by Kevin Whatley (NMLS #113781)

Retail Sales measures total receipts at stores that sell tangible “things” and — aside from weak demand for automobiles and automobile parts — Retail Sales displayed surprising strength in April.

So much strength, in fact, that many experts are changing their predictions about the U.S. economy’s fate.

Several months ago, most pundits declared that a economic recession was all but inevitable. Today, a growing number are changing their views.

Not only are stock and credit markets improving, but data such as April’s Retail Sales figures suggest that their fears were overblown.

The takeaway from a story like this is that “experts” do a much better job of interpreting the past than predicting the future. A person can make an educated guess, but it’s impossible to know what the future holds for the economy, or for housing, or for mortgage rates.

Even when the outcome is “inevitable”.

Source
Recession? Not So Fast, Say Some
Kelly Evans And Justin Lahart
May 14, 2008, The Wall Street Journal Online
http://online.wsj.com/article/SB121068163716188223.html

According to the FBI 2007 Mortgage Fraud Report, more than 46,000 cases of suspected mortgage fraud were reported last year. This led to bank losses exceeding $813 million.

If you’re looking for reasons why mortgage underwriting is measurably more difficult in 2008 — add “mortgage fraud” to the list. Lenders now perform extra scrutiny on each home loan application to protect against additional losses on all levels.

Mortgage fraud is a federal crime and exists in two basic varieties:

1. Fraud for Housing — Misrepresentation by a mortgage applicant for purposes of buying a home, usually related to income, assets, or debts. The applicant intends to repay the loan as agreed.
2. Fraud for Profit — Coordinated misrepresentations by a group of people related to applicants, appraisals, loan documents and relationships between buyer and seller. The applicant does not intend to repay the loan as agreed.

Although both are illegal, Fraud for Profit is most concerning to law enforcement officials and mortgage lenders. That’s because Fraud for Profit tends to incorporate multiple loans for multiple homes in a single neighborhood.

In other words, the bank’s potential loss is larger with Fraud for Profit schemes.

The photo above (from the FBI report) is from a Fraud for Profit home appraisal. It indicated that the “recently renovated condominium” included Brazilian hardwood, granite countertops, and a value of $275,000.

Clearly, this is untrue.

Despite increasing 31 percent, mortgage fraud growth slowed in 2007 as law enforcement agencies and mortgage lenders increased their efforts to identify and arrest perpetrators.

(Image courtesy: Federal Bureau of Investigation)

Just like real estate markets differ from town to town, so does the Cost of Living.

Courtesy of CNNMoney, this helpful calculator measures the change in living expenses a person would face when moving between any two major cities in America.

The key expenses compared are:

• Groceries
• Housing
• Utilities
• Transportation
• Healthcare

The comparison data is provided by C2ER which, on its own Web site, charges $4.95 for each city-to-city comparison.

At CNNMoney.com, the exact same C2ER data is licensed and available for free.

With little economic news to influence trading and despite a late-Friday afternoon spike, mortgage rates edged lower last week.

Two weeks ago, when it lowered the Fed Funds Rate by a quarter-percent, the Federal Reserve noted two things:

1. The economy was stabilizing
2. High energy costs threatened inflation

In the days that followed, though, the U.S. dollar strengthened and crude oil prices fell.

This positive reinforcement of the Fed’s outlook spurred the stock market at the expense of the bond market.

Mortgage rates rose during that period.

But, starting last Monday, the dollar started to soften and oil touched another all-time high. At $126 per barrel, crude oil is now close to double its May 12, 2007 price of $69.

High oil prices are inflationary and speak directly to the Federal Reserve’s concerns: Too much inflation can derail a fragile, recovering economy.

The stock market gave up its prior gains last week and that is why we saw mortgage rates improve — it was the unwinding of the economic optimism.

This week, optimism (or pessimism) about the economy will be swayed by a number of factors including Tuesday’s Retail Sales report and Friday’s Consumer Sentiment survey.

The most important data point to watch, though, will be Wednesday’s Consumer Price Index report. We know we should watch it Ben Bernanke told us to watch it. Keeping inflation in check, remember, is one of the Fed’s major focal points for the economy.

In addition, this week will feature 14 public speaking appearances by Federal Reserve members. Expect each speaker to speak plainly about the economy, its future and the Fed’s current rate-cutting cycle.

When Fed speakers stump, markets listen closely so expect mortgage rates to be jumpy all week long.

When the everyday “Cost of Living” increases, our dollars don’t go as far as they used to. Economists call this inflation.

One popular method of measuring inflation is to track prices for 84,000 individual items and lump them together into a “basket”. If the overall price is higher, then the economy is experiencing inflation.

If a picture is worth a thousand words, this one from The New York Times is worth at least 84,000.

Broken down item-by-item, life is more expensive in some places you expected, and some places you didn’t. For example, over the past year:

• Gasoline: +26%
• Milk: +13.3%
• Children’s Shoes: +4.6%
• Pet Supplies: +6.8%

Aside from damaging household budgets, inflation can be especially rough on both active home buyers and homeowners looking to refinance. Inflation is linked to high mortgage rates.

This is one reason why mortgage rates have fallen since the Federal Reserve’s hints last week that its rate-cutting cycle may be over; many believed that additional Fed Funds Rate cuts would stoke inflation later this year.

In the absence of inflation, mortgage rates tend to improve (all things equal).

Source
All of inflation’s little parts
Matthew Bloch, Shan Carter and Amanda Cox
The New York Times, May 3, 2008

When real estate news is reported on television or in the papers, it’s usually told as a national story. Unfortunately, stories like these aren’t helpful for everyday Americans because real estate is not a national market.

Real estate is local.

The graph above was used by Fed Chairman Ben Bernanke in a speech to Columbia Business School earlier this week. Using data from conforming mortgage fundings, it shows the change in home prices from year-to-year on a county level.

Any county not in red increased in value.

In other words, contrary to what reporters tell us, real estate is retaining its value just fine nationwide. Aside from a few counties and states, most areas appreciated.

Graphics like this put important real estate issues in perspective. Home values may falling precipitously in some areas, but those neighborhoods represent just a fraction of the country overall.

In most regions, home values are up.

Four times annually, the Federal Reserve surveys 84 different banks about general banking conditions.

One of the survey questions asks about current mortgage lending standards and whether they are loosening or tightening.

The chart at right is from the April 2008 survey and it illustrates what we already know: It’s getting tougher and tougher to get approved for a home loan.

Some of the areas in which mortgage guidelines are tightening are well-known:

• More thorough income documentation
• Higher credit score requirements
• More “money in the bank” post-closing

Some areas are less well-known:

• More scrutiny of prior delinquencies
• Strict review of appraised values

Overall, getting a mortgage approval from a bank is more difficult than in months past and the tightening trend is expected to continue throughout the rest of the credit cycle.

No “class” of buyers is immune, either — not even the “prime” ones.

Home prices may fall going forward but stricter mortgage guidelines means that fewer home buyers will be able to take advantage. If you’re unsure about your credit profile, check with your loan officer to see how additional restrictions could impact your ability to purchase (and finance!) a home.

(Image courtesy: Federal Reserve)

The ubiquity of “free” credit reporting services like FreeCreditReport.com, TrueCredit.com, and AnnualCreditReport.com have helped breed a new generation of credit-aware Americans.

Because credit ratings have more importance to everyday life than in years past, this is a welcome development. For example:

• Lenders use credit ratings to determine borrowing rates
• Insurers use credit ratings to determine premiums
• Employers use credit ratings to make hiring decision

Unfortunately for Americans, though, not all credit reports are created equal. And when it comes to actually applying for credit in the form of a new credit card or mortgage, the free reports are worth precisely what they cost.

This is one reason why home buyers should have their credit reviewed by a mortgage lender as soon as possible in the home buying process — the free reports offered by the major credit bureaus may be misleading and incomplete.

Free credit reports are useful for identifying identity theft and reviewing active accounts but do very little to help a potential creditor gauge your creditworthiness.

As the chart shows us, each industry’s creditors has a way they like to do business and that way is the “standard” way.

Mortgage rates ended higher last week on stronger-than-expected jobs data, strong consumer spending, and an appetite for riskier investments.

But, investors were most excited about the Federal Reserve’s hint that its rate-cutting cycle may be over.

The week was quiet until Wednesday when the Federal Reserve voted to lower the Fed Funds Rate by a quarter-percent.

The rate cut wasn’t the big news, however.

Market players were most interested in Fed’s press release in which it confirmed that the economy is struggling, but improving. The remarks were both soothing and a strong contrast to the Alarmist Analysts — the ones that make for better television than analysis sometimes.

The Fed’s statement also forced investors to rethink their economic outlook for the short- and long-term and when investors change their outlook, markets can be volatile.

One of the more important shifts in thinking now is the attitude towards the U.S. Dollar. An improving economy tends to be good for the dollar and that can help lead to lower mortgage rates.

The dollar’s gains last week, incidentally, helped lower gas prices nationwide for the first time in almost 3 weeks. In the 18 days leading up to Friday, gas prices had made 18 consecutive record-highs.

This week, with very little new data and with few companies reporting earnings, expect market momentum to determine in which direction mortgage rates will go.

Because momentum can change quickly, be prepared to lock your mortgage rate if you see one that fits your budget — it may not last long.

According to the Bureau of Labor Statistics, the U.S. economy shed 20,000 jobs in April 2008. The labor force now counts at 146 million people as employed.

Normally, a loss of jobs would foretell economic weakness and would be a good thing for mortgage rate shoppers. Today, though, traders had been expecting a larger loss of 70,000 jobs.

In other words, today’s jobs report looks surprisingly strong.

The stock market is now rallying on optimism that “the worst is over” for the U.S. economy and evidence supporting the Federal Reserve’s remarks that its rate cuts were starting to take hold.

The stock market’s gains are the bond market’s losses.

Mortgage rates are up today because the cash that is fueling the stock market is coming from the sale of all types of bonds — including mortgage bonds.

This is unwelcome news for people doing mortgage comparisons today, or buying a home this weekend.

In general, interest rates on adjustable-rate mortgages are increasing more than on fixed-rate mortgages.