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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If you have an adjustable rate mortgage (ARM) you have probably been bombarded with solicitations and exhortations to “fix it” before rates go sky-high. You are right to be concerned about the future but jumping into the nearest fixed rate mortgage could be a costly move.

Looking at recent ARM rate adjustments tells the story. Rates for many ARM borrowers have decreased lately. Before making any decision about refinancing to nail down a stable rate, get out your loan documents, find the Adjustable Rate Mortgage Rider, and look up the terms of your ARM. Locate the index that your rate is tied to (for example, the LIBOR, COFI, or T-Bill). The index is a published financial indicator and you should be able to look up its value easily online. This week’s 6-month LIBOR, for example, is 2.88%. Next, find the margin that your lender adds to the index to get your interest rate. If your loan is based on the 6-month LIBOR and carries a margin of 2.5%, your rate would be 5.38% if adjusting today.

OK, but what if a lender calls you up and says you can get a fixed loan at 6% right now? Should you go for it?

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It’s great that community services agencies, the government, and some lenders are working with homeowners who are having problems making their mortgage payments, or refinancing mortgages they can’t afford. Unfortunately, the scam artists are out to make a from borrowers facing foreclosure.

Foreclosure proceedings are a matter of public record. Scammers can get your name and property address from these records. Yes, folks, there are people who will send offers of quick help, no money required “solutions,” and they may also offer to pay you to stay in your home. These kinds of schemes can result in losing your home, your money, and your credit rating. Don’t get involved in any deal that seems too good to be true; it probably is!

Reducing capital requirements on lending giants Freddie Mac and Fannie Mae from 30% to 20% could provide an additional $200 billion to the ailing mortgage industry. These funds can be used for refinancing sub-prime loans and for making mortgage loans according to Freddie and Fannie’s recently increased loan limits.

On the surface, this is great news, as anything that boosts the depressed housing market could be good for the US economy. On the other hand, let’s proceed carefully and avoid taking on excessive risk. Responsible approval of mortgage applications is essential to cleaning up the meltdown mess and stabilizing the housing market

One of the challenges faced by the average home owner or potential buyer is deciphering how to react to big-picture news about the mortgage market. Often, the right move runs counter to the news cycle.

Over the past week, that news cycle continued to focus on negative stories. For example:

• Mortgage foreclosures were reported to be up sharply in February over the prior year’s levels
• Treasury Secretary Henry Paulson outlined proposals to tighten regulation on mortgage lenders
• Meanwhile, one result of mounting economic concerns is that mortgage rates remain near the 6% level, which is low by a few different measures

In other words, the macro-economic view of housing and mortgages continues to be bleak. It may be counter-intuitive, but this could well be an environment which calls for action, on the part of home owners and potential buyers alike.

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Even as mortgage conditions worsened, comments from top policy makers made it clear that a full-scale bailout isn’t in the cards. The best relief in sight came in the form of a downward turn in interest rates. 

Here’s what the government had to say:

• President Bush and Treasury Secretary Henry Paulson called some Congressional bailout plans an inappropriate use of taxpayer dollars. 
• Federal Reserve Chairman Ben Bernanke asked lenders to forgive some portion of borrowers’ debts.

Here’s what housing statistics had to say:

• The mortgage foreclosure rate reached a record high
• Home equity levels fell to an all-time low

And finally, here’s how interest rates may help:

•  After rising steadily over the previous five weeks, thirty-year mortgage rates took a step back and fell to 6.03% as of March 6th.

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Mortgage applications dropped for the 3rd consecutive week according to the Mortgage Bankers Association’s weekly survey of applications. Mortgage applications dropped by 19.2% during the week ending February 22. Refinance applications declined by 30%, which appears to highlight the difficulties homeowners are experiencing due to falling home prices and tighter mortgage lending standards.

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To take a step back from week-to-week news for a moment before moving on to recent developments, a little historical perspective reveals just how low mortgage rates are these days. For a month-and-a-half now, thirty-year mortgage rates have been below 6.0%. How low is that? In thirty-six years of mortgage data, there have only been three years in which mortgage rates averaged below 6.0%. In none of those three years, did those rates stay below 6.0% for the entire year.

In other words, history is clear on two things:

• Current mortgage rates are low
• Low mortgage rates don’t stay around for long

This history lesson gives added power to some recent developments:

• Oil prices recently closed above $100 a barrel for the first time
• January continued 2007’s trend toward higher inflation, with a 0.4% monthly increase in the Consumer Price Index (CPI)
• Long bonds and short-term interest rates are going their separate ways, with yields on long bonds rising over the past month

It all adds up to reinforce the importance of taking advantage of low interest rates as soon as they become available.

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Mortgage news this week was dominated by the announcement of Project Lifeline, a program to help mortgage borrowers who are on the brink of foreclosure.

To appreciate the context of Project Lifeline, it is important to also consider two other stories from this past week:

• Figures from the first four months of this fiscal year show that the U.S. Government budget deficit is running at about twice the pace of last year’s
• Morgan Stanley became the latest in a series of financial firms to bite the bullet because of the mortgage crisis, with the announcement that they would lay off 1,000 mortgage workers

Considering the circumstances, Project Lifeline might be the most pragmatic type of solution available.

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It was a mixed week for mortgage news. Here were some items of interest:

• Mortgage rates rose in the last week of January, breaking a streak of four straight weeks in which those rates declined.
• Mortgage application activity was a mixed bag. New purchase applications increased, but refinancing applications — which had been running hot and heavy — slowed down.
• A Federal Reserve survey reported that 55% of U.S. banks had tightened their mortgage lending standards.
• The service sector of the economy contracted sharply in January, heightening fears that the economy may already have slipped into a recession.
• Oil prices, which were tickling the $100 mark not too long ago, fell below $90 a barrel.

It’s these last two items which may turn out to be the best news of all for mortgage shoppers.

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