Basis Point(s) (BP)

A basis point is one hundredth (1/100) of a percent.

Conforming Loans

See chart on http://econonews.net/indexa.html

Core Rate (of inflation)

The core rate of inflation is calculated by eliminating the volatile food and fuel components. The logic employed here is that food and fuel prices tend to fluctuate widely from month-to-month. The core rate is presumed to give a clearer picture of what inflationary pressures may be mounting (or receding) in the broader sectors of the economy.

Delivery Rate

Wholesale lenders and mortgage bankers lock loans for brokers with Fannie Mae and Freddie Mac and other conduits for home loan funding.

When you lock a loan, you (the broker) will have a certain number of days to deliver the funded loan package to the people providing the funds and the interest rate lock. That is why lenders offer different rates or rate/fee combinations for different lock periods (15-day, 30-day, 45-day, etc.) The 10-day delivery rate (which is what we track) is the lowest interest rate you can lock-in a conforming fixed rate loan on any given day. The lender or broker must deliver the funded loan package to the provider of the locked rate and funds within 10 days for a 15-day rate lock.

Generally speaking jumbo fixed rate loans carry an interest rate 1/4% higher than a conforming fixed rate loan.

Durable Goods

Durable goods are manufactured items that, by design, are intended to last for three years or more. Things such as autos, trucks, refrigerators, factory equipment, aircraft, buses, home computers and televisions are included in this category. The origins of this tracking goes back to when we were an industrial based economy in the 1950’s and has since diminished in relative importance as the manufacturing sector now represents less than 20% of the total output of our national economy.

Effective Yields

Mortgage-backed securities (MBS) have a specified face rate of return. If the instruments market value goes down due to market conditions, supply concerns and/or the perception of looming Fed rate actions, the effective yield of the instrument goes higher. This is the mechanism that moves home loan rates up and down on a day-to-day basis.

Fed Funds Rate

The fed funds rate is the ‘target rate’ that the Federal Reserve’s policymaking body sets for overnight inter-bank loans of ‘reserve funds’. Banks are required to maintain reserve levels and not maintaining those levels will be costly for the bank due to regulatory sanctions imposed by the Federal Reserve.

Why are “reserve funds” also called “supercharged” money? When you secure a loan from a commercial bank they are not giving you someone else’s deposits. They are in fact ‘creating the money’ by crediting your account with the funds. The reserve requirements are (at least were in the most recent published documents we have) that they have 3% of their outstanding loans as reserves on deposit with the Federal Reserve. Think about that for a moment. With every $3.00 they have in their bank vault they can in effect create $97.00 of new, previously non-existing money. That is how the money supply expands. If a bank does not have enough reserve funds at the close of business on any given day they must borrow excess reserve funds from another bank to remain in compliance and avoid severe penalties imposed by the Fed’s regulatory arm.


Federal Reserve

The Federal Reserve is a private corporation established by an act of the US Congress in 1913. The Federal Reserve is owned by roughly 200 commercial bank holding companies. They are the de facto central bank of the United States of America even though the Federal Reserve Act of 1913 did not specifically establish a central bank. They perform many functions beside monetary policy including the clearing all check written in this country. You can learn more about the Fed at:
http://www.federalreserve.gov/general.htm

GDP Deflator (a.k.a. Chain Deflator)

The GDP deflator measures price changes in all the various categories of our gross domestic product (total of all goods and services produced). This particular measure of inflation is more to the liking of the Federal Reserve’s Open Market Committee over the consumer price index (CPI). Why? The CPI only measures changes in a hypothetical grocery basket of specific goods and services purchased by consumers. The Fed prefers broader over narrower measures.

Institute for Supply Management (ISM)

This industry group was formerly known as the Purchasing Managers’ Association. Each month they send a survey of question to their members to measure things from new orders to delivery time for supplies and their completed orders to material costs to new job creation and their outlook for the upcoming six-month period. The then tally the responses to calculate their indices. In recent years this group (about when the changed their name) the added the non-manufacturing sector index after only doing the manufacturing sector since their inception. This was a prudent move for them as manufacturing now represents less than 20% of the output of all goods and services for our national economy.

Jumbo Loans

Any loan amount above the conforming loan limit is a jumbo loan. A “Super Jumbo” is a term that used to be for loans above $650,000 for a single-family residence or condominium. Today we have agency high-balance going to $729,750 (in some higher-priced areas, based on a government formula) and then non-agency jumbo loans kick in.

Leading Economic Indicators (LEI)

There are ten components that when combined yields the LEI. Common wisdom suggests it takes three consecutive months of the LEI in the same direction to be indicative of the direction of the economy in the upcoming three to six months. Those components are:

1. The interest rate spread between 10-year Treasury notes and the federal funds rate.
2. The inflation-adjusted, M2 measure of the money supply.
3. The average manufacturing workweek.
4. Manufacturers' new orders for consumer goods and materials.
5. The S&P 500 measure of stock prices.
6. The vendor performance component of the NAPM index.
7. The average level of weekly initial claims for unemployment insurance.
8. Building permits.
9. The University of Michigan index of consumer expectations.
10. Manufacturers' new orders for nondefense capital goods.

Mortgage-Backed Securities (MBS)

MBS are the underlying publicly traded instruments that are the sole determinant factor in the setting of home loan interest rate levels. The overwhelming majority of lenders generally do not hold the loans they fund. They sell them to Fannie Mae, Freddie Mac and other home loan funding sources. Batches of loans are bundled together and shares in these bundles are sold to investors on the open market. They can be bought and sold like any other commodity. This is the mechanism used to create more money available to fund more home loans.

Open Market Committee (FOMC)

The Open Market Committee of the Federal Reserve is the policy making group that sets monetary policy. Their legislated mandate is to strive towards price stability: a metaphor for containing inflation. They use open market operations of buying and selling credit instruments to move the markets as well as setting key internal interest rates. For more information on the FOMC you can visit:
http://www.federalreserve.gov/fomc/

Par Pricing

Par pricing is at no points and no discount. It is a term most often used when mortgage brokers and mortgage bankers discuss wholesale pricing Yes we know about par pricing for stocks, but that is an entirely different context and meaning.

PCE

The acronym PCE stands for personal consuumption expenditures. It is a figure embedded within the gross domestic product (GDP) release. Unlike the CPI, that only measures price changes for a limited number of items in a hypothetical basket of goods and services, the PCE measures prices changes for all goods and services within the economy. This is why the Federal Reserve’s policymakers prefer this in gauging inflationary pressures (or lack thereof) within our economy.

Prime Rate

The prime rate is an artificial number created by commercial banks. It is always 3% higher than the Fed funds rate. It is purported to be the rate banks charge their preferred large customers like General Motors. We call it artificial and arbitrary because there are times when the average person can buy a home using a fixed rate loan that is at or very near the prime rate. There are many variable rate products available with fully indexed rates well below the prime rate.


Rate/Fee Configuration

In almost all cases interest rates on home loans are quoted in 1/8% increments. However, there are movements within those 1/8% moves that are reflected by a difference in the origination points or rebates. Generally speaking the loan points move in increments of 1/8 point. Usually the rate on fixed rate loans (prior to funding) can be adjusted up or down by 1/8% with a corresponding up or down move of 1/2 point to the fees. A “buy down” of rates will carry higher points (or smaller rebates).

Yield Spreads

A yield spread is simply stated as the difference in yields when comparing two different financial instruments. The day-to-day difference has limited value except perhaps when determining which to invest your money in. We track the spreads for the delivery rate to the Treasury Benchmark 10-year Note and the 30-year long bond. Our purpose of tracking yield spreads is to observe the ebb and flow of the spreads and take notice of unusual movement for the spreads when they surface.

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