The Case for Not Waiting

One of the more frustrating aspects of today's marketplace is all the wasted energy. Consumers are stuck on the fence, waiting for lower rates to refinance, waiting for lower prices to become a buyer in this buyer's market. Sometimes waiting pays off, and it certainly has if you hesitated to buy a home in 2006, and are now reconsidering. But you could be heating your house with the windows open...

Trying to squeeze blood from a turnip, waiting for 4.500% when you can get 4.625% today can lead to disappointing results. Rates are at or within spitting distance of all time historical low levels. With all the moving pieces of the puzzle, waiting often means a lot of false starts and missed opportunities.

Example 1 (purchase). Defining the cost of waiting. Maybe you've got a pretty good read on the supply/demand dynamics of your market, you know about the seller's circumstances, competition, etc. Visibility is ok, and you know this house is overpriced. So you try and pull down the price tag, but the seller isn't going for it. Do you have a good read on the global markets? Well, do ya? Some sort of inside track? What if that house you want does eventually come down 25k, but at that exact point in time, the markets are digesting a panic over inflation expectations, and rates have shot from 4.750% to 5.250%? What's a better deal? The answer is: Lower rate, higher price. I'll show my math if you don't believe me, shoot me an email to request it.

Example 2-4 (refinance). Job loss, Equity loss, Rate spike. If you owe $400k 6.250%, waiting for 4.500% when you could have 4.625% today, how much do you lose paying at 6.250% for 3, 6, 12 months of waiting? Again, it's helpful to do the math. 12 months at 6.250% costs $6500 more in interest than 4.625% over one year. The extra .125% in rate, if you can get to 4.500%, is worth $500 over a year.

Sure, over 30 years, that's a significant savings. But it is not worth the cost of missing the boat altogether, as we hear about consumers doing every day.

Unemployment is rising (currently 8.5%). Equity is falling (price declines of 30-50% off peak in some markets). And there is a debate going on in the markets about inflation coming from excess stimulus cash in the financial system, and whether it will cause rates to spike without warning.

Would you rather have a $6500 sure thing, or a shot at $7000 with a potential risk of zero? These are forces beyond your control, so eliminate them or avoid them if you can. Otherwise, if you're sitting on that fence, and you fall asleep, you might end up with a nasty burn...

Barney Frank on High Balance Conforming Loans

I caught a video piece of Barney Frank fielding questions the other day, in which it was painfully obvious to this mortgage planner that the legislation cannot force free markets to do as legislators intend or wish. I wish I had a link to the video, but I don't, nor do I have the time to search for it. I am sure it is out there.

In 2008, the elected representatives on Capitol Hill decided to allow for Fannie Mae and Freddie Mac to purchase loans at a temporarily increased ceiling - ranging by county according to the median home values in these counties. The non-conforming loan breakpoint was 417k, we've talked about it here. Anything above 417 could not be touched by Fannie/Freddie.

The 2008 temporary limits were put into effect, and some areas were able to treat loans all the way up to 729,750 as conforming, per law. But the banks did not like the temporary nature, investors didn't look at it the same way either, and rates and terms for anything between 417 and 729k left much to be desired, and many to be refinanced at some other time, or never.

For 2009, lawmakers made the "temporary" permanent, but revised the limits, bringing the max ceiling down to 625,500 in the highest cost areas. Investors and banks were a little better to adopt these. And in many ways, borrowers with 417-625k see many of the same underwriting rules. But some of the differences are significant.

Pricing these loans is not the same, bringing much disappointment to the borrowing and lending community. Lawmakers stipulated that banks could only package a small percentage (10%) of "high balance" loans with the traditional, sub-417k loans into their bond issues for the secondary market.

There was so much pent up demand from borrowers with high balance loans to refinance, that the banks all got inundated with demand for money under these terms. It put them way off balance, and they dont have 9x the traditional conforming investments to match every dollar worth of high balance loans. So what do they do? Raise rates. So now when you have a high balance loan, your rate is SIGNIFICANTLY higher than the traditional balance conforming loans.

This will ebb and flow as the banks process and liquidate their inventory. But watching Barney Frank scratch his head, saying something to the tune of "I don't understand why anybody would be treated any differently if they were borrowing the higher balance, we changed the rules to make it the same" - which is not a quote, but is precisely what he was saying - you can see why so many of the governments attempts to help the market have not worked, or only partially helped, or helped one area and introduced a new problem...

One more complication in today's market. Next to impossible to predict a given bank's pipeline composition, and therefore next to impossible to know when they will spike their rates overnight, as we are seeing them do erratically.

Great perspective to a timely question

Ric Edelman fields a question from one of his radio show listeners:

Q: Do you and your wife make extra principal payments to your
interest-only loan? Or do you not want to own your home someday?

Many in the investment business suggest investing it in the stock market
- you don't keep up with inflation by putting the money into your home
or keeping the money in cash. Well, over the past decade or so, with all
of the ups and downs of the stock market, I bet the folks who kept their
money in cash or paid down their mortgages fared better than those in
the stock market. I know, I know, the market goes up and down, and over
the "long term" the stock market is supposed to outperform the other
things, but I question this advice sometimes and just wonder if you are
going to own your home someday? If not, why?

Ric: No, we don't make extra payments. We personally handle our money
the same way we advise our clients and consumers.

Why would we want to add extra money to our payment? If you believe that
real estate values rise over long periods, the home's equity will grow
all by itself, and it will do so at such a rate that any extra payments
we'd make would be pointless.

Here's an example: Say you own a $500,000 house with a $400,000
mortgage. You thus have only $100,000 in equity. If you send in an extra
$100 per month for five years, you'll have an extra $6,000 in equity.
But if the house grows just 1% per year, it will produce $25,505 in new
equity, or four times more than your effort from making extra payments!
And if the house grows 2% per year, your new equity will be more than
$50,000!

This is one reason - there are nine others in my DVD on the topic - why
making extra payments is a waste of time and effort.

Of course, I began by asking if you believe that real estate values will
rise over long periods. If you don't believe that, then you shouldn't be
a real estate owner in the first place. You should rent instead.

Also, I note that you referred to those who recommend placing into the
stock market all the money that you'd otherwise use to make extra
payments. I do not agree with that advice. Instead, you should invest
the money in a highly diversified manner. That's because, as you've
noted, it's possible to see stock prices falter for extended periods. By
owning a wide variety of assets, and not just stocks, you reduce the
risk of such underperformance.

But even if you invest solely in stocks, you're highly likely to do
fine. Remember that we're comparing the interest rate on your mortgage
to the performance of the stock market. Since your mortgage will last
for 30 years, we need to evaluate stock prices over that same period.
And in every 30-year period since 1926, according to Ibbotson
Associates, stocks have handily outperformed mortgage rates.

I realize that you're questioning the strategy because of the stock
market's recent performance, but it's precisely at such times that we
need to remind ourselves of the long-term nature of the markets.
Otherwise, you'll be tempted to do the wrong thing at the wrong time for
the wrong reason.

Find out more about Home Ownership here:
http://www.ricedelman.com/cs/education/home_ownership

Inflation Panic 2008 - What Are We Headed For?

I wonder if in a few years, when we look back at this great Credit Crunch episode, and the associated economic slowdown, if we will remember the extreme moodiness of the markets during the transition. It seems every other week the Dow is posting multi-day consecutive 3-digit gains or similar consecutive losses. The financial news media is loaded with guys who say "we are nearing bottom" or "we are at the bottom", yet none of these guys was here telling us we were headed for this in the first place, so how are they expecting to be viewed as credible? One article I read recently (from Marc Faber, introduced by John Mauldin) labeled this a "conspiracy of optimism". A pretty dismal prognosis for our economy is laid out in this piece. I have to admit, it was a bit jarring to read.

But the view is a slight bit different in this one, from Pimco's Paul McCulley. With all this debate going on about stagflation, wage-price spirals, the 1930s (depression) or the 1970's ("the lost decade", at least economically speaking), and general financial Armageddon, eyes are on the Federal Reserve this week for an updated policy statement. Expectations, via the Fed Funds Futures trading activity, are all over the place in predicting the Fed Funds rate over the coming year. There is a general lack of consensus, the market is confused.

It will be interesting to see if "Doctor" Bernanke appears on board with McCulley's concept of a Hippocratic Oath, and there should be a lot of attention on tomorrow's Fed news release.

Interesting times for sure. Where exactly is this economy headed, and what's it going to mean to you? How does it impact your investments? Your employment? Your family? Are you positioned to endure the downdrafts as well as participate in the bull runs?

Buy Or Rent - What Can We Learn From The Rent Ratio?

The New York Times has an interesting graphic illustrating the costs of renting versus owning a home in various US cities. The Rent Ratio is a useful metric for people contemplating the costs of renting versus owning a home. Bay Area residents will notice that the ownership premium is higher here than many other areas, especially non-coastal metro zones. Historical appreciation records are likely the reason why buyers are willing to pay a greater premium in these cities.

Understanding the true costs of renting relative to the true cost of owning, you need to look well beyond average rent prices and average mortgage payments for equivalent properties. A true rent vs. buy analysis will take into account:

• inflation of rent costs
• opportunity costs of down payment funds that could have been invested elsewhere
• return on investment of dollars invested rather than spent on mortgage payments in excess of equivalent rent
• tax implications of owning real estate
• appreciation of housing as an asset
  

Also, are we looking at the cost of renting the home we want to buy? Or are we looking at the cost of renting the home we would likely rent, if we chose not to buy? They may not be the same, for when we are not required to sink 100k or 200k into a down payment, we may be inclined to spend an extra $200, $300 even $500 a month more in rent. If you want to see how a true rent vs. own analysis works, please email me.

Some other interesting observations: San Jose, CA has the highest ratio. New York City is surprisingly low, suggesting that it's not only expensive to own, but also to rent in that city.

Another Reason To Pay As Little As Possible Into Your Home Equity

Reason: Corrupt Insurance Companies.

File under: SAFETY.

Staying liquid is safer. Might it cost you a few more dollars? Sure, but its safer. What's that worth to you? Nothing brings that point home like images of houses in flames, homeowners in tears, and more houses in flames.

Watch all three installments of this video, an effort by PBS and Bloomberg.

I can't really weigh on where the bias is in this, but I am sure there is some. The media loves to portray big business (insurance companies) as evil, and looking to choose dollars over people all day long. But how well do you know about your homeowners policy? Do you know anybody who lost their home in the Oakland Hills Fire? How about the 2003/2004/2005/2006/2007 fires in San Diego/Los Angeles/Orange/San Bernadino/Santa Barbara/Ventura County?

What I can do, is point out to you that it is important to review and understand your policy. It's important to work with an insurance provider who is reputable and reliable. If you need a referral to one, please email me.

And I can also teach you some highly effective mortgage strategies that help you take control of your financial profile, build liquidity and safety, and rest easy at night.

Nobody expects disaster to happen to them. But if it does, and you have a fight on your hands with the insurance company, it can take YEARS to settle, or be indemnified. Regardless of the outcome, where are you going to live while the fight goes on - and how are you going to pay for it when the insurance company is denying your claim?

Here's another example: Senator Trent Lott has been down this road related to Hurricane Katrina devastation to a home he owned free and clear.

Interest Rate Spreads And Why The 10 Year Treasury Is Not The Best Indicator Of Mortgage Rates

One of the topics that comes up on a daily basis with my clients is the relationship between mortgage rates and the headline-grabbing interest rate reference points like the 10 Year TreasuryNote, or the Federal Funds Rate.

A very common misconception is that mortgage rates are based on the 10 Year Treasury Note. I am not exactly sure what the logic there is, but I have heard people say that the average 30 year mortgage lasts only10 years. Seems like a pretty loosey-goosey way for a bank to call out a price for lending their money out on a 30 year term. Do mortgage rates correlate to the 10 Year Treasury at all? Over time, mortgage rates and the 10 Year Treasury do trend in the same direction, but on a day by day basis, they often go in different directions, or at least at a different pace. There are separate specific implications for each, and they react to a different set of data points in different ways - at times, the differences can be significant.

The other question I get rather frequently is how the Federal Reserve will impact rates with their recent string of cuts to the Fed Funds rate. People continuously expect that its best to wait until after the cut to take advantage of lower rates. Again, not the correlation you are looking for. The Fed has cut 7 times in the recent cycle, and on the first 6, mortgage rates spiked in response. On the last one, rates went down a little. Do mortgage rates react to the Federal Reserve actions? Absolutely, but its the greater economic context that matters at the time, and dictates the type of reaction.

So what's the best metric for determining mortgage rates? MBS, or mortgage-backed securities, aka mortgage bonds. Read a definition of these here. When mortgage bonds trade at higher prices, the associated interest rates drop. This tells lenders for new mortgage issues what the current value and rate of return is on long-term bond money, and helps them set their rates.

Each of the first 6 cuts this time around have brought on a perceived increase to the threat of inflation. Long term fixed-income securities, like bonds, Treasury Notes, etc, HATE inflation. If you were a bank, and committed to lend 100 dollars to somebody for 30 years, and then inflation doubled, your 100 dollars would be worth far less than you had expected it would be when you loaned it out. So you would loan your next 100 dollars at a higher interest rate to compensate. Accordingly, rates on mortgages jumped at each time.

Then on the most recent cut, the Federal Reserve hinted at the idea that this would end the cycle. It gave the bond market confidence that no further inflation pressure would be invited, and the bonds rallied on the news. Rates went lower.

The bottom line when it comes to trying to predict mortgage rates, is that you need to know where MBS are trading, and what the climate is for them amidst the constant inflow of economic data points. They react very strongly to things like the Unemployment data, GDP, CPI, PCE, PPI, Home Starts and Sales, and a bunch of other metrics. Depending on the mood, different indicators have different impacts. If inflation is a hot button, the inflation barometers like the CPI and PCE will have heavy influence. If we are looking for indicators of recession, MBS will be sensitive to GDP, Consumer Confidence, Retail Sales, etc.

The Cleveland Federal Reserve has an article out discussing the increasing spread between Treasury and mortgage rates. With the current credit crisis, money has rushed into bonds as usual. But mortgage bonds have been relatively less appealing, as the whole mortgage marketplace is at the epicenter of the crisis. Last time we had a recession, money flooded into all bonds, Treasury and especially MBS because the housing economy was strong, and MBS values were thus very secure. This is why we are seeing a lack of correlated movement between these two instruments.

If you are entrusting a mortgage professional with the management of your debt, you need to align with one who understands interest rates. They need to specifically understand the market for mortgage-backed securities, and the economics behind the current credit and liquidity crisis. If the person you are speaking with tells you that mortgage rates are based on the 10 Year Treasury, or especially if they call the 10 Year Treasury Note a Treasury Bond, there's a risk they are going to mishandle your business. And if they say they 'can't see into the crystal ball', its likely a sign that they don't have a clue what upcoming events might be influencing rates.

Exploring The Liquid Value Of Real Estate - SF Federal Reserve Study

If you have not heard me preach in the past about the value of liquidity, and how defining that value might impact your borrowing strategy, now is a good time to listen-up.

When a millionaire buys a million dollar home, they typically don't pay cash. They use a mortgage, because they want to maintain liquidity. Would you rather have a million dollar home, and no cash, or a million dollar home, a big tax-deductible mortgage, a million in other investments, and a monthly payment?

Liquidity preserves options, and builds control and safety into the financial picture. It has a cost (the mortgage interest) and its up to each consumer to figure out where the benefit of liquidity out-weighs the cost of interest. This is what we can help you evaluate.

Real estate, in general, is illiquid. We are seeing this realized on a whole new level, as sellers are dropping prices to entice buyers, and the time required to sell a home has skyrocketed. If you need to sell a home, and you are not liquid, how long can you wait for a buyer?

The Federal Reserve Board of San Francisco recently published a brief letter discussing the relationship between falling prices, days on market, and liquidity, and the message is noteworthy. The author (John Krainer) suggests that real estate values should be adjusted for their lack of liquidity, and in doing so, we see a different picture.

Think about this. If you are selling a home, and its worth 100k, but it costs 1k per month to pay the bills, and you are facing an average time on the market of 6 months, you face a decision of carrying for 6k to sell in 6 months for 100k, and net 94k in your sales price. Why not drop the price to 94k today, and sell it right away?

If you are holding the asset, you also hold the risk of market deterioration. What if in 6 months, the present value has dropped to 90k? Now you've spent 6k and will be selling at 10k below what you could received 6 months ago. Not to mention what you could have done during the past 6 months with the cash in-hand!!! Time. Is. Money. Case in point.

In fairness, if you hold the asset, and the value increases by 10k over the 6 months, you also own that. But who wants to bet on this market getting better over 6 months? If buyers believed that were going to happen, the average time on market would not be 6 months!!!

The tricky part about markets is understanding where psychology intersects with economics. Sellers typically try to hold out for the top dollar when they are selling their former home, but there are some cases where sellers are trying to hurry. These are auctions and foreclosure sales, typically driven by builders, banks, and other business entities. They want to cut to the chase, while the homeowner doesn't want somebody to take their home on the cheap. But they have to compete against non-homeowner sales in their market, especially when there is an imbalance of buyers and sellers!

So be careful. Real estate is liquid enough at a low enough price, but when sellers outnumber buyers, that price is likely far lower than what your concept of value is in your home. And this brings us back around to why its important to maintain liquidity outside the home; if you want to sell your home, and want top dollar, you better be prepared to wait. You'll need savings to carry the cost of owning. There are a lot of reasons why this may work better in the long run, but each case is subjective.

1031 Exchange Sees 180 Day Rule Challenged

If you have ever dealt with a 1031 Exchange, you are familiar with the 180 day term. If you have not, the basic gist is as follows:

A person selling real estate can roll over the proceeds into a new like-kind investment and defer taxation on the gain, but the replacement property needs to be identified within 45 days of sale, and the investor needs to take ownership of the new property within 180 days after the sale.

The Mortgage Meltdown/Credit Crisis/Credit Crunch/Subprime Meltdown/whatever you want to call it has officially sucked the 1031 market into its vortex, and according to the 10/19/07 Kiplinger Tax Letter, the IRS is considering soft enforcement of this 180 day rule. 1031 Exchanges involve an 'intermediary' to handle the exchange, and because so many of these entities have gone into bankruptcy, the cash involved in the exchanges has been tied up in court, hampering the ability of the investors to settle within 180 days.

In previous cases where an intermediary caused such a delay, the IRS claimed they were powerless to extend the deadline. This current attitude may be reflective of a 'bail-out' friendly attitude in various parts of our government.

Please consult your tax advisor for more specifics, or contact me if you need a referral to one.

Income Taxes Of The Rich And Famous (redux)

2005's tax analysis is in! You can read the summary from the 2004 figures here for a comparison.

• The top 1% of filers paid 39.4% of all income taxes on 21.% of total adjusted gross income
• Minimum income needed to be in the top 1% of filers: $364,000 (AGI)
• The top 5% of filers paid 59.7% of all income taxes on 36% of total AGI
  
• Minimum income needed to be in the top 5% of filers: $145,300
• The top 10% of filers paid 70% of all income taxes on 46% of total AGI
• Minimum income needed to be in the top 10% of filers: $103,900
• Bottom 50% of filers shouldered 3.1% of total income tax

Today is Super Tuesday. Who did you vote for?

Let me know if you need some ideas about how mortgage planning can lead you to a more tax efficient balance sheet.

It's A Good Time To Review The Correlation Between Fed Funds And Mortgage Rates

Here is a common question over the past few weeks:

“If rates were cut .500%, is my 30 year fixed going to be .500% lower?”

The answer is different than you may think, and while I do agree that we tend to see declining interest rates in mortgages when the Federal Reserve is in the cut-side of the rate cycle, the subtle relationship between Fed Funds and Mortgage Rates needs to be understood if you are engaged in a purchase or refinance transaction involving money borrowed from a bank. Failure to understand this means you may get caught on the wrong side of a timing bet.

Remember “Fed Funds” is the rate that banks can borrow money from each other to keep their reserve amounts in line. The “Discount Rate” is the interest rate at which an eligible financial institution may borrow funds directly from the Federal Reserve when their reserves dip below the reserve requirement. It's considered the last resort for banks, which usually borrow from each other. The Federal Reserve can change either – but they can’t change mortgage rates!

Check out this chart for an illustration. You'll notice some basic tendencies that are similar, but by no means is there a basis point to basis point connection. In fact, when the Fed cuts rates, there is often a spike in mortgage rates based on the perceived threat of inflation associated with lower borrowing costs at the institutional level. Mortgage rates are based on long term fixed income investment vehicles, aka bond instruments, which hate inflation. Inflation eats away at the value of that income over time.

Looking back at the markets when the Fed threw in a surprise .750% rate cut, I believe it was the news about the rogue trades made by Societe Generale to the tune of MINUS 7.1 BILLION DOLLARS that caused the Fed to throw in the emergency towel and caused domestic money to pile into safe fixed income investments – like mortgage bonds. This pushed mortgage rates down quickly. It was not the Fed action directly causing mortgage rates to improve, but both were reacting to the same news in their own way for different reasons. In the days that followed, the mortgage bonds quickly reversed and went the other direction, suggesting that the Fed action ultimately caused rates to worsen when you look at the net of the 2-7 days that followed the news... Again, lower Fed rates invites inflation, arch enemy of fixed investments.

This does not mean that I expect to see rates rise steadily as the Fed continues this cutting cycle - and I expect to see the Fed go another 100 basis points over the coming year. Mortgage rates will also come under pressure based on the same economic data that the Fed is responding to. The important lesson here is to understand that the Fed is trying to achieve balance between price stability and economic growth. Cutting rates threatens price stability by inviting inflation. But raising rates to fight inflation chokes off growth. This is why they constantly tamper with the Fed Funds rate. The bond market reacts to their policy decisions and jumps back and forth based on how effectively it views the Fed to be at maintaining that balance.

It may not be simple to understand. But if you are in a mortgage transaction, or about to consider one, you best make sure that you're working with a professional who gets this. Waiting to lock because we expect the Fed to cut rates has been bad advice at every single cut since the Fed began easing in this cycle.

Conforming & Jumbo Loan Limts For 2008 - YET EVEN MORE Market Chatter

Possible Impact of Higher Limits

There are 19 metropolitan areas where the economic stimulus package's changes to the conforming loan limits would likely have an impact, according to this analysis from the Stanford Group Company, a Washington, D.C.-based financial services company. Of those, seven are in California and six are in the New York metro area. Stanford uses median home price data from the National Association of Realtors.

Metropolitan Area
Median Home Price(Q3 07)
Median Home Price x 1.25
Proposed New Limit
Increase Above Current Limit

Anaheim-Santa Ana, Calif.
$700,700
$875,875
$729,750
$312,750

Barnstable Town, Mass.
$400,600
$500,750
$500,750
$83,750

Boston-Cambridge-Quincy, Mass.
$414,700
$518,375
$518,375
$101,375

Boulder Colo.
$367,500
$459,375
$459,375
$42,375

Bridgeport-Stamford-Norwalk, Conn.
$491,100
$613,875
$613,875
$196,875

Los Angeles-Long Beach-Santa Ana, Calif.
$588,400
$735,500
$729,750
$312,750

Miami-Fort Lauderdale-Miami Beach, Fla.
$346,800
$433,500
$433,500
$16,500

New York-Northern N.J.-Long Island, N.Y./N.J.
$476,100
$595,125
$595,125
$178,125

New York-Wayne-White Plains, N.Y.
$550,900
$688,625
$688,625
$271,625

Edison, N.J.
$391,800
$489,750
$489,750
$72,750

Nassau-Suffolk, N.Y.
$470,000
$587,500
$587,500
$170,500

Newark-Union, N.J./Pa.
$459,700
$574,625
$574,625
$157,625

Riverside-San Bernardino-Ontario, Calif.
$377,000
$471,250
$471,250
$54,250

Sacramento-Arden-Arcade-Roseville, Calif.
$335,700
$419,625
$419,625
$2,625

San Diego-Carlsbad-San Marcos, Calif.
$589,300
$736,625
$729,750
$312,750

San Francisco-Oakland-Fremont, Calif.
$825,400
$1,031,750
$729,750
$312,750

San Jose-Sunnyvale-Santa Clara, Calif.
$852,500
$1,065,625
$729,750
$312,750

Seattle-Tacoma-Bellevue, Wash.
$394,700
$493,375
$493,375
$76,375

Washington-Arlington-Alexandria Va./Md.
$438,000
$547,500
$547,500
$130,500

Source: NAR, Stanford Group

Conforming & Jumbo Loan Limts For 2008 - EVEN MORE Market Chatter

Yesterday, the US House of Representatives overwhelmingly passed HR 5140 – an economic stimulus package that includes a temporary increase in the conforming loan limit and the upper threshold for FHA loan programs to as much as $729,750 in high-cost areas. The temporary increase would last only until the end of 2008. The bill would also restrict Fannie Mae, Freddie Mac and the Federal Housing Administration from guaranteeing or purchasing loans above 125 percent of the median home price for a given area. That means that the existing $417,000 conforming loan limit for mortgages eligible for purchase by Fannie and Freddie would not increase in areas where the median home price is $333,600 or less. The problem of course, is that as of right now, no one knows what the median home price is in different markets because this data has never been published by HUD!

Therefore, it would be up to the Secretary of Housing and Urban Development to determine the median home price for different housing markets "as soon as practicable," but no later than 30 days after passage of the bill, relying on existing commercial data where needed. In other words, if median home prices in your marketplace are $336,000 or less, this bill won't really affect you; and there's no way to tell if median home prices in your area are higher than $336,000 until HUD publishes this data. Nevertheless, jumbo relief is certainly on the way for places like California where median home prices are certain to be above $336,000.

Currently, the loan limit for FHA loan programs is between $200,160 and $362,790, depending on the county where the property is located. The proposed higher limits for FHA loan guarantees are also set to expire at the end of this year, unless Congress passes other legislation intended to modernize FHA programs by introducing risk-based pricing and lowering down-payment requirements.

While House leaders thought they had reached an agreement with the Bush administration to include FHA modernization as part of the stimulus package, they agreed to continue working on that issue separately at the administration's request, the Associated Press reported.

In order to make higher limits a reality, the next step is for the Senate to pass the bill and for the President to sign it into law. The target date for final passage set by the White House and Congressional leaders is February 15.

Conforming & Jumbo Loan Limts For 2008 - MORE Market Chatter

MBA (1/25/2008 ) Sorohan, Mike
The Bush Administration and the House of Representatives yesterday agreed on a $150 billion economic stimulus package that contained key components supported by the Mortgage Bankers Association.

Specifically, the package calls for Federal Housing Administration loan limits to be increased from $362,000 to as much as $729,750. The government-sponsored enterprise conforming loan limit would increase from $417,000 to a maximum of $729,750. And to provide an incentive for lawmakers to work on overall GSE regulatory reform, the loan limit increases for the GSEs are limited to one year.

MBA Chairman Kieran Quinn, CMB, praised Administration and House leaders for their bipartisan approach and quick action, saying the package will help borrowers and stabilize the housing and mortgage markets.

“This stimulus package will bring much-needed help to consumers and restore some stability to the housing and mortgage markets,” Quinn said. “Reform of the Federal Housing Administration has long been a top MBA priority. A more modern and vigorous FHA will provide another option for first time and low and moderate income borrowers and borrowers who need to refinance existing mortgages.”

Quinn said a temporary increase in Fannie Mae and Freddie Mac's loan limits, as well as a boosting of the FHA loan limit, should return liquidity to a portion of the mortgage market that has essentially been at a standstill since August. “This will be especially helpful to current and potential homeowners in areas of the country that have seen the largest price run ups during the recent boom,” he said. “It is not coincidental that many of these areas are the same ones that are now facing the most difficulty.”

In addition to the housing provisions, the package contains tax rebates of up to $1,200 per family and allows businesses to double the amount they can write off for capital investments.

President Bush said he was pleased by the quick action, asserting that while the economy was “structurally sound,” it is dealing with short-term disruptions in the housing market and the impact of higher energy prices.

“This package has the right set of policies and is the right size,” Bush said. “The incentives in this package will lead to higher consumer spending and increased business investment this year. Importantly, this package recognizes that lowering taxes is a powerful and efficient way to help consumers and businesses. I have always believed that allowing people to keep more of their own money and to use it as they see fit is the best way to help our economy grow.”

Not everyone expressed pleasure with the package. Office of Federal Housing Enterprise Oversight Director James Lockhart III said he was “very disappointed” with the proposed increase in the GSE conforming loan limit, calling it a “mistake to do so in the absence of comprehensive GSE regulatory reform.”

“To restore confidence in the markets we must ensure that the GSEs’ regulator has all the necessary safety and soundness tools,” Lockhart said.

Ideologists on both end of the political spectrum also found fault with the package, saying that it did too much (conservatives) or not enough (liberals). And Senate leaders indicated that they might add provisions that the House/Administration agreement does not have, such as extension of unemployment and food stamp benefits, which they said would provide a quicker jump-start to the economy.

But House Speaker Nancy Pelosi, D-Calif., who conceded that she was not “totally happy” with the package, nonetheless defended it, calling it the result of compromise and cooperation. She said the Bush Administration made key concessions on the scope of the tax rebates, which cap at $174,000 in 2007 family income.

“Our goals were to provide working Americans who are struggling in these difficult economic times with timely, targeted and temporary relief and to quickly give our economy a shot in the arm. We have accomplished both goals,” Pelosi said. “Economists agree that any stimulus package must put money in the hands of those who will spend it quickly to stimulate the economy, and this bipartisan package does just that.”

Pelosi said the package would go to the full House for a vote next week. The bill would then move to the Senate, where Senate Majority Leader Harry Reid, D-Nev., said the goal was to have a bill on President Bush’s desk by Feb. 15. Depending on what bill the Senate passes—and how the House, Senate and Bush Administration agree on a final package—the bill’s provisions could go into effect this summer. Treasury Secretary Henry Paulson Jr. said the first rebate checks could go out as early as May.

“All these provisions should provide a boost for struggling borrowers and the stalled housing market,” Quinn said. “We are pleased to see that leaders on both sides of the aisle on Capitol Hill have indicated the measure will receive swift action and we look forward to seeing the package signed into law as soon as possible."

Conforming Loan Limts For 2008 - Market Chatter

First today, this from CNBC:

The Treasury and the House of Rep's have agreed to an economic stimulus package that will include a temporary increase in conforming loans to $625,000 in high cost areas.

The bill will now go to the Senate for its approval. Stimulus package is expected to become law by February 15th.

Then a few hours later, this from OFHEO:

For Immediate Release
January 24, 2008


STATEMENT OF OFHEO DIRECTOR
JAMES B. LOCKHART ON CONFORMING LOAN LIMIT INCREASE

We are very disappointed in the proposal to increase the conforming loan limit as we believe it is a mistake to do so in the absence of comprehensive GSE regulatory reform. To restore confidence in the markets we must ensure that the GSEs’ regulator has all the necessary safety and soundness tools.

Yesterday Chairman Dodd talked about moving a GSE reform bill early this year. We are ready to work with him and the Senate Banking Committee. We will also be working with Fannie Mae and Freddie Mac to ensure that any increase in the conforming loan limit moves through their rigorous new product approval process quickly and has appropriate risk management policies and capital in place.

###

OFHEO's mission is to promote housing and a strong national housing finance system by ensuring the safety and soundness of Fannie Mae and Freddie Mac.

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Controversy! Borrowers and Mortgage Professionals in high cost areas are drooling over this, and OFHEO is cringing. A wet blanket for Bush's stimulus package. We'll see how it all unfolds...

So what do you do about it? If you have a loan balance (combined or in a single lien) somewhere between 417k and 625k, you need to get ready. Refinancing into this market is going to make sense under most circumstances, as we have seen 30 year fixed rates as low as 5.250% for conforming sized balances this week. Call your broker to discuss it. The landscape for borrowing money has changed dramatically over the past 6 months. If your broker has quit the business, and left you to figure it out on your own, get in touch with me here.

Mortgage Relief Act HR 3648 Update From CMPS

Update # 1 - Mortgage Relief Passed by Congress & Signed Into Law by the President!

On Thursday, December 20th, President Bush signed into law a bill passed by Congress: HR 3648 –Mortgage Forgiveness Debt Relief Act of 2007. The three major points are:

· Elimination of the “phantom tax” on foreclosures, short sales or other discharges of debt on a primary residence. Consider this scenario: A property is worth $250,000, and the mortgage balance is $300,000. Under the old rules, if a lender forgave the $50k difference as part of a foreclosure, short sale, refinance or loan modification, the borrower had to claim the $50k as income and pay federal income taxes on that amount. The new law eliminates this “phantom tax”, and the forgiven debt is no longer treated as taxable income to the borrower as long as certain requirements are met, such as the discharged mortgage balance must be on the taxpayer’s principal residence.

· The tax deduction for mortgage insurance premiums is now extended until December 31, 2010 instead of expiring at the end of 2007. The same rules apply as before in terms of the income limitations etc.

· The capital gains exclusion is now $500,000 instead of $250,000 for an unmarried individual who sells their primary residence within 2 years of the time their spouse has died. This new guideline applies to sales after December 31, 2007, and provides relief for widows and widowers by giving them a 2 year window from the time their spouse has died to sell their home and receive the $500,000 exclusion. Of course, the same rules apply as before, where the individual(s) need to have lived in the home as their primary residence for 2 out of the last 5 years.

You can read the full version of the bill by visiting the THOMAS Library of Congress web site and searching for HR 3648. Version # 6 (the enrolled / ENR version) is the final version that was passed by both the House and Senate.

Update # 2 - AMT Relief Passed by Congress

After much drama and a few rounds of chicken between the House and Senate, Congress FINALLY passed AMT relief on Wednesday, December 19. The President has indicated a strong willingness to sign this bill into law, and it is currently awaiting his signature. Under this one year patch, approx. 20 million taxpayers have escaped the clutches of the AMT. However, approx. 3.5 million taxpayers are still expected to be subject to the AMT.

If you have questions related to any of these updates, consult with your tax advisor or contact me for more info.

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*** Posted with help from CMPS Institute

How's This For "Contained Meltdown"?

I heard one economist recently refer to the current credit markets situation as "well-contained. Sure, contained on Planet Earth..."

A large part of the reason the markets are so erratic lately is because there is so much uncertaintly as to how much damage has been done and not yet acknowledged. How much more money will be lost, and by who? Financial engineering has helped build layers upon layers of cloaking around the bad investment eggs, and the unwind is coming in baby steps (which is good, time helps the markets digest what is clearly a big rotten meal...)

So here's a story from a colleague of mine, which highlights the defensive posturing by creditors who are clearly fearing this "unknown risk" in the market. It also signifies a huge leap in terms of the webbing between "subprime" mortgage issues and areas of other financial concern. This is one way how the virus is NOT being contained...

"How far will this reach into credit cards? One fellow I know received a letter from American Express, dramatically lowering his available credit limit. Our analysis of the credit risk associated with customers who have residential loans from the creditor(s) indicated in your credit report." He has two loans: one from ING Mortgage and a HELOC from JPMorgan Chase. He called Amex and they said: "We were told by Experian that your mortgages are with 'risky lenders". They also said that "information received from a consumer credit reporting agency was factored into the decision." (He has no delinquencies. They listed standard reasons, inquiries, balances, etc.) He wrote, I have never seen credit being denied or reduced for something 100% out of the borrower's control."

Something to keep a watch on as the market feels for a bottom, those in position to lend money for any reason are proceeding with extreme caution...

Conforming Loan Limits For 2008 Set By OFHEO

OFHEO has announced the 2008 conforming loan limits - the limit stays at $417,000. Read the details at the OFHEO website. Were it not for the fear of widespread consumer damage from falling prices and tightening credit, the 2008 limit would likely have been reduced. They have made an exception to the general price-setting methodology to avoid adding insult to injury in the housing market. I discussed that here.

This number is based on national median home value info. For those of us in California, where median prices are higher than other states, hopes of a state-by-state limit are dashed with this latest release. OFHEO’s is not in the position to issue state-by-state guidance unless Congress enacts legislation directing them, which has not happened. And the last news on this was that Governor Schwarzenegger has issued a letter to the leaders in the U.S. Senate and the House of Representatives urging them to support legislation that would raise the loan limit for conforming loans. The median price for a home here is more than $586,000. "This disparity makes these products practically irrelevant in California. This means that for the majority of California homebuyers, the only option is to obtain a larger 'jumbo' loan and pay higher interest rates and fees," said the governor. I'd say that the conforming loans have a shorter reach, but they are hardly irrelevant. In any event, most mortgage professionals say that raising the limit would be the biggest boost for the real estate market possible here in the Golden State.” Unfortunately there is probably not much taxpayer support in the rest of the nation for this…

With rates hitting 2 year lows yesterday, anybody with a rate above 6.500% (on any type of loan) should consider refinancing. Thankfully the conforming limits are staying at 417k, as the Jumbo market is still pricing at a significant premium to conforming products.

Tightening Guideliens In Mortgage Lending

The Economist has a great visual tool this week showing the trend in guideline tightening by mortgage lenders. It looks back almost 20 years, and you can see where guidelines tighten into tougher housing markets - and where they tend to get more loose (below the zero mark) during booming markets. This is quite a spike, with nearly 50% of lenders reporting that they are tightening guidelines right now.

This is why many of the borrowers who have loans entering an adjustable rate period are going to be caught between a rock and a higher payment, as many will be unable to qualify for the same loan they had, let alone a better one.

To some extent, the tightening guidelines are an over-reaction by lenders, who are trying to fix a problem after the damage has been done. Some adjustment is clearly needed, as the liberal guides can be blamed for contributing to the run-up in housing mania. But we are seeing it difficult in some cases to fit some very sensible deals together, as lenders are hyper-sensitive and picking apart every aspect of the file. Some cases, not all.

Like the housing market itself, the lender guidelines will balance out again. Markets have crossed from the manic side of balance to the panic side, and we will stay here until the participants themselves are convinced that a bottom has been reached.

Why It Helps To See Things In Perspective

Check out this chart from Barry Ritholtz. There was a lot of recent media coverage about the anniversary of the 1987 stock market crash. Black Monday. It happened on October 19, and the Dow Jones was off by 22.6% There was also a lot of comparison to today's market environment. Coincidentally, the Dow had another big dip on October 19 2007, but a couple hundred points off of an index value of 14,000 is rather different than a couple hundred points from 2,000. On 10/19/07, the index lost 2.6%. Weird, but coincidental.


It was devastating at the time, but notice the "crash" in the red circle, and then in the context of the next 20 years in the market. Would you have bought the day after the crash?