Marc's Mortgage Matter's

Friday is the traditional start of the holiday shopping season, although it seems some stores like Costco have had a holiday motif ever since Labor Day. No economy can recover without consumers, which still make up about 70% of the U.S. economy, but we are still grappling with increasing unemployment, part time work, pay cuts, and empty commercial buildings

Do you have a 401(k) plan? It is the most popular retirement savings vehicle in the US, with about 65 million, or an estimated 40%, of private sector employees having one. It is named after the section of the IRS code, and came about in 1978 after Congress provided for taxpayers to receive a break on deferred income. In 1981 the IRS allowed employees to defer part of the pretax salary into their retirement plan. Most are offered at a lower cost than a traditional pension plan, and of course billions of dollars have moved from mattresses into the financial markets. But do they make investors smarter? Of course not – for better or worse, many companies encourage employees to use their 401(k) plans to invest in the company’s stock by offering discounts and other plans. Employees of companies like Enron, Countrywide, WorldCom, Lehman Brothers, Fannie Mae, Freddie Mac, etc. were encouraged to, in effect, double down instead of diversifying, not only relying on the company for employment but also hoping to rely on the stock during their retirement. So as we come up on the end of the year, and employees are realizing that they can put more money into their 401(k) plans, they should be careful where it goes.

But speaking of retirement plans, Many Lenders requires evidence of liquidation when a borrower’s funds to close are coming from a “401(k), IRA or other acceptable retirement account, regardless of documentation required by Total Scorecard. Loans will not be cleared-to-close until acceptable evidence of liquidation is provided. Document liquidation with the following: a copy of the distribution check and evidence of deposit to the borrower’s bank account or a copy of the retirement account showing withdrawal and evidence of deposit to the borrower’s bank account.

The bond market has low rates, the stock market has improved dramatically this month, yet the unemployment rate is hitting new highs. Many experts believe that the “odd man out here” is the stock market. The Fed and the Treasury have placed a huge bet on a recovery driven by asset prices. Stock prices have improved because corporate earnings are up due to cost cutting measures. The biggest single cost they’re cutting is their payrolls. Apparently some companies are cutting payrolls even below where they were 3-6 years ago, either outsourcing the work to other countries, contracting it out, or using automation. So obviously productivity looks great because companies are generating almost as much output with fewer workers and fewer hours. And if a large company can borrow money cheaply, it’s easy to substitute capital for labor, and to buy foreign assets with cheap American money.

Botton Line: A holiday-shortened week was nonetheless packed with economic data. While there is a nascent recovery forming, it seems likely to be a slow, grinding affair. Full recovery, one which involves wider swaths of the economy -- may not occur until next year some time. In the interim, prominent government support for the nation's housing markets does seem to be having some beneficial effects, $8,000 "first time" housing tax break, and low mortgage rates are chief among those supports. 

Low mortgage rates will be with us at least until the Fed's MBS purchasing program comes to a close in March, when they will probably firm somewhat. How much rates firm squarely depends upon the private market's appetite for these kinds of investments, which still have considerable risk attached with them. Aside from mortgage rates, low market interest rates should remain with us for a while. Mortgage rates will wander aimlessly next week and are just as likely to rise a few basis points as to fall by a like amount.

Happy Thanksgiving! Even though there are many troubles here and across the world, it's a good time to pause and give thanks. Despite trying times, we do live in a great country of generous and generally prosperous people.

If you have a job and still have equity in your home, you may be able to take advantage of some of the most attractive refinancing conditions ever. If you want to buy a home, affordability is at levels you may not have experienced in your (adult) lifetime. Consider taking advantage of these opportunities as they won't last forever.

Four Catholic men and a Catholic woman were having coffee.

The first Catholic man tells his friends, "My son is a priest. When he walks into a room, everyone calls him 'Father'."
The second Catholic man chirps, "My son is a Bishop. When he walks into a room people call him 'Your Grace'."
The third Catholic gent says, "My son is a Cardinal. When he enters a room everyone says 'Your Eminence'."
The fourth Catholic man then says, "My son is the Pope. When he walks into a room people call him 'Your Holiness'."
Since the lone Catholic woman was sipping her coffee in silence, the four men give her a subtle, "Well....?"
She proudly replies, "I have a daughter, slim, tall, 38D, 24" stomach and 34" hips. When she walks into a room, people say, ‘Oh, My God’.”

A co-worker recently asked me about "instant messaging". I told him that the only instant messaging that I do is with my middle finger. (Illustration not necessary.)

When speaking to realtors in many parts of the nation, they admit that foreclosures and short sales continue to be a key part of the housing activity in their area (not necessarily certain NYC neighborhoods). Many analysts feel that the pace of short sales is likely to increase, especially given market conditions and the opinion that short sales are an alternative to foreclosure that can benefit the borrower and the lender. The lender sees potentially lower losses on the loan, and the borrower avoids the stigma of having a foreclosure on their credit history. The government continues to use various tools, such as modifications or foreclosure moratoria (moratoriums?) to prevent more loans from entering the REO market.

The short sale option is mostly offered to borrowers who are ineligible for or have failed to succeed in loan modifications, or just choose not to be modified and are certain to enter foreclosure (or are already there). The program can be economically beneficial to both parties involved. For the servicer, the four main costs involved in selling the house are possible further depreciation in a declining market, a discount to the overall market when sold, the cost of principal and interest advanced to the trust until the house is sold, and repair and maintenance costs. Foreclosures which turn into REO situations typically take longer than a short sale, exposing the parties to more possible depreciation, and few banks & institutions are in the business of owning real estate. And in a foreclosure, servicers find that the expenses associated with the liquidation and repair costs are significant, given that foreclosed upon borrowers are unlikely to maintain the property. Most of the benefits of a short sale are due to the shortened timeline and cooperation from the resident. The house would also potentially attract better bids, as it is being actively maintained and lived in.

From the troubled borrower’s viewpoint, they have to decide among a foreclosure or short sale, staying in the house for free until evicted, staying in the house until it is sold in a short sale. A short sale will have a lesser hit on their credit history, and probably be able, if they really want, to buy a house after a few years. Of course there are emotional differences between a foreclosure and a short sale, potential deficiency judgment issues, the stigma of having been foreclosed upon, and tax implications of forgiven debt. The lender typically reports a successful short sale differently from a foreclosure to the credit bureaus although if the loan had gone deeply delinquent prior to completion of a short sale, the hit to credit history would already be significant and, thus, not much different from foreclosure. The biggest advantage to a borrower when opting for a short sale is the timeframe within which a new mortgage loan can be taken out: two years versus (I believe) five for a foreclosure.

Right now, companies all over the US are talking about next Friday. Either the companies are closed, and the employees have the day off to go spur the economy, or companies are open. Those that are open may have low seniority people at the desks, or people who don't care about taking the day off and would rather "bite the bullet" and come in for the day after Thanksgiving. US Postal service is in effect, and therefore it counts as a mortgage rescission day. 

Bottom Line: -- Although one might have thought that everyone knew that a sluggish economic recovery is on tap, a reiteration of this by Federal Reserve Chairman Ben Bernanke on Monday seemed to push some investors out of equities and back into bonds, driving yields and mortgage rates downward. 

Conforming 30-year fixed slipped to the 5% mark, the 5th time they've done so this year, and have now matched 2009 lows. This is occurring despite an improving economy, which usually brings somewhat firmer interest rates.

Certainly, the economic news out this week didn't suggest that Mr. Bernanke's assessment was incorrect. Growth seems to be weakly inching forward in a still-fragile way, no matter what the last GDP report had to say.
The key to the recovery is housing, which remains in poor shape. According to the Mortgage Bankers Association of America, mortgage delinquencies are again at record highs for the third quarter as generation-high joblessness continues to pressure homeowners.

All this is coming despite unprecedented levels of support for housing. The MBAA also noted that the level of applications for mortgages to buy homes has declined for the past six weeks. This may be because the tax credit for "first time" homebuyers expired; if so, the resumption and expansion of the credit into next year may revive some demand, but that probably won't occur until we get past the holiday season.

Like most of America I’ve gained a little weight lately, so I decided that I needed to figure out an exercise routine. I happened upon this one:

“Begin by standing on a comfortable surface, where you have plenty of room at each side. With a 5-LB potato sack in each hand, extend your arms straight out from your sides and hold them there as long as you can. Try to reach a full minute, and then relax. Each day you'll find that you can hold this position for just a bit longer.
After a couple of weeks, move up to 10-LB potato sacks. Then try 50-LB potato sacks and then eventually try to get to where you can lift a 100-LB potato sack in each hand and hold your arms straight for more than a full minute.
After you feel confident at that level, put a potato in each sack.

A few years ago my 80-something year old Mom talked herself out of a speeding ticket by telling the young officer that she had “to get there before she forgot where she was going”. Where does the market think rates are going? The futures market is pricing in a 78% chance that the Fed keeps rates somewhere between 0% and .25% through mid-March. So although overnight rates between banks have a very limited correlation with 30-yr mortgage rates, the odds of mortgage rates going sky-high between now and then are small.

But what the heck – why are bonds and stocks both doing well? Didn’t we just learn that the unemployment rate jumped to 10.2% and reached the highest level since 1983? The rate reflects the fact that the number of people unemployed is increasing, and unemployed people are notorious about not being able to pay their mortgage, and having their “consumer confidence” be low. And when confidence is low, those flat screen TV’s don’t fly off the shelves. If the economy is about to rebound, as the stock market thinks, then why is the Fed expected to keep low rates for an extended period of time? Many believe that the outlook for growth, or at least a strong recovery, is grim: there is just too much weakness underlying the economy for the Fed to move to higher rates as inflation is not a worry at the moment. So place your money wisely, since something has to give.

A tax credit update! Although most provisions are the same, apparently there is a facet of the recent extension that is retroactive to November 6. Please check out this site, as the start date for the $6,500 credit is November 6th.                http://www.federalhousingtaxcredit.com/faq2.php

From Freddie Mac (Should go industry-wide i.e. Fannie Mae etc.) : Today, we are announcing that our base conforming loan limits will be maintained at their current 2009 levels for 2010, with the maximum loan limit for a 1-unit single-family property remaining at $417,000. The temporary high-cost loan limits for properties located in designated high-cost areas will remain unchanged for 2010 as well...the loan limits in designated high-cost areas are the higher of the temporary limits established by the Economic Stimulus Act of 2008 (maximum of $729,750 for 1-unit single-family properties in the contiguous United States) and the permanent limits established by the Housing and Economic Recovery Act of 2008 (maximum of $625,500 for 1-unit single-family properties in the contiguous United States)."

Botton Line: November 15, 2009 -- Mortgage rates eased back a little bit this week. Although the price of money is quite attractive, the availability of it remains difficult for many borrowers.   For many wannabe mortgage borrowers, the structure of the market today could be likened to that of a group of penniless children staring in the candy-store window: You can look, but you can't buy.

The fact that credit conditions remain daunting comes as little surprise, as the risks of making loans to the consumer continue to remain at elevated levels. Those hoping to see some reprieve found little encouragement in the latest Senior Loan Officer Opinion Survey, released this week by the Fed and covering the third quarter of 2009. Even as financial markets are slowly healing, "About 35 percent of banks, on net, reported in the latest survey that they had tightened standards on prime residential real estate loans over the past three months," according to the survey. That's actually an increase from the 17% who reported tightening in the period ending in July.

For next week, rates probably don't move much but do seem to have a slight downward trend to them at the moment. We were a little surprised that they slipped back this week, but that may continue next week.


A man staggered into a hospital with a concussion, multiple bruises, two black eyes, and a five iron wrapped tightly around his throat.
Naturally the doctor asked him, "What happened to you?"
"Well, I was having a quiet round of golf with my wife, when, at a difficult hole, we both sliced our balls into a cow pasture. We went to look for them and while I was looking around I noticed one of the cows had something white at its rear end. I walked over, lifted its tail, and sure enough, there was a golf ball with my wife's monogram on it - stuck right in the middle of the cow's rump."
“Ah,” said the doctor, “then what?”
“Still holding the cow's tail up, I yelled to my wife, 'Hey, this looks like yours!'"
"I don't remember much after that ..."

My boss told me that I should take an "anger management" class in 2010. I told her that I was already angry enough with management.

And what do Eddie Bauer Holdings and Dunkin’ Donuts have in common? They, along with literally one million other businesses, have both received loans from commercial lender CIT Group. CIT filed for Chapter 11 bankruptcy protection, which analysts say will help bondholders and customers but not stockholders and taxpayers. Apparently we’ve put about $2.33 billion of our money into CIT, which is now the largest firm to go bankrupt after getting a federal bailout.

What are Fed Funds? These are cash balances held by banks with their local Federal Reserve Bank, typically involved in an “inter-bank sale” of a Fed fund deposit for one business day - overnight. And the Fed Funds Rate is the overnight interest rate charged by those banks with excess reserves on hand. Why would this impact the mortgage rate that James & Jen Borrower pay on their mortgage? They don’t, directly, since the credit profile of a borrower, or house, is more complicated and riskier than a bank with excess funds, and an overnight rate is obviously different than a 30 year rate.

As was expected, the FOMC kept its central message and the Fed Funds rate unchanged, noting that "economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period." Of course the current economic conditions are low rates of resource utilization, subdued inflation trends, questionable housing situation, a weak labor market, and stable inflation expectations. The FOMC (Federal Open Market Committee) reduced the size of their Agency debt (bonds issued by the agencies, not directly backed by mortgages) purchase program to "about" $175 billion from $200 billion, but is still set on purchasing $1.25 trillion of agency mortgage-backed securities. Even with this adjustment the Fed balance sheet should peak above $2.6 trillion at the end of March 2010.

The Fed sees some signs of life, just like all of us do, in certain parts of the economy, and inflation not being an issue. Conditions in financial markets were roughly unchanged, but activity in the housing sector has increased over recent months. “Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit.”

Well, the tax credit extension is about to be signed. Yesterday the House voted 403-12 to extend and expand the tax credit to include many buyers who already own homes. The Senate approved the measure Wednesday, and the White House said President Barack Obama would sign it today. “Buyers who have owned their current homes at least five years would be eligible for tax credits of up to $6,500. First-time homebuyers — or anyone who hasn't owned a home in the last three years — would still get up to $8,000. To qualify, buyers in both groups have to sign a purchase agreement by April 30, 2010, and close by June 30. The credit is available for the purchase of principal homes costing $800,000 or less, meaning vacation homes are ineligible. The credit would be phased out for individuals with annual incomes above $125,000 and for joint filers with incomes above $225,000.” As usual, consult with your accountant for further details.

Bottom Line: The Federal Reserve re-committed to keeping the short-term interest rates it controls at "exceptionally low" levels for an undefined "extended period of time." Along with the extension and expansion of the homebuyer tax credit, these important supports should help the housing market to continue to stabilize, and may even serve to promote some refinancing activity, too. However, the job market remains troubled enough as to warrant concern that there just may not be all that many people who are eligible to refinance or purchase a home in the months ahead.

A guy was sitting quietly reading his paper when his wife walked up behind him and whacked him on the head with a magazine.
“What was that for?” he asked.
“That was for the piece of paper in your pants pocket with the name Laura Lou written on it,” she replied.
“Two weeks ago when I went to the races, Laura Lou was the name of one of the horses I bet on,” he explained.
“Oh honey, I'm sorry,” she said. “I should have known there was a good explanation.”
Three days later he was watching a ball game on TV when she walked up and hit him in the head again, this time with the iron skillet, which knocked him out cold.
When he came to, he asked, “What the heck was that for?”
She replied...”Your horse called!”