession: 

• A parade of bad earnings reports by U.S. companies created a growing impression that a recession may have already begun.
• The effect of economic weakness and falling oil prices was evidenced even more in the bond market than in mortgage rates, as 10-year Treasury yields fell nearly half a percent in just over a week.
• While the economic malaise had clearly spread throughout the economy, the source of the trouble — the housing market — continued to struggle. Foreclosures rose yet again in the third quarter of 2008, and new home construction slowed to the weakest level since 1991.

Certainly, this is the most troubling economic environment in a generation — but one with at least some glimmer of hope.

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It should have been hailed as good news. Instead, the move by 30 year mortgage rates back below 6% was largely overshadowed by other events:

• In quick succession, the government launched a huge mortgage bailout package and a half-point cut in interest rates, and considered direct intervention in banks.
• None of the above calmed financial markets, as stock market declines actually accelerated upon passage of the mortgage relief bill.
• Even the price of oil came under such pressure that OPEC called an emergency meeting.

So what is a mortgage shopper to do? Take advantage of lower rates, or stay on the sidelines until the world financial turmoil subsides?

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Mortgage rates, which had enjoyed a sustained downtrend through mid-September, rose for the second consecutive week, as of October 2, 2008.

This rise was despite the fact that the mortgage bailout bill seemed to have edged a step closer to passage by achieving overwhelming Senate approval. The rise also appeared to occur into the headwind of bad economic news, as factory orders were reported to have dropped sharply in August, while new jobless claims rose.

The contradiction is that the bailout bill is supposed to give lenders more confidence, while interest rates in general typically fall during an economic slowdown. Despite this, mortgage rates rose. So what is going on here?

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There’s an old saying that it’s an ill wind that blows nobody any good. It applied this week, as the whirlwinds on Wall Street had an unexpected benefit for mortgage shoppers.

• Insurance giant AIG became the latest addition to the string of financial failures, the taxpayer cost of which is rapidly rising
• Leading economic indicators declined by more than expected in August
• Along with a slowing economy, inflation also backed off rapidly in August
• Lower inflation gave interest rates room to fall, so mortgage rates took another impressive step downward over the past week

While mortgage shoppers should not ignore the gathering economic and financial clouds, those lower mortgage rates should remain their primary focus.

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30-year mortgage rates fell sharply over the past week, extending a sustained move into more affordable territory. Two key factors were behind the change:

• The high-profile government bail-out of Freddie Mac and Fannie Mae increased lender confidence
• Interest rates in general have been falling, responding to easing inflation worries

Is this reason to be optimistic about the housing market? As always, optimism about housing should be tempered with a healthy dose of caution, but this does spell opportunity for certain buyers and home owners who want to refinance — especially those with strong credit histories.

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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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