Friday, September 29, 2006
Wednesday, September 27, 2006
Monday, September 25, 2006
Friday, September 22, 2006
Income Verification Express Service (IVES)
Speeding up the Application Process --
"The Internal Revenue Service (IRS) has completed the development of a system providing secure electronic return of tax transcripts."
"Income verification is a tool used by mortgage lenders and others within the financial community to confirm the income of a borrower at the beginning of the loan application process in an efficient and cost effective manner."
Read the rest . . .
IRS Webpage
"The Internal Revenue Service (IRS) has completed the development of a system providing secure electronic return of tax transcripts."
"Income verification is a tool used by mortgage lenders and others within the financial community to confirm the income of a borrower at the beginning of the loan application process in an efficient and cost effective manner."
Read the rest . . .
IRS Webpage
Thursday, September 21, 2006
Wednesday, September 20, 2006
2:20 PM EDT
As expected, the Federal Reserve's monetary policy committee decided to leave interest rates alone today, noting that "moderation in economic growth appears to be continuing, partly reflecting a cooling of the housing market." But, as was the case in previous meeting statements, today's said that "some inflation risks remain" and that "The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information." FED STATEMENT
Interest Rates and Monetary Policy
Today is a big day for interest rates and therefore Treasuries and therefore mortgage-related securities and therefore mortgage rates. Today the Federal Reserve will hold its latest monetary policy meeting. These meetings are held about every six weeks (but the Fed can call unscheduled meetings as it did three times in 2001).
The Federal Reserve is charged with the responsibility to see that the U.S. economy maintains a relatively stable course. When the economy speeds up (high production, high consumption, high employment) it eventually ignites inflation which dilutes the value of money.
To slow down the economy, the Fed's monetary policy arm, the Federal Open Market Committee (FOMC) raises its target on a benchmark short-term borrowing rate. This is the federal funds rate, the interest rate charged by banks for overnight loans necessitated by Fed regulations that banks maintain a certain level of reserves each day. When the fed funds rate is changed, the banks will also change the rate they charge their customers to borrow. The prime rate is the rate banks charge their best business customers for loans. Interest rates, therefore, permeate the financial system as lenders seek to obtain borrowers.
To obtain its fed funds target, the Fed sells a portion of its Treasury holdings on the open market (hence the name Open Market Committee). Unlike sales by other traders, the money paid for these Treasury securities does not go into a regular bank but into the Federal Reserve account. This drains funds from the monetary system and the reduced supply is therefore more valuable and the fee for borrowing it goes up. This is what has been happening since June of 2004 when the Fed began hiking the rate by 0.25% increments at each of its policy meetings up through last June's meeting. In those seventeen hikes, the rate has gone from a forty-six year low of 1.00% to its current level of 5.25%.
It should be noted that some of the recent rate hikes are not seen by the Fed as specifically reining in the economy but simply as recalibrating the rate structure to a more normal level after the extreme cuts which preceded the current tightening cycle. Between January of 2001 and June of 2003, the Fed made thirteen cuts (nine 0.50% cuts and four, 0.25%) in order to stimulate a slumping economy. A cut is accomplished through the purchase of Treasuries, which adds money to the monetary system.
The way mortgages fit into all of this is that they represent money that is lent out to be paid back with interest. This debt can then be sold in the financial markets in the form of mortgage backed securities. An investor evaluates the levels of risk and reward to decide what the most profitable investment is. Treasuries are virtually risk free because they are issued by the government. Mortgages are more risky because borrowers can pay off their debt sooner than expected (depriving investors of interest income), or borrowers can stop making payments
altogether and default on their obligation. Obviously, investors will demand a higher return on a mortgage-backed security than on a Treasury security.
Since the price of a bond is determined by a bid and offer process, a number of factors are involved in evaluating the instrument. One factor is the coupon rate, that is, the fixed amount of interest that is paid on a regular basis to the owner of the security. But many investors are more concerned with the yield that the security offers. If one must pay more than the face value of the bond, the net effect is to reduce the original yield from what it would have been at par (paying only the face value). On the other hand, paying less than the face value will increase the yield since at the end of the maturity period, the whole face value will be received in addition to the interest payments previously received.
If interest rates go up, Treasury coupon rates will also go up (the government is borrowing from the investor). Current security issues will therefore decline in value. Who would pay full price for a bond that won't make interest payments as high as another bond with similar risk characteristics? So the threat of higher interest rates has a negative effect on the bond market.
At the last FOMC meeting on August 8, the committee decided not to raise its target for the fed funds rate, though the meeting statement noted that "some inflation risks remain." It went on to say, however, that "the extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information."
The economic situation since the August meeting can be summarized in the first sentence of the Fed's latest edition of is Beige Book, an anecdotal summary of economic conditions, "Reports from the twelve Federal Reserve Districts indicate that economic activity continued to expand since the last report, but five Districts indicated deceleration while the remaining seven reported little change in the pace of growth." This suggests that another rate hike could overcool the economy. Moreover, recent inflation data (the Consumer Price Index and the Producer Price Index) have been benign. Moreover, a recent sharp drop in oil prices has eased a major inflation concern for now. Consequently, most Fed watchers are not expecting a rate hike today but they will be eager to see if the policy statement contains any clues to upcoming Fed actions.
The Federal Reserve is charged with the responsibility to see that the U.S. economy maintains a relatively stable course. When the economy speeds up (high production, high consumption, high employment) it eventually ignites inflation which dilutes the value of money.
To slow down the economy, the Fed's monetary policy arm, the Federal Open Market Committee (FOMC) raises its target on a benchmark short-term borrowing rate. This is the federal funds rate, the interest rate charged by banks for overnight loans necessitated by Fed regulations that banks maintain a certain level of reserves each day. When the fed funds rate is changed, the banks will also change the rate they charge their customers to borrow. The prime rate is the rate banks charge their best business customers for loans. Interest rates, therefore, permeate the financial system as lenders seek to obtain borrowers.
To obtain its fed funds target, the Fed sells a portion of its Treasury holdings on the open market (hence the name Open Market Committee). Unlike sales by other traders, the money paid for these Treasury securities does not go into a regular bank but into the Federal Reserve account. This drains funds from the monetary system and the reduced supply is therefore more valuable and the fee for borrowing it goes up. This is what has been happening since June of 2004 when the Fed began hiking the rate by 0.25% increments at each of its policy meetings up through last June's meeting. In those seventeen hikes, the rate has gone from a forty-six year low of 1.00% to its current level of 5.25%.
It should be noted that some of the recent rate hikes are not seen by the Fed as specifically reining in the economy but simply as recalibrating the rate structure to a more normal level after the extreme cuts which preceded the current tightening cycle. Between January of 2001 and June of 2003, the Fed made thirteen cuts (nine 0.50% cuts and four, 0.25%) in order to stimulate a slumping economy. A cut is accomplished through the purchase of Treasuries, which adds money to the monetary system.
The way mortgages fit into all of this is that they represent money that is lent out to be paid back with interest. This debt can then be sold in the financial markets in the form of mortgage backed securities. An investor evaluates the levels of risk and reward to decide what the most profitable investment is. Treasuries are virtually risk free because they are issued by the government. Mortgages are more risky because borrowers can pay off their debt sooner than expected (depriving investors of interest income), or borrowers can stop making payments
altogether and default on their obligation. Obviously, investors will demand a higher return on a mortgage-backed security than on a Treasury security.
Since the price of a bond is determined by a bid and offer process, a number of factors are involved in evaluating the instrument. One factor is the coupon rate, that is, the fixed amount of interest that is paid on a regular basis to the owner of the security. But many investors are more concerned with the yield that the security offers. If one must pay more than the face value of the bond, the net effect is to reduce the original yield from what it would have been at par (paying only the face value). On the other hand, paying less than the face value will increase the yield since at the end of the maturity period, the whole face value will be received in addition to the interest payments previously received.
If interest rates go up, Treasury coupon rates will also go up (the government is borrowing from the investor). Current security issues will therefore decline in value. Who would pay full price for a bond that won't make interest payments as high as another bond with similar risk characteristics? So the threat of higher interest rates has a negative effect on the bond market.
At the last FOMC meeting on August 8, the committee decided not to raise its target for the fed funds rate, though the meeting statement noted that "some inflation risks remain." It went on to say, however, that "the extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information."
The economic situation since the August meeting can be summarized in the first sentence of the Fed's latest edition of is Beige Book, an anecdotal summary of economic conditions, "Reports from the twelve Federal Reserve Districts indicate that economic activity continued to expand since the last report, but five Districts indicated deceleration while the remaining seven reported little change in the pace of growth." This suggests that another rate hike could overcool the economy. Moreover, recent inflation data (the Consumer Price Index and the Producer Price Index) have been benign. Moreover, a recent sharp drop in oil prices has eased a major inflation concern for now. Consequently, most Fed watchers are not expecting a rate hike today but they will be eager to see if the policy statement contains any clues to upcoming Fed actions.
Tuesday, September 19, 2006
Monday, September 18, 2006
Saturday, September 16, 2006
An Economic Observation
Is it Adam Smith's invisible hand of the marketplace? OPEC? Administration energy policies? The greater availability of computer technology? Luck?
Why -- despite oil price fluctuations, terrorist attacks, changes in government, increasing energy demands -- has the flow of imported oil become so stable in the last fifteen years relative to the
volatile oscillations seen in the previous fifteen years?
Data Source: U.S. Census Bureau
Thursday, September 14, 2006
Wednesday, September 13, 2006
A Look at Mortgage Application Activity
(The index numbers do not represent a specific number of applications or dollar volume but reflect a relationship to a base reading of 100 established for the week of March 16, 1990)
Tuesday, September 12, 2006
And We Say We're Not Living in Trees Anymore.
A typical new wood-framed home uses about 15,000 board feet of lumber. The Census Bureau said that there were 1,635,900 one-unit houses completed in 2005. That translates into about 24.5 million board feet of lumber.
By the way, a board foot is a piece of lumber that is -- or has equivalent volume to one that is -- one foot long, one foot wide, and one inch thick.
If all the lumber for those new houses was molded into one plank that was one foot wide and one inch thick, it would extend more than 4.6 million miles.
By the way, a board foot is a piece of lumber that is -- or has equivalent volume to one that is -- one foot long, one foot wide, and one inch thick.
If all the lumber for those new houses was molded into one plank that was one foot wide and one inch thick, it would extend more than 4.6 million miles.
Friday, September 08, 2006
A Look at Residential Construction Spending
On a year-over-year basis, private residential construction spending has been increasing since early 2001. The rate of increase began to decelerate in 2004 and the data series was jolted by the hurricanes of late 2005. With record spending rates posted over the last year, it seems likely that the plot will continue to lose ground and eventually begin to reflect contractions.
Thursday, September 07, 2006
Bubble or Froth
Well, it does look like the trend in home prices is softening a bit, but it's too early to tell if the bottom is about to fall out or if the descent will be tolerable. In any case, some homeowners are bound to get burned and the horror stories are already accumulating. Yet, the economy is still expanding and mortgage rates are still low by historical standards.
In the longer view, analysts note that the trend in the number of people who traditionally are first-time homebuyers is on the rise. According to Census Department population projections, the number of people between the ages of 28 through 32 will be 11.0% higher by 2011 and 13.7% higher in 2016.
In the longer view, analysts note that the trend in the number of people who traditionally are first-time homebuyers is on the rise. According to Census Department population projections, the number of people between the ages of 28 through 32 will be 11.0% higher by 2011 and 13.7% higher in 2016.
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