Economic Insights

Capital markets and economic update
April 9th, 2008 9:34 AM

I. Capital markets and economic update
The past week saw continued stability in MBS markets, but continued deterioration in the economy. The markets seem to believe that the Fed and OFHEO have halted the seemingly endless downward spiral in MBS prices. Through its Bear Stearns bailout, the Fed has provided credible evidence that it will do whatever is necessary to prevent a major financial institution from collapsing.

  • FNMA MBS yield spreads over Treasuries maintained their recovery from the previous week and actually closed the week on the tight end of the recent range (see Chart 1 at the bottom of this email).
  • Lehman Brothers easily sold $4 billion of equity, putting an end to speculation that it needed capital and would have trouble raising it.
  • Non-farm payrolls and continuing claims signaled further employment weakness (Charts 2 and 3).
  • Treasury rates declined as an already pessimistic market was unpleasantly surprised by the unexpectedly weak payroll numbers.
  • The spread between LIBOR yields (what banks charge each other) and Treasury rates remained well above "normal" levels, indicating that banks are still in survival mode (Chart 4).
  • Fed Funds futures indicated that the market no longer expects 75 or 100 basis point cuts in the Fed Funds rate after all the liquidity measures taken in March. Before this week's employment data, the market expected a 25 bp cut at the Fed's April 30 meeting; afterward, the odds of a 50 bp cut improved (Chart 5).
  • A clearer picture of "conforming jumbo" FNMA MBS and jumbo FHA MBS execution began to emerge, with relatively positive initial signs.
  • Foreign interest in U.S. agency MBS and agency debt increased to a record level.

II. How much risk-taking should be allowed?
A big-picture theme starting to take shape is government's role in determining how much risk to allow back into the system. As I've said before, risk-taking needs to resume in order for MBS spreads to recover lost ground and mortgage rates to drop. (For an explanation of the relationship between MBS spreads and investor risk, see the section entitled "FYI" located at the end of this email.) In practice, the "right" amount of risk-taking in the system is decided through a balance of self-policing market forces and government regulations. Today's reality, however, is that the balance is likely to tilt toward regulation.

The dilemma facing the Fed is that the tools they're currently using — reducing short rates and making it easier for financial institutions to borrow money — have a nasty side effect of encouraging what might be called excessive risk-taking. However, they don't have much choice. Since low mortgage rates are a vital part of a housing recovery, they can either continue to promote leveraged purchases or buy MBS themselves.

Back in the Greenspan Fed era, we saw the unregulated development of what some call the "shadow banking system" — hedge funds and other investors in the alphabet soup of CDOs, CDS, SIVs, and other financial innovations. Unhindered by the regulatory oversight that governs banks, these new lenders were free to take as much risk as they liked. In the process, however, they became so large and so intertwined with banks that their failure put the regulated banking system at risk. In another macro development last week, Treasury Secretary Hank Paulson proposed to change the structure of market oversight by giving the Fed broader power over a wider array of financial institutions.

This massive a change may take some time to put in place, especially in an election year, but his proposal is a sign of current thinking on a subject that has an enormous impact on the amount of risk-taking in the system. Its message seems to be that if the Fed is going to be held responsible for cleaning up after the party, they want more of a say in who gets invited and how crazy things get.

Where will we end up? I certainly don't know the "right" amount of leverage in a financial system as complex and interconnected as ours has become. But any teenager who's used bad judgment can tell you that the price is almost always less freedom and more rules. The entire financial system recently suffered a major lapse in judgment, and we'll probably lose some freedom to determine for ourselves how much risk is the "right" amount. Increased regulation and oversight, along with what may well be significant changes in the models used to quantify risk, will lead to capping the amount of leverage in the system at some level lower than in recent years. The most likely result is a sustained period in which the cost of consumer credit will remain higher than in 2005-06.

III. Housing: what's being done to slow the fall?
As home prices continue their slide, even investors who have access to leverage are reluctant to assume risk. Using FNMA and FHLMC as proxies for many would-be MBS investors who are still able to freely issue debt, you can see in the chart below that despite historically attractive MBS yields relative to their cost of funds (the line), these two GSEs actually have reduced their MBS holdings (the bars). Why? Because they need to raise capital to cover credit losses in the "g-fee" business resulting from falling home prices. Other investors are equally concerned that attractive MBS yields may be booby-trapped by further losses due to accelerating depreciation.

FNMA: Annualized Portfolio Growth

Lawmakers have devoted much attention to slowing the rate of defaults and foreclosures, with no fewer than eight housing rescue plans being discussed at the federal level and countless more in the states. Of the federal solutions, the two that seem to have the most momentum are sponsored by Rep. Frank and by Sen. Dodd. Both plans focus on heading off foreclosure so people can stay in their homes. For borrowers in trouble, participating lenders would forgive a portion of the existing loan equal to the difference between the old loan and 90% of the home's current market value. A new loan with a current LTV of 90% would replace the old loan. Who would make these new loans? You guessed it: the FHA.

The Senate plan that actually made it to the floor for debate last week was a scaled-down compromise providing, among other bits and pieces, tax benefits to home builders and homeowners buying foreclosed properties. If the Frank plan reaches the House floor in its current form, it would provide $300 billion in FHA funds for workout loans. Its major flaw is relatively broad eligibility requirements, which may encourage borrowers who can afford their payments to purposely default in order to reduce their debt. The Frank plan tries to prevent this by requiring that the original DTI be greater than 40% and by limiting the borrower's ability to participate in any future appreciation.

Some critics of these forgiveness plans will insist that they're a waste of taxpayer money, since there's no way to ensure that they reach borrowers at greatest risk of foreclosure. Others will argue that "bailing out" people who took more risk is unfair to those who were more prudent. These are reasonable arguments, but no plan can be perfect; and the consequences of no plan at all may cost a great deal more.

FYI: The inverse relationship of leverage to MBS spreads
The rate spread between MBS and risk-free instruments might be considered a sort of inverse temperature gauge of the amount of leverage (i.e., risk) in the financial system. More leverage makes MBS spreads go down, while less leverage allows MBS spreads to increase. Here's an example:

Say the yield on MBS is 6.50% and borrowing the money to buy them costs me 6.0%. Therefore, my "spread" is 50 bps. If I borrow 90% of the cost of the MBS, the return on my 10% equity will be 11%:

(100% * 6.5%) – (90% * 6.0%)
10%

If I'm able to borrow 95% of the cost, increasing my leverage from 10:1 to 20:1, I can buy twice as much and my return on equity will rise to 16%:

(100% * 6.5%) – (95% * 6.0%)
5%

But if everybody else does the same thing, demand for MBS will increase and (assuming the supply remains constant) the yield spread will tighten. Instead of 50 bps, it will be something less. As we saw in 2005-06, more leverage in the system did cause spreads to tighten, mortgage rates to fall, and housing to become more affordable. Sadly, it later became clear that so much leverage was too much of a good thing.

Chart 1 – FNMA MBS Yield Spreads to Treasury Yields
FNMA MBS Yield Spreads to Treasury Yields
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Chart 2 – Non-Farm Payrolls
Non-Farm Payrolls
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Chart 3 – Continuing Jobless Claims
Continuing Jobless Claims
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Chart 4 – Libor vs. Treasuries
Libor vs. Treasuries
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Chart 5 – Fed Funds Probability Distribution for 4/30 Meeting
Fed Funds Probability Distribution for 4/30 Meeting
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Posted by Heath Lefort - Personal Financial Advisor on April 9th, 2008 9:34 AMPost a Comment (0)

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Fed Cuts 75 Basis Points
March 19th, 2008 5:12 PM

The markets had expected a more aggressive rate cut of a full point, but the main indexes pulled back only mildly in the immediate wake of the announcement.

The FOMC statement:

The Federal Open Market Committee decided today to lower its target for the federal funds rate 75 basis points to 2-1/4 percent.

Recent information indicates that the outlook for economic activity has weakened further. Growth in consumer spending has slowed and labor markets have softened. Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters.

Inflation has been elevated, and some indicators of inflation expectations have risen. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook has increased. It will be necessary to continue to monitor inflation developments carefully.

Today’s policy action, combined with those taken earlier, including measures to foster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain. The Committee will act in a timely manner as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Gary H. Stern; and Kevin M. Warsh. Voting against were Richard W. Fisher and Charles I. Plosser, who preferred less aggressive action at this meeting.

In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 2-1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, and San Francisco.

Sincerely,

Heath B. Lefort


Posted by Heath Lefort - Personal Financial Advisor on March 19th, 2008 5:12 PMPost a Comment (0)

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My Rates have been recently revised!
March 17th, 2008 9:36 PM

Investors poured their money into bonds today due to one of the top investment banks Bear Stearn loosing roughly 80+% of its stock value.  Investors do not trust the financial markets right now.  The Federal Reserve meets tomorrow and I expect the Federal Reserve to cut 75-100 basis points off the short term prime rate to bring investor confidence back into the market.  I expect long term mortgage rates to go up tomorrow due to this cut.

If you are in the market to refinance or purchase a home in the next 3-6 months, its important to get your loan in a position of approval so I can execute your rate when the market dips during these volatile periods.


Posted by Heath Lefort - Personal Financial Advisor on March 17th, 2008 9:36 PMPost a Comment (0)

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NEW FHA & FNMA LOAN LIMITS TO HELP HOMEOWNERS – ECONOMY
March 6th, 2008 2:39 PM
NEW LOAN LIMITS TO HELP HOMEOWNERS – ECONOMY


 

New FHA Mortgage Limits

Effective March 6, 2008, HUD will offer temporary FHA loan limits that will range from $271,050 to $729,750 (Limits). Overall, the change in loan limits will help provide economic stability to America's communities and give nearly 240,000 additional homeowners and homebuyers a safer, more affordable mortgage alternative. The maximum amount of $729,750 will only be applicable to extremely high-cost metropolitan areas. Previously, FHA's loan limits in these very high-cost areas were capped at $362,790.
The Economic Stimulus Act of 2008 permits FHA to insure loans on amounts up to 125 percent of the area median house price, when that amount is between the national minimum ($271,050) and maximum ($729,750). The new minimum and maximum loan limits are based on 65 percent and 175 percent of the conforming loan limits for Government-Sponsored Enterprises in 2008, which is $417,000. The FHA used a combination of existing government data sets and available commercial information to determine the median sales price for each area. The change in loan limits are applicable to all FHA-insured mortgage loans endorsed with HUD’s publication of the increased loan limits today, and it lasts until December 31, 2008.
 
By increasing loan limits nationwide, FHA will provide much needed liquidity and stability to housing markets across the country. Already, as conventional sources of mortgage credit have been contracting, FHA has been filling the void. From September to December 2007, FHA facilitated more than $38 billion of much-needed mortgage activity in the housing market, more than $15 billion of which was through FHASecure, FHA's refinancing product. By focusing on 30-year fixed rate mortgages, FHA helps homeowners avoid and escape the risks associated with exotic subprime mortgage products, which have resulted in rising default and foreclosure rates.
 
"This is not an easy crisis to address, and there is no silver-bullet, but I know that we can help hundreds of thousands of people keep their homes, and we can calm the waters," said HUD Secretary Jackson.
 
In January 2009, FHA's maximum loan limit will return to $362,790, unless the U.S. Congress approves bipartisan legislation to permanently increase loan limits as part of the FHA Modernization bill, which is still awaiting final approval on Capitol Hill.
 
 
Sincerely,
 
Heath Lefort

Posted by Heath Lefort - Personal Financial Advisor on March 6th, 2008 2:39 PMPost a Comment (0)

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Fed Fund Rate Drops another .50!
January 31st, 2008 7:30 AM

Fed Delivers, Financials Flounder

 
The Fed has cut a total of 1.25% in 8 days! (A record)

Most of the excitement in Wednesday's session happened in the last two hours of trading after the FOMC decided to cut both the fed funds and discount rates by 50 basis points and a CNBC report suggested downgrades of bond insurers were imminent.

Prior to these happenings the stock market traded in a narrow range, sporting relatively modest losses that were driven by disappointing earnings news from Yahoo! (YHOO 19.05, -1.76) and Merck (MRK 46.69, -1.32), and a fourth quarter GDP report that showed growth of just 0.6% versus the 1.2% consensus estimate.

The GDP report, frankly, wasn't as bad as the headline suggested considering a drop in inventories created a big drag.  Final sales, which exclude the swing in inventories and offer a better read on underlying demand, increased 1.9% at an annual rate.

Separately, in a bit of encouraging news, the ADP Employment report showed an estimate of 130K for January private payroll growth.  While this report doesn't correlate very strongly with monthly payrolls reported by the government, it has been a decent directional indicator.  As such, it sparked some hope that the January employment report on Friday will contain better than expected news.

For the most part, though, the market remain preoccupied with the FOMC decision at 2:15 p.m. ET.  It got exactly what it wanted, too, when the FOMC cut the fed funds rate 50 basis points to 3.00% and the discount rate 50 basis points to 3.50%.  In turn, the policy directive noted that downside risks to growth remain and that the Fed will act in a timely manner to address growth risks.  That acknowledgment was taken as a hint that more rate cuts may be coming.

The major indices rallied in the wake of the decision.  The Dow, Nasdaq and S&P, which were all down ahead of the announcement, gained as much as 200, 38, and 24 points, respectively.

Then, the music stopped when CNBC ran a report that one of the two major bond insurers was going to be downgraded by a credit rating agency, perhaps as early as today.  As it so happens, Fitch cut its rating on FGIC Corporation and its financial guaranty insurance subsidiaries.

Selling activity quickly accelerated in the wake of these developments and it was pretty much a one-way trade in the final 30 minutes of the session.  The major indices all closed in negative territory, led lower by the financial sector, which dropped 1.1%.

The industrials sector, up 0.3%, was the best-performing of the economic sectors on Wednesday, having been propped up by the positive moves made in Boeing (BA 82.87, +1.91) and UPS (UPS 72.02, +1.10) following their earnings reports.

The Gov't cut short term interest rates hoping that the financial market's will improve and they also want to see if the short-term rate cut will affect the spending habit's of consumer's.  Keep in mind that the reduction of 1.25 effects equity lines, credit cards, personal loans etc.

If the economy does not show signs of growth in the coming quarter's, we will see interest rates fall to records level's again. Interest rates are currently at a 4 year low and could approach the 2003 level's.

If you know of anyone who might benefit from meeting with me to discuss buying, selling, or refinancing their loan in the next 3-6 months, please let me know!

Sincerely,

Heath Lefort-Personal Financial Advisor

401-461-9987


Posted by Heath Lefort - Personal Financial Advisor on January 31st, 2008 7:30 AMPost a Comment (0)

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Fed cuts rates 75 basis points in emergency move!
January 22nd, 2008 10:00 AM
Marketwatch
WASHINGTON (MarketWatch) -- Hoping to halt a market meltdown and prevent a recession, the Federal Reserve lowered its overnight lending rate by three quarters of a percentage point to 3.50% on Tuesday in a rare move between formal meetings.

The 75 basis-point surprise cut came after global financial markets sold off in dramatic fashion on Monday on fears that bad bets in credit markets could spread further and drive the U.S. economy into recession. See full story on London markets.

"The committee took this action in view of a weakening economic outlook and increasing downside risks to growth," the Federal Open Market Committee said in a statement. Read the text of the statement.

The Fed also lowered its discount rate by 75 basis points to 4%.

It was the largest cut in the federal funds rate since 1982, after the FOMC had driven rates to 20% to kill inflation.

U.S. stocks opened with huge losses. The Dow Jones Industrial Average was down more than 450 points, or more than 3%. Treasurys rallied.

"This move is not an instant fix," wrote Ian Shepherdson, chief U.S. economist for High Frequency Economics. "The economy is still staring recession in the face, but at least the Fed now gets it."

With the move coming just eight days before the next scheduled meeting, "there can be no doubt that the timing of this morning's move is aimed at supporting global financial markets after yesterday's global equity meltdown," wrote Joshua Shapiro, economist for MFR Inc.

Some traders said the Fed's move sniffed of panic. "I think that there's an element of thinking that, if the Fed is so worried that it is cutting rates, then that is feeding into fears that the U.S. economy is in really bad shape," said David Page, a strategist at Investec Securities in London.

After a conference call Monday evening among the 10 voting members of the Federal Open Market Committee, the FOMC released a statement early Tuesday saying downside risks to growth remain. One member of the committee, William Poole, president of the St. Louis Fed, voted against the move. One other, Fed Gov. Frederic Mishkin, was absent.

"While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households," the FOMC said. "Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets."

"Appreciable downside risks to growth remain," the statement said. "The committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks."

The statement barely mentioned inflation, only saying that the FOMC expects inflation to moderate and will monitor inflation carefully.

As expected, the Bank of Canada cut its key overnight rate by quarter percentage point to 4% at its regularly scheduled meeting.

By cutting rates now instead of waiting a week, the FOMC showed that it's much more concerned about the financial markets and the economy slipping into recession than it was just a month ago, when the committee cuts its target for the federal funds rate by a quarter percentage point to 4.25%.

Over time, rate cuts should stimulate economic growth by making it cheaper to borrow money for consumption or investment. Banks typically lower their prime lending rate for their best customers in lockstep with the Fed. Many consumer and business loans, however, are based on interest rates set in competitive markets, which may or may not follow the Fed's lead.

The Fed has now lowered interest rates by 1.75 percentage points since Sept. 18.

The rate cut wasn't a complete surprise to markets that have been anticipating aggressive rate cuts from the U.S. central bank, though the timing of any inter-meeting rate cut was uncertain.

On Jan. 10, Fed Chairman Ben Bernanke had signaled the Fed's willingness to act boldly when he said it would "remain exceptionally alert and flexible" and was prepared "to take substantive additional action as needed to support growth."

"The rationale for this move today was in Mishkin's speech a week-and-half ago, which argued that at times of severe financial turmoil, policy had to be '"timely,' 'decisive,' and 'flexible,'" wrote John Ryding, chief U.S. economist for Bear Stearns.

It was the first time since Sept. 17, 2001, that the Federal Open Market Committee had changed the federal funds target rate outside of a regular meeting.

The next meeting is scheduled for Jan. 29 and 30. Markets anticipate another rate cut, possibly a half-point cut, at that time.

"The next move or moves depends on the financial markets more than the economic data," wrote Roger Kubarych, an economist for UniCredit Markets


Posted by Heath Lefort - Personal Financial Advisor on January 22nd, 2008 10:00 AMPost a Comment (0)

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Total Mortgage Demand Surges as Loan Rates Fall, Holidays End
January 9th, 2008 6:42 PM

Mortgage Bankers Association weekly index of mortgage application activity for the week ended January 4, 2008 (Change from the previous week).

  • All applications: 706.0, up 32.2% from 533.9;
  • Purchase loan applications: 414.0, up 14.7% from 360.8;
  • Refi loan applications: 2,494.2, up 53.9% from 1,620.9.
  • ARM share: 9.3% of total applications down from 9.8%;
  • Refi share: 57.7% of total applications up from 50.9%;
  • 30-year fixed rate: 6.07% down from 6.17% (per Freddie Mac);
  • 1-year ARM rate: 5.47%, down from 5.53% (per Freddie Mac)

 Four-week moving averages (change from the previous week):

  • Total applications: 624.4, down 4.1%;
  • Purchase loan applications: 397.7, down 3.5%;
  • Refi loan applications: 2,031.0, down 4.5%.

         
Trend:

Total mortgage demand soared, shaking off the holiday hangover and basking in lower interest rates, registering its first weekly increase in a month.

The purchase index also improved for the first time in a month to its highest level in three weeks.

The refi index which had tumbled 43.7% in just three weeks led the surge with but still fell short of its 2007 high of 2,879.8 for the week ended December 7.

The increases came as the rate for a fixed rate loan fell sharply after three steep weekly increases. At 6.07%, the rate for a 30-year fixed rate loan dropped to its second lowest level since October 2005 (6.03%, had dropped to 5.96% at the beginning of December 2007); the rate for a one-year had risen from 5.46% to 5.53% in the last three weeks of December.

The refi share of all applications jumped to the highest level since March 2004.
 

What it means:

The sharp increase in overall mortgage demand is easy to misread with the noise of holiday shortened weeks, but the near seven percentage point increase in the share represented by refinance applications is the story here.

The jump in refi application activity comes on the heels of a sharp increase in credit card borrowing (in November) reported by the Federal Reserve Tuesday and a decline in personal savings (translation: borrowing) in November, the first since August 2006. The MBA application index still has noise in the background in the form of tighter lending standards which induce multiple applications from borrowers.

Since lenders often look to how applicants handled similar obligations in the past, the applications may not turn into loans with data showing increases in delinquencies in home equity loans and lines of credit. The bottom line remains cautionary for credit card lenders who are often paid off with the proceeds of refinances. That the spike in application activity didn’t come from an increase in purchase applications doesn’t suggest a quick recovery of the housing sector.


Posted by Heath Lefort - Personal Financial Advisor on January 9th, 2008 6:42 PMPost a Comment (0)

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Bush, Paulson unveil plan to aid troubled borrowers by Heath Lefort
December 6th, 2007 5:07 PM

 

The mortgage industry has agreed on a plan to help some struggling borrowers keep their homes, Bush administration officials said Thursday.

Elements of the plan include a five-year freeze on interest rates for certain subprime loans, many of which are expected to reset to higher rates in the months ahead.

Treasury Secretary Henry Paulson said that the plan involves no government money, and that he expects companies that service loans to abide by guidelines for refinancing and modifying subprime mortgages for able borrowers.

Speaking at the White House, President Bush said that the plan was not a bailout for investors.

Under the plan, negotiated by the Treasury and White House with representatives from the private sector, borrowers will be able to refinance an existing loan into a new private mortgage or be moved into a loan from the Federal Housing Administration.

In 2008 and 2009, about 1.8 million subprime mortgages will reset to higher interest rates, according to Paulson. Many foreclosures are expected to follow.

The plan is estimated to help as many as 1.2 million homeowners avoid foreclosure, he commented.

"It is in everyone's interest -- homeowner, servicer, investor -- to develop a market-based approach to avoid foreclosures that are preventable," Paulson said at a Thursday afternoon news conference. "The approach announced today is not a silver bullet."

He added the administration would continue to work on the problems created by the slump in housing and credit markets.

Five-year plan

The five-year freeze, Paulson said, would give borrowers a chance "to work through this housing cycle."

Speaking to reporters after the announcement, Wells Fargo Home Mortgage Co-President Michael Heid said that it would take "a matter of days" for a borrower to work out new terms on a loan.

Servicers are modifying "today," according to Heid, a member of the housing-industry group that worked out the plan.

Consumers must reach out and make contact with their servicer or a not-for-profit credit counseling agency to take advantage of Thursday's announcement, he said.

The administration, lawmakers and the industry itself have been under intense pressure to aid strapped borrowers. The subprime problem is also beginning to emerge as a campaign 2008 issue, with Democratic presidential candidates trotting out their own plans to help borrowers.

On Wednesday, Democratic front-runner Sen. Hillary Clinton said that Wall Street shares the blame for the subprime mortgage crisis and should get behind voluntary proposals to shield working families from a rising tide of foreclosures, or face the prospect of a legislative crackdown. See full story.

Democrats want more

Congressional Democrats said they welcomed the plan, but that it was incomplete.

"Not having a prepayment-penalty addressed, I think, is a flaw," House Financial Services Committee Chairman Barney Frank, D-Mass., said at a hearing Thursday.

"There is much more that still needs to be done, most essentially the funding for nonprofit counselors that the president is threatening to veto," said Sen. Charles Schumer, D-N.Y., the chairman of the Joint Economic Committee.

Record third-quarter foreclosures

Before the administration's announcement, the Mortgage Bankers Association reported that the number of homes in foreclosure rose to a record level in the third quarter, with 1.7% of homes in foreclosure. The number of delinquent mortgage rose to 5.6%.

In remarks prepared for the news conference, Comptroller of the Currency John Dugan also said the plan is a "safe and sound practice" for national banks that service mortgages.

The administration's plan is a model "best practice" for the industry to address a number of competing interests, he added. "Most important, it constitutes another creative way to allow current borrowers to stay in their homes."

The Center for American Progress, a liberal think tank, commented that the plan fails to address the needs of people whose rates have already reset, or creditworthy borrowers with negative equity in their homes.

"The administration can and should do more," said Andrew Jakabovics, associate director of the center's economic mobility program.

The White House also has proposed allowing cities and states to issue tax-exempt mortgage bonds to refinance existing loans. Bush is calling on Congress to approve the temporary measure quickly.

I want to let everyone know that I'm advising clients how this new law will work.  I'm also helping clients get into an FHA or VA loan so they can lock into a low 30yr fixed loan.  I am a direct endorsed FHA and VA lender and my expertise is associated with FHA and VA. 

You can call me toll free 800-900-1241 ext 0 or you can e-mail me at www.alternativelendinggroup.com .  My direct number is 401-461-9987


Posted by Heath Lefort - Personal Financial Advisor on December 6th, 2007 5:07 PMPost a Comment (0)

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How to spot signs the housing crisis is nearing bottom by Heath Lefort
November 30th, 2007 6:29 PM
This week's stock market rally lifted long-suffering financial shares and home-builder stocks and was seen as a heartening sign for the battered housing market, although economists say it's only the first, uneasy step toward restoring confidence and an eventual turnaround.

A recovery may still be years away, and several other key factors need to come together before housing prices can stabilize and begin to mend. Interviews with housing and financial analysts revealed several signs that savvy investors might want to look for that would set the stage for a housing recovery.

First, financials stocks such as banks and lenders, as well as other housing sectors such as home builders, need to flatten and rebound.

"The sentiment is so negative," said Mark Vitner, senior economist at Wachovia Corp. (WB, Trade ). "The housing industry isn't going to get better until financial services improve, and there's just too many homes out there in inventory."

The economist said if construction pulls back the next two years as expected, housing supply and demand should get back in balance by the tail end of 2009, considering the glut of unsold homes currently on the market.

Another requirement is that spreads on bond yields need to come down, giving investors a better sense of safety, while the commercial real estate market has to avoid major setbacks. A plan to freeze rates on subprime adjustable-rate mortgages, if it moves ahead, would help quell fears of a surge in home foreclosures, experts said.

The projections for the credit and mortgage markets must brighten, and consumer confidence has to revive. Homebuyers need to come out this spring, but all bets are off if the economy slides into a recession. Finally, more rate cuts by the Federal Reserve in coming months would also improve the outlook, as would consolidation in the home-builder sector or foreign investors putting more money into banking and housing stocks.

First, experts agree the turmoil in credit and mortgage markets needs to settle, giving banks and lenders a chance to get their dented balance sheets back in order.

Also, liquidity must return to the so-called secondary mortgage market where banks bundle together and sell loans in packages called mortgage-backed securities, using the proceeds to fund more loans.

When mortgage markets seized up this summer, investors treated riskier mortgage-backed securities like toxic waste and they became difficult to value, in some cases being viewed as virtually worthless.

Now, some lenders getting cash infusions from investors are seen as a sign that these securities are at least being priced, and that confidence is returning to markets. Tattered lenders need to find capital at a reasonable cost so they can continue to give loans to borrowers.

The market found a glimmer of hope this week from reports that the U.S. Treasury is working with a group of banks including Citigroup Inc. (C, Trade ), Wells Fargo & Co. (WFC, Trade ) and Washington Mutual Inc. (WM, Trade ) on a plan to extend the lower introductory rate on subprime loans that is scheduled to reset higher in coming months.

About $362 billion worth of subprime adjustable-rate mortgages, or ARMs, are slated to reset higher next year after their "teaser" rates expire, according to Banc of America Securities. The rescue measure would provide relief to distressed borrowers and is designed to prevent a surge in foreclosures, which would only add to the inventory overhang and delay a recovery.

"Will the farewell to ARMs end the credit crisis? Not by itself, but it is certainly a move in the right direction," said Ed Yardeni, chief investment strategist at Oak Associates.

"The plan being floated by Treasury to temporarily freeze subprime mortgage rate resets makes compelling sense," wrote analysts at Fox-Pitt, Kelton in a report to clients Friday. "It is a necessary step to stabilize reeling mortgage markets and avoid a further downturn, as servicers struggle to cope with a cascade of current and potential foreclosures."

Markets cheered news of the ARM bailout plan and Friday's rally capped a strong week on Wall Street. Some of the biggest beneficiaries were financials and home-building stocks that have taken the brunt of the damage during the recent correction.

Embattled Citigroup shares also enjoyed a much-needed lift this week after the banking giant got a $7.5 billion cash investment from the Abu Dhabi Investment Authority, and the news boosted financials stocks across the board. Although banks are clearly not out of the subprime woods yet and more write-downs and job cuts may be looming, the foreign investment was seen as a vote of confidence.

"The Citigroup deal is a huge sentiment changer, and gives people bullets they haven't had lately," said Jon Najarian, co-founder of OptionMonster.com, a Web site that monitors trading activity.

"Banks need to continue to clean up their acts and then be ready to facilitate a housing recovery, rather than being a stumbling block," said Anita Clemons, vice president of investments at New Covenant Funds.

Banks are in a dilemma because they have subprime exposure that may have to come onto their balance sheets. That would further squeeze capital reserves and prevent banks from making loans, which would hurt the job market and spill over into housing.

"Even if the stock market goes through brief relief rallies, we haven't seen all the subprime losses yet," said Jim Swanson, chief investment strategist at MFS Investment Management.

Swanson said he's also looking at the bond market and the yield curve. He said the spread between the yields of high-yield bonds and safer Treasury bonds needs to come down. "The high-yield market is showing signs of distress," he said. "The bond market is not saying things are going to get better soon."

Andrew Clark, senior research analyst at Lipper, said the current housing downturn is unlike the most recent pullbacks in the early 1980s and 1990s. This correction has not been marked by surging interest rates or an economic recession, at least yet.

Also, thus far "the commercial side has held up relatively well," said Josh Zegen, managing partner at Madison Realty Capital. "Still, there's not a lot of transparency in the market on future write-offs, and lenders aren't stepping in like they used to." If the market for commercial properties such as offices and apartments worsens, it could crimp any improvement in residential housing.

On the other side of the equation, home buyers have to overcome their fear of taking out a loan on a house that may only end up losing value in the short term.

One of the biggest factors standing in the way of a housing recovery is buyers' lack of confidence in home prices and pessimism that a home will decline further in value after it is purchased, said Don Tomnitz, chief executive of D.R. Horton Inc. (DHI, Trade ) at a recent investment conference. The CEO added that he hasn't seen price stability yet, but that he expects it to be achieved in 2008.

"Consumers' spending and credit in recent years have been boosted by their biggest asset going up -- their home," said Kevin Divney, a portfolio manager at Putnam Investments. "We'll have to see what kind of pain flows through now."

Certainly, additional Fed rate cuts would soothe some of the sting for consumers. Also, a pickup in homebuyer traffic this spring during the sales season would provide a lift and take some inventory off the market, although activity needs to be adjusted for seasonal factors to spot a solid trend. After much hype, the last two spring seasons turned out to be busts.

The builder stocks are another sector that may tip investors off to better times, since they tend to rally before the housing market itself rebounds.

Shares of residential builders have been pummeled this year as the companies have suffered losses and huge impairment charges to write down land values. An exchange-traded fund tracking the industry, iShares Dow Jones U.S. Home Construction (ITB, Trade ), was down about 60% so far this year as of Nov. 28.

Some analysts say the downtrodden sector is a screaming bargain, but investors who've dipped a toe into builders have only found a value trap thus far as the stocks continue to fall.

Meanwhile, more grim data came out of the housing market this past week. In October, the inventory of existing homes for sale reached a 22-year high, and builders cut prices on new homes at the fastest pace in 26 years. Separately, U.S. home prices were falling in every region of the country in September, hitting cities that had been holding up relatively well in the pullback, according to the S&P/Case-Shiller price index.

"There's a huge inventory of unsold homes, and home prices are still high," said Robert Shiller, chief economist at MacroMarkets LLC, in an interview. The housing market is struggling in the aftermath of the "biggest real estate boom we've ever seen," he said.

The depth of the current housing bust has surprised many, but some investors are piling into unloved home-builder stocks in the hope they will be rewarded in the long run.

"The home builders will rally first," said Stephen Kim, an analyst who covers the industry at Citigroup Inc. "The thing that gets them to rally is that the housing situation is less worse than initially feared."

Home builders are among the most-shorted stocks right now and investors are pricing in the possibility of bankruptcy as they focus on balance sheets, liquidity and leverage. Even Kim, one of the more bullish analysts on the group, recently downgraded his near-term outlook on the group. He said it's difficult to time the bottom because the housing cycle hasn't correlated with the economic cycle, and because price cuts in the resale market are lagging far behind the market for new homes, which has already seen significant discounting.

Despite the bloodshed in home-builder stocks, and some smaller, private and Florida-based firms filing for Chapter 11, the sector could get a psychological boost from industry consolidation. Some builders have seen their debt cut into junk territory and have needed to amend their credit facilities with lenders. Judging by recent short-interest levels, those facing the greatest pressure include WCI Communities Inc. (WCI, Trade ), Beazer Homes USA Inc. (BZH, Trade ), Hovnanian Enterprises Inc. (HOV, Trade ) and Standard Pacific Corp. (SPF, Trade ).

"We will see speculation on M&A," said Najarian at OptionMonster. "A deal would be a sign that builders are on the path to recovery."

One scenario would be foreign investors buying a public home builder as a way to own a piece of the U.S. housing market. "That would be my tip-off," Najarian said. "Increased volume and trading in the housing stocks would be a good sign that the bottom is in, and home prices should start to uptick."

Clemons at New Covenant Funds said money managers are looking for a flicker of light in builder stocks, which are still seen as risky even though they're trading at or below book value.

"When we see things start to turn, the builder stocks will move before the earnings recover; that's how they behave," she said.

"We need to wring the excess out of the system, and get housing market expectations to a bottom," said Bob Doll, global chief investment officer for equities at BlackRock Inc. (BLK, Trade ).

"Markets always anticipate, and before we actually see a housing rebound, home-builder stocks will recover," Doll said. "That's the investment dilemma. If you wait for fundamentals to improve, you've missed the stocks' bottom, but you've also removed the risk of catching a falling knife."

Posted by Heath Lefort - Personal Financial Advisor on November 30th, 2007 6:29 PMPost a Comment (0)

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Fed cuts rates by a quarter point to 4.50% by Heath Lefort
October 31st, 2007 3:02 PM
Fed cuts rates by a quarter point to 4.50%
 
 
Marketwatch - October 31, 2007 2:47 PM ET

WASHINGTON (MarketWatch) -- Warning that the housing correction will intensify and slow growth, the Federal Reserve gave the economy another shot Wednesday, cutting short-term interest rates by a quarter-point.

The reduction in the federal funds rate to 4.50% is meant to spur the economy through lower borrowing costs. Lower rates should also help Wall Street firms and banks.

Stock markets sold off on the news, judging that the Fed could be finished cutting rates as the Federal Open Market Committee returned to a balanced view of the risks to the economy, with inflation a major concern again.

The FOMC statement highlighted real risks to growth, but also suggested that the committee members believe they're on top of it.

While growth has been solid, "the pace of economic expansion will likely slow in the near-term, partly reflecting the intensification of the housing correction," the Federal Open Market Committee said in a statement. Read the full statement.

This rate cut, along with the September rate cut and other recent moves by the Fed, "should help forestall some of the adverse effects on the broader economy" from the disruption of financial markets and "promote moderate growth over time," the statement said.

The statement suggests that the Fed "could be on hold for while," said Joe Carson, head of global economic research at Alliance Bernstein.

The language of the statement shows the Fed is not contemplating a recession, said Mike Moran, chief economist for Daiwa Securities America.

"They see growth moving below potential for a time and gradually moving back," Moran said.

The FOMC said some inflation risks remain. Core inflation readings have improved modestly, "but recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation," the FOMC said.

The committee returned to a balanced risk assessment, judging that the upside risks of inflation "roughly balance" the downside risks to growth. In September, the committee said conditions were in such flux that it couldn't weigh the balance of risks going forward.

Moran said the statement gave the central bank "maximum flexibility to cut rates again if financial conditions remain unsettled or if it appears the economy is slowing unduly. At the same time, the statement would allow them to reverse course if inflation flares up."

The vote was 9-1, with Kansas City Fed President Thomas Hoenig voting to keep rates steady.

Most analysts expected the quarter-point reduction. See full story.

It was the second cut in the federal funds lending rate in the past six weeks.

In its statement the Fed also said it was cutting the so-called discount rate, what the Fed charges banks for short-term loans, by a quarter point to 5%.

Though the economy grew at a 3.9% rate in the third quarter, economists are worried about growth in the fourth quarter and the first part of next year. See full story.

The Fed cut rates by a half point only six weeks ago on Sept. 18. At the time, Fed policymakers said the cut was designed "to forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets."

In the weeks that followed, financial markets appeared to believe the Fed would hold rates steady at their two-day meeting this week.

But a steady stream of poor economic indicators, coupled with continued financial market strains and the announcements of more than $30 billion in losses and write-downs by Wall Street brokerage firms from their holdings of sophisticated derivative products linked to subprime mortgages, seemed to convince investors that another rate cut was in order.

Some analysts said Bernanke gave the clearest hint of a rate cut in his speech in New York mid-month.

"The further contraction in housing is likely to be a significant drag on growth in the current quarter and through early next year," Bernanke said. Read text of Bernanke's speech

Although the votes at the Fed meetings had been unanimous, offering the veneer of unanimity, some nonvoting regional Fed bank presidents are thought to be wary of too many rate cuts out of a concern about the possibility of triggering inflation. Hoenig joined them on Wednesday, casting a vote to hold rates steady.

Several presidents are known to be worried about the so-called "moral-hazard" issue, that the Fed is helping bail out some Wall Street players from their bad bets, thus encouraging more wasteful investments in the future.

These presidents showed their dissatisfaction in a relatively obscure way, by voting against a reduction in the Fed's discount rate in mid-September. See full story.

In Wednesday's meeting, only six of the 12 regional banks requested a cut in the discount rate, which could show little support for more aggressive action ahead, Moran said.

The voting membership of the FOMC is on a rotating basis, with five of the 12 presidents voting in any given year.

Economists said the Fed didn't want to go against markets that expected a rate cut.

"They didn't want to create any surprises or confusion in financial markets," Moran said.

At some point the Fed might have to push against market expectations, but Fed watchers saw no evidence of this in Fed speeches between meetings.

Happy Halloween to Everyone!  Thank you for your business and referrals!


Posted by Heath Lefort - Personal Financial Advisor on October 31st, 2007 3:02 PMPost a Comment (0)

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Fed cuts rates by half percentage point
September 18th, 2007 4:11 PM
Fed cuts rates by half percentage point
Marketwatch - September 18, 2007 4:03 PM ET
WASHINGTON (MarketWatch) -- In a surprisingly strong move, the Federal Reserve unanimously voted to cut its overnight interest rate target by a half percentage point to 4.75% Tuesday, citing turmoil in financial markets as a threat to economic growth.

U.S. stock markets rallied on the first cut in the federal funds rate in more than four years. Financial markets and analysts had been expecting a smaller quarter-point cut.

The Fed also cut the discount rate by a half percentage point to 5.25%. Read the statement.

"Today's action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time," the statement from the Federal Open Market Committee said.

"It's definitely a bold move, particularly in light of the strength of stock market," said Mickey Levy, chief economist at Bank of America. "The Fed wanted to stay ahead of the curve" and didn't want to have to cut again before its next meeting on Oct. 30-31.

The drop in the fed funds rate is expected to be matched almost immediately by banks dropping their prime lending rates. Bank of America lowered its prime rate within minutes of the announcement. Most banks peg their prime lending rate to the fed funds rate. The interest rates on many adjustable-rate mortgages and credit cards are pegged to the prime rate.

"Developments in financial markets since the committee's last regular meeting have increased the uncertainty surrounding the economic outlook," the FOMC said.

The committee said growth had been moderate but judged that "the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth."

Ahead of the announcement, the National Association of Home Builders said confidence among builders fell to its lowest level in the 22-year history of its housing index, a sign that the housing market could continue to worsen in coming months. See full story.

The FOMC signaled that further rate cuts could be coming, saying it would monitor the situation and that it stood ready to act if necessary.

But Mike Englund, chief economist at Action Economists, said this might be the only rate cut if the credit crunch unwinds.

"Though the risks are that the Fed eases again, our best guess is that this is one and done," Englund said. He noted that the Fed statement did not contain any mention of a "bias" toward future action.

Inflation readings had improved modestly, the FOMC said, but some inflation risks remain.

On the other hand, Bill Gross, chief investment officer at Pacific Investment Management Co, said in a television interview that the Fed will likely have to cut rates as low as 3.5% to counter the weak growth that he expects over the next year and a half.

Neil Soss, global head of economics at Credit Suisse, said he expects another quarter-point rate cut by the end of the year, most likely at the next meeting on Oct. 30-31.

"Simply because the data have been on a weaker run and this is a Fed that is not looking for opportunities to sit on their hands," Soss said.

Background to cuts

What started as turmoil in the market for subprime mortgages -- those mortgages at less than the best credit quality -- has mushroomed into a global credit crunch.

Savvy and wealthy investors, hedge funds and banks found that they held subprime loans as part of complex derivative securities. Since mid-August, financial market conditions have worsened. Cost of credit has soared and its availability has been limited.

This forced the Fed to quickly switch direction. After saying in early August that inflation was its No. 1 concern, the Fed said on Aug. 17 that downside risks to growth had "increased appreciably."

Since then, concern about the economic outlook has grown and economists have been busy cutting their forecasts for the fourth quarter and early next year.

Fed Chairman Ben Bernanke said three weeks ago that the central bank is paying "particularly close attention to the timeliest indicators" to assess how the recent credit crisis and market turmoil are affecting the real economy. See full story.

In a sense, Fed officials are relying on their gut instincts as there is little firm evidence yet that the tight credit has hurt the economy.

And after the August employment report showed the first drop in payroll jobs in four years, market expectations of a rate cut were cemented. See full story.

Before the announcement, economists were leaning slightly toward the expectation that there would be a quarter-point cut, but many favored a more aggressive half-point cut, particularly after several nonvoting Fed bank presidents said they feared that any cut by the Fed would be seen as bailing out investors, thus encouraging more risky behavior in the future. See full story.

This was the first cut in the federal funds target rate since June 2003. The funds rate is at its lowest level since May 2006.

The federal funds rate is the rate banks charge each other for overnight loans to meet the Fed's reserve requirements. By buying and selling short-term Treasury bills, the Fed manipulates short-term rates in the market, allowing banks to increase or decrease the funds available for loans.

Over the last month, the effective funds rate has been lower than the Fed funds rate. Some economists said it was an extra bit of liquidity from the Fed.

Ultimately, the fed funds rate influences even longer-term rates, such as mortgages, corporate bonds and Treasury notes.

The separate discount rate is the rate it charges banks to borrow money from its discount window. Reducing the rate is seen as a way to add liquidity to financial markets. The rate, which has little impact on consumers, is set by the seven members of the Fed board of governors.

The recent financial turmoil has had a distinct global nature. The U.K. government was forced earlier Tuesday to step in and guarantee all deposits held by mortgage-lender Northern Rock after queues of customers demanded their deposits.

Posted by Heath Lefort - Personal Financial Advisor on September 18th, 2007 4:11 PMPost a Comment (0)

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BUSH ADMINISTRATION TO HELP NEARLY ONE-QUARTER OF A MILLION HOMEOWNERS REFINANCE, KEEP THEIR HOMES
September 4th, 2007 5:12 PM

BUSH ADMINISTRATION TO HELP NEARLY ONE-QUARTER OF A MILLION HOMEOWNERS REFINANCE, KEEP THEIR HOMES
FHA to implement new "FHASecure" refinancing product

WASHINGTON - President George W. Bush today announced that HUD's Federal Housing Administration (FHA) will help an estimated 240,000 families avoid foreclosure by enhancing its refinancing program effective immediately. Under the new FHASecure plan, FHA will allow families with strong credit histories who had been making timely mortgage payments before their loans reset-but are now in default-to qualify for refinancing.

In addition, FHA will implement risk-based premiums that match the borrower's credit profile with the insurance premium they pay-i.e., riskier borrowers pay more. This common-sense, risk-based pricing structure will begin on January 1, 2008.

"Many hard-working American families who were able to make their mortgage payments under the initial teaser terms of the exotic loan are now struggling to make ends meet because their rates have doubled or tripled," said HUD Secretary Alphonso Jackson. "FHASecure will bring stability to the housing market and give eligible families who were in good financial standing before their loans reset a chance to keep their homes."

The combination of FHASecure and risk-based premium pricing will permit FHA to return to the role it was originally designed to play, bringing stability to the real estate market by helping break today's cycle of foreclosures and price depreciation and creating much needed liquidity in the now-constricted mortgage market.

FHA has recently experienced a substantial increase in the number of conventional borrowers refinancing into FHA products. With FHASecure, it can help even more. The number of these refinancing transactions has tripled since the start of 2006. FHA's transactions are projected to surpass 100,000 loans by the end of the fiscal year. To date, these figures do not include refinances for delinquent borrowers.

The FHASecure initiativewill operate under the same safe guidelines as the FHA's existing mortgage insurance program without affecting FHA's financial health. Eligible homeowners will be required to meet strict underwriting guidelines and pay a mortgage insurance premium, which offsets the risk to FHA's insurance fund at no cost to the taxpayer.

The risk-based insurance premium structure will further expand FHA's reach to additional underserved borrowers, particularly minorities and first-time homebuyers who have been disproportionately lured into exotic mortgages, and enhance the FHA's overall risk management. The move to risk-based premiums ensures that FHA remains on solid financial footing as a self-financed agency for the long-term.

FHASecure, like all FHA products, will be underwritten to ensure the borrowers have the ability to repay the loan, will require escrow for taxes and insurance, and will continue to offer unprecedented foreclosure prevention assistance. The FHA has never permitted and will not include pre-payment penalties or teaser rates that are common in exotic mortgages and have caused much of the current market troubles.

To qualify for FHASecure, eligible homeowners must meet the following five criteria:

1. A history of on-time mortgage payments before the borrower's teaser rates expired and loans reset;

2. Interest rates must have or will reset between June 2005 and December 2009;

3. Three percent cash or equity in the home;

4. A sustained history of employment; and

5. Sufficient income to make the mortgage payment.

"FHASecure is designed for families who are good borrowers but were steered into high-cost loans with teaser rates," said Assistant Secretary for Housing-FHA Commissioner Brian Montgomery. "These homeowners, many of whom are minorities, need a safe, affordable mortgage product that will help build wealth. All FHA borrowers pay mortgage insurance premiums to offset claims to the FHA insurance fund and ultimately prevent risk to the taxpayer."

FHASecure will also bring much-needed liquidity to the mortgage market. FHA anticipates more lenders will offer FHA-insured loans, pool them, and securitize them with the Government National Mortgage Association (Ginnie Mae), which has the full faith and credit of the U.S. government. This guarantee makes Ginnie Mae's mortgage-backed securities the safest on the market and helps to channel greater capital into the housing market, benefiting U.S. homeowners.

Since its inception in 1934, FHA has helped almost 35 million people become homeowners, making it the largest insurer of mortgages in the world. The 109th Congress introduced the Expanding American Homeownership Act in June 2006 which would enable FHA to be a safe option for more underserved low- and moderate-income and minority families so they can achieve the American Dream of homeownership. Today, President Bush also urged Congress to quickly pass the Administration's FHA modernization proposal to help more families in need.

For more information about FHASecure, please just call or e-mail


Posted by Heath Lefort - Personal Financial Advisor on September 4th, 2007 5:12 PMPost a Comment (0)

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U.S. Mortgage Rates drop
July 26th, 2007 6:26 PM
U.S. mortgage rates drop
Marketwatch - July 26, 2007 11:40 AM ET

CHICAGO (MarketWatch) - Mortgage rates dropped this week, with Freddie Mac attributing the fall to market concerns of continued weakness in housing demand.

Data released Thursday showed the 30-year fixed-rate mortgage averaging 6.69% for July 20-26, down from the previous week's 6.73% average. The mortgage averaged 6.72% a year ago. The 15-year averaged 6.37%, down slightly from last week's 6.38% but above 6.34% a year ago.

The softening rates came after further evidence of sluggish housing demand, Freddie Mac vice president and chief economist, Frank Nothaft, said Thursday.

"For example, building permits fell last month to the slowest pace in a decade, and more recent data on June sales of existing home showed a fourth consecutive monthly decline," he said in a news release.

Five-year Treasury-indexed hybrid adjustable-rate mortgages averaged 6.30%, down from last week's 6.35% average and below 6.35% a year ago. The one-year Treasury-indexed ARM averaged 5.69%, down from last week's 5.72% and below 5.78% a year ago.

To obtain the rates, the 30- and 15-year fixed-rate mortgages, along with the five-year ARM, required payment of an average 0.4 point. The one-year ARM required payment of an average 0.5 point. A point is 1% of the total loan amount, charged as prepaid interest.

Rates easing from previous highs

Increases in mortgage rates last month may have contributed to the continued sluggishness in housing, Nothaft said.

"Several factors contributed to the softening in housing markets this spring," Nothaft said. "In addition to the tightening of lending standards earlier this year -- especially on subprime loans -- the 40-basis-point jump in rates on 30-year fixed-rate mortgages in June may have deterred potential buyers."

According to a separate survey by the Mortgage Bankers Association, mortgage application volume was down a seasonally adjusted 3.6% last week, compared with the week before. See full story.

So far this year, mortgage brokers have been closing fewer non-traditional or subprime loans than they did in 2006, according to a report earlier this week from the National Association of Mortgage Brokers.

Subprime loans made up an 11% share of all mortgages offered in April, NAMB said, while in 2006, 13% of mortgage loans were subprime.

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Heath Lefort


Posted by Heath Lefort - Personal Financial Advisor on July 26th, 2007 6:26 PMPost a Comment (0)

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10-year yield falls below 5% on Bernanke, subprime concerns by Heath Lefort
July 18th, 2007 4:31 PM
10-year yield falls below 5% on Bernanke, subprime concerns
Marketwatch - July 18, 2007 4:19 PM ET
 

NEW YORK (MarketWatch) -- Treasury prices rose sharply Wednesday, pushing the yield on the benchmark 10-year note below 5%, on renewed concerns over the U.S. subprime mortgage market and after the Federal Reserve Chairman said that core inflation should edge lower.

Two Bear Stearns Cos. hedge funds that made big bets in the subprime mortgage market are worth virtually nothing, according to a letter the investment bank sent to clients. Fed Chairman Ben Bernanke told Congress that the situation would likely get worse before getting better. See full story.

"Subprime jitters and worries of another credit meltdown are keeping yields in check," said Kevin Giddis, managing director of fixed-income at Morgan Keegan.

The benchmark 10-year Treasury note ended 10/32 higher at 96 02/32, while its yield $TNX stood at 5.012%, down from 5.077% late Tuesday. Bond prices move inversely to their yields.

In intraday trading, the 10-year's yield had dropped as low as 4.991%, the lowest level since July 3.

The 30-year bond rallied 19/32 to 94 21/32 with a yield $TYX of 5.103%.

On the short end, the 2-year note finished up 3/32 at 100 02/32 with a 4.835% yield.

Bond-bullish

Bernanke, in prepared testimony to the House Financial Services Committee, said that core inflation "should edge a bit lower, on net, over the remainder of this year and next year."

"If energy prices level off as currently anticipated, overall inflation should slow to a pace close to that of core inflation in coming quarters," he said. See full story.

On growth, the Fed chairman said the economy should expand at a "moderate pace" over the second half of 2007 and "strengthen a bit" next year.

"In terms of marginal shift in rhetoric, the prepared testimony is bond-bullish," said T.J. Marta, fixed-income strategist at RBC Capital Markets.

"The statement expressed concern that housing correction might continue longer than expected and weigh on spending," he said.

Subprime worries

The ABX "BBB" 07-1 index, which measures subprime-related bonds, sank to a fresh low amid persistent worries about deteriorating loans in that industry.

Following the reports on Bear Stearns, Punk Ziegel & Co. analyst Richard Bove downgraded the top Wall Street firms to sell from market perform, including Goldman Sachs (GS), Lehman Brothers (LEH), Merrill Lynch (MER) and Morgan Stanley (MS).

In addition, credit-ratings agency Moody's put the ratings of 13 tranches of eight deals from Bear Stearns on review for possible downgrade. These deals are mostly backed by Alt-A mortgage loans, which are a step higher in quality from subprime loans.

Consumer prices

Earlier, government bonds also found support after government reports showed as-expected core consumer prices.

U.S. consumer prices increased a moderate 0.2% in June, with falling energy prices offsetting rising food prices, Labor Department data showed. Excluding volatile food and energy prices, the core consumer price index also increased 0.2%. Economists had been expecting the headline CPI to rise 0.1% and the core rate to rise 0.2%. See full story.

Separately, the Commerce Department said U.S. housing starts rose in June, beating analysts' expectations, but building permits fell, pointing to a mixed housing picture last month. See full story.

Starts of new homes rose by 2.3% to 1.467 million, the quickest pace since April. Building permits, considered a forward-looking housing indicator, sank by 7.5% in June to an annualized pace of 1.406 million. Analysts surveyed by MarketWatch had expecting starts to fall to 1.45 million and permits to drop to 1.48 million.

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Posted by Heath Lefort - Personal Financial Advisor on July 18th, 2007 4:31 PMPost a Comment (0)

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Mortgage-insurance tax status alters loan math
June 7th, 2007 9:01 PM
 
As of Jan. 1, private mortgage insurance is tax deductible. This is something worth mentioning in your next PMI article for your readers. Karl Holub, senior mortgage consultant, Accurate Finance, Buffalo Grove, Ill.

Answer: Sure is. Premiums not just on private mortgage insurance but also government insurance are tax deductible for the first time ever. But for now the write-off is good for the 2007 tax year only and not everybody is eligible. Still, that fact now requires borrowers to think a little harder about which loan is most beneficial.

Private mortgage insurance is required by lenders willing to allow borrowers to put up less than 20% of the purchase price or, in the case of owners wishing to refinance their properties, 20% of the home's appraised value. Actuarial studies have shown that the less skin borrowers have in the game, the more likely they are to default on their monthly house payments. But since it is so difficult and time consuming for most people to come up with enough money for a standard 20% down payment, lenders accept mortgage insurance as a substitute for the lack of cash.

The task of saving for a down payment is particularly tough on first-timers. Unlike repeat buyers, who often can avoid mortgage insurance by using some or all of the equity they've built up in their current residence to meet the 20% threshold, rookies have to scrimp and save every nickel they can get their hands on -- or borrow from friends and relatives.

According to Mortgage Insurance Companies of America, which represents six of the nation's seven private insurers, the typical buyer can purchase a house 10 years sooner by using mortgage insurance.

While the coverage protects lenders against the possibility that the borrower will not make payments as promised, it is the borrower who pays the freight, and it isn't cheap. The cost varies widely, depending on a number of factors: How large the cash down payment, the type of mortgage and the amount, or "depth," of coverage required by the lender. On a single-family home at the median price of $224,500, the cost of private insurance coverage ranges from $50 to $100 a month.

Often the fee is so expensive that lenders recommend taking out two loans, a primary mortgage at 80% of the purchase price and a second lien at a somewhat higher rate to cover the difference between the required 20% down payment and the amount of cash the borrower can put into the deal.

These so-called "piggy-back" loans can sometimes be cheaper than mortgages with insurance because interest on both loans is tax deductible. But they have their drawbacks, too. They require two closings, so settlement fees are higher. And they must be paid back in full. They cannot be canceled like mortgage insurance, which can be jettisoned when the difference between the outstanding loan amount and the current value of the property reaches a certain point.

Tax arithmetic

Of course, the best way to determine which product is best for your situation is to do the math. But this year, anyway, part of the equation involves the ability to write off a portion of your mortgage insurance premiums.

That may not be as great as it sounds, however. For one thing, it's not a dollar-for-dollar write-off. Like mortgage interest, it is a "below-the-line" deduction that is based on your tax bracket. So, if you are in the 31% bracket, your actual tax benefit is only 31 cents on every dollar of insurance premium.

For another, you can claim the write-off only if you file an itemized return. Most homeowners do, because the tax-deductible mortgage interest and property taxes they pay are usually greater than the standard deduction. But if the standard deduction is more beneficial, the MI deduction is useless.

And one more thing: The deduction is limited to borrowers with adjusted gross incomes of $109,000 or less. You will be eligible for the full deduction if your adjusted gross income is $100,000 or less. But for every $1,000 of income above the $100,000 threshold, your write-off for mortgage insurance will be reduced by 10%.

Despite all this, the average annual savings for taxpayers taking the mortgage interest write-off will be in the $300 to $350 range, according to MICA. Not a lot, but not pocket change, either.

There are a few other qualifications worth mentioning as well:

The write-off applies only to mortgages on a principal residence and one vacation property held for the personal use of the taxpayer for 14 days or 10% of the days it is rented, whichever is greater.

It applies to refinances up to the original loan amount. This could include first and second mortgages but not cash-out refinances. When refinancing a piggy-back loan, the original loan amount is considered the sum of the first and second mortgages.

It applies to move-up borrowers, not just first-timers. But investor loans are not eligible.

There is no loan limit. The only ceiling is on the taxpayer's income.

The deduction does not apply to lender-paid mortgage insurance in which the premiums are built into the interest cost of the loan. The cost of LPMI is already deductible as interest.

Finally, if you prepay a year's worth of premiums at closing, which is a popular option, or choose to finance the entire premium by rolling it into the loan amount, only the amounts allocable to the period between the closing date and the end of the 2007 tax year will be deductible. You can't write off the whole amount in one year.

At the same time, there is a chance that Congress could extend the write-off beyond the one-year trial period. The broad coalition of tax, consumer, civil rights and civic groups that persuaded lawmakers to give the deduction a shot are now busily at work seeking an extension, so deductions beyond 2007 are a possibility.

"Making mortgage insurance tax deductible will amount to real savings for people who need it most -- families who've worked hard to get into their first homes," says Peter Sepp of the National Taxpayers Union. "Our tax code has long recognized the importance of allowing costs associated with home financing to be tax deductible, and mortgage insurance should be no exception, Congress should uphold this principle by extending the federal tax deduction for mortgage insurance."


Posted by Heath Lefort - Personal Financial Advisor on June 7th, 2007 9:01 PMPost a Comment (0)

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