For Home Buying California

The Federal Open Market Committee begins a scheduled, 2-day meeting today to discuss the country’s monetary policy. As is custom, the group will issue a press release to the markets upon adjournment.

There are 8 scheduled FOMC get-togethers annually and the post-meeting press releases are among the most powerful market-moving events of the year.

It’s not the Fed’s actual policy changes that causes fortunes to be won or lost, though.

These changes can predicted and traded — and, therefore, hedged — on Wall Street using Fed Funds Rate Futures. For example, Wall Street predicts with 97% certainty that the Federal Reserve will not make a policy change at this time.

As opposed to than policy change, it’s the verbiage of the FOMC’s press release that can really move markets. This is because the press release is a clear-eyed look into what the Federal Reserve thinks of the United States economy — its strengths, its weaknesses, and its threats.

After its January 2009 meeting, the FOMC’s press release said:

• The economy has weakened further
• Employment has declined steeply
• A gradual recovery may come later in 2009

Since that meeting, though, a number of high-profile economists, including Fed Chairman Ben Bernanke, have said the likelihood of economic recovery increased for late-2009.

This is why tomorrow’s FOMC press release is so important. It will contain clues about the Federal Reserve’s next steps and current psyche. Undoubtedly, it will make a significant impact on the mortgage markets.

In general, when the Fed alludes to inflation and stronger growth, mortgage rates rise. Talk of a recovering economy and rising oil prices in tomorrow’s press release, therefore, would likely raise rates from their current low levels towards levels not seen for 6 months.

In the end, it’s what the Fed says that matters more than what the Fed does. The FOMC is expected to leave the Fed Funds Rate within its target range of 0.000-0.250 percent.

Mortgage markets lost a little bit of ground last week, edging mortgage rates higher in a week marked by the largest stock market gains since November.

Once again, mortgage rates couldn’t sustain a rally of more than 5 days. Not since late-2008 have mortgage rates managed to fall two weeks in a row.

Last week’s market was impacted by three distinct factors:

1. Bank balance sheets weren’t as bad as feared
2. Discussion started on new bank valuation methods
3. Traders got optimistic that “the worst is over”

The rally will likely continue into this week, too. This after the 60 Minutes interview with Ben Bernanke in which the Fed Chief said he won’t let big banks fail and that the recovery will likely begin later this year.

It’s the first interview with a sitting Federal Reserve Chairman in history.

Coincidentally, the Federal Reserve will be in the spotlight this week as it concludes a two-day meeting Wednesday after which the Fed will issue its standard, post-meeting press release at 2:15 P.M. Although it’s not expected to make Fed Funds Rate changes, the markets will closely watch the Fed’s language for clues about the next phase of monetary policy.

In general, when the Fed indicates that inflationary pressures may build, mortgage rates rise. Moreover, in the above interview, Bernanke alluded to such inflation and the need to control it in the future.

Despite the small rise in rates last week, mortgage rates remain low and favorable for high-credit scoring borrowers. Volatility is still a factor, however, so if you’re nervous about rates rising, it may be best to lock early in the week — before the Fed’s Wednesday announcement.

“Most of the biggest real estate fortunes were not made in good times, but in bad times like this” Barbara Corcoran reminds us in this talk with NBC.

It’s important perspective for Americans wondering how to invest in foreclosed properties without losing their cash or their credit rating.

In the 4-minute interview, Corcoran quips on the basics and the essentials of foreclosure investing,

• “Everyone who loses their shirt loses it somewhere else.”
• “Every big shark started small.”
• “The house on the corner sets the tone for the block.”

She also lends some personal perspective to rent rolls, the cost of losing a tenant, and finding a good business partner.

Banks are anxious to sell their foreclosed homes and that makes this an ideal time for shrewd real estate investors. If you’re new to the game, watch the video and take good notes.

You know you’re in the middle of an economic crisis when an accounting issue become Front Page News, and that’s exactly where we’re at today.

Mark-to-market accounting is having its day in the sun and people in need of mortgage sometime soon would do well to pay attention.

If you’ve never heard of mark-to-market accounting, don’t worry. Not many people have. Mark-to-market is a method of valuing an asset based on its what-if-it-was-sold-today value. Mark-to-market is officially known as FASB Statement 157.

Mark-to-market is one reason why bank balance sheets look so awful right now. Banks have to assign firesale-like values to their mortgage-backed assets even if those loans are performing, and even if there’s no plans to sell them. Assigning low values to assets, then, in turn, forces the banks to seek TARP funds and take other measures to solidify their mandated capital requirments.

Wall Street and Washington are taking notice of mark-to-market’s impact on banking and, by extension, the economy. Even Fed Chairman Ben Bernanke has expressed an interest in opening a dialogue about the matter.

So, today, starting at 10:00 AM ET, the House Committee on Financial Services meets with key members of the Securities and Exchange Commission, the Treasury, and the Financial Accounting and Standards Board to talk about mark-to-market accounting and whether it should be modified.

It’s unlikely that change will come immediately, but if enough evidence shows that mark-to-market is unduly damaging to the economy, expect changes to the way we value banks to happen soon.

For homeowners and home buyer, a reversal in mark-to-market rules would be a bad thing. Almost overnight, bank balance sheets would recapitalize and the economy would spring forward. This would reverse most of the pressures that have held mortgage rates low for so many months.

A healthy economy, in other words, may be bad for mortgage rates.

The basis of most mortgage lending is credit scoring. In general, the higher a person’s credit score, the lower his offered mortgage interest rate.

Despite the many credit scoring models in use today, however, just 3 are relevant to American homeowners:

• The Equifax BEACON^® score
• The Experian Fair Isaac Risk Model
• The TransUnion EMPIRICA^®

Generically, these scoring models generate what are commonly known as “FICO” scores.

FICO scores are measurements of probability. The higher a person’s credit score, by definition, the less likely a person is to default on his home loan. This is one reason why credit scoring has added importance lately — mortgage lenders are very careful about what they’re lending and to whom.

Notably, minimum FICO thresholds have been added to all types of mortgage loans.

FICO scoring has 5 main components as listed above. Payment history and credit capacity are two of the largest pieces, but a myriad of other factors contribute to a credit score, too. For example, the longer your reported history of managing credit, the more favorably your credit score will respond.

The myFICO.com website does a terrific job with credit education, explaining in plain language the ins-and-out of credit scoring and ways to boost your score. It also makes a free, 20-page PDF available for download.

Whether you’re a homeowner or lifetime renter — consider it required reading.