Archive for February, 2009

Government tries to help, but it isn’t easy

February 20, 2009

No one will ever be able to say the government failed to act.  Obama’s stimulus plans provides several ways to help current and future homeowners.  More details of the plan can be read here, but quickly:

– $8,000 tax credit for first time home buyers who purchase a home between Jan 1, 2009 and the end of November.

– Tax credits and incentives to make homes more energy efficient

– A developing plan to help homeowners in trouble of losing their home as well as homeowners who are “at risk” of losing their home.

While these are great strides by the government to help, lenders continue to tighten their guidelines in a couple of ways.  First, more and more cities are being defined as a “declining market” making max Loan To Values at 95%, 90% or less (meaning a borrower must have at least a 5% – 10% down payment). Second, minimum credit score requirements are rising.

For some time now, borrowers were required to have a 620+ credit score to qualify for a conventional loan.  FHA and VA loans were seen as the “safe haven” for this due to their use of non-traditional credit and little or no minimum credit requirements.  Well, not anymore!

Several lenders began imposing minimum credit requirements on FHA and VA loans late last year.  The requirements began around 540… then 580… and quietly moved it up to 600.   Now, one nation-wide bank has updated their credit requirements to a minimum of a 640 score for ALL loan products (conventional, FHA, VA, etc.).   Also, they will no longer accept any forms of non-traditional credit on FHA and VA loans.

It will be interesting to see if other banks follow the lead.  Ironically as I typed this post, I received an email from a different lender who increased their FHA credit requirements to 620.

As the government works to help the economy and individuals, they must balance this act with a market/investor that does not want anything to do with loans from “risky” borrowers.  Ultimately, lenders are forced to tighten their belts (guidelines) in order to make the market/investor happy. This process must be frustrating for everyone involved – the government, investors, banks, loan originators, borrowers, etc. As the saying goes, “if it’s not one thing, it’s another.”

Clay Jeffreys is a Mortgage Consultant with Hillside Lending, LLC and writer for “Blog Pertaining to the Acquisition of a Mortgage to Purchase a Domicile.”  Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing.  For more information about available programs and interest rates, please visit www.hillsidelending.com.

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Stop me if you’ve heard this before

February 19, 2009

Imagine a country with a thriving economy spurred on by a two driving forces – over inflated property values (both commercial and residential) coupled with incredibly low interest rates. This combination resulted in credit being both cheap and readily available, which lead to massive borrowing and investing.

You may know, but hold on, it gets better, or, um worse…

Finally, the bubble burst. The repercussions lead to massive losses in the stock market, a debt crisis, declining property values, and defaulting loans. Banks endured heavy losses and many did not survive.

I know you’ve heard this before, but there’s more…

Eventually, many banks became unsustainable and a series of bank consolidations occurred. Credit became harder to get and businesses suffered resulting in higher unemployment rates.

Sound familiar? It should. This downturn began in the early 1990s in Japan. Yes, Japan faced a similar struggle in the 1990s, and the following years became knows as “The Lost Decade.”

There are similarities between the U.S. and Japan’s economic meltdowns, but there are also some major differences:

– Japan’s Finance Ministry actually raised rates to curb the unsustainable economic growth. The Federal Reserve began lowering rates to stimulate the economy when it was obvious the U.S. economy was suffering.

– Both countries required government bailouts, and within a year to two years of the downturn, the U.S. government had churned out several bailout plans for banks, the car industry, individual states, and tax payers. Japan tried to tough it out, but finally issued a government bailout in 1999 – roughly 9 years after their downturn began! It was the mother of all bailouts to the tune of $18 trillion yen (roughly $168 billion).

– Japan tried to let the markets work it out (freely) on their own. That didn’t go so well, and through the bailout, they eventually created the Resolution and Collection Corp. that bought up the bad assets from banks. Currently, the U.S. is trying to support the infrastructure instead of letting the markets decide what will and will not survive while refraining from creating a “bad bank” to purchase toxic assets from banks.

– Even though the U.S. government has an enormous head start in terms of bailouts and assistance, the U.S. financial crisis is much, much bigger than the one Japan faced.

No one really knows how long this downturn will last in the U.S. Based on similarities, one could argue the U.S. will endure its own lost decade. That said, with faster government actions, maybe it won’t last as long. If history tells us anything, it seems we may be somewhere between the beginning and midpoint of this downturn instead of nearing the end of it.

Clay Jeffreys is a Mortgage Consultant with Hillside Lending, LLC and writer for “Blog Pertaining to the Acquisition of a Mortgage to Purchase a Domicile.”  Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing.  For more information about available programs and interest rates, please visit www.hillsidelending.com.

 

The Latest Stimulus Plan

February 18, 2009

The whopping $787 Billion Stimulus Plan is now official. What does all of this mean for those who are looking to purchase or refinance a home?

– Tax Credit for Homebuyers: First-time homebuyers who purchase homes from the start of the year until the end of November 2009 may* be eligible for the lower of an $8,000 or 10% of the value of the home tax credit.  Remember a tax credit is very different than a tax deduction – a tax credit is equivalent to money in your hand, as opposed to a tax deduction which only reduces your taxable income.

* – The tax credit begins phasing out for individuals with incomes above $75,000 ($150,000 for couples filing jointly). Buyers will have to repay the credit if they sell their homes within three years.

– Tax Incentives to encourage energy savings: This is designed to help promote energy-efficient investments in homes by extending and expanding tax credits through 2010 for purchases such as new furnaces, energy-efficient windows and doors, or insulation.

– Landmark Energy Savings: Provides $5 Billion for energy efficient improvements for more than one million modest-income homes through weatherization. Some estimates show this can help modest-income families save an average of $350 a year on heating and air conditioning bills.

– Repairing Public Housing and making energy efficiency retrofits to HUD-Assisted Housing: Grants a total of $6.3 Billion for increasing energy efficiency in federally supported housing programs. Specifically, it establishes a new program to upgrade HUD-sponsored low-income housing (for elderly, disabled, etc.) to increase energy efficiency, including new insulation, windows, and frames.

– Expanding Housing Assistance: Increases support for several critical housing programs. It includes $2 Billion for the Neighborhood Stabilization Program to help communities purchase and rehabilitate foreclosed, vacant properties.

Another interesting item in the stimulus package is President Obama’s plan to help struggling borrowers before they are faced with a default on their mortgage. Statements from Obama this afternoon indicate the plan calls for up to $75 billion dollars to help up to 9 million people stay in their homes. Instead of just helping home owners who are behind on the mortgage, this plan allows help to go to those who are at risk of going into default.

A few of the details from Obama’s speech today in Arizona:

– The program is voluntary for mortgage services and investors, but there will be a few incentives such as giving a mortgage servicer $1,000 for each modification and an additional $1,000 each year (for up to three years) if the borrower stays current on their loan. Additional funds will be made available to mortgage servicers and holders for assisting at risk home owners before they fall behind on their mortgage payments.

– Obama also plans to work with Congress to change bankruptcy laws allowing judges to modify mortgages. Community advocates have been seeking this for some time now, and obviously, mortgage lenders and servicers are against it.

While this is good news for individual homeowners, it will likely be good for the housing industry as a whole. Assisting struggling borrowers before they default should help slow the wave of foreclosures, which are estimated to top two million this year. That, in turn, will help stabilize home prices.

The initial reaction by mortgage rates have been mixed.  There were substantial gains when the bill was signed as stocks showed their displeasure with the bill by tanking and bonds benefited.   Today, bond prices are all over the map and lenders are releasing higher rates only to come back and lower them a little later.  One thing is for sure, expect the volatility to continue.

Clay Jeffreys is a Mortgage Consultant with Hillside Lending, LLC and writer for “Blog Pertaining to the Acquisition of a Mortgage to Purchase a Domicile.”  Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing.  For more information about available programs and interest rates, please visit www.hillsidelending.com.

You’ve got to move it, move it

February 13, 2009

Even though the US Treasury bought billions of dollars each week in to mortgage backed securities (mbs) bonds, mortgage rates have moved slightly higher over the past six or seven trading days.   Regardless of what media and politicians have said, rates have been unable to push into the low 4’s.

The reason interest rates have not moved lower has to do with the actual mortgage securities being purchased — the government funds being used to purchase mortgage backed securities are actually buying higher rate mortgage assets (in the 6% range), mortgages that will likely be paid off through refinancing — which will allow the Feds to get some of their funds back in the short term.

The passing of the new Economic Stimulus Bill (while not necessarily providing for lower mortgage rates yet), have allowed for some stability in the mbs market, and mortgage rates are headed in the right direction. 

Over the past two weeks, I have been advising my clients and new leads that even if it makes sense to refinance, let’s wait and see what happens as the markets digest the Economic Stimulus Plan and what that means for the future of mortgage rates, the financial system, banks, etc.  With rates moving below 5% again, then I say . . .

You’ve got to move it, move it…

Clay Jeffreys is a Mortgage Consultant with Hillside Lending, LLC and writer for “Blog Pertaining to the Acquisition of a Mortgage to Purchase a Domicile.”  Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing.  For more information about available programs and interest rates, please visit www.hillsidelending.com.

 

 

Creative Accounting 102

February 4, 2009

It was reported last week that the Federal Reserve may begin buying long-term government bonds.  In this scenario, we have a federal agency that wants to purchase bonds from the Treasury — one government agency loaning to another — and both of them recording the transaction as a positive.

That sounds a bit shady to me.  Does anyone else think it sounds shady? For an in-depth analysis of this creative accounting scenario, let’s turn to Gregg Easterbrook and his comments from this week’s edition of TMQ.

Already the federal government reduces the apparent magnitude of the national debt by borrowing from the Social Security Trust Fund, issuing IOUs that are absolutely sure to be paid back! Issuing loans to yourself, then manipulating the accounting so your financial condition appears much better than it is: this is exactly what they were up to at Bear Stearns, Lehman Brothers, Merrill Lynch and the rest. The financial sector got into its current mess by borrowing excessively without accountability, then trying to cover up the details with bookkeeping gimmicks, all so the people in power could continue to enjoy money till the whole thing collapsed. Now the federal government is doing exactly the same thing.

Sometimes I wonder if Harry and Lloyd are the masterminds behind our economic policies.

Sometimes I wonder if Harry and Lloyd are the masterminds behind our economic policies.

 

I’m not a CPA, but this doesn’t come across as sound accounting practices.  Unfortunately, it seems our current dilemma brought on from Creative Accounting 101 (the missteps of Wall Street) may not deter our own government from taking everyone through the consequences Creative Accounting 102. 

Of course, this could be simply a case of politics as usual… an official says one thing but then does another and/or no follow through on the statement (for an example, Google “Paulson, Henry”). Hopefully this will be another example of saying one thing and then not following through.

Clay Jeffreys is a Mortgage Consultant with Hillside Lending, LLC and writer for “Blog Pertaining to the Acquisition of a Mortgage to Purchase a Domicile.” Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing. For more information about available programs and interest rates, please visit www.hillsidelending.com.

 

Whoever wins… we lose

February 3, 2009

That was the tagline of the famous/infamous (depending on your point of view) movie “Alien versus Predator” from 2004.  Take a look at that picture.  Talk about ugly.  On that note, there are two other equally ugly and possibly terrifying things in the news that regardless of who wins out, we all lose – inflation and deflation.

For now, inflation is definitely not a factor in the market.  The closely watched Core Personal Consumption Expenditure Index (Core PCE) came in at 0.0% for January.  This left the year-over-year Core Rate at 1.7%, which is well inside the Fed’s preferred range of 1 – 2%. 

I bet if inflation and deflation were each given a face, they would look about as scary as these two characters.

I bet if inflation and deflation were each given a face, they would look about as scary as these two characters.

 

It seems the “scary” inflation news from just a few weeks ago was slightly exaggerated.  While there could be some issues with inflation toward the end of 2009 (impacts of all the stimulus attempts, low interest rate environment, and the Federal Funding Rate virtually at 0%), it is definitely not something that needs worrying about today. 

 

But in this market, what is a day without worry?  Thankfully, we have deflation to keep us up at night.  What is deflation?  Investorwords.com defines inflation as:

          A decline in general price levels, often caused by a reduction in the supply of money or credit.

          Direct contractions in spending, either in the form of a reduction in government spending, personal spending or investment spending.

          The side effect of increasing unemployment in an economy, since the process often leads to a lower level of demand in the economy.

 

I know what you are thinking, “declining prices, that is good, right? So why is deflation bad?

 

We all know inflation is a bad thing and the Feds meticulously fight against it.  If you don’t believe me, Google “inflation calculator” and play around with some of the calculators you can find online.  If you do, you’ll discover that it takes almost $2 to buy the item that was just a dollar twenty years ago.  At this rate, that means the today’s $50,000 Lexus will cost $100,000 in 2029!  Inflation means spend today because it will cost more tomorrow. 

 

So inflation is bad, but is deflation worse?  Actually, yeah, it is.  Deflation kills the overall economy.  There is no incentive to spend today since prices will be cheaper tomorrow.  This destroys product sales and increases unemployment, which in turn intensifies this downward spiral.

 

Monday’s economic reports offered proof of deflation.  Consumer spending fell for the sixth consecutive month to -1.0% and rose just 3.6% in 2008 – the smallest gain in nearly 50 years.  Another report showed Personal Income fell by -0.2%.  Americans increased their savings rate to 3.6% of their after-tax incomes in December.  While saving is a good thing, it’s not a good thing for our consumer spending based economy. 

 

Couple high unemployment rates with the summary of those reports – lower energy prices, decline in investment spending, and reduced consumer spending – and you get signs that all point to deflation.

 

How does this affect interest rates?  From reading this blog, we all know that inflation hurts mortgage rates, but what about deflation?  Deflation is bad for economy, which is good for rates.  However, deflation also causes loads of volatility in the market, which creates an uncertain environment for all parties involved (stocks, bonds, rates, etc.). 

 

Anyone looking to buy a home should find a lender that has a float-down option on a rate lock.  If rates improve, use the float down option to make up the difference.  If you are in the market for a refinance, talk to a professional that watches the markets to find your ideal target refinance rate and time to lock in that rate!

 

Inflation and deflation… they are both a pain to deal with, and it isn’t like one is better for the economy than they other.  Regardless of who wins, the economy loses.

 

Clay Jeffreys is a Mortgage Consultant with Hillside Lending, LLC and writer for “Blog Pertaining to the Acquisition of a Mortgage to Purchase a Domicile.” Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing. For more information about available programs and interest rates, please visit www.hillsidelending.com.

 

There is a time for everything…

February 2, 2009

“A time to be born, and a time to die; a time to plant, and a time to harvest what is planted; a time to possibly overreact and a time to do nothing”…

So that isn’t exactly how it goes, but it does bring up an interesting point.  Let’s quickly compare the initial reactions of the Great Depression to our current economic plight.

Herbert Hoover received a lot of the criticism for the extent of the Great Depression.  Why – because the government was slow to respond when the stock market crashed.  Sure they eventually tried to help, but there was no immediate reaction. Since he was the President, he took the blame.  It has to be someone’s fault, right?

Fast forward almost 80 years and it seems we are going through the opposite response from the government.  From the first signs of the downturn, the Federal Reserve began cutting the Federal Funding Rate in an attempt to stimulate the economy.  When that didn’t work, politicians got involved and multiple bills were passed in hopes of stimulating the economy.  Since that didn’t do the trick, we are now witnessing the semi-nationalization of the banking industry and Obama’s stimulus package is now waiting on a vote from the Senate.

I totally agree that the government should be involved, and I completely understand that Obama wants to help turn things around now that he is President of the United States.  That said are we now reaching a point where inaction may be the appropriate action?

Most economists feel that it takes at least 6-9 months (if not years) for policies to truly show their effect on the economy.  The government has already thrown roughly $1.5 trillion at the economic downturn.  Obama’s plan is the largest to date with over $800 billion requested.  By the time the Senate is done adding “pork” to Obama’s plan, it may top $1 trillion!  With all of this action, are we reaching the point of overreaction?

Here are some questions that keep running through my head:

          Since it does take time to see how policies affect the economy, should our leaders take a break for 3-6 months and let some of this play out?  

          The first few bailout/stimulus attempts haven’t produced a lasting effect thus far.  Why are we doing another similar plan now?

          What exactly are we trying to “restart?”  The U.S. economy is currently based on consumer confidence and purchasing of goods and services on available credit. The U.S. doesn’t really make anything or export anything.  This is the economy we are trying so desperately to restart? And building off of this point…

          If we are able to restart this “Ponzi scheme” of an economy (words of Nouriel Roubini who predicted this downturn in 2006), how long will it last this time?  Will the inevitable collapse be worse the second time?

          If the new plan is passed, will our leaders stick to its original intended use or will we get another bait and switch move like Paulson did a few months ago?

          Who is going to pay for all of this?  That answer is actually kind of clear.  Sadly, it will be our children and grandchildren who will feel this burden.

These are hard but necessary questions to ask. In reality, there are no easy answers.  People are out of work, losing their homes, going hungry – and this is also a global crisis.  Call my cynical when it comes to politics, I just hope our leaders are more concerned over the state of the economy rather than making a list of items they can brag about when it is time for reelection.

Clay Jeffreys is a Mortgage Consultant with Hillside Lending, LLC and writer for “Blog Pertaining to the Acquisition of a Mortgage to Purchase a Domicile.” Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing. For more information about available programs and interest rates, please visit www.hillsidelending.com.