HOLMDEL, N.J. — Barry Habib, CEO of Mortgage Market Guide (www.mortgagemarketguide.com) issued a warning to mortgage seekers that using APR comparisons as a way to determine the best deal isn't the way to shop for a home loan.

Habib is often featured on CNBC and CNN as a mortgage consultant and

he's a popular keynote speaker at mortgage-related conferences. He has 20+ years in the business.

"In theory, APR is supposed to make it easy to compare a loan with a lower rate and higher fees to a loan with a higher rate and lower fees. The problem is that the APR calculation makes some very bad assumptions," said Habib. Those assumptions include zero inflation (the value of the dollar may change) the mortgage won't be prepaid or paid off (the average mortgage life is under 6 years; borrowers refinance or resell before the term is out), and APR doesn't account for the value of dollars spent in fees. "If you spent thousands in points or fees to get a lower rate the APR calculation doesn't give any value to the money if it wasn't spent on closing costs," said Habib.

The APR calculation does not consider tax consequences, which can be significant, he said. "Higher fees on a mortgage may not be deductible, while a higher rate is typically deductible. And the APR can be manipulated." How? Habib explained that APR is not calculated on the mortgage amount, but rather on the amount financed, which is derived from the Truth in Lending statement. Because the amount financed takes into account lender fees, like application fees, points and commitment fees, as well as interim and per diem interest, it gives lenders variables that they can use to raise or lower the final APR value. The amount financed is equal to the mortgage amount less any lender fees, points and interim interest, so the more fees, the lower the amount financed. Monthly payments are then calculated as a product of the amount financed to give you the APR. The lower the amount financed, the higher the APR. Therefore, lenders can easily manipulate the amount financed by assuming a closing on the last day instead of the first day of the month, which would increase the amount financed and decrease the APR.

Federal Home Loan Banks Increase Funding

WASHINGTON — Amidst the national credit crunch, The Federal Home Loan Bank System has increased its lending by some $182 billion to member banks. The 12 Federal Home Loan Banks loaned out $822 billion in the third quarter, a 28% jump from the $640 billion advanced in the quarter ending in June.

The FHLB's rise in funding is noticeable compared with the Government Sponsored Entities (GSEs) Fannie Mae and Freddie Mac. In August, when they increased their own portfolios by $62 billion, the FHLB posted a $110 billion rise.

There is movement in Washington to increase Fannie Mae's and Freddie Mac's cap on home loan purchases but they still face regulatory growth limits put in place after both companies underwent accounting scandals and operational difficulties. Now that the boom in housing is over, second-guessing on such expanded lending is giving way to more questions. Internal controls that may signal impending

losses from defaults must have a lower threshold than in the boom times,

experts warn. And possible fluctuations in interest rates must be considered for shock to the portfolio.

Moody's and Standard & Poor's, the major debt rating agencies, now rate debt issued by the FHLB system AAA. But debt ratings have been questioned throughout the credit crunch. Still, government backing, or the "full faith and credit" guarantee is a confidence booster that has resulted in investors buying FHLB debt because it is perceived as safe.

With no internal financial control problems to cloud the picture, the FHLB system is expected to serve as a continuing source of much-needed liquidity.