Illinois Mortgage Rates Weekly Update
19th July 2008
Welcome to Illinois Mortgage Rates and News week in review for the week ending July 18th, my take on the week’s financial news and how it affected Illinois mortgage rates.
This was a brutal week for mortgage bonds, and mortgage rates. After a false start where rates recovered on Monday, 
the rest of the week mortgage bonds got demolished and fixed mortgage interest rates rose about 3/8s of a point to the highest they have been all year. Mortgage bonds got hammered even as some of the factors that had been responsible for the recent rise in rates seem to be turning. Oil prices fell sharply this week down to $128 per barrel, the dollar strengthened, the Government announced a plan (sort of) to maintain Fannie Mae and Freddie Mac and insure that they stay solvent. These were all factors that in normal times would have propped up mortgage bonds and lowered mortgage interest rates. The CPI (Consumer Price Index) came in high at a monthly increase of 1.1%, which flashed the red light danger sign of rampant inflation. And several of the Fed governors as well as Chairman Bernanke made statements that inflation was their biggest concern. But much of this was looking in the rear view mirror. The economy is soft, credit is still tight and consumers have no purchasing power. The softness in our economy has spread over seas and China and India, the fast growing economies that have fueled the growing demand for commodities world wide, are now slowing down. Many experts think that this will bring down the inflation level in the coming months. So why did rates get so bad so quickly this week?
There is a psychological term called selective perception which states that how someone expects something to turn out will change the way that they perceive what actually does happen to them. This concept was proved by experiments showing how college students would get drunk when they were given what they were told were potent drinks, even though there was no alcohol in them. It is also why liberals and conservatives react so differently to the same information. I think we are seeing a great example of this in the stock and mortgage bond markets now. Money flows back and forth between stocks and bonds based on investor’s view of the economy. When the economy is growing and the view is optimistic the stock market usually benefits. When the economy is tanking and there is fear in the air money rushes into bonds, which means lower interest rates. This week was a great week for the stock market. The Dow Jones average gained 3.6% after a rally that was the biggest in five years. PP Morgan Chase and Wells Fargo came in with earnings better than expected and the market is now thinking that the worst is over for the big banks.
This may be wishful thinking. Coming a week after Indy Mac failed, and days after the potential bail out of Fannie and Freddie was announced, the market may be getting ahead of itself. Merrill Lynch announced another $9.7 billion in credit write downs which says that the credit crunch is still not over. With home prices down and less access to the home equity, we are seeing a reverse of the wealth effect. People feel poorer and they are less likely to spend money if they don’t have to. The stimulus checks have mostly been spent, and this kept the economy out of an official recession, but the pop is now gone. The stock market had a great week, but my guess is that fear will set in again over the next few weeks, and the pattern will reverse itself with money flowing out of stocks and into bonds. I expect that rates will come back down again in the coming weeks.
If you have a contract on a property or if you are in the market for mortgage financing, you may want to look at the adjustable rate mortgages. ARMs are available with fixed terms of 5, 7 and even 10 years before they become adjustable, and the initial interest rate is much lower than the fixed rates. Some of the banks go in and out of the market with their ARMs, but it is worth comparing the programs, especially if you don’t plan to be in the home for a long, long time. If rates come down you can refinance into a fixed rate for little or no upfront cost.
Here is what Illinois mortgage rates look like today for an A+, full doc purchase on a 30 day rate lock, with 0 points, and no origination fee. The conventional loans are based on the highest conforming loan amounts, which give the best pricing. (Again, there are many factors which affect mortgage rates and your ability to be approved for a loan. These rates may not fit your situation and this is just a sample of the programs that are out there. If you would like a quote for your personal situation, or to get pre-approved for a mortgage, give me a call or contact me and I’ll take the time to find the rate and program that is best for you.) :
Conventional loans up to $417,000
30 year fixed rate 6.625% 6.724% APR
15 year fixed rate 6.00% 6.143% APR
5-1 A.R.M. 5.75% 5.867% APR
7-1 A.R.M. 5.875% 5.989% APR
For Jumbo loans over $417,000
30 year fixed rate* 7.00% 7.147% APR – Requires 20% down payment
7-1 A.R.M.* 6.00% 6.173% APR *there is a 1 year pre-payment penalty on this option.
FHA LOANS - 3% down payment
With 1 point origination fee – 60 day lock
30 year fixed rate 6.50% 7.278% APR
With no origination fee – 60 day lock
30 year fixed rate 6.75% 7.296%
FHA APR reflects 3% down payment and the effect of mortgage insurance on the loan.
These are just a few of the programs and mortgage rates available. Which option is best for you depends on your own specific goals and needs. If you have any questions or want to go over your situation in depth, let me know how I can help. The market has been unbelievably volatile and I expect that this volatility will continue.
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Stearns. If left to fail on its own, it was feared that this would set off a panic that could shake our financial system to its core. Since then we’ve been told that the worst was over, and even though the housing market was still a mess, our economic foundations were strong. This week the bullet we missed with Bear Stearns is looking like a pea from a pea shooter, and we have a nuclear missile headed our way (Where is Superman when we need him?) The stock of Fannie Mae and Freddie Mac, the two pillars of our mortgage finance system, dived this week as the loss of liquidity pushed these giants toward insolvency. Both stocks lost about 45% of their value this week and are down about 90% in the last year. With the stock prices this low there is no way they can raise the cash they need to continue operating in the markets. If the worst comes to pass, this means 2 possibilities: a bailout where the government funds the organizations, or a receivership or complete government takeover. 
Everyone agrees that Fannie Mae and Freddie Mac are too big to fail. If it gets to that point the government will surely step in and do what is necessary to keep the mortgage market going. But the question then becomes how would they do this? The debt is so huge (even backed by the homes supporting all those mortgages) that it would be equal to almost ½ our current national debt. After the panic first started, Fed officials, Treasury Secretary Paulson and statements from both Fannie and Freddie assured everyone that there was no crisis. But a panic is a panic. The market calmed down a little Friday afternoon, but this will come back as an issue. Maybe this coming week, maybe later. We are still in a severe credit crunch this fear only tightens it another notch. What it means for consumers is that conventional mortgages are likely to continue their trend of becoming harder to qualify for and more expensive for those who can qualify. On the good side, there is almost no chance that the Fed will hike rates any time soon. 
really kicks in. I like the parades, festivals, barbeques and fireworks. And this holiday is all about freedom, something we take for granted but it is good to be reminded of what we have, and what we could lose if we don’t pay attention. That being said here is the breakdown of what happened to affect mortgage rates this week.
the threat of inflation. Wall Street wasn’t happy with the decision. The Dow hit a low just ticks away from a 20% overall decline, the official mark of a Bear market. Not only did the Fed not raise rates, but their announcement balanced the threat of inflation with the threat of further slow downs in the general economy. This signaled that the Fed plans to stand pat, keeping rates the same until something forces their hand. The stock market dived and mortgage bonds benefited. Mortgage backed securities moved through an area of strong resistance Friday afternoon, ending the week at their best level in the last 3 weeks.
In other economic news, consumer confidence this week came in at the third lowest reading ever, and the lowest since 1980. Oil prices surged again, now up to $142 per barrel. Personal spending for last month was the best reading in the last 5 months, but if the stimulus checks are gone this is probably not a trend. New and existing homes both came in a touch better than expected, but still at low levels. Sales of homes in the Chicago area were down 29% from last year, but up from the previous month. Prices here seem to be stabilizing. The core inflation rate showed we are just over the target zone, giving the Fed some cover for their decision not to raise rates. Here in Illinois, Attorney General Lisa Madigan sued Countrywide Mortgage for abusive loan practices. I have mixed feelings on this one. I’m not a fan of Countrywide. As a company they have been arrogant and they were the leaders in some of the bad practices that got us into this whole mortgage mess. I also like Lisa Madigan. She’s done a good job as Attorney General, and I expect that she will be our next Governor. But that’s the point of this, it’s all political. Countrywide is a big target and an easy way to score political points, but unless they can show it was a corporate decision to defraud customers, I don’t see this going anywhere. 
credit were choking the system. Big banks and financial powerhouses were on the edge of failure and our whole economy was in the danger zone. The Fed moved decisively to inject credit into the financial markets and stem the panic. Wall Street breathed a sigh of relief, but the easier credit didn’t trickle down to the small business or home mortgage markets. On Main Street the stranglehold still seems pretty tight. The economy hasn’t been growing, but with the rate cuts and stimulus checks there have been some signs of activity. And now with gas and food prices spiking up, the worry has turned from the softness in the economy to the threat of inflation. Over the last few weeks mortgage rates headed higher as the financial community, in mass, called for higher rates to stop the inflationary spiral that was about to hit us. Last week it became official that the economy was on the road to recovery when former Fed Chairman Alan Greenspan announced that the credit crunch was over, or would be soon. This week a new message is coming through – not so fast, we might not be out of the woods yet.
Much of the inflation is due to the high demand for commodities in developing countries overseas. India and China have been booming and they are growing a huge middle class. This brings a desire to increase their standard of living, which means more cars on the road and an improved diet, so food and fuel prices go up. This trend will be with us for a while, but there are signs pointing to a slowdown in Asia, and if there is this will reduce inflation by itself. The other thing that makes me think this will come down on its own is the trading activity. I have a friend who is a trader at the Chicago Mercantile Exchange where he trades contracts for cattle futures. Futures contracts are traditionally used as a hedging device. So if McDonalds wants to lock in the price of their hamburgers 9 months from now, they buy contracts on the exchange and they know what their costs will be going forward. This exchange has traditionally been used by farmers and food producers to take some of the ups and downs out of the market and measure their risk. So who are the big buyers of cattle futures today? They’re not food producers; they are financial companies, some of the same big players who created the bubble in the mortgage market. They are buying futures in all the commodities from grains to oil. The reasoning is sound. Prices are going up, so they need to buy the futures and take advantage of the rising prices. Only their buying divorces the price from any fundamentals of supply and demand. Food and fuel prices are in a bubble now, and at some point this bubble will pop and prices will go down. The question is when, and it could get much worse before it gets better.
a bad week. Make that a bad day. A really bad day. Over the last months, the economy has been dealing with the twin dangers of recession and inflation. In the last few weeks it looked like the economy was growing slowly enough that we might avoid the recession, but it’s looking more and more likely that we may be lucky enough to get both at the same time. _Resized_421x259.jpg)
Here is what Illinois mortgage rates look like today for an A+, full doc purchase on a 30 day rate lock, with 0 points, and no origination fee. The conventional loans are based on the highest conforming loan amounts, which give the best pricing. (Again, there are 
inflation and recession have been pretty much equalized, and though there were extreme moves on a day to day basis, it seemed that by the end of the week the market was back close to where it started. That changed this week as mortgage bonds fell out of bed and out of this range sending mortgage rates higher. There were economic indicators cited as reasons behind the move, but these indicators aren’t saying that the economy is back on track, and they aren’t pointing to raging inflation either. The indicators are mixed, as they have been over the past months, showing our economy is still muddling along and inflation is a factor, but more of a future threat than a present menace. So it’s not that the economy has suddenly changed, it is the perception 
economic stagnation. The Fed has been walking out on this tight rope, careful to not lean too far one way or the other. It’s been a difficult task and so far it looks like they are dipping on both sides, but still maintaining balance. The economy is slowing and inflation is heating up, but there are signs we are heading in the right direction.
mortgage bond markets and how the fear and greed balance out. On a day to day basis mortgage rates have been extremely volatile, and it has become almost commonplace for mortgage bonds to go up or down 40 tics in a day, an amount that used to be exceptional. There have been days when the market has moved as much as 100 tics, with multiple re-prices during the day. But if you pull back and look at the activity from a longer view, we are going back in forth in a fairly narrow range. This week the mortgage backed securities markets had two days where prices went up, a lot, two days where they went down about the same, and one day, Friday, where they moved around a lot, but ended with no change. There was a huge swing between the high for the week and the low, but at the end of the week we were very close to where we started. Over the last two months we have seen this same trend, though in a wider range. The market reacts (overreacts?) based on news reports and whatever happens that day seems to be the most important factor, until the next, possibly contradictory report is released the next day. Chances are that as long as the forces of inflation and the slowdown counteract each other, we will continue to stay in this range. What this means is that you should be aware of these trends if you are buying a home or refinancing your mortgage, and take these trends into account when locking your loan. 
Myanmar. With true disasters like this the mess in the real estate and mortgage markets doesn’t look nearly so bad. In fact, there were a few signs this week that we are starting to come out of the worst of the mess. While it is too soon to say that we have reached a bottom, there are signs that point to how we can navigate through this. We are still a long ways from where we were, but in a way we are coming to a new normal, and I see signs of the financial markets stabilizing and the mortgage industry gaining confidence. Two things happened this week that point to this conclusion. One, foreign investors started to show interest in buying mortgage bonds again, and two, Fannie Mae is getting rid of their disastrous declining market policy. 
A lot of economic reports were released this week, and as has been usual in this market, they were a mixed bag. Retail sales numbers dropped, but when low auto sales were factored out they increased by a higher than expected .5%. This could be looked at as proof that consumers are still spending, which means that the economy still has some strength. It could also be looked at as a reflection of higher prices, and the increase is due to inflation. Housing starts unexpectedly moved higher, but again this was a mixed result because the increase was due to a surge in multi unit apartment buildings. Single family home starts dropped for the 12th straight month. Consumer price index came in lower than expected, which means inflation is still manageable. Good news for mortgage rates. There were some other reports which showed that the economy is continuing to loose steam, and consumer confidence fell again to its lowest reading since 1980.