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The Federal Debt Ceiling. Does it Matter? 
The Federal Debt Ceiling is the amount that the Federal Government is allowed to borrow and that amount is determined by Congress. The Treasury Department has said it will hit the existing ceiling on October 15th, but the fiscal year ends September 30th, so a preliminary budget must be agreed to by then. There is a lot of posturing on both sides of the political aisle, but ultimately the Republicans will negotiate in an effort to get something from the Democrats in exchange for agreeing to increase the ceiling. If no agreement is reached, the Federal Government will shutdown.

I don't think this will happen. It shouldn't, because they should remember what happened in 2011. The Federal Governement's debt rating was donwgraded in an historical event. Hank Smith, chief investment officer at Haverford, agrees, saying "There's no question they're going to raise the cebt ceiling."

The downgrade caused mortgage rates to bump up slightly, but then mortgage market participants quickly realized that the rating placed on US debt didn't really matter, since the US was still the safest place to invest because the US has never defaulted on any obligation in it's history. I really don't expect it to start happening now.

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Mortgage Rates Down for the Week 
After Wednesday's blockbuster news, mortgage rates dropped across the board. Yesterday and today were relatively quiet in the mortgage market as investors tried to determine what to do next. Most were waiting and watching, trying to get a leg up on their counterparts by finding a nugget of information that would enable them to predict what the FOMC will do next.

30 Year fixed rates for most lenders ended the week at 4.5%, typically with no points, while 15 year fixed rates were at 3.5%, also typically with no points.

SHOULD I LOCK OR FLOAT?
Unless you are going to closing and must lock, I feel that is relatively safe to float your rate. There will be some volatility with mortgage rates, but overall the risk should be outwieghed by the reward. Let it ride!


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Why the FOMC chose not to Taper 
On Tuesday, Bob Doll, chief equity strategist at Nuveen Asset management said "I think the Fed is desperate to get going on it," referring to Tapering. In my blog post on Tuesday, I agreed with him. I felt it was the perfect time since rates had run up solely on the talk, thinking that the start of Tapering was already "baked in the cake", because rates had already risen.

After some additional research, I found some interesting data that explains why i was wrong. The FOMC is looking at Unemployment and Inflation. Bernanke feels that the current rate, which is 7.3%, understate the real rate, and I agree. Why? Because the calculation does not include the people who have run out of benefits and are not longer bing counted. It also doesn't include workers who were full-time employees but are now part-time.

Core PCE Inflation is what the Fed uses as a benchmark for inflation. PCE is a measure of price changes in consumer goods and services. Personal consumption expenditures consist of the actual and imputed expenditures of households. The PCE is currently 1.2% and is dangerously low. Since Deflation is the only thing the Fed dislikes more the Inflation, it is easy to see why they chose to leave QE3 unchanged.

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Surprise, Surprise! The FOMC Stands Pat. 
At the end of the FOMC's 2 day meeting, the news was huge. So huge that no one saw it coming. Mortgage market participants and economists were all but certain that the Fed was going to announce the start of some type of Tapering. But everyone was fooled, because the FOMC chose to do what Bernanke had pledged to do from the begining, maintain QE3 until the Unemployment Rate or Inflation reached the FOMC's pre-determined levels.

As you can imaging, the mortgage market rallied furiously, driving 30 year fixed rates down roughly a quarter (0.25%) of a percent. The rally was fast and broad, causing hope that rates my continue to improve.

SHOULD I LOCK OR FLOAT?
Unless you are going to closing and must lock, i feel that is relatively safe to float your rate. There will be some volatility with mortgage rates, but overall the risk should be outwieghed by the reward. Let it ride!

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Ben Bernanke and the Federal Reserve Meeting 
The much anticipated Federal Reserve Open Market Committee (FOMC) meeting starts today and ends tomorrow. You have probably heard the talking heads discussing "Tapering" of QE3. QE3, Quantitative Easing, is the FOMC policy of purchasing US Treasuries and Mortgage Backed Securities (MBS) to the tune of $85 Billion per month. It was created to stimulate the economy by droping rates to make borrowing easier. FOMC Chairman Ben Bernanke has pedged to keep the policy in place until 2014, or until Unemployment drops to 6.5%, or Inflation rises above 2.0%. Since these benchmarks have not been met, why all the talk of "Tapering"?

I believe that the FOMC desperatly wants to get out of QE3 since they never should have gotten into it in the first place. The trick is how to do it without causing further damage. Since the FOMC members started discussing "Tapering (the reduction of FOMC monthly purchases), 30 year fixed mortgage rates have risen from 3.5% (with 0.00 points) to 4.5% and the housing market has slowed. This may actuallly be the perfect time to "Taper". Why?

Because rates have risen based solely on the talk, not the action, so the action could turn out to be a non-event in the mortgage market. Since Housing has been on of the few bright spots in the economy, the FOMC could actually start to "Taper" and give Housing a boost by cutting back on the purchases of US Treasuries, but not MBS. This should cause the mortgage market to rally and cause mortgage rates to drop. One can only hope. Stay tuned.

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