Dennis' Mortgage Blog

Last night in his State of the Union message President Bush asked Congress to quickly pass the economic stimulus bill--and not to add any pork or earmarks to the bill.  The bill quickly passed through the House last week but has been kicked around the Senate and its committees since then.  Last night Bush stated he would veto the bill if the Senate and/or House layered on more spending to the bill.

Integral to our industry is language in the bill that would raise the loan limits for conforming (FannieMae and FreddieMac) and FHA mortgages considerably.  Depending on whose math you use Southern California as a "high cost" area could see conforming loan limits raise from the current $417,000 for single family properties to as high as $715,000, more likely would be somewhere around the $650,000 but it depends on what trading occurs in the Senate and then in the Joint Committee meeting with the House for the final version of the bill to be sent to the White House for the President's signature.  Again depending on the math and formulas used we may see FHA climb as high as $625,000 but again probably closer to the $475-525,000 range.

These increases in loan limits would assist the housing markets considerably as lower rates and easier qualifying would allow thousands of homeowners currently in ARMs or fixed-to-adjustable mortgages to refinance their homes to fixed rate mortgages and greatly expand the number of qualified buyers for homes within 20% the regions median priced homes.

Given that the Democrats only have one more year to pile on President Bush and that they control the Senate the cynic in me sees the stimulus package as a perfect opportunity for them to try to tweak Bush one more time.  Challenging the President by adding pork and earmarks to the bill to see if he will veto the legislation, Senate Democrats (two of whose members are running for Bush's job) may want to take the veto out to the public and the voters as a campaign issue.  "Bush vetoed legislation we passed to help you..."  I never understood politicians who run their campaigns against an incumbent who will not be in the race, i.e. a termed out President, but they seem to think it effective.

Ideally the Senate will pass untouched and unmarked the House version of the stimulus package that went through in almost record speed--but we'll see if expediency or politics has greater priority for those voting.  Not that I am enamored with most of the package--I think rebate checks are a waste of tax payers' money and we would be better off with cuts in the tax rate--but if I must swallow the bitter with the sweet then swallow I must as like many mortgage professionals across the country I have clients who really need higher loan limits.

Call or write your Senators today to tell them to pass the package!

Dennis

Tuesday, January 29, 2008

This past Tuesday the Federal Reserve Board of Governors surprised the world by announcing a cut in key interest rates of 0.75% (three-quarters of one percent) before the stock markets opened for business. The purpose of this cut was to ease anxiety and a possible significant decline in U.S. stock prices following a huge drop in financial markets the day before in Europe and Asia (U.S. exchanges were closed in observance of Martin Luther King Day). The cut worked, stocks did drop on Tuesday but were up substantially Wednesday and Thursday. Confidence was somewhat restored and a market crash was averted.

Following an email I sent out to my clients and contacts in my database I received many calls and emails along the lines of, “what does this mean to me?” Here is what cuts to rates by the Federal Reserve means to most homeowners: not much.

When the Fed cuts rates it trickles through the financial markets and the key rate that is affected that impacts consumers is the Prime Rate. So called because it is historically the rate by which banks charged their best and most qualified borrowers—typically large companies and corporations. As Home Equity Lines of Credit (HELOCs) became more prevalent in the American mortgage markets the Prime Rate became available to millions obtaining HELOCs. The Prime Rate is used as the index for HELOCs and subsequently other credit instruments—some credit cards and large consumer loans most notably.

Unless you have a HELOC the reduction in rates by the Fed will have little direct effect. Most auto loans are fixed rates so if you have one it does not impact you. If your mortgage is a fixed rate, or an interim ARM in its fixed rate period, you are not impacted. Unless your credit card is tied to an index your credit card rates on any outstanding balances are not affected. For most Americans, and most American homeowners without HELOCs, the reduction in these rates will have no direct impact on you.

Indirectly there is significant impact on many more people and ultimately most Americans. When the Fed lowers its rates it is making it cheaper to borrower money—loosening the credit markets. The lower rates they are charging member banks to borrow money the lower rates those banks can charge their clients to borrow money. Corporations and small businesses looking to make capital investments in their businesses will be able to do so at lower costs and will be more likely to make these investments—investments which typically result in more jobs.

Slowly the lower Fed rates will impact the yield (rates) on Treasury bills which will lower the rates paid by those with Adjustable Rate Mortgages. This will make monthly mortgage payments lower for those with ARMs, and slowly over time reduce the number of ARM borrowers in default or foreclosure. This will level out the housing markets and bring stable prices to most areas of the country.

While there is rarely an immediate impact on the rates for fixed rate mortgages (typically Fed moves are predicted in advance and the market moves accordingly before the Fed meetings. As you can see by the chart below the Prime Rate has moved dramatically in the past seven years, but the movement in 30 year conforming fixed rates not nearly as significant. The “line in the sand” alludes to what appears to be an unbreakable barrier for fixed rates that has been barely breached once and that was immediately following 9/11.

So if you are looking for a home mortgage, and for rates to drop because the Prime rate has dropped you can see that we are near the bottom of the range. Will we break through in this cycle? Possibly, however statistical data says the break through will be difficult.

How does the Fed rate cut affect you? It eases credit for all the markets, it lends some confidence—or at least allays concerns—for investors and consumers, and it serves to encourage economic growth and expansion. In the long run these are the principals that have us still in the longest period of economic growth in post-WWII history—a cycle that while slowing down has not yet reversed from growth to contraction.

Dennis

The news last week that the rumor circulating for weeks is becoming reality, that Bank of America is looking to purchase Countrywide, is welcome news for consumers, the industry and this mortgage broker.

A bankruptcy filing by Countrywide, seemingly inevitable if not bailed out by a buy-out, would throw more uncertainty and negative energy into the credit markets.  This would further tighten underwriting standards and make it even more difficult to get mortgages funded for all applicants.  By selling to BofA and avoiding bankruptcy Countrywide avoids another lender "foreclosure" which could be the final straw tipping the industry into the abyss reminiscent of the S&L crisis of the 1980's.  

With BofA taking over the assets and liabilities of the company and restructuring the management and administration of Countrywide all those with mortgages funded by the number one lender in America will experience a new attitude of experience and customer service.  I am not saying that BofA has the best customer service in the industry, but I am saying it is better than Countrywide's.

Locally myself and others in our company have seen countless Good Faith Estimates provided by clients that they received from Countrywide loan officers that had us shaking our heads.  Suffice it to say when competing against Countrywide we would consistently be able to provide lower costs, lower rates and fixed rates instead of the adjustables being pushed.  With BofA taking over the originating giant I expect to see more consumers offered and approved for fixed rate mortgages through the Countrywide retail outlets than under the current Countrywide administration.

Dennis

 Monday, January 14, 2008

Great question Friday from Mark & Chris (Armendariz, great real estate agents and excellent neighbors!) about the Mortgage Forgiveness Debt Relief Act of 2007.  The Act excludes from income taxes debt relief from a lender through short sale.  Essentially prior to the Act if you owed $200,000 on your home and it was sold at short sale for $180,000 then the lender would issue a 1099 to you for $20,000 which would be taxable income. 

Mark & Chris' question was does this Act apply to all mortgages: purchases, rate and term refinances and cash out refinances.  The answer NO!

Under the terms of the law the debt must be "acquisition debt", meaning funds used to purchase the property.  What is not spelled out but meaningful is if the mortgage being discounted through short sale was a rate and term refinance of a purchase mortgage; i.e. you had a $200,000 mortgage balance from the purchase of your home and refinanced to lower the payments, exit an Adjustable Rate, or some other reason but did not obtain cash out of the property.  I would argue that this is still the funds used to acquire the property and since it was not used to pull equity/cash from the property then the Act should apply.  I would argue that but it would be subject to ruling by IRS or other government agency so check with a tax professional or attorney if this may apply to you or a client.

What is not covered are mortgages that were cash-out refinances; i.e. you had a mortgage with a balance of $200,000 and refinanced for $300,000 pulling $100,000 in equity out of the property and then it was sold with a discounted balance to $250,000 you would receive a 1099 for $50,000.

There are several aspects to the bill beyond what I have written here.  Here are two links that may assist you:

1) Duane Gomer has a good recap here

2) If you have the guts to slog through it the text of the bill is here 

Thanks for the question Mark & Chris!

Dennis

 Wednesday, January 09, 2008