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.

Stop The Madness!

This one needs no words of accompaniment. Solid graphic...

Why New Conforming Loan Limits Won't Help You - At Least Not Yet...

There has been a ton of attention paid to the recent legislation that passed as part of President Bush's Economic Stimulus Plan. Especially by people in the mortgage industry. And people with mortgages. Rightly so - the mortgage market has been in a funk since last August, especially for people with "Jumbo" loans. You have a Jumbo loan if you started out owing more than 417k.

Rates on Jumbo loans spiked back in August, as the secondary market essentially shut down. The value of bundled mortgage investments on Wall Street exchanges was called into question after defaults within these bundles started to run at higher levels, causing the bond investments they fed into to underperform. Why did this happen? Because home values started to drop, and homeowners with mortgage balances larger than the value of their homes went into voluntary default. Others had loans with adjusting rates that caused the payments to jump - and they went into semi-involuntary default. I say "semi", because I think they'd have found a way to pay the bill if the equity in their homes was still there. It was all related. Values coming down, rates going up, payments coming in late, payments not coming in...

if you were looking for a place to invest money, would you buy a bond in which the underlying debt represented somebody's mortgage, and their motivation to pay back the mortgage was deteriorating as fast as their home equity? Neither did Wall Street. The market shut down, became illiquid, and CNBC began the era of "Liquidity Crisis" and "Credit Crunch" headlines. Banks were stuck holding their latest batch of mortgages, and had no willingness to lend new money. They communicated this by jacking rates up about 1.5-2% over a few days.

Since then, we've seen some liquidity come back, and the market has made a few attempts to recover. But nothing has really lasted. Every time a "new shoe drops", the market freaks out and sticks its head back in the ground. Bear Stearns? Forget it. This bubble burst is a big meal for the markets to digest, and its going to take a while...

But in the non Jumbo market - also known as "conforming" - the market has been much more fluid. Thats because conforming loans have an implied government backing, and they "conform" to the standardization rules set by Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).

So when Bush's Stimulus Package passed, it was seemingly great news that the new conforming loan limits would be set based on a revised county-by-county valuation model. For areas with higher than average cost, this would represent big changes, and help close the gap between average home costs in above-average cost areas. The maximum new limit reaches as high as $729,750. Big change!

At first, many assumed that people with loans between 417k and 729k - who were facing jumbo rates - were going to be able to refinance down to rates 1-1.5% lower. A few steps needed to happen between the legislators, regulatory bodies, and banking institutions before these new rules would take shape. This was a stimulus package, right? A bail-out for consumers who had been recently swindled into bad loans and were facing losing their home, right? The news has been full of these stories.

But a big wet blanket has been thrown on this whole idea - little bit by bit. You see, the banks have started taking the new loans with conforming rules. Except the conforming rules for these arent the same. For example, there's a price premium on the rates, and for a refinance, you have to have 25% equity... !!! I don't know many borrowers with 25% equity who are really having a problem. They don't allow foreclosure, even if their rates are a little high. They'll find money from family, or sell the home, or something. So in other words, this whole thing was pointless.

But really, what was the point? Well it seems that the "bail-out" was more for the banks than the consumer. The banks are now able to go back and sell all of this stagnant mortgage debt they issued, now backed retroactively by the FNMA/FHLMC guarantees. They get to liquidate, loosen things up, start breathing again. Its kind of like getting an insurance policy after you get in a car wreck - and getting to cash it in!

So thats where we are. The banks are clearly showing that they do not want to take new loans in on the temporary Stimulus Act model. They want to liquidate their books. But that may not be such a bad thing if you are a consumer. Because as they restore their balance sheets, they'll grow more confident to loan new money out. And they'll lower rates to attract new business. That may cause the pricing premiums to narrow, and eventually this should make new loans more attractive. But the stimulus act is only applicable until the end of the year. So how long is this going to take? There is no data on thes new conforming loans for performance or prepayment - the statistics that give investors an ability to guage their risk. It doesnt feel like anybody wants to take unknown risk on any type of investment in this climate. Might be a lot of us trying to squeeze through the door before it shuts on Jan 1. Maybe it will never happen...

So now what? Even though this whole thing looks like a bit of an empty promise, there are some other pieces of the Stimulus Act that may allow some people to still get 95% refinances up to that 729k level and at about a 6% interest rate. We are still watching the details unfold, but if you know more or stay updated, email me and ask to be included on new announcements.

Sign Your Mortgage Yearbook? No Thanks!

I got a solicitation email today inviting me to purchase the 2007 Mortgage Yearbook. Yes, its important to understand this market and what we have come through and what we have learned, but this is a year I'd rather forget. You can read about the offer here.

Actually, this is probably pretty valuable info to the Secondary Marketing and Pricing teams with various mortgage lenders, but I'm not paying ~$500 for it.

I just wanted to suggest the cover photo to commemorate the year.

New FHA Loan Limits By Area - Great Interactive Tool!

Want to know why the new conforming loan limits wont help you? Stay tuned for my next post... In the meantime, I'll skip right past the final word and show this great new tool for searching the new limits for FHA loans in your area.

This market is moving quickly. The need for guidance and careful planning is greater than it has been for years. Make sure you are getting the help you need. If you have not heard from your broker recently, he/she may have become a casualty of a massive reduction in workforce in the mortgage industry. If you would like to discuss your options or join my management program, please email me.

Conforming Loan Limts For 2008 - FINALLY ANNOUNCED!!

From OFHEO:

TEMPORARY CONFORMING LOAN LIMITS RELEASED FOR HIGH COST AREAS

Washington, DC – The Office of Federal Housing Enterprise Oversight (OFHEO) today released the maximum conforming loan limits that will be in effect through year-end as a result of The Economic Stimulus Act of 2008. That legislation permits Fannie Mae and Freddie Mac to raise their conforming loan limits in certain high-cost areas. The new jumbo limits are a function of median home prices as estimated by the U.S. Department of Housing and Urban Development (HUD).

The maximum for temporary jumbo conforming loan limits, which apply to loans originated in the period between July 1, 2007 and December 31, 2008, are as high as $729,750 for one-unit homes in the continental United States. Two, three and four-unit homes have higher limits as well. Alaska, Hawaii, Guam and the Virgin Islands also have higher maximum limits.

There are two data sources reflecting the new maximum limits. The first, on OFHEO’s Web site, available at www.ofheo.gov/media/hpi/AREA_LIST.pdf, reports only those counties and Metropolitan Statistical Areas (MSAs) that are affected by the new loan limits. Data for all areas are available on the HUD Web site at https://entp.hud.gov/idapp/html/hicostlook.cfm.

Seventy-one Metropolitan and Micropolitan Statistical Areas are affected including 245 counties and cities not in counties. In addition, there are 21 counties outside of Metropolitan or Micropolitan areas that show increases, plus Guam and four municipalities in the Marianas Islands. The newly increased limits range from $417,500 in Greeley, Colorado to the highest of $793,750 in Honolulu, Hawaii.

In support of HUD’s calculation of county median home prices, OFHEO provided HUD rural house price indexes for 48 states. HUD used these indexes, which reflect price changes for homes outside of Metropolitan Statistical Areas, to estimate median prices in counties for which sales price data were sparse. OFHEO has made these indexes available at: /hpi_download.aspx.

###



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.

You Walk Away Dot Com - Foreclosure Trends

From the New York Times last week:

"Then in January he learned about a new company in San Diego called You Walk Away that does just what its name says. For $995, it helps people walk away from their homes, ceding them to the banks in foreclosure...

You Walk Away is a small sign of broad changes in the way many Americans look at housing. In an era in which new types of loans allowed many home buyers to move in with little or no down payment, and to cash out any equity by refinancing, the meaning of homeownership and foreclosure have changed, economists and housing experts say...

Though many states give banks recourse to sue borrowers for their losses, Mr. Case said, in practice it’s not often done “It’s tough to do recourse,” he said. “It’s costly, and the amount of people’s nonhousing wealth tends to be pretty slim...”

The company assured him that in California he was not liable for his debt, and provided sessions with a lawyer and an accountant, as well as enrollment with a credit repair agency. He stopped paying his mortgage and used the money to pay down other debts."

Scary.

Conforming Loan Limts For 2008 - Market Chatter 2/26/08

A little less excitement over jumbo/conforming loan limit changes as the reality drags on. I have heard of buyers trying to delay close of escrow to wait for the new limits, but we still really do not know how its going to look. But I do still expect it to offer some significant help to some people in the 417-729k range, especially where equity is below 20%

From A Colleague:

During a recent teleconference with the U.S. Department of Housing and Urban Development (“HUD”), NAMB learned that HUD plans to publish the new FHA loan limits in a Mortgagee Letter to be issued during the first week of March. HUD will publish separate lists for the FHA program and the GSEs. Additionally, HUD will be recalculating the median home prices which are used to calculate the loan limits. The new loan limits will be based on 125% of the median home price in counties across the country, and will be capped at $729,750. The floor for FHA loans will be raised from $201,060 to $271,050, and originators can begin processing applications now for any loan that was assigned an FHA case number after February 13th (the date the bill was enacted). These changes are a result of the Economic Stimulus Package signed by Pres Bush on February 13th, and will expire after one year. However, HUD officials participating on the teleconference indicated that more comprehensive FHA reform should be moving through Congress in the coming weeks.

Conforming Loan Limts For 2008 - Market Chatter 2/21/08

Capital Markets Analyst:

HUD has 30 days from the day the President signed the package into law to identify the impacted Metropolitan Statistical Areas, so it may be sometime in mid-March before all lenders receive the official pricing notification. At this point anything else is pure conjecture. Although several mortgage lenders have promoted lists of what they believe the new limits will be, these are only estimates because HUD has yet to determine the higher loan limits. HUD will determine the new loan limits based on the median area sales prices – but which ones? 2007? The fourth quarter of 2007? The third quarter? Median area sales prices may be dramatically different throughout the year, so the timeframe used by HUD to determine the higher loan limits is very important.

Conforming Loan Limts For 2008 - Market Chatter 2/19/08

Some of this may be tough to follow. If you have questions, email me.

From A Colleague:

The Secretary of HUD, and OMB, have 30 days from the signing the bill to provide suggested guidelines for loan types, units, etc. to OFHEO. After that, OFHEO will make recommendations to FNMA & FHLMC, who in turn will make recommendations to large investors (Citi, Wells, Countrywide, Chase, etc.) regarding the types of loans, fixed or adjustable, number of units, etc. No one is sure of the exact schedule.

Statistical areas are manipulated by various federal agencies, depending on their wants. For example, the EPA may put a county like Sonoma or Napa into the San Francisco Metropolitan Statistical Area, in spite of Napa & Sonoma Counties being their own “micro” statistical area, whereas the OMB may split them out. A combinations of areas is called a “CSA”, or Combined Statistical Area. The National Housing Act provides formulas for HUD to determine maximum mortgage limits for loans insured by FHA. These limits are determined by the county in which the property is located. You can view all local FHA Mortgage Limits at this website. The bill that was signed by the President did not specifically address the areas that will be affected, as mentioned above. You can keep checking the attached website periodically to find out what the increase will be.

READ THIS PART 2X (JG)

The Securities Industry and Financial Markets Association (SIFMA), publishes “Good Delivery Guidelines” for To-Be-Announced (TBA) trading of Mortgage-backed Securities (MBS) pools issued by Government Sponsored Enterprises (GSEs) and Ginnie Mae. The TBA market facilitates the forward trading of MBS issued by GSEs and Ginnie Mae by creating parameters under which mortgage pools can be considered fungible and thus do not need to be explicitly known at the time a trade is initiated – hence the name “To Be Announced.” The TBA market is the most liquid, and consequently the most important secondary market for mortgage loans. SIFMA will keep the maximum TBA eligible original loan balance at current levels and clarify several long standing market practices for good delivery. The current maximum original balance allowable for a loan on a one family property in a TBA eligible Fannie Mae or Freddie Mac pool is $417,000 in most states. However, in Alaska, Hawaii, Guam and the U.S. Virgin Islands the limit rises to $625,500. Higher balance loans which are now temporarily eligible for Federal Housing Authority (FHA) and GSE guarantee programs under H.R. 5140, the Stimulus Package, will not be eligible for inclusion in TBA-eligible pools. They are instead expected to be securitized under unique pool codes for trading on a “specified pool” basis or inclusion in Real Estate Mortgage Investment Conduit (REMIC) transactions.

Conforming Loan Limts For 2008 - Market Chatter 02/15/08

From A Colleague:

Speaking of different areas of the country, most people think in terms of country, state, county, town, street, even zip code. But “MSA”? The new conforming loan limits discuss Metropolitan Statistical Areas. For the complete list, which also shows the counties included in each MSA, click here. Remember that OFHEO, to the best of my knowledge, has not ruled on whether or not ARM loans are included, nor 2-4 units, nor IO loans. And therefore neither have Freddie Mac or Fannie Mae, and therefore neither have any investors.

“Median”: the middle number in a given sequence of numbers. (4 is the median of 1, 3, 4, 80, 90). Speaking of MSA’s, here in California, the median income (half below, half above) was $64,563 in 2006. The top county – Marin – had a median income of $99,713. So it would appear that, to take advantage of the new limits, loan agents will be focusing on borrowers with much higher incomes than the median. In a full doc scenario, with reasonable debt-to-income levels, a borrower earning $100k per year may not qualify for a $700k loan. Perhaps an income, under the most generic of underwriting & borrower criteria, of something above $125k would be needed to get a DU approval for the new loan amounts.

Doug Duncan, chief economist for the Mortgage Bankers Association, says it will take lenders three to six months to make technical changes so their systems can process the larger loans. And after that, Wall Street investors still must determine the risk of buying these bigger loans. Doesn’t that put us into 2009? So interest rates might not come down as much as some hope, Duncan cautioned. "On balance (the stimulus package) is a plus," he says, "but I would not expect immediate or dramatic change in the near term."

What’s the big deal with FHA loans? Currently the FHA program has no declining value adjustments at the government level, has low down payment and loan to values as high as 97%, cash out refinances allowed to 85%, rate and tern refinances to 97%, total down payment can be a gift, no credit score requirements, no income limits or sales price restrictions, FHA loans are assumable, seller concessions may be as high as 6%, no cash reserves required, non-occupying borrowers are allowed with blended ratios (SFR only), non taxable income (including child support) may be grossed up, and bankruptcies allowed after 2 years. We’ll see if investors continue allowing all of these with $729 loan amounts, of if they add “overlays” to restrict underwriting.

Quetions? a me.

Conforming Loan Limts For 2008 - Market Chatter 2/14/08

From A Colleague:

The two major questions on the new conforming & FHA loans rage on: when and how? The President is expected to sign the bill this afternoon. However, James Lockhart, OFHEO Director (the regulator for Fannie Mae and Freddie Mac) indicated that any increase in the GSE limits would require “new product approval process” to evaluate credit risk, concerns about geographic concentration in high risk markets and prepayment risk associated with jumbo purchases. He went on to say that implementation could take between one and up to three months for enactment, and that operational issues including system changes could delay implementation. Since FNMA & FHLMC follow OFHEO’s lead, these comments must be taken seriously, especially since he was opposed to the mortgage limit increase.

questions? Email me.

Stay tuned...

Conforming Loan Limts For 2008 - Market Chatter Now WITH VISUAL!

From a colleague:

Please see the graph below, from UBS. The spread saw a dramatic widening in August, narrowed slightly in September, but then widened out (and stayed there) in November. It is widely hoped that spreads will narrow, but many analysts feel that the change in conforming limits will actually have a negative impact on loan amounts above $730,000, due to the perceived higher risk.

Conforming & Jumbo Loan Limts For 2008l: Market Chatter XVI

From Goldman Sachs:

Fiscal Stimulus- Becomes law this week; the first checks will be mailed in mid-May

On Wednesday, President Bush is likely to sign into law the recently passed economic stimulus bill.

Loan limits: The legislation raises the limit on the size of mortgage that Fannie Mae and Freddie Mac may purchase and that the Federal Housing Administration (FHA) may insure. In both cases, the increases are temporary and apply only to loans originated by the end of 2008. Under the bill, Fannie and Freddie may purchase loans up to 125% of the median home price in an area, up to a national limit of $730,000. FHA limits would see the same increase. In addition, the floor on FHA limits would be raised so that larger FHA-insured loans would become available in low-cost areas. Area-specific loan limits for the GSEs and FHA should be issued by mid-March. These provisions should benefit borrowers, but the effect may be modest. Jumbo rates have been higher than the present conforming rate (30 yr fixed) of roughly 5.5% since only mid-2005, and the rate on these new conforming-jumbo loans may not come down as far as the traditional conforming rate. Also, of those who originated loans in late 2005 through 2007, most have lost equity in their homes since. In virtually every city in which the increased limits are likely to apply, the Case-Shiller index now stands below its late 2005 levels.

ALSO TODAY WELLS FARGO Released a memo stating that they do not intend to accept applications based on the new loan limits until all details have been unveiled, and GSEs have responded with their impact studies, etc.

Talk about a wet blanket!

I'll post more as I receive...

Changes To Conforming & Jumbo Loan Limts For 2008 - More Market Chatter AGAIN!

Chatter from today:

As I have noted for some time, many experts believe that FNMA & FHLMC being able to buy higher loan balances won’t cause a total reversal of the mortgage-banking slump. The higher loans could have fee adjustments, it may expire at the end of the year, and it won’t correct the guideline changes or cause their property value to increase, giving many much-needed equity. The Department of Housing and Urban Development will calculate the new loan ceilings and determine the geographic areas impacted, although most likely they will be based on MSA (Metropolitan Statistical Area). And investors still don’t know what to charge for the higher loan balances, which will be based on whether or not the loans can go into mortgage-backed securities. Regardless, yesterday’s vote was a shot of perceived good news for an industry that hasn’t had much to crow about in the last year.

And Then...

H.R.5140
Economic Stimulus Act of 2008 (Enrolled as Agreed to or Passed by Both House and Senate)

SEC. 202. TEMPORARY LOAN LIMIT INCREASE FOR FHA.

(a) Increase of High-Cost Area Limit- For mortgages for which the mortgagee has issued credit approval for the borrower on or before December 31, 2008, subparagraph (A) of section 203(b)(2) of the National Housing Act (12 U.S.C. 1709(b)(2)(A)) shall be considered (except for purposes of section 255(g) of such Act (12 U.S.C. 1715z-20(g))) to require that a mortgage shall involve a principal obligation in an amount that does not exceed the lesser of--

(1) in the case of a 1-family residence, 125 percent of the median 1-family house price in the area, as determined by the Secretary; and in the case of a 2-, 3-, or 4-family residence, the percentage of such median price that bears the same ratio to such median price as the dollar amount limitation determined for 2008 under section 305(a)(2) of the Federal Home Loan Mortgage Corporation Act (12 U.S.C. 1454(a)(2)) for a 2-, 3-, or 4-family residence, respectively, bears to the dollar amount limitation determined for 2008 under such section for a 1-family residence; or

(2) 175 percent of the dollar amount limitation determined for 2008 under such section 305(a)(2) for a residence of the applicable size (without regard to any authority to increase such limitation with respect to properties located in Alaska, Guam, Hawaii, or the Virgin Islands); except that the dollar amount limitation in effect under this subsection for any size residence for any area shall not be less than the greater of: (A) the dollar amount limitation in effect under such section 203(b)(2) for the area on October 21, 1998; or (B) 65 percent of the dollar amount limitation determined for 2008 under such section 305(a)(2) for a residence of the applicable size. Any reference in this subsection to dollar amount limitations in effect under section 305(a)(2) of the Federal Home Loan Mortgage Corporation Act means such limitations as in effect without regard to any increase in such limitation pursuant to section 201 of this title.

(b) Discretionary Authority- If the Secretary of Housing and Urban Development determines that market conditions warrant such an increase, the Secretary may, for the period that begins upon the date of the enactment of this Act and ends at the end of the date specified in subsection (a), increase the maximum dollar amount limitation determined pursuant to subsection (a) with respect to any particular size or sizes of residences, or with respect to residences located in any particular area or areas, to an amount that does not exceed the maximum dollar amount then otherwise in effect pursuant to subsection (a) for such size residence, or for such area (if applicable), by not more than $100,000.

(c) Publication of Area Median Prices and Loan Limits- The Secretary of Housing and Urban Development shall publish the median house prices and mortgage principal obligation limits, as revised pursuant to this section, for all areas as soon as practicable, but in no case more than 30 days after the date of the enactment of this Act. With respect to existing areas for which the Secretary has not established area median prices before such date of enactment, the Secretary may rely on existing commercial data in determining area median prices and calculating such revised principal obligation limits.

AND FINALLY... some color from a colleague:

How will the new amounts be priced? The law impacts loans originated after July 1 of last year. So do you remember all those jumbo loans for $500 or $600 or $700k that were purchased by Citi, Chase, Wells, etc.? Per the proposed law, these loans can now fall under FNMA & FHLMC guidance. Owners of these mortgages are “testing the waters” in terms of pricing in the secondary market. If there is little investor acceptance, rates will stay high. If there is investor appetite, rates on these high-balance loans will improve. It is anyone’s guess. Please note that the law “encourages” these loans to be securitized – it does not require it! So no one knows the answer yet. As soon as they hear, we will pass it along.

What is the schedule? President Bush needs to sign the legislation. That may happen this weekend, or sometime next week. I doubt any large investors will announce a policy until he actually signs the document. And even after that, pricing may be unknown due to questionable investor acceptance.

In the text of the proposed law, it mentions section 302(b)(2) of FNMA’s charter. If you are curious, here it is: http://www.ofheo.gov/Media/Archive/docs/reports/fnma.pdf

Here is the exact text of the law:

SEC. 201. TEMPORARY CONFORMING LOAN LIMIT INCREASE FOR FANNIE MAE AND FREDDIE MAC.
(a) Increase of High Cost Areas Limits for Housing GSEs- For mortgages originated during the period beginning on July 1, 2007, and ending at the end of December 31, 2008:

(1) FANNIE MAE- With respect to the Federal National Mortgage Association, notwithstanding section 302(b)(2) of the Federal National Mortgage Association Charter Act (12 U.S.C. 1717(b)(2)), the limitation on the maximum original principal obligation of a mortgage that may be purchased by the Association shall be the higher of--

(A) the limitation for 2008 determined under such section 302(b)(2) for a residence of the applicable size; or

(B) 125 percent of the area median price for a residence of the applicable size, but in no case to exceed 175 percent of the limitation for 2008 determined under such section 302(b)(2) for a residence of the applicable size.

(2) FREDDIE MAC- With respect to the Federal Home Loan Mortgage Corporation, notwithstanding section 305(a)(2) of the Federal Home Loan Mortgage Corporation Act (12 U.S.C. 1454(a)(2)), the limitation on the maximum original principal obligation of a mortgage that may be purchased by the Corporation shall be the higher of--

(A) the limitation determined for 2008 under such section 305(a)(2) for a residence of the applicable size; or

(B) 125 percent of the area median price for a residence of the applicable size, but in no case to exceed 175 percent of the limitation determined for 2008 under such section 305(a)(2) for a residence of the applicable size.

(b) Determination of Limits- The areas and area median prices used for purposes of the determinations under subsection (a) shall be the areas and area median prices used by the Secretary of Housing and Urban Development in determining the applicable limits under section 202 of this title.

(c) Rule of Construction- A mortgage originated during the period referred to in subsection (a) that is eligible for purchase by the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation pursuant to this section shall be eligible for such purchase for the duration of the term of the mortgage, notwithstanding that such purchase occurs after the expiration of such period.

(d) Effect on Housing Goals- Notwithstanding any other provision of law, mortgages purchased in accordance with the increased maximum original principal obligation limitations determined pursuant to this section shall not be considered in determining performance with respect to any of the housing goals established under section 1332, 1333, or 1334 of the Housing and Community Development Act of 1992 (12 U.S.C. 4562-4), and shall not be considered in determining compliance with such goals pursuant to section 1336 of such Act (12 U.S.C. 4566) and regulations, orders, or guidelines issued thereunder.

(e) Sense of Congress- It is the sense of the Congress that the securitization of mortgages by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation plays an important role in providing liquidity to the United States housing markets. Therefore, the Congress encourages the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation to securitize mortgages acquired under the increased conforming loan limits established in this section, to the extent that such securitizations can be effected in a timely and efficient manner that does not impose additional costs for mortgages originated, purchased, or securitized under the existing limits or interfere with the goal of adding liquidity to the market.

Changes To Conforming & Jumbo Loan Limts For 2008 - More Market Chatter AGAIN!

From a colleague:

The economic stimulus plan drafted by Senate Democrats was blocked by a Republican filibuster last night when the Senate fell a single vote short of the 60 needed to consider the measure. Now what? Since it is so close, experts believe that it nearly ensures passage of the House’s less expensive stimulus plan, though the Senate may make some changes. The Senate version was backed by automakers, home builders, realtors and mortgage bankers, and the AARP. Senate Republican leader Mitch McConnell of Kentucky said the Democratic stimulus bill passed by the Senate Finance Committee was "a Christmas tree of legislative goodies'' that Bush might not sign. The alternative proposal passed by the House last week could be approved quickly and would be signed, he said, but Democrats face an uphill battle to get the 60 votes necessary to advance the more expansive Senate package in a procedural vote expected today. An interesting civics lesson, since I have forgotten most of what I learned in high school…

From Goldman Sachs:

The Senate failed to pass its fiscal stimulus bill last night, coming up one vote short. This was not a surprising development, and we suggested this outcome in our note on Monday (link below). Despite these negative headlines, the process is still on track – in fact last night’s developments may speed enactment – and still expect stimulus legislation to become law soon. Tax rebates, bonus depreciation for businesses, and a GSE/FHA loan limit increase are very likely to be enacted, perhaps as soon as late next week.

1. The Senate's failure to pass a much different version of stimulus legislation may speed the process up. This is because reconciling differences between competing House and Senate versions would have taken days if not weeks. The House-passed bill was a slimmed down measure including only tax rebates, bonus depreciation for businesses, and increased loan limits (up to $730k) for Fannie, Freddie, and the Federal Housing Administration. By contrast, the Senate included all these things plus additional spending and even more tax breaks for businesses, some targeted at specific industries.

2. The House bill, or something close to it, looks likely to become law. The Senate is likely to pass the House-passed legislation, now that it has failed to pass its own. Before the Senate passes the House bill, one change looks likely: the Senate may add rebates for certain individuals with 'unearned' income. This would increase the amount of rebates in 2008 from $100 billion to $115 billion. Along with bonus depreciation, this brings the likely total cost to around $160 billion.

3. The Senate is likely to pass stimulus legislation by the end of the week. Senate Majority Leader Reid (D-NV) has said he may try to force one more vote on the Senate's stimulus measure in the hope of finding one extra vote. This is possible, but these efforts usually don't succeed, so we would expect the Senate to cast its final vote on stimulus legislation it will pass by the end of this week (possibly today). Majority Leader Reid will announce next steps at around 10:30am today.

4. Stimulus could still be enacted by the end of next week. If the Senate manages to send the House a bill by the end of the week, the House will pass the slightly revised version in the middle of next week and then send it to President Bush for signature. The only risk to this timing is if Democratic leaders attempt to make further changes to the bill, which could result in further delays in the Senate.

5. The legislative wrangling has little impact on timing of stimulus. We don't expect a significant delay. But even if the bill is held up in negotiations, the IRS has made it clear that there is little it can do to process rebates before the tax filing season ends on April 15. This means rebates aren't likely to make it to consumers until sometime in mid- to late May. A long delay could affect the timing of rebates, but a delay of a couple of weeks would be unlikely to make a difference in when rebates are mailed.

6. The differences between the House and Senate are of most interest to certain industries. Homebuilders and alternative energy manufacturers would have benefited from tax provisions that only the Senate bill included. These now look less likely to make it into the final version. Also, only the Senate bill would extend unemployment insurance (UI). While the final stimulus bill looks likely to omit this provision, an extension later this year looks likely, assuming unemployment rises as we expect. For more on the details of the House and Senate versions, see Politics & Policy 08/07

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.

Anatomy Of A Recession

The following is a copy of one of the best recent blurbs I have seen to describe the prospects of recession here in the US, and it comes from Paul Kasriel of Northern Trust. You can follow his work here.

"The financial sector, especially the banking system, is the transmission mechanism between the Federal Reserve and the private sector of the economy. If the financial transmission is not functioning properly, the Federal Reserve can mash on the monetary accelerator but little power gets transmitted to thet "wheels" of the economy."

The "wheels" he refers to is consumer spending. Recent bank losses are going to prevent these institutions from making use of the lower Fed Funds rates for some time, as they are still trying to stop the bleeding. We will not see the effects play through to the consumer accordingly. Kasriel thinks we are in a recession, and that it will mimic the one we experienced in 1991, citing that the above analogy applied then as it does now. Very interesting piece, I recommend reading it.

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.

------

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.

John Mauldin Waxing Political

Frequent visitors know I am a fan of Economist John Mauldin (recently voted as the runner up to Warren Buffet for MotleyFool's Investor of the Year Award). I find his economic insights both informative an entertaining, and his newsletter can become addictive to be perfectly honest. Give it a try here.

I don't usually get into politics, mainly because I find it difficult to find politicians worthy saying nice things about. And you know what they say about what to do when you can't think of something nice to say.

But if Mauldin can make an exception to the rule, I can at least point toward his newsletter. I think it is important to read. I can point to several cases where politics over-ruled economics and caused major problems in our economy (take The Great Depression for one). There is a real danger when politicians pander with empty promises that they know they cannot (or should not) back up. Telling the voting public what they want to hear - or what the candidate thinks they need to hear - when it isn't realistic or good for us anyway is a reckless but common practice by these folks. I'll leave it to Mauldin to pick up from here to illustrate why when it comes to our economy, almost all politicians are donkeys.

Read it here. Enjoy...

BART Fares Are Up Jan 1

BART fares are up as of January 1, 2008 - 10 to 30 cents per trip. Minimum fares are now at $1.50, while longer trips, such as Millbrae to Pittsburg are up to $6.60.

Small adjustments like this may not seem like much, but over time they can add up. Understanding the costs of homeownership means consideration of several overlooked factors - such as commuting costs. When fuel and transportation costs on the rise, something called an "affordability index" is altered. This might make the less-expensive homes in the outer-lying metro areas effectively more expensive.

When planning a new home purchase, it is best to be cognizant of all true costs associated with your decision. BART fare inflation might be small one, but there are so many other factors worth evaluating. Make sure you understand how to evaluate variables like this, opportunity cost, etc. You can email me if you have questions.

Spreading Rumors

You may have noticed that Countrywide’s stock price is down 20% this morning, into the $6 range. The price is down based on rumors of a credit downgrade and possible bankruptcy filing.

From a colleague of mine:

"One buddy, who works for a large investment bank, wrote to me and said, “Investors are literally buying thousands upon thousands of puts to bet on its demise - keep in mind every thousand puts is equivalent to 100K shares of stock - I have seen about 100K puts change hands myself - that's 10 million shares.”

Countrywide's fate has big implications for the mortgage market and the mortgage industry. There are a lot of eyes on this...

Paul Kasriel Celebrates Festivus

This one is worth reading. Kasriel (Northern Trust) is a consistently enjoyable read. A little more playful than your typical economist, his recent piece is a Seinfeld-themed, economic strip search of the American Household. And the message is a serious one.

Don't let the dark prognosis ruin your New Year's good times though. While Kasriel makes some great illustrations and highlights some important forces at work, they are not measured against any of the positive forces in our economy. Its always a tug of war out there, and our path forward will follow the balance...

Is The Writing On The Wall? Or Is That Just The Artwork?

In a memorable essay about a year and a half ago, John Mauldin (one of my favorite economic writers - you can read more here) discussed correlations between economic cycles and the markets for Wine, Race Horses, and Fine Art. His commentary suggested that these three items tend to see a spike in value at the tail end of economic boom, as investors feel wealthy and look for alternative places to speculate on investment value. It is an interesting theory. At the time, he noted some recent value increases in these markets, and expected that our economy would be soon slowing (for other reasons - this was just 'another barometer'). Perhaps he was just a bit early.

The markets today are much less confident, and we are seeing a zigzag in the main indexes with frequent 3-digit gains or losses. Volatility is a sign of uncertainty. The near-term future of the economy is a subject of debate right now amidst the mortgage market and credit market meltdown/paralysis/crunch/etc.

This article caught my eye recently. I had not realized this, but I guess the market for Fine Art is still on a tear (I can't comment on Race Horses or Wine). Just an interesting theory to keep aware of as we are all looking for signs of whats coming next. It feels like any day now we may see a market top, and a realization that we are in (or about to be in) a recession. But I also hope we can digest this whole subprime episode in small bites, and move on without too much damage. I won't be making predictions investment decisions based on the value of Fine Art, but I can't shake that concept either.

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.

- - - - - - -

*** Posted with help from CMPS Institute

Credit "Issues"

Every day the news headlines seem to set a different tone for this market. Credit "issues" persist, but the Fed is cutting rates, mortgage applications are at a 2 1/2 year high, and then more banks are closing, cutting jobs, or just cutting off access to their money. One day its up, one day its down. Volatility like this is typical of an uncertain market. So until the reach of this market adjustment is defined, we will see choppy waters, and business who lend money will make defensive posturing moves.

Today, the following blurb from "Inside Mortgage Finance":

American Express Stops Allowing Mortgage Payments American Express recently notified some of its customers that it will no longer allow them to make mortgage payments with their credit cards. The company said it will stop allowing such payments in two months. Studies suggest that when borrowers face financial trouble, they default on their credit card payments or auto loans before defaulting on their mortgage. AmEx noted that paying via credit card for fees associated with obtaining a mortgage is still acceptable.

Yikes! I guess it stands to reason that paying a mortgage by credit card would be a great way to rack up frequent flyer miles, but it also seems a slippery slope. I guess I am just amazed to learn this was even possible. But now that it isn't, it represents yet another example of a source of liquidity disappearing...

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.

A Great Place To Shop For Foreclosures

Its called Catanzaro Way in Antioch, California... take your pick...

There will undoubtedly be some money made by the bottom-feeders of the real estate market. And by bottom feeder, I mean opportunistic investors who use market conditions as a lever to snag inventory on the cheap. They feed off the market at its bottom. Because lets face it, what goes up must come down, but when it comes to housing, or just about any other investment, what comes down goes back up ... eventually.

We'll see a deluge of infomercials hosted by "real estate gurus", featuring average looking folks sitting poolside in a Hawaiian shirt at some resort in Orlando, and talking about their bounties in terms of monthly incomes. For $99 or $599 or 3 easy installments of $129, you can buy the books and tapes that unleash the secrets of how to get your own Aloha shirt and two tickets to the Radisson Disneyworld. We've seen it all before... These guys who make a living selling the recipe instead of baking the cake are arguably the real bottom feeders, but I can't tell you who is/isn't legitimate in that world...

But timing the markets is the challenge. Once you hear its time to get back in, it might be too late. So understanding how to find a good home, a good investment deal, and manage it safely without exposure to excessive risk will be the key until the market booms again. We'll definitely be keeping an eye on this...

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.

Fragments Of Recent Market Commentary Related To Subprime Contagion

At this point, there has been a deluge of financial press about the implications of a "Mortgage Meltdown", how the Subprime problems started a Credit Crisis, (or Liquidity Crunch, Credibility Crunch, etc), and about speculation into the US Economy's chances to enter a recession. I don't think you can turn over a rock anywhere and find anybody who hasn't 'heard the news'.

In the Mortgage world, this has made everything a little more challenging. Fewer loan programs exist, fewer borrowers qualify, and fewer deals work. Its an over-reaction to the 'easy money' days we saw on the run-up in the housing market. But it will normalize. Just watch...

In the meantime, here are some snippets from articles I've recently read. Each is telling, descriptive, or interesting in the context of this changing economy and shifting housing market (my own interjections are beneath each quote where applicable):

• In an era of spread compressuion and search for yield, the rising tide of amle liquidity covered up a profusion of jagged and dangerous rocks. As the tide now goes out, the rocks now get uncovered. The subprime crisis is a classic example of what can be unmasked at low tide. -Stephen Roach, "A Subprime Outlook For The Global Economy"
  
• As a side note (John here again) This sentiment has already been famously expressed by Warren Buffett as follows: " It's only when the tide goes out that you learn who's been swimming naked", but it was spoken in relation to an entirely different issue - evidence of history repeating itself yet again...
  
• Starting in 1991, the US financial sector began contributing more and more to total US corporate profits as our universities began matriculating relatively more financial engineers (modern day alchemists?) compared to mechanical engineers. -Paul Kasriel, Northern Trust
  
• CDOs, CLOs, SIVs, anybody?
• The central banks have a difficult balance to strike. If policy is too tight, they will be held responsible for creating recessions. If it is too loose, their grip on inflation could slip, as markets and the public cease to believe that prices will remain stable. The great paradox is that the central banks' mastery of inflation has made the task of keeping financial markets safe all the harder. When people are confident that inflation is low and will remain so, they may be more prepared to take on debt.That leads to an expansion of credit and the pursuit of more exotic rewards by lenders. It feeds price rises in assets such as housing and securities. It encourages excessive risk taking. If so, how can you contain inflation without sparking occasional but dangerous bouts of insanity in asset markets? That is a riddle likely to test central bankers for a long time to come. -The Economist, "Only Human"
  
• See Hyman Minsky, and "stability breeds instability"
• The Fed is anxious to calm the credit markets, so that the economy's funds are allocated in line with risk and reward. But even if it succeeds, risky assets are likely to hold much less appeal than they did. The central banker's task is to unscramble price signals distorted by panic, not to protect the markets from a signal that they do not like. -The Economist "Paper Losses"
• Borrowers found that such creditors, in their hunger for higher yields at a time of low interest rates, were quite willing to drop safeguards altogether, leading to a surge of "covenant-lite" loans. Because banks held on to fewer loans, they relaxed their guard. -The Economist, "Switching off the lites"
  
• Sounds like a game of Hot Potato
  
• Providing greater short-term liquidity might ease the taking back of assets on to banks' balance sheets and hence bring down interbank rates. But it would also undermine the efficient pricing of risk by providing insurance, after the event, for risky behavior. -The Economist, "CSI: Credit Crunch"

More Signs Of A Topping Market - From Luxury Alternative Investments, And Some Market Chatter

It has been well publicized that asset markets have cycled higher in value in recent quarters, largely attributable to strong economic growth worldwide, and cheap and easy access to cash, credit and liquidity. Low rates from the US Federal reserve, as well as other countries like Japan (where the Fed Funds equivalent was at 0.000% for 8 years... 0%!! .... 8 years!!!) encouraged investors and consumers to borrow and invest and save, and economies boomed and everything got more expensive. We have seen it in the stock markets, bond markets, housing, commodities, precious metals, corporate buy-outs, you name it.

But there is another set of asset markets that tend to receive a little less publicity, and whose cycles often signal the peaking of exuberant money. In July 06, John Mauldin writes:

"Art, Wine & Horses

One of the recurrent themes of our research has been that it has "never been so expensive to be rich" and that this situation will only likely deteriorate. But even with that in mind, we have to admit that we have been floored by the recent activity at the high end of the market. Take wine, art & horses as examples. As most of our readers will know, modern art, fine wines, & horses, are assets that tend to peak just before the start of a pronounced downturn of the economic cycle. And interestingly, over the past couple of months, these assets have really been shooting up, breaking several records on the way:

* The US$16 million horse. A few months ago, a two-year-old colt who has yet to run a race drew a world record sale price of US$16 million at an auction in Florida, after a furious bidding war between Englishman Michael Tabor and Sheikh Mohammed bin Rashid al Maktoum of Dubai (could he be thinking that horses will run better than Dubai stocks?). The sale broke the previous record of US$13.1 million paid in the mid-1980s for Seattle Dancer. Considering that very few horses ever reach winnings of US$1 million and that the all-time leading earner, Cigar, took home close to US$ 10 million, this is a truly mind-boggling price to pay for a horse that has yet to race a single race (incidentally, Seattle Dancer, the previous record holder, went on to win a paltry US$150,000, racing only five times in his short career).

* The unbottled 2005 Bordeaux. In the world of wine investments, Bordeaux is king, with up to US$3.7 billion worth of wines changing hands every year. Over the past twelve months, much to Charles' chagrin (who likes to say that he is now too old to drink cheap wines), the price of top vintages have surged more than +45%. Much of this latest rally can be attributed to the - yet to be bottled - 2005 vintage. The 2005 vintage from some of the top chateaux are reportedly selling for around US$9,000 per case; as a comparison, in 2003, the same wines went for about US$3,800 per case... While investing in wine can be a very risky business, there is one undeniable advantage: if all else fails, it is a liquid asset...

* The US$135 million portrait. A few weeks ago, Robert Lauder bought a portrait by Gustav Klimt for a staggering US$135 million, the highest sum ever paid for a painting, eclipsing a Picasso sold for US$104 million in 2004. While we (by no means) would pass for art connoisseurs, prices do seem to have reached stratospheric heights. In his latest Gloom Boom Doom report, our good friend Marc Faber, describes his visit to the June Basel Art Fair, where one pure black canvas had a price tag of US$1.5 million... "

Sotheby's International, pedaler of all such things luxury is one good barometer of these markets. Look at a Sotheby's share price 2 year chart. Look like the peak has been reached? The company got kicked by shareholders today after a staggeringly poor auction result. Implication? Money is dried up. Sellers think the peak has been reached.

Paul McCulley of Pimco recently described liquidity as follows:

"... liquidity is not a pool of money but rather a state of mind. ... liquidity is about borrowers and lenders collective appetite for risk, a function of: The willingness of investors to underwrite risk and uncertainty with borrowed money and the willingness of savers to lend money to investors who want to underwrite risk and uncertainty with borrowed money..."

So with all that has been going on along with this subprime virus, and its mutating its way through our credit markets right now, its no wonder everyone is getting a tight grip on their wallets. As new stories about financial loss break daily, the confrontation with reality becomes more real. The reason for the lag between the rising rates (the Fed started raising rates in 2004) and the realization of a liquidity crisis is because, as McCulley puts it, liquidity has more to do with psychology than it does with capital.

Likewise, it will take some time for the recent Fed cuts (and the coming ones as well) to work their way through the markets and translate to brighter attitudes and expectations. Banks - who have tightened up guidelines after-the-fact, will not un-pucker until after a bottom in housing is evident. Great quote from Pimco's Bill Gross, who describes the current situation as "closing the barn door after the subprime mortgage horse has escaped from the barn."

Pretty much. Going to be some bumps in the road, but I would not underestimate the mortgage industry to come up with some creative ways to work through some of the problems, and rescue the good deals from distress; not everybody facing pain in the housing market right now deserves to be there. We shall see...

Considering A Short-Sale?

If you are in a situation where you can no longer make your mortgage payments and your home is now worth less than you owe on it, foreclosure may not be your only option.

A "short sale," in real-estate terms, is a sale of a house in which the sale price is less than what the owner still owes on the mortgage. It is a procedure sometimes agreed to by lenders who often would rather take a small loss than go through the lengthy and costly foreclosure process.

While there are some significant negative consequences to a short sale, an ever-increasing number of properties are being advertised with that label. Proponents say, arguably, that they can be a “win-win-win” situation for seller, buyer and lender. Here's how: the seller gets out of the mortgage liability without facing bankruptcy, the buyer gets the home at a reduced price, and the lender agrees to a loss it considers minimal without going through a foreclosure and being saddled with an unsalable property.

While it may seem surprising that lenders would agree to accept less than what they are owed, they benefit from the process, too, since they don’t have to go through the lengthy foreclosure process and then having to put the property on the market and go through the whole marketing process.

I'm not sure this is a win-win-win, but maybe a win (buyer); lesser-of-two evils (lender); better-than-nothing (seller); business-as-usual (realtor).

How To Get Out Of An Option ARM

Thoughts go out to those affected by fires in Southern California.....