Dennis' Mortgage Blog

Question of the week:  Is mortgage insurance tax deductible?   Answer:  I preface this answer with: I am not a tax professional please consult with your own tax preparer regarding any tax deductions.  Okay, disclaimer in place.  According to IRS Publication 936 (2008) mortgage insurance may be deductible for the tax year 2008.  To qualify the mortgage insurance must be “in connection with home acquisition debt” meaning the mortgage used to purchase your home.  Check with your tax preparer if she/he considers a rate and term refinance of your purchase mortgage(s) to qualify as “in connection with home acquisition debt.”  If the mortgage insurance meets that criteria the second criteria is that deduction phases out starting at $100,000 in income for married couples ($50,000 for married filing separate or individual filers), deduction completely phased out after $110,000 in adjusted gross income ($55,000 individual filers).  Is your mortgage insurance deductible?  Maybe!  Thanks to CPA DJ for assistance on the answer to this question.

If you have a question you would like me to answer send it to me!

As you are aware from my email Tuesday the Federal Reserve slashed the Fed Funds Rate and the reduction spread through to the Prime Rate, immediately benefiting those with debt tied to Prime (mainly those with home equity lines of credit) which fell to 3.25%.  On Tuesday the mortgage market reacted very favorably and we saw rates drop significantly.  On Wednesday and Thursday we saw investors take profits out of mortgage backed securities and rates have climbed back up from their lows on Tuesday.  Long term readers of this weekly update know that for bonds, and mortgage securities, higher prices mean lower rates and lower prices mean higher rates.  When the rates dropped on Tuesday the price of the securities was climbing; investors like to buy low and sell high so after the spike in prices on Tuesday many investors sold their investments at the high prices and collected the profit.

I was asked this morning what my Crystal Ball says.  My CB is usually a bit cloudy and this morning is no exception.  Let’s take a look at some economic fundamentals and what they may portend for the end of 2008 and into 2009.  Underlying the commentary is that as a rule what is bad news for the general economy is good news for lower mortgage rates.  Interest rates are tied to inflation, or the threat of inflation; if investors fear inflation is coming they will react in a way that causes interest rates to rise.  Why? Because they know the Federal Reserve will raise rates to keep inflation at bay (see chart on My Blog showing increase in Prime Rate from 2004 into 2006 as economy was growing rapidly and Fed raising rates to allow growth without significant inflation).  Conversely when the economy is faltering or in recession the Fed will lower rates to stimulate borrowing and investment and generate economic activity (same chart shows cuts starting in 2000 for recession that continued through 9/11 and into 2002-2003). 

With the current economic news one expects lower rates to spur investment and economic activity.  One problem here is that the Fed is “all in” they have lowered their overnight discount rate to 0-0.25%; they cannot lower it any further.  So this puts the pressure on the private sector to lower rates and increase borrowing to stimulate investment and growth.  Problem is the private sector is not making a lot of loans at the moment—hence GM goes to Washington D.C. for a loan instead of Wall Street.  So the economics dictate lower rates, but what we do not know is if the markets will follow economic theory and produce lower rates. 

A lot of uncertainty exists for anyone predicting economic trends in the coming months to a year, mainly because we are seeing economic phenomena never before experienced.  Certain parallels and comparisons may be drawn to other economic times, but nothing quite matches the confluence of events we see today.  Playing into the scenarios is the incredible amount of money the Federal Government has put into the economy, by New Year’s Day the number will approach $2 Trillion (that deserves to be capitalized) by some estimates.  That much outside cash into the economy plus the incredibly low rates set up a perfect storm for rapid inflation as soon as any segment of the economy starts to experience confidence and traction to stability and growth. 

Keep in mind most of the losses experienced have not been cash.  When Washington Mutual posts losses of $3 billion and gets bought the $3 billion was not cash in its vaults, it was devaluation of assets against their mortgages which resulted in mortgages going unpaid.  Mortgages which were higher than the amount lent due to adjustable rates and negative amortization.  Most of our economy is “paper”, investments and profits moved around from one institution to another, one asset to another.  What the Federal Government has been doing is injecting huge amounts of cash into a system that has a lack of cash due to the bidding up of the “paper” with no tangible asset base to back it up.  Once the assets begin to stabilize and increase again in value the cash injected from Washington will have a big impact on rates.

So my Crystal Ball is telling me continued downward pressure on rates until some confidence enters the economy and jobs losses start to slow down, but, BUT (big but here) there is not too much lower rates can go, at some point there is a bottom and my belief is it cannot be too far from where we are today.

My advice to those looking to buy is not to wait for lower rates to buy.  Take advantage of the rates today, buy while you can. Rates and prices may in fact go lower, but if you miss the opportunity to buy today because you misjudged the timing of the bottom—and it is almost guaranteed you will unless you are lucky. 

My advice to those looking to lower their payments is if the math makes sense with today’s rates then don’t get greedy, take the lower payment and lock in your rate.  Also, give serious consideration to paying a half-point or point for an even lower rate.  Historically I have been against paying points for refinances, in this current rate environment however Fannie and Freddie are having serious price adjustments for no point mortgages, especially if proceeds are being used to pay off an equity line. 

Finally be patient!  The industry is getting flooded with refinance applications, this clogs a system that has downsized in personnel.  Be smart and look at 45 day transactions and locks instead of 30 day rate locks with increasing turn times in the process.

NOTE PRICING BELOW IS BASED ON 20% DOWN FOR CONFORMING, 3% FOR FHA, FULL DOC, AND FICOS OF 740 AND ABOVE (change from last Friday):

30 year conventional at 1 point 4.875%            é 0.125%

30 year conforming-jumbo at 1 point 5.125%            é 0.125%

30 year FHA at 1 point 5.00%                                    ó 0.000%

It is a great weekend to buy a home, the last weekend before Christmas!  We are doing our own running around this weekend and looking forward to special Sunday as Leslie is celebrating another anniversary of her 39^th birthday and we will see Blaire in the last of her four performances in The Nutcracker with the Long Beach Ballet.  If you need assistance give a call and I will get back as soon as I can.

Happy Hanukkah and Merry Christmas!

Dennis

Remember this update is posted weekly on My Blog at www.DennisCSmith.com , feel free to forward the link to family and friends who may be interested in past commentaries.  Also beginning 12-20-08 it will be posted on the Long Beach Post every week.