Dennis' Mortgage Blog

Question of the week: What’s in it for me…again? Answer:  We continue to get this question as more and more proposals come out of Washington D.C. and there are more variables for home owners, and potential homeowners, in the WIFM question.  First, regarding the tax credit for new homeowners, one of the best recaps I have seen thus far is from Jon Lansner on his Orange County Register blog, if you may be eligible for the credit read his post—and then consult with a tax specialist!  Next up is the limiting of deductions on tax returns for Americans earning over $200,000—I have read $200,00, I have read $250,000 and I have read top marginal tax rate which in 2009 kicks in at $372,950 (which means if $200k or $250k income is the limit where deductions get cut then it is the top two tiers of income earners being hurt, not just the top tier as the President has stated)—my understanding of this proposal is that if you earn above one of these amounts the amount you will be able to deduct from your income for tax purposes will be cut back 25% or more.  This includes but is not limited to home mortgage interest, charitable contributions, retirement contributions, medical bills and property taxes.  What’s in it for you and me?  We will be paying tax preparers to determine the answer, but my guess is there will be more in it for the IRS than there will be for us!

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This has been another week with a lot of news, and the bond and mortgage markets have not reacted too favorably.  With the Dow flirting with dipping below 7,000 for the first time since the mid-1990s, the standard assumption would be that mortgage rates would drop as investors pulled their money out of stocks and placed it in bonds.  Alas this has not been the case primarily because of the $3+ trillion budget Obama announced early in the week.

Bond investors detest inflation.  Inflation erodes return on investment and bond investors are locking in their returns tomorrow with dollars today.  Inflation discounts the return on their investment not only by weakening the purchasing power they will have when the investment pays off, but also because their rate of return will be lower than future rates of return because as inflation rises so do market interest rates.  Looking back at the past year we have seen the Prime Rate drop all the way to 3% as the Federal Reserve Board of Governors has cut rates to stimulate the economy.  Once the economy stabilizes and begins to grow again, and it will grow again with our without Washington doing anything, the Fed will start to look at raising rates to stem inflation. 

With the almost $2 trillion already put into or pledged into the economy and another $3 trillion plus in Obama’s budget proposal has created tremendous concern.  Investors in stocks and bonds are concerned about the amount of money spent and borrowing created in the past five to six months by Washington.  The money flooded into the economy is very inflationary and the amount of borrowing creates tremendous pressure on the credit markets.  Both of these create higher interest rates.

Last week we were experiencing resistance at the upper levels of bond trading as prices could not break the ceiling of triple moving averages.  This week as investors began doing more math and Obama released his staggering budget requests bond prices dropped and we began bouncing of bottom levels of resistance.  Experienced readers of my updates know, low prices mean high rates. This week we saw rates pop.

I want to close on some positive news.  It was announced this week, and I put a post my blog and emailed real estate professionals, that Fannie and Freddie will be raising their loan limits for “hi-balance” mortgages back to our levels for most of 2008: $729,750 for single family residences.  We are unable to offer the loan amounts yet because lenders, the GSEs and primarily the secondary markets have not yet priced the loan limits.  When lenders start putting the new/old limits on their rate sheets I will let you know.

Rates rose across the board from last Friday as investors worry about excessive government borrowing, government involvement in banking and future inflation concerns.

FIXED RATE MORTGAGES AT COST OF 1 POINT*

30 year conventional at 1 point 5.125%                     Up 0.25%

30 year conforming-jumbo at 1 point 5.625%            Up 0.125%

30 year FHA at 1 point 5.375%                                  Up 0.375%

Please note that rates quoted are based on average of several lenders for a purchase transaction with 20% down payment and a minimum FICO score of 740; APR is not quoted as it is dependent upon specific loan amounts, lenders and services selected.  Numbers provided are for comparative purposes only.

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Have a great weekend,

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.