This week will be interesting for the bond market and mortgage rates. There are five remaining economic reports scheduled for release, but only one of them is considered to be of high importance to the markets. With data being posted all but one day of the week, we may see some noticeable fluctuations from day to day in mortgage pricing.  Generally speaking, despite the lack of a data-packed calendar, I would still maintain constant contact with your mortgage professional.

Interest rates remained volatile last week as worries about inflation continued to influence the mortgage market.   Comments from the Federal Reserve indicated that the current rate of inflation is above desired levels.  When the Fed is concerned about inflation, they tend to raise interest rates.  We recommend locking now before they go up.

Inflation data continues to hammer headlines and our wallets. News this week demonstrated what we have all been feeling; prices are higher at the pump, the grocery store and anywhere else you use your debit card. Interest rates trade off of bond prices and bonds HATE inflation. Coupled with this is concern about a declining economy which could hold rates back a bit, but the overall trend is higher for those seeking a mortgage in coming months.

Volatility being what it is these days, mortgage rates bounce around a lot. Upward pressure for rates one day gives way to downward pressure the next, only to succumb to upward pressure again.

The see saw between concerns about growth and fears about inflation tilted toward the inflation side again this week, after Fed Chairman Ben Bernanke addressed Congress in the semi-annual report on monetary policy. While detailing the challenges facing the economy, Bernanke noted that inflation was above desired levels and that upside risks for higher prices have “intensified” lately. A Fed seeing higher inflation usually can be expected to react with an upward move to the Fed Funds and Discount Rates at some point in the not-too-distant future. In fact, the Federal Reserve Open Market Committee explicitly noted at its last meeting that “with increased upside risks to inflation and inflation expectations, members believed that the next change in the stance of policy could well be an increase in the funds rate.”

Fed Funds Implied Probability

Ben Bernanke says US Monetary Policy is ‘well positioned’; Wachovia fell for second day after ousting CEO Kennedy Thompson; Analysis by Mark Howard, Barclays Capital Head of Credit Analysis.

President Bollinger, Dean Hubbard, Co-Chairman Kravis, and distinguished guests, I am very pleased to be here and especially honored to receive the Columbia Business School’s Distinguished Leadership in Government Award. This evening I would like to offer a few thoughts on mortgage markets and the recent increase in the pace of delinquencies and foreclosures. My particular focus will be on geographic variation in mortgage performance and how that variation can help us better understand and prevent foreclosures. I will also discuss some initiatives taken by the Federal Reserve to address the foreclosure crisis as well as other policies that might be used to strengthen mortgage and housing markets.

Geographic Variation in Loan Mortgage Performance

As my listeners know, conditions in mortgage markets remain quite difficult, and mortgage delinquencies have climbed steeply. The sharpest increases have been among subprime mortgages, particularly those with adjustable interest rates: About one quarter of subprime adjustable-rate mortgages are currently 90 days or more delinquent or in foreclosure. Delinquency rates also have increased in the prime and near-prime segments of the mortgage market, although not nearly so much as in the subprime sector. As a consequence of rising delinquencies, foreclosure proceedings were initiated on some 1.5 million U.S. homes during 2007, up 53 percent from 2006, and the rate of foreclosure starts looks likely to be yet higher in 2008. Not all foreclosure starts result in the borrower’s loss of the home; sometimes the borrower is able to make up the missed payments or other arrangements are made with the lender. Given the number of borrowers in distress and the weakness of the general housing market, the share of foreclosure initiations that ultimately result in the loss of the home seems likely to be higher in the current episode than customarily has been the case.

Bear Stearns CEO Alan Schwartz was in the hot seat on Capitol Hill as lawmakers review rescue plan. In the days leading up to the fire sale of investment bank firm Bear Stearns, the company was the topic of rumors, speculation and fear that led the venerable Wall Street firm to the brink of ruin.

Bear Stearns CEO Alan Schwartz, testified about those uncertain days before the Senate Banking Committee.

The Federal Open Market Committee decided today to lower its target for the federal funds rate 75 basis points to 2-1/4 percent.

Recent information indicates that the outlook for economic activity has weakened further. Growth in consumer spending has slowed and labor markets have softened.  Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters.

Inflation has been elevated, and some indicators of inflation expectations have risen.  The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization.  Still, uncertainty about the inflation outlook has increased.  It will be necessary to continue to monitor inflation developments carefully.

Today’s policy action, combined with those taken earlier, including measures to foster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity.  However, downside risks to growth remain.  The Committee will act in a timely manner as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Gary H. Stern; and Kevin M. Warsh.  Voting against were Richard W. Fisher and Charles I. Plosser, who preferred less aggressive action at this meeting.

In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 2-1/2 percent.  In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, and San Francisco.

2008 Monetary Policy Releases

Ben Bernanke gave a speech today where he is urging lenders to write down the principle of the loans to distressed homeowner is where the price has fallen.

Is the Federal Reserve chairman breaking new ground on fed communication?

Alan Greenspan Was Incompetent And Ben Bernanke Only Knows Academics - Not Reality. Barron’s Economics Editor Gene Epstein looks at the Federal Reserve’s role in the housing crisis.

Federal Reserve to Propose New Curbs to Target Subprime Mortgages. Further Analysis and Discussion with David Wyss of S&P

Federal Reserve staff recommended that policy makers issue new restrictions on subprime mortgages, from a ban on low documentation loans to limiting penalties for borrowers who prepay their debts.

The new proposal, which the Board of Governors will vote on later today, follows months of public comment by Congress and consumer advocates, who urged the Federal Reserve to toughen consumer protections.

Finance industry officials warned that a crackdown would curtail lending in the midst of the housing recession. “Mortgage-market discipline has in some cases broken down and the incentives to follow prudent lending procedures have, at times, eroded”, Fed Chairman Ben Bernanke said in a statement.

The proposed new rules “were carefully crafted” to deter “improper lending” without “unduly restricting mortgage credit availability”, he said.

The proposed changes are the product of Central Bankings biggest regulatory initiative since Bernanke took office in February 2006.

The Fed chief is aiming to preserve the Fed’s consumer protection role after Democratic lawmakers blamed it for lax oversight and introduced legislation to set rules for mortgage lenders. The Fed proposed tightening restrictions on so called pre-payment penalties, requiring the escrow of taxes and insurance, and banning loans made without verification of income or assets.

Lenders would be responsible for determining whether their customers can afford a loan after the initial interest rate resets.

Fannie Mae and Freddie Mac should be focused on rescuing subprime borrowers as opposed to developing a new line of products to serve the jumbo market, according to the regulator of the two government sponsored enterprises.

The chairman of the Federal Reserve Board recently suggested to Congress that the two GSEs could play a role in securitizing jumbo mortgage loans. But James Lockhart, director of the Office of Federal Housing Enterprise Oversight indicated that the GSEs have no expertise in the jumbo market. “Our view is that at the moment, Fannie and Freddie have their hands full in the conforming loan market and in particular the lower credit quality portion of the conforming loan market,” Mr. Lockhart said. “That is where they should be concentrating their firepower.”

The OFHEO director said Fannie and Freddie are doing a reasonably good job in refinancing subprime borrowers that are current on their payments. However, they need to make more of an effort to help borrowers that need loan modifications or partial writedowns. “We will be discussing this with the Fed,” he said.