The full scope of the housing meltdown isn’t clear and already there are ominous signs of a new crisis — one that could turn out the lights on malls, hotels and storefront  Commercial Properties nationwide.

Even as the holiday shopping season begins in full swing, the same events poisoning the housing market are now at work on commercial properties, and the bad news is trickling in. Malls from Michigan to Georgia are entering foreclosure.

Hotels in Tucson, Ariz., and Hilton Head, S.C., also are about to default on their mortgages.

That pace is expected to quicken. The number of late payments and defaults will double, if not triple, by the end of next year, according to analysts from Fitch Ratings Ltd., which evaluates companies’ credit.

“We’re probably in the first inning of the commercial mortgage problem,” said Scott Tross, a real estate lawyer with Herrick Feinstein in New Jersey.

That’s bad news for more than just property owners. When businesses go dark, employees lose jobs. Towns lose tax revenue. School budgets and social services feel the pinch.

Last week, the average rate for a fixed-rate 30-year mortgage was 5.68 percent, down sharply from 6.34 percent a year ago, according to Freddie Mac (FRE). The drop in rates has prompted a surge of refinancing as homeowners look to get out of adjustable-rate mortgages or lower the rate on their fixed-rate mortgages. Applications for mortgage refinancing rose 22 percent for the week ended Jan. 25 from the week earlier, the Mortgage Bankers Association says.

Should you jump on the refi bandwagon? Unless you’re already paying a low fixed rate, it’s certainly worth considering, especially if you plan to stay in your home at least several more years.

Some borrowers may be tempted to hold out in hopes that rates will fall even more. But that’s risky, says Bob Walters, chief economist for Quicken Loans. Long-term mortgage rates are near historic lows, he notes, which means they’re more likely to rise than fall. The Federal Reserve reduced short-term rates by half a point last week and signaled that it might cut rates even more in the next few months. But while Fed cuts typically lead to lower rates for credit cards and car loans, the Fed doesn’t influence long-term mortgage rates. These rates track 10-year Treasury notes, which tend to respond to changes in the economy.
In fact, “There are times when short-term rates go down and mortgage rates go up,” says Jim Svinth, chief economist for LendingTree.com, a Web site that connects borrowers with lenders.

Long-term rates are particularly sensitive to any whiff of inflation, which causes bond yields to rise. If Congress approves an economic-stimulus package, Walters says, mortgage rates could move higher on fears that the stimulus will boost the inflation rate.

Though mortgage lenders are hungry for business, credit standards have tightened. That means some borrowers won’t qualify for the lowest rates, and some won’t be eligible to refinance at all. To take advantage of low rates, you’ll need:

A good credit score. To get the lowest mortgage rates, you’ll need a FICO score — named after the model developed by Fair Isaac (FIC) — of at least 680, and preferably above 700, Svinth says.

Equity. Some lenders are offering competitive rates for borrowers who have as little as 5 percent equity in their homes, as long as their credit scores are above 680, Walters says. Some borrowers with at least 5 percent equity and lower credit scores will also be able to refinance, he says, but they’ll pay more.
If, however, you’re one of the millions of homeowners who are “upside down” — you owe more on your mortgage than your home is worth — you won’t be able to refinance, Walters says.

A conforming loan. The decline in mortgage rates has been limited to so-called conforming loans. These are loans that can be bought by Fannie Mae (FNM) and Freddie Mac and resold to investors. Only loans of $417,000 or less are considered conforming loans.
Rates for mortgages that exceed that limit, known as jumbo loans, haven’t declined along with rates for conforming loans. Last week, the average rate for a 30-year fixed-rate jumbo loan was 7.03 percent, according to Bankrate.com.

No free loan
Here’s a scary sign of the times: Last week, mortgage refinancing promotions accounted for 10 percent of all spam, according to Commtouch (CTCH), which develops anti-spam products. Whenever interest in a product or service rises, shady operators tend to emerge.
For that reason, it’s important to make sure you’re dealing with a reputable lender and to scrutinize all offers. To stand out from the crowd, some lenders are promoting “no-cost” refinancing. But those deals are “rarely free,” Svinth says. Some no-cost loans carry a higher interest rate, he says. In other cases, the costs are rolled into the loan, which means you would end up financing them for the next 30 years.

“As a consumer, you need to have your eyes wide open,” Svinth says. “If somebody is offering you something for free, they’re earning it back someplace else.”

Paying upfront fees can help you negotiate a lower rate than you’ll get on a no-cost refinancing. But before you sign any papers, think about how long you plan to stay in your home. If, for example, you pay $2,500 in closing costs to lower your monthly mortgage payment by $100 a month, you’ll need to stay in your house for 25 months before you start saving money. You can find a refinancing calculator at www.thebestfixedrates.com.

Refinance or Purchase

The Fed has lowered short-term interest rates this year but longer-term bond yields have risen. Call it the new conundrum. And it’s adding to the confusion on Wall Street about the economy.

In his final year as chairman of the Federal Reserve, Alan Greenspan repeatedly talked about a “conundrum” in the markets. He was referring to the fact that rates for the 10-year U.S. Treasury and 30-year mortgages remained low even as the Fed jacked its key short-term federal funds rate from 1% to 4.5%.

This conundrum didn’t go away after the Maestro retired either.

By the time Greenspan’s successor Ben Bernanke was done raising rates in June 2006, the yield on the 10-year Treasury stood at 5.22% while the federal funds rate was at 5.25%.

What’s more, the 10-year yield was only 0.6 percentage points higher than where it was when the rate hikes began two years earlier. The average 30-year fixed rate mortgage had risen by less than a half-point.

These low long-term rates helped fuel the homebuilding boom and the credit market’s appetite for securities backed by increasingly riskier mortgage loans. And it arguably put the economy into the trouble the Fed finds itself dealing with today.

So starting last September, the Fed started trimming rates. And last month, it slashed rates, with two cuts totaling 1.25 percentage points in a little more than a week.

But long-term rates are once again moving in the opposite direction of the Fed: the yields on the benchmark 10-year Treasury note and fixed-rate mortgages are higher now than where they were in late January. This could add to pain in the housing market…or be cause for optimism. It depends on who you ask.

http://money.cnn.com/2008/02/25/news/economy/conundrum/?postversion=2008022512

The average fixed rate for a 30-year home loan rose more than half a percentage point during the past four weeks to 6.04 percent, according to Freddie Mac, the world’s second-largest mortgage buyer after Fannie Mae. The increase occurred after the Fed lowered its benchmark rate by 0.75 percent on Jan. 22 and cut the rate by a further half-point eight days later.

When Bernanke faces Congress tomorrow and Feb. 28, he will be questioned about why long-term bond yields are moving in the opposite direction to the Fed funds rate, said Credit Suisse Group Chief Economist Neal Soss. Lower fixed mortgage rates would avert foreclosures and give consumers more money to spend, said Diane Swonk, chief economist of Mesirow Financial Inc. in Chicago.

“Chairman Bernanke is caught in a tug-of-war between growth and inflation,” said Swonk, who is a member of the Congressional Budget Office’s panel of economic advisers. “Inflation is still a threat and that influences the mortgage-bond investors who ultimately set the fixed rates.”

More than two-thirds of Americans own their own home, with total mortgage debt of $11 trillion, data compiled by the Fed show. About a third of the loans are adjustable-rate mortgages, according to the Federal Housing Finance Board. Nine out of 10 people with so-called ARMs who refinanced in the fourth quarter moved to a fixed-rate loan, Freddie Mac said in a Feb. 19 report.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aUy1SnMXNMVA&refer=home

In order to help you determine whether you may benefit from refinancing, consider the following:

The rate caps on your mortgage
If you have an ARM that is about to reset, it’s crucial that you understand the caps on your loan. Caps are limits on the amount your interest rate (and, subsequently, your monthly payment) can go up. They are designed to protect you from the shock of extreme rate increases. There are three main types:

The initial cap limits the amount your rate can go up at the first adjustment period.
The periodic cap sets the maximum increase for any single adjustment.
The lifetime cap restricts the overall amount your interest rate can be raised over the entire mortgage term.
As an example, imagine that you have a 3/1 ARM with an initial rate of 4 percent. Your initial and periodic caps are both 2 percent, and the lifetime cap is 6 percent. Now let’s assume your mortgage will reset for the first time in one month, and interest rates have risen since you obtained your loan. If your new fully indexed rate were 6.5 percent, your initial cap would protect you, keeping your actual rate at just 6 percent.

Note, however, that your loan will be adjusted again a year from now, and even if interest rates stay the same, your ARM will go up to 6.5 percent, because an increase of 0.5 percent is still well under the periodic cap of 2 percent. As long as interest rates continue climbing, your mortgage rate will climb with it, by a maximum of 2 percent a year, until the lifetime cap halts the increase at 10 percent. That’s why caps may not provide long-term protection against rate increases.