The Impact of Last Week's Fed Rate Cut

The Federal Reserve made an "emergency rate cut" last week, dropping the Fed Funds Rate by one half-percent to 1.500 percent.

The move is meant to stimulate the U.S. economy.

When the Federal Reserve changes the Fed Funds Rate, it often takes 9 months for the changes to work their way through the economy. 

On a broad scale, therefore, we won't know if the cut truly "worked" until Summer 2009.

But, as it relates to Americans in general, the rate cut spurred two immediate changes.

First, because Prime Rate is directly tied to the Fed Funds Rate, Prime Rate fell by 0.500 percent, too.  That means that interest rates on credit card debt and home equity lines of credit are now lower, reducing monthly interest costs for the majority of American households.

The second change is that mortgage rates were rising at the same time.

The Fed's actions today sparked optimism in some corners of Wall Street and money is now flowing into the stock market at the expense of bonds.   Because mortgage rates move in the opposite direction from bond demand, mortgage rates are higher this morning. 

As always, mortgage markets and mortgage rates remain on edge.  Therefore, rates are subject to change.  And quickly.  If you see a rate and payment you like, be ready to commit to it because it likely won't last long.

(Image courtesy: USA Today)

Pros & Cons of Borrowing Against Your 401(k)

As household budgets get pinched and credit markets tighten, a growing number of Americans are making "hardship withdrawals" from their 401(k) plans. 

One major fund group cites a 15 percent increase in activity from this time last year for various reasons including staving off foreclosure and medical emergency.

However, 401(k) loans should only be made with careful consideration.

On the positive side, 401(k) loans don't require a credit check.  This is helpful feature for people deep in debt, and who may have missed a payment or two to their creditors.  With no credit score requirement, a poor payment history won't disqualify a plan participant.

In addition, most 401(k) loans can be arranged with just a phone call and a small stack of paperwork.  There's no "qualification process" like applying for a credit card or a mortgage.  Money can be available, therefore, in as little as a day.

But there are negatives to 401(k) loans and the biggest one relates to taxation. 

If you take a 401(k) loan and can't repay according to its terms, the IRS taxes the loan as ordinary income and slaps on a 10 percent penalty if you're under 59 1/2.  That can be very costly for a lot of people. 

But, even if you do repay the loan on time, it's still gets expensive.  This is because 401(k) loan repayments are subject to double-taxation. 

The first taxation occurs when the loan is repaid because the payback is made with post-tax paycheck dollars.  A person in the 25% tax bracket, for example, would need a $1,333 paycheck to repay a $1,000 loan -- the missing $333 goes to taxes.

And the second taxation occurs at retirement when the funds are finally withdrawn.  The IRS taxes that money as ordinary income.

Now, this isn't to say that taking a loan against your 401(k) is bad, it just may not be the best possible route for a person in trouble.  Especially because of the costs.  If you're planning to withdraw from your 401(k) for hardship, be sure to talk with a qualified financial professional first. 

If you'd like a referral to a trusted professional, call or email me anytime.

Fannie Mae Lowers Fee, Makes Mortgages More Affordable

In an effort to provide "the most market support possible", Fannie Mae is cutting one of its mandatory loan fees by 0.250 percent, effective immediately.

Fannie Mae introduced the Adverse Market Delivery Charge in December 2007 to offset foreclosure and delinquency losses.  The initial fee was a quarter-percent of the amount borrowed. 

Then, as market conditions worsened, Fannie Mae doubled its across-the-board loan fee to 0.500 percent in August of this year.

As of today, the fee is back to its starting point.

Since the start of the 2008, Fannie Mae has made 21 separate changes to its mortgage guidelines.  Most have been detrimental to borrowers, increasing the difficulty, or the cost, of qualifying for a conforming home loan.

Today's change is among the few that are beneficial.

With mortgage pricing edging higher because of the looming Congressional vote and Wall Street's reaction to the weak jobs report, the good news is that price changes could have been worse. 

Fannie Mae's Adverse Market Delivery Charge flip-flip is keeping rates in check -- perfect timing for home buyers shopping for their new mortgage.

Getting a Break When Rates Dip

Getting a great, low mortgage rate is often a combination of luck and preparation. 

Consider what happened in conforming mortgages last week:

• Monday, mortgage rates plunged to their lowest levels of the year
• Tuesday, they bounced back in full
• Wednesday, they clicked higher by a eighth-percent
• Thursday, they clicked higher by another eighth-percent

And so, here we on are Friday, four days after the best rates of the year, and the mortgage market barely resembles itself.  Despite what the papers tell you, mortgage rates are not low anymore.

That's the luck element -- you can't plan for rates moving up and down.

But, if you missed Monday's plunge, and don't want to miss the next one, all you have to do is get prepared.  Then, you're waiting for luck when it happens.

There are 4 basic steps to prepare for low rates and the key is to follow them before rates plunge, not during.  That way, you're ready to pounce on low rates at the moment they present themselves.

The first step is to contact your loan officer. 

If you don't have a loan officer, or your loan officer is no longer in the business, ask a friend for a referral.  Do not call the 800-number on your mortgage statement -- you'll almost always get a better "offer" from a live person than from a call center representative. 

Next, give your loan officer a complete mortgage application, including a "credit pull".  Be honest and accurate and don't worry about the credit check harming your score -- the bureaus protect it for a period of 30 days.

Then, ask your loan officer what supporting documentation will be required to approve your eventual home loan.  Whatever it is, gather it and send it in -- either by fax or email.

And lastly, be ready to act when your loan officer calls with the good news. If rates have dipped to lower-than-normal levels, it likely won't last long.

This preparation process is very similar to what home buyers do before making an offer on a home.  Getting ready for a refinance is like getting pre-approved, but instead of waiting to pick out a home, it's waiting to pick out a rate.  

So, to summarize:

1. Contact your loan officer
2. Give a complete application
3. Gather and submit supporting documentation
4. Be ready to act

Mortgage rates don't plunge often, but when they do, it's usually short-lived.  If you're prepared for when it happens, you can lock in the best mortgage rate available at the best possible time.

It will be your lucky day and you will have been ready for it.

Picking the Right Mortgage Payback Period?

On all principal + interest home loans, the first few years of payments include a lot more money going to interest than to principal. 

This is because mortgage repayment schedules are front-loaded with interest, meaning large-volume principal reduction won't occur until late in the mortgage's lifecycle.

Comparing products at a 6% mortgage rate, did you know that after 15 years:

• A 15-year mortgage will be paid in full
• A 20-year mortgage will have 41.21% of its loan balance remaining
• A 30-year mortgage will have 73.19% of its loan balance remaining

Of course, this doesn't mean that 15-year mortgages are better than their 20-year or 30-year brethren.  It just means that 15-year mortgages pay off faster. 

Yet, there are reasons for homeowners to avoid 15-year mortgages. 

For example, versus 20-year or 30-year products, 15-year mortgages require the highest monthly payment because the payback period is compressed to a shorter time.  In addition, mortgage interest tax deductions to which most homeowners are entitled are reduced.

So, just because the 15-year pays off quickly doesn't mean that it's best for everyone.

Translating Fed Speak

For the third consecutive meeting, the Federal Open Market Committee left the Fed Funds Rate unchanged at 2.000 percent.

Of interest to mortgage rate shoppers, the FOMC led its press release with comments about the health of the financial and labor markets, calling them "strained" and "weakened", respectively. The relative weakness in both of these areas has contributed to low mortgage rates of late.

The FOMC also noted in its release that, although economic growth has slowed this year, the historically-low 2.000% Fed Funds Rate should foster "moderate economic growth" in the future.

In the wake of the announcement, Wall Street is rallying. Investors like what the Fed had to say and this is attracting money to the stock market at the expense of bonds.

Mortgage rates have given up all of Monday's gains, and then some.

Source
Parsing the Fed Statement
The Wall Street Journal Online
September 16, 2008
https://online.wsj.com/internal/mdc/info-fedparse0809.html

How The Government Take Over of Fannie Mae and Freddie Mac lowered Mortgage Rates

When comparing two investments with equal risk, a rational person will choose the investment with a higher rate of return.

This behavior is called Risk Aversion and is a basic tenet of personal investing.

An off-shoot of Risk Aversion is that a rational person will only invest in an instrument of greater risk if the returns are greater, too.

The chart at right illustrates this concept, comparing return rates on two investments:

• U.S. Government bonds
  
• Mortgage-backed bonds

The difference in investment return rates is sometimes called a "spread" and the historical spread between government debt and mortgage debt is somewhere near 1.5 percent. 

However, notice how the spread started to grow starting in July 2007.

July 2007 marked the "official" start of the Credit Crunch and as mortgage delinquencies grew nationwide, so did the market's perceived risk of investing in them. 

By the start of this month, the spread had nearly doubled.

But that all changed Sunday.  When the government announced its takeover of Fannie Mae and Freddie Mac, it put the same "risk-free guarantee" on mortgage debt that has helped keep U.S. government debt so cheap to finance and the spread immediately shrunk.

This is one reason why mortgage rates fell Monday and why they should continue to stay low over the near-term.  With the U.S. government backing the mortgage market, there's no room for the risk premium that helped keep rates high this past year.

It doesn't mean more people will qualify for conforming home loans, but for the ones that do, financing should be cheaper.

Government Takover Lower MOrtgage Rates

Sunday, the U.S. government assumed control of Fannie Mae and Freddie Mac.

The papers have done a terrific job talking about the political perspective of the takeover, and the economic perspective of the takeover, but very few people have addressed the key news for homeowners.

Mortgage rates are plummeting.

The reason why mortgage rates are falling post-takeover is because of Fannie Mae and Freddie Mac's collective role in the U.S. mortgage market.

1. They guarantee about half of the nation's $12.1 trillion in mortgages
2. They purchased and securitized four-fifths of the nation's home loans as recently as six months ago

See, earlier this year, Wall Street punished Fannie Mae and Freddie Mac for their weak balance sheets and large numbers of delinquencies.  This led to Wall Street to raise the borrowing costs for the two firms across the board which, in turn, led to higher mortgage rates for Americans.

But today, with their balance sheets backed by the U.S. government, Fannie and Freddie are now viewed as "safe" by the eyes of Wall Street. 

This has lowered their borrowing costs, pushing down mortgage rates for the four-fifths of the country that is currently channeling their home loans through Fannie or Freddie.

(Image courtesy: The New York Times)

If You Want Change You Need to do Stuff!

New quote of the day "If you're afraid of being criticized, Say nothing, Do nothing, Be Nothing!'

Just got that from a friend on the Interpretations and Procedures Subcommittee of NAR's Professional Standards Committee. She said she got it from her Grampa - I think Grampa was a pretty smart guy -

Today the Federal Government moved into a conservator position with Fannie Mae and Freddie Mac. While I'm not sure how that will affect the mortgage market, the fact that they have thrown the full strength of the government into supporting the housing market is encouraging.

Now we need to wait and see what happens.

How Labor Day can Effect Housing Affordability!

As we get closer to Labor Day, volume on Wall Street is dwindling as market players get a head start on their long weekend.

Today could be a difficult day to shop for mortgage rates and that can impact home affordabilility. 

Expect volatility.

This is because mortgage rates are based on the price of mortgage bonds and, on Wall Street, bonds trade a lot like stocks.

There has to be a buyer and a seller at a specific price to make a deal.

With so many traders on vacation today, though, there are fewer opportunities to match buyers and sellers.  This can cause mortgage prices rise or fall faster than on a "normal" day, directly leading to mortgage rate volatility.

Each 0.125% mortgage rate increase is an extra $96 cost per $100,000 borrowed on a principal + interest home loan.

For a light-volume trading day, there is a lot of information for markets to digest:

• The weather reports on Tropical Storm/Hurricane Gustav
  
• Reports that inflation is rising
  
• Reports that Consumer Spending is slowing
  
• Ongoing political tension between the U.S. and Russia

By themselves, each of these points can move markets. Together, however -- and aided by Labor Day -- they can move markets a lot.

Mortgage bond pricing is fluid, changing every minute of every day.  Today, those changes will be exaggerated and, as an example, in the first 30 minutes of trading, mortgage rate pricing swung from rate improvement to rate deterioration in a flash.

Watch the Weather Impact Mortgage Rates

Three years to the week after Hurricane Katrina caused $81.2 million in damages, Tropical Storm Gustav is charting a similar Gulf of Mexico path.

Memories of Katrina are making oil traders nervous.  The 2005 storm shut down 30 platforms and 9 refineries.  And, this week, oil prices are up nearly 4 percent on fears that the market, once again, may be disrupted by storm. 

Mortgage rates are edging higher on the news.

The link between oil prices and mortgage rates is not a direct one, but it's worth paying attention to. 

Rising oil prices strain business and consumer budgets, creating inflationary pressures on the economy.  And at no time was this relationship more evident than in May and June of this year.  As oil prices reached new, all-time highs almost daily, Americans felt the impact each time they opened their wallets -- the Cost of Living inflation gauge reached a 17-year high in July 2008.

Inflation is the enemy of mortgage rates so as inflation rises, mortgage rates tend to rise, too. 

And this is one reason why mortgage rates are ticking higher this morning -- there is an overriding fear that Gustav will strengthen into a full-fledged Hurricane before making landfall, causing damage to oil refineries and shipping ports around the Gulf of Mexico.

Damage reduces oil supplies and that causes oil prices to rise.  It's basic supply and demand.

Gustav is expected to make landfall Monday or Tuesday.  If the storm continues on its path, we may see mortgage rates continue to trend higher.  If the storm dissipates, rates should reverse.

Mortgage Insurance Rates on the Rise

Private Mortgage Insurance (PMI) is an insurance policy paid to a lender in the event that a homeowner defaults on his home loan.

With the growing number of mortgage defaults nationwide, mortgage insurers are finding their balance sheets under attack and their revenues in the red.

So far this year, mortgage insurers have paid out $6 billion in claims.

In response to the losses, the mortgage insurance industry is using two tactics to return to profitability -- and both mean bad news for homeowners.

1. Raise the minimum standards to get insurance
2. Raise the annual mortgage insurance cost

This is very similar to what Fannie Mae and Freddie Mac are doing to shore up their respective balance sheets; lending to only the most credit worthy, and making sure to charge them for their commensurate risk.

Because of the higher PMI rates, it's getting more expensive for small-downpayment home buyers to finance their homes. And that's if they can even still get mortgage insurance.

Some mortgage insurers now require a 10 percent minimum downpayment in certain states.

So with the number of mortgage defaults expected to rise through 2009, qualifying for PMI should get more expensive and more difficult. If you plan to make a small downpayment on your next home -- or plan to remortgage your current low equity home -- consider moving up your timeframe.

It may not be as cheap or as easy to get financing as it is today.

(Image courtesy: The Wall Street Journal)

How Your Purchasing Power Just increased!

The Producer Price Index is a business inflation meter and it's now up 9.8 percent annually.

This is a huge number for PPI and represents the highest year-over-year rate of inflation since 1981.

Normally, blowout inflation like this would be terrible for mortgage rates but mortgage markets are actually improved since last Tuesday's data release.

Usually, a rocketing PPI would create an inflation expectation on Wall Street which would, in turn, cause mortgage rates to rise, impacting home affordability.

Yesterday, however, that's not what happened.

Upon the PPI release, Wall Street looked at the 9.8 percent number and simply shrugged it off. "Of course PPI is high," traders thought. "Did you see how high energy costs were last month?"

Traders know that in July, oil prices reached an all-time high of $147.27 per barrel and, since then, crude is down more than 20 percent. Because of this, Wall Street has now turned its attention to the August PPI data, thinking it will much more calm than July's.

In other words, instead of fearing inflation, traders believe the worst of it is over, providing an unexpected boost to home buyers in need of mortgages. As inflation expectations fall, mortgage rates are following suit.

Fannie Mae Fees May Increase Buyer Costs

Fannie Mae announced a new risk-based pricing model and additional mortgage delivery fees this week, adding to the cost of buying a home.

Risk-based pricing was first introduced by Fannie Mae this past April. It added new, mandatory loan fees for high-risk borrowers while rewarding a small group of low-risk borrowers with fee credits.

In the updated model, even 720 credit scores with a 20 percent downpayment won't protect mortgage applicants from the risk-based fees and they can range as high as 2.750 percent, depending on credit scores and downpayment size. 

Fannie Mae will continue the practice of rewarding high-downpayment borrowers with fee credits.

Fannie Mae's second pricing change involves the Adverse Market Delivery Charge and it is not risk-based -- it applies to all applicants equally. 

First introduced in December 2007, Adverse Market Delivery Charges are mandatory surcharges on all conforming mortgages.  The fee was initially a quarter-percent.  It's now doubled to 0.500 percent.

Combining risk-based pricing and delivery fees, mortgage applicants have two choices to pay them:

1. As a one-time fee, paid at closing, payable to the lender
   
2. As an interest rate increase, payable month-after-month to the lender

The one-time fee is calculated by multiplying to fee amount by the applicant's loan size and dividing by 100.  The interest rate increase is calculated as a general rule, where each 0.500 percent in fees can be substituted for a 0.125 percent increase to a mortgage rate.

The fees become "official" October 1, 2008, but lenders are expected to deploy them much sooner.

Cost of Living Figures Increase

Another day, another piece of inflationary data.

June's Consumer Price Index showed a 5 percent year-over-year increase in what is now the largest annual Cost of Living increase for Americans in 17 years.

This is bad news for active home buyers because rising costs are considered inflationary and inflation causes mortgage rates to increase.

Predictably, mortgage rates jumped Wednesday morning after the CPI data was released and they continued to move higher throughout the day.

For most home loans, mortgage rates finished the day up by 0.125 percent.

Applying Wednesday's mortgage rate movement to the true cost of owning a home, the eighth-percent increase added $8 per $100,000 mortgaged per month. The silver lining of this cloud in our market is that our housing stock is still so affordable, that now may be the time to act before rates increase more.

(Image courtesy: The New York Times)

Fannie & Freddie Are Yesterday's News

Investors have turned their attention back to the U.S. economy this morning, causing yesterday's mortgage rate improvements to unwind a bit.

Rates had fallen Monday after the Federal Reserve and U.S. Treasury's joint announcement in support of Fannie Mae and Freddie Mac. Today, it's the data that is taking center stage.

Most notably, the U.S. Dollar is trading at an all-time low versus the Euro and other currencies.

This is a negative for active home buyers because American homeowners repay their mortgage interest in U.S. dollars. When the dollar loses value, so does the value of those interest payments so mortgage rates end up increasing in order to attract new investors.

Another reason why mortgage rates are higher this morning is that June's Producer Price Index registered much higher than was expected, posting its largest one-month gain since November 2007.

PPI is a lot like the Cost of Living index, except that it measures operating costs for businesses instead. When business costs are increasing, they are often passed onto consumers and this is why rising PPI is thought to be inflationary and inflation -- like a weakening dollar -- pressures mortgage rates to rise.

So, while Monday's rate improvements haven't completely erased, today's action reminds us that mortgage markets wait for no one and yesterday's mortgage rates rarely carry forward.

Especially when inflation is in the mix.

(Image courtesy: The Wall Street Journal)

If A Bank Reduces Your HELOC -Try This..

A Home Equity Line of Credit is bank product that grants homeowners access to the equity in their home at anytime, usually using checks.

Often called a HELOC, these equity-based credit lines function very much like credit cards:

• The rate is adjustable, tied to Prime Rate
  
  
  
• There is a minimum monthly payment
  
  
  
• There is a pre-set spending/credit limit

But different from credit cards is that a HELOC is "guaranteed" by real estate and with real estate values in question nationwide, many banks are exercising a little-known clause in the HELOC contract.

With alarming frequently, banks are reducing the pre-set spending limits on their active equity lines. Via USPS, lenders are notifying homeowner with $100,000 HELOCs that their new HELOC limit is $25,000, for example. This move is part of a trend towards conservative lending that is a response to the too liberal lending policies that have led to the current issues in the credit industry.

And the banks aren't being discriminate based on payment history or local real estate conditions, either -- it's happening everywhere with equal force.

The good news is that banks will accept appeals on HELOC reductions on a case-by-case basis.

One way to appeal a HELOC reduction is:

1. Call your lender's Customer Service line. Do not send an email.
   
   
   
2. Politely ask why the HELOC limit was reduced. Listen carefully to explanation.
   
   
   
3. Explain why you would like your HELOC reinstated. Acceptable reasons may include home improvement projects or improper home valuation by the lender.
   
   
   
4. Be prepared to write a formal letter, if asked. Address the issues explained in #2.

Banks will typically not reinstate a HELOC if a borrower has been delinquent on payments, or lives in a severely depressed neighborhood. However, because lenders rely on computer models to assess risk, it's always a good idea to ask.

The key to the success or failure of your request may lie completely in the manner in which you approach the problem. Remember that the person you're speaking to in the bank may be able to help you, but they are probably not the person who instituted the policy, and its not a good idea to be too aggressive with them if you want their help. After all, its only human to want to help people that are nice to you or be less inclined to help those who are not. And in this case, the Human Element of an appeal may work in your favor.