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Good Morning!

There can be some confusion in the minds of the average consumer about interest rates, especially as it relates to the Federal Open Market Committee, or FOMC, meetings. About every six weeks, the FOMC meets to discuss the current state of the economy with an eye toward the future. One important task is to monitor and adjust the cost of funds. In general, the “Fed” tries to keep inflation in check and in theory raise or lower the cost of funds. They do so by adjusting the Federal Funds rate and this is the rate that gets so much press each time the FOMC meets.

The Federal Funds rate is the rate banks can charge one another for short term lending. Short term as in overnight. Why does a bank need to borrow money on such a short notice? Banks are required to keep a certain amount of liquid capital, in other words “cash,” at the end of each business day. These funds are essentially demand funds. When a consumer wants to withdraw some cash either at the bank or at any automated teller, there needs to be cash available to meet those withdrawal requests. If the bank sees their reserves to meet these requests do not meet the reserve requirements, banks seek out a short term loan from another depository institution to meet the reserve requirements. This is what the Fed adjusts, the overnight lending rate. But the Fed doesn’t directly impact the everyday 30 year conforming fixed rate mortgage.

When lenders set their rates each day, they refer to a specific mortgage bond. For example, with a 30 year fixed conforming loan underwritten to Fannie Mae standards, the lender will review the current yield on the FNMA 30-yr 3.0 mortgage bond. Just like any bond, with the price of the bond goes up, the yield will fall. And when the price goes down, the yield will rise. Investors buy bonds, all types of bonds, as a safe place to park cash. When the economy appears to falter, investors can get a little skittish and pull some funds from the stock market and transfer those funds into bonds, including mortgage bonds. If on the other hand the economy is healthy and improving, the opposite will occur.

When the Fed makes an announcement at the end of their two-day meetings, investors are anxious to hear if the Fed raised, lowered or kept rates the same. If the Fed announces they decided to raise the cost of funds by 0.25%, it can tell investors the FOMC decided the economy is doing rather well but to hold of any potential inflation, it will raise the cost of funds that banks will pay for short term lending. It’s not a direct affect on mortgage rates, but definitely an indirect one.

Have an awesome week!

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Home Mortgage Trends 3/12/07

by Galand Haas
The Mortgage Bankers Association
According to the MBA's statistics approximately 11% of subprime loans are used by first-time homebuyers.
Last week MBA stated that "Today, homeownership stands at 69 percent because many people not able to get credit in the past have gotten the opportunity to borrow money. And, our data demonstrates that 87 percent of borrowers with subprime loans are paying their mortgages on time and enjoy the benefits of homeownership." MBA tracks 43.5 million loan database, including subprime, to track industry trends and statistics.
The Center for Responsible Lending
The Center for Responsible Lending points out that this means "loans in the subprime market are typically debt consolidation refinance loans and do not create new homeownership opportunities.
Loans that borrowers cannot afford do not lead to lasting homeownership. Comparing an 11% increase in homeownership with projected default rates of 19.4% for recent subprime loans; subprime lending appears to result in a NET LOSS of homeownership in its current form.
In addition, most borrowers who get subprime loans later refinance into new subprime loans, and many of these will also be foreclosed upon. Following the borrower through subsequent loans rather than just looking at that first loan, CRL roughly estimates in Losing Ground that actual subprime borrower foreclosure rates will be over 35%." CRL's research is based on the performance of more than six million subprime loans originated over a seven-year period.
Most sobering is the CRL prediction that "... one out of five (19 percent) subprime mortgages originated during the past two years will end in foreclosure. This rate is nearly double the projected rate of subprime loans made in 2002, and it exceeds the worst foreclosure experience in the modern mortgage market, which occurred during the 'Oil Patch' disaster of the 1980s."
Suggested Corrective Action
This past week, in testimony before the House, MBA Chairman John M. Robbins stated that "Working together, I suggest we must accomplish three things. (1) We must stabilize the subprime mortgage credit system; (2) provide assistance for homeowners facing foreclosure; and (3) finally prevent this from ever occurring again. Sound perspective and a prudent regulatory hand will soothe investors, calm editorial writers and help consumers."

Key Economic Reports Released This Week

RELEASE
DATE
ECONOMIC
INDICATORS
RELEASED
BY
CONSENSUS Wt. INFLUENCE ON
INTEREST RATES
Mon 04/02
10:00 am et
ISM (NAPM) Index
for March '07
National Association of Purchasing Mgt.

51.2%

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Mon 04/02
1:00 pm et
Weekly Bill Auction
Dept. of the Treasury

N/A

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Tue 04/03
Motor Vehicle Sales
for March '07
Automobile Manufacturers

Vehicles 16.5M

** Undetermined
Wed 04/04
7:00 am et
MBA Mtg Apps Survey
for week ending 03/30
Mortgage Bankers Association of America

N/A

* Undetermined
Wed 04/04
10:00 am et
Factory Orders
for February '07
Bureau of the Census
Dept. of Commerce

2.0%

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Wed 04/04
10:00 am et
ISM Index (Non-Mfg)
for March '07
National Association of Purchasing Mgt.

55.0%

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Thu 04/05
8:30 am et
Jobless Claims
for week ending 03/31
Bur. of Labor Statistics
Department of Labor

320K

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Fri 04/06
8:30 am et
Employment Report
for March '07
Bur. of Labor Statistics
Department of Labor

Payrolls 120K
Unemp 4.6%

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Fri 04/06
10:00 am et
Wholesale Trade
for February '07
Bureau of the Census
Dept. of Commerce

0.4%

** Undetermined
Fri 04/06
3:00 pm et
Consumer Credit
for February ' 07
Federal Reserve Board

$5.0B

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* Low Importance ** Moderate Importance *** Important **** Very Important

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This Economic Report was sent to: galand@galandhaas.com

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Galand Haas Team
Keller Williams Realty Eugene and Springfield
2644 Suzanne Way
Eugene OR 97408
Direct: (541) 349-2620
Fax: 541-687-6411

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