Inside the Mortgage World

Hear the whistle blowin'...how will the Fed's exit affect you?

Elizabeth Rose - Certified Mortgage Planning Spec - Texas (Network Funding, LP) — Wed, 31 Mar 2010 15:34:21 -0700

Today...the Federal Reserve exits the train station and ends their 15 month long buying spree of mortgage backed securities (MBS). This purchase program helped bring some stability to the housing market since its inception in January 2009.

Looking back to late 2008, mortgage rates were in the 6.5% range and housing was on a fast downward spiral. The government wanted to bring rates lower to stimulate housing, thus making it cheaper to buy or refinance homes. In order to bring rates down, there has to be an appetite for buying MBS. At that time very few investors were buying MBS, so the government stepped in as a buyer.

The Fed's entrance into the MBS market accomplished two things. First, their massive purchases drove yields higher and rates lower. Second, they brought some confidence into the market for other potential investors. How? Well, a purchasing investor has confidence he has a seller (the Fed) in case he wants to make a fast exit. It lowered the risk of getting stuck holding the bag...or bond in this case.

The result was exactly as the Fed hoped...rates moved lower. While there were periods of upward trends and intra-day volatility, mortgage rates have remained historically low. As we wrap up today, the Fed has purchased $1.25 trillion in MBS since the beginning of this program.

The Fed began unwinding there purchase program back in the fall of 2009. Originally scheduled to exit the program at the end of 2009, the Fed extended the exit date to today, March 31, 2010. They did not increase their dollar commitment, just extended the deadline. Purchases of MBS have declined from around $30 billion/week to lately about $5-$6 billion/week.

What happens after today? Where will rates go? As the Fed gravy-train pulls out of the station, it leaves a void in the market which will push interest rates higher. Think about it...less buyers means prices move lower. Lower prices on bonds mean higher interest rates for home buyers.

Another dynamic I will be watching is the Fed changing their role from being a buyer to being a seller. This could add additional pressure to the bond market. Dallas Federal Reserve President, Richard Fisher said that "the Fed must sell back those Mortgage Bonds to the market, but it is not yet time to do so." There is growing sentiment among the voting members of the Fed to start trimming their balance sheet over time.

Remember, rates are historically low and although the trend will likely be higher...rates will still remain very attractive. That combined with deflated home values continue to make this a great time to be a home buyer!

Shadow Inventory...is lurking about!

Elizabeth Rose - Certified Mortgage Planning Spec - Texas (Network Funding, LP) — Thu, 04 Feb 2010 18:06:18 -0800

There's plenty of chatter to go around regarding Shadow Inventory? And it has been defined many different ways, some of which are incorrect. So let's get our arms around it and see if we can make some sense of this. Shadow inventory is housing units that are not making it onto the public market for one reason or another.

Much speculation has taken place as to "why" these properties are not coming to market...

Lenders are overwhelmed and don't have the staff to handle the glut? Wrong answer.
Lenders are simply don't have an efficient system in place to handle this mess? Wrong again.
Lenders are arrogant and just don't care? Well, there may be some truth to that...but in this case, wrong again.

So what's the deal with lenders? And why might this Shadow Inventory be lurking about...in the shadows?

It all starts with the Banks capital ratio requirements. First - what is Capital Ratio? Banks are required by the Fed to maintain certain capital ratio's - meaning they are required to maintain a level of cash in relationship to the dollars they have loaned. The requirement is about 16-1, so they can lend 16 x the amount of cash on the balance sheet.

As a bank, if they take a loss in the form of a foreclosure, that loss goes against the capital account, reducing the amount of capital...so the bank has to raise more capital to stay in compliance, or call some loans due. And let's face it...with all the pre-foreclosures, that could be a very sizable hit to a capital account. It is easier for them to suck it up and take the monthly payment loss and carry the home a while rather than write it off and have to raise boatloads of capital.

Here is an example of how it works:

Let's say we decide to open a bank with $1,000,000 cash. That is our capital account. But we don't lend that out. We encourage people to bank with us and open a deposit account (maybe we'll pay 1/2%) and we take that money and lend it out at... say 8%. Our Bank makes the spread of 7.5%, called arbitrage. We take in as much in deposits and lend out as much as possible and keep increasing that spread. But we are limited though...we can only loan out 16,000,000 (16 x our capital account).

Even though we have tough lending practices, we still realize that some loans will lose money, some will default. When that happens, we cannot risk customer deposits, so our capital is at risk. As these losses occur, we must raise more capital. So let's assume that we have 16,000,000 outstanding and we lose $500,000 in foreclosures. That $500K comes out of our $1MM capital account...so now our capital account only has $500K and we must raise an additional $500K to be in compliance. OR...we can only lend out $8MM versus the $16MM we have outstanding. Which means we don't make as much in arbitrage because we can't have as much loaned out.

Well, as Board members of our Bank, we decide it would be easier, smarter, and cheaper to carry the loans on the books longer...maybe it cost a couple thousands per month and we can unload slowly. And maybe we get lucky while we wait, and the market turns and we unload them at a better price.

So it is safe to anticipate the banks will unload slowly instead of all at once.

Another thing to keep in mind with a potential foreclosure...The Bank is typically going to unload properties with the most amount of immediate equity. For instance, let's say a bank has 2 properties that go into foreclosure on the same day....both are $200K homes (market value today). One has an outstanding mortgage for $180K ($20K in equity), the other has an outstanding mortgage of $150K ($50K equity). The latter will be processed more quickly than the former. They will dump the mortgage for $150K and grab as much of the $50K equity sitting there, and be a little more patient with the home that has only $20K equity. So people who have 100% financing or are upside down in their homes are the safest bunch from a speedy foreclosure.

Need more info? Just give me a call or email me!

Air, Food, Water...and a Job Please!

Elizabeth Rose - Certified Mortgage Planning Spec - Texas (Network Funding, LP) — Thu, 28 Jan 2010 14:11:42 -0800

Last night many American's tuned in to Obama's first State of the Union Address. With concerns of jobs and the economy on our minds...it was impossible to miss this statement, "Jobs must be our No. 1 focus in 2010, and that is why I am calling for a new jobs bill tonight." For most of us...after air, food, and water...having a job is pretty important. It's nice to hear that Obama may turn his attention from his healthcare objective and give a little attention to jobs. However, what struck me as odd is I could have sworn the primary objective of the 2009 Stimulus Plan was to create jobs.

Many experts would agree that the Stimulus Plan isn't working. What troubles me a little from the address is Obama's use of the term "jobs bill"....because if history is any indicator, this means more spending, more pork, more special interest...and I'm just not sure where the everyday person looking for a job will fit in.

Hopefully Washington will realize that Jobs must be created in the private sector to sustain and grow the economy. Adding new government jobs just doesn't help us much, if at all. We need ease taxation on small and mid size businesses to encourage growth and hiring.

When Obama took office in January 2009, he inherited a total Job loss of 2.6 million jobs from the Bush Admin, of which 1.9 million were lost in the last 3 months of Bush's term. Most of this loss was attributed to the financial meltdown. During the Bush years, overall job creation was 5.2 million jobs, or an average of 58K jobs per month (http://budget.house.gov/doc-library)

Fast forward to today. Unemployment has risen to 10.5%...but wait...that's not the whole story! We must factor in U6 Unemployment. U6 Unemployment a broader measure and includes discouraged workers and individuals currently accepting PT waiting for FT opportunities, and the severely underemployed person (like a CEO flipping burgers). Add those people in and now we have 17.3% unemployment.

Continuing claims as of this morning - 4,602,000 people are receiving unemployment benefits...whoa! But that is only half the story...

Late last year, an extended and emergency unemployment benefit was snuck into the Home Buyer Tax Credit bill. Now, I'm not saying that it is a bad thing we are providing extended and emergency benefits to people out of work...actually, it is one good thing we are doing. But it is interesting how Congress slipped it into another bill. Anyway, individuals receiving the emergency extension are omitted from the headline number and there are an astonishing 5,600,000 people in this hidden category. Add that up and you have a shocking 10,202,000 people receiving unemployment assistance....RIGHT NOW! And this does not include people who have fallen off the rolls completely.

Needless to say, there is much work to be done. We must keep in mind that 125,000 Jobs must be created each and every month to keep up with population growth. What will it take to return to lower unemployment levels? If we were to put on 300,000 jobs per month...it will take about 5 years to get back to the 6% unemployment rate from September 2008.

Hopefully we will see some of the burden lifted from small and mid size business owners. Over half of all jobs created come from this sector. Until we have jobs, the economy will continue to drag.

Ch-Ch-Ch-Changes...

Elizabeth Rose - Certified Mortgage Planning Spec - Texas (Network Funding, LP) — Tue, 11 Aug 2009 10:33:08 -0700

Like David Bowie's lyrics..."changes are taking the pace I'm going thru" and the mortgage world is going thru changes that take the pace to a whole new level. It seems every time we turn around, there is a new rule, new legislation, new guideline, new something or other.

On July 30^th a new ‘something or other' became effective. It's called the Housing and Economic Recovery Act (HERA). This act requires all mortgage lenders and mortgage brokers to help prevent deceptive lending practices and protect customers by helping them become more informed." Sounds smart on the surface, right?

With the government stepping in everywhere to manage our lives, it seems that once again in their effort to protect us from ourselves, they are going to bog down the process and make it a paperwork frustration...not just for the bankers and brokers...but for the consumers too. This paperwork frustration may also make the once common 30-day closing become more difficult to meet.

Here are a few things you can expect:

No fees may be collected for the transaction other than those for running a credit report at the initial time of application. Additional fees may be collected only after four business days.

Should the APR change by more than .125% on a fixed rate loan or .250% on an adjustable rate loan, the lender must disclose the new APR and the borrower must have a minimum of three business days to review the information before the transaction may proceed.

Items that can trigger re-disclosure requirements include a change(s) in the loan amount, closing date, loan program, any fees that impact the APR or interest rate from the rate indicated on the original loan application.

In cases where documents are sent by mail to the borrower related to re-disclosure of APR and/or providing a copy of the appraisal, anticipate six business days (three to allow for mailing and three to allow adequate time to review them) before a closing can occur.

Keep in mind, if something should change prior to closing (like the seller finally agrees to roll in closing costs so you want to adjust the purchase price), if it affects the APR by 1/8^th then re-disclosure is required and then the waiting period kicks in again.

For more information on this and how it might affect you, send an email to Elizabeth@ElizabethRoseOnline.com.

New Appraisal Rules Hit Home Hard

Elizabeth Rose - Certified Mortgage Planning Spec - Texas (Network Funding, LP) — Tue, 28 Jul 2009 14:19:13 -0700

The Home Valuation Code of Conduct (HVCC) became effective on May 1^st in an effort to insulate the appraisal process from influence by any of the parties that may have an interest in the outcome. So...what is wrong with that?

Recently, the National Association of Realtors (NAR) conducted a survey...and...well, the survey results weren't so good, however they came as no surprise to realtors, lenders, and mortgage originators.

Here's just a few of the results:

76% report the time to obtain a completed appraisal has increased an average of 8 days.
Lost sales are reported by 37% of respondents
An increase use of out-of-area Appraisers was reported by 70% of those surveyed
Approximately half of appraisers reported a reduction in fees received and 70% of appraisers reported an increase in costs to the consumer
55% realtors surveyed reported a perceived decrease in appraisal quality.

Talk about adverse effects! (Maybe that is why you should care?)

Yesterday, NAR President Charles McMillian sent an email to members stating his recent meetings with the NY Attorney General's office, Federal Housing Finance Agency (FHFA), Fannie and Freddie, have led to new guidance to all lenders on HVCC. Here are is sampling of their "new guidance" -

They stated, "Contrary to some suggestion..."

The code does not require the use of AMC's (Appraisal management companies) over independent or in-house appraisers.
Closing costs have risen in some instances, but that has not been a function of the Code.
The Code may have initially slowed appraisal time as it was being implemented. However, there are other reasons for turnaround time changes
Contrary to some suggestions, the Code provides for communications with appraisers about errors, additional needed information and unprofessional conduct
Contrary to some suggestions, the Code does not lead to lower appraisals for property. The Code insulates appraisers from pressures that led to higher or lower appraisals and should now lead to more accurate valuations

Well, now that has been resolved, we can go back to wondering how this is really helping our housing market - and buyers and sellers.

But decide for yourself, read the report here: http://www.fhfa.gov/webfiles/14611/hvcc_NOTICE_7_22_09F.pdf

Who Moved My Cheese....

Elizabeth Rose - Certified Mortgage Planning Spec - Texas (Network Funding, LP) — Tue, 14 Jul 2009 10:20:06 -0700

Better than expected earnings from Corporate America, higher Retail Sales and a hot Producer Price Index has moved our 30 year Mortgage Back Security from the cheese platter to....the waste basket? Oh no....

The producer price index is a reading on wholesale inflation. The headline number was hot and after stripping out energy and food, the core number was quite a bit better than expected. Of course there still is no fear of inflation just yet, but today shows us that any suggestion of future inflation can ruin the day in the bond markets. Tomorrow will get a better idea of the hint of inflation when the Consumer Price Index is released.

The improvements seen in the market over the past 4 days have been completely erased and the market has lost almost 100 basis points in just those few days. Today MBS opened below support at the 50-day moving average and is clinging on...

Treasury Unveils Plan...

Elizabeth Rose - Certified Mortgage Planning Spec - Texas (Network Funding, LP) — Thu, 09 Jul 2009 10:15:00 -0700

Late in the day Wednesday, the Treasury unveiled their plan to take up to $40 billion in so-called illiquid assets off bank balance sheets. Nine investment managers have been chosen to bid for these illiquid assets.

The $40 billion is composed of $30 billion of equity and debt invested by the Treasury, along with an additional $10 billion by the private investor groups.

The programs goal is to enable the financial institutions to dispose of troubled illiquid mortgage securities and other packaged assets so they can provide new sources of lending to the economy.

Some analyst believe interest in the program has diminished and financial institutions might be a bit more reluctant to sell assets. Could this have something to do with the easing of Mark to Market accounting...thus valuations have either improved already or are likely to improve as the economy strengthens?

Mortgage Bonds Bust a Move...

Elizabeth Rose - Certified Mortgage Planning Spec - Texas (Network Funding, LP) — Wed, 08 Jul 2009 16:13:45 -0700

Mortgage Backed Securities (MBS) are moving again! Over the past several days, MBS have been improving as stocks continue their struggle. Today's bond auction was well received which has helped fuel a beautiful rally today, giving Bonds the needed momentum to break above some tough overhead resistance. The past few days gains have brought rates back...well, almost back...to the levels of one month ago.

Rumors of a 2^nd stimulus plan hit the wires just days ago and the chatter continues. The first stimulus plan was aimed at Banks, Automakers, City and State governments. New reports indicate that it also put more money into the hands of the poorest American's thru monthly food stamp allocations. Aside from that...it's a bit difficult to see the benefits.

We were promised with the first stimulus plan that it would create jobs. That has not occurred as we saw another ugly jobs report just last week.

Now, some insiders say that the first stimulus plan is having a positive effect, but the country is still sick and needs more relief. While the chatter continues, President Obama said that the unemployment rate is something "we wrestle with constantly", but added that spending more borrowed money is "potentially counterproductive." Imagine that! (See blog post "Obama Says We Are Already Out of Money") It sure would have been nice if they would have figured that out before they when on their spending spree. (They have already spent 2 Trillion of taxpayer dollars).

As I mentioned in my previous post, this Spending...oops, I mean Stimulus plan will lead to inflation and higher interest rates all around. Remember, we are auctioning Treasury securities to pay for this spending. In order to attract buyers, these longer term instruments would rise in rates. While Mortgage Rates are NOT tied to Treasuries, Mortgage Bonds and Treasury Bonds compete for the same investment dollar. In order for Mortgage Bonds to compete, rates will rise.

What's in store for Mortgage Rates?

Elizabeth Rose - Certified Mortgage Planning Spec - Texas (Network Funding, LP) — Tue, 23 Jun 2009 10:59:01 -0700

Today the Fed begins their 2 day meeting. We know the Fed Funds Rate is not going to change, but there is speculation that the Fed will buy more longer-term Treasuries, which may provide a jump start to eventually bring Mortgage rates down.

So if you are still considering a refinance, it is important to be ready to pull the trigger should "Fed-speak" cause a rally tomorrow. Be prepared to act quickly.

I've seen many people pass on saving $200 per month in the hopes rates might improve a bit more, helping them gain another $25 per month in additional savings with a lower rate that where we stand. Now clearly we've seen many times this year, rate turn higher and this window of opportunity is lost. Reminds me of the old saying, "if you snooze, you lose."

I don't want anyone to miss an opportunity by either waiting, or not understanding what is at stake. If you think you might want to take action, let's talk further about your situation. Just send a note to me at Elizabeth@ElizabethRoseOnline.com to see if I can help improve your current situation.

For more insight of what has impacted Mortgage Rates:

Since falling off the cliff on May 27^th, Mortgage Bonds lost 500 basis points (worsened) and have since regained a portion of those loses. Still, Bonds are down 212 from May 27^th when they could no longer cling to the important support level of the 100 day moving average, then pummeled right thru the 200 day moving average. After finally finding a support level, they bounced on June 11^th and are attempting to make a bit of a recovery.

While the Fed has committed to purchasing Mortgage Backed Securities in an effort to keep rates low and help stabilize the housing market, the added supply of paper is making this difficult. This afternoon, the Treasury will auction off another $40B in 2 year Notes, part of the $104B that is hitting the markets in the next 3 days. Recent history has shown that Bonds haven't performed well upon the announcement of the auction and during the auction. So, why all the auctions? We have to pay for all the stimulus plans. This is how the Treasury pays the way.

This added supply has pushed Treasury yields higher in an effort to make the government's debt more appealing to be financed. While Mortgage Rates are based on the activity of the Mortgage Bond, Treasuries will also compete for investor dollars. A short while ago the most active Mortgage coupon was at 4%, while long-term Treasuries were just above 2%. This made Mortgage Bonds very attractive to investors however, the massive debt that must be financed via Treasury auctions has pushed longer-term Treasury yields closer to 4%. This has forced the focus coupon on Mortgage Bonds up to 4.5%, as to give investors a more attractive return on them. And then lies a problem in seeing Mortgage rates move lower. Aside from Mortgage Bonds having their own added supply come to market from refinances that are now closing, Mortgage rates can't move much lower unless longer-term Treasuries move lower first. Which brings us right back to the Fed Meeting, which concludes tomorrow. Again, should they announce more longer-term Treasury purchases, this could help the Mortgage Bond market.

Feel free to contact me for more information: Elizabeth@ElizabethRoseOnline.com

Obama says we are "already out of money"...duh -

Elizabeth Rose - Certified Mortgage Planning Spec - Texas (Network Funding, LP) — Thu, 04 Jun 2009 08:58:14 -0700

The Treasury has been going to town printing money...clear proof we are "already out of money". The Treasury has literally been printing money at a record pace by way of Treasury auctions to pay for the massive spending. How does that impact those attractive home loan rates you once were hearing about? Let's break it down.

It's back to school with Economics 101. Supply and Demand. For months, our government has been trying to right the economy with various stimulus and bail out plans. These plans cost money...money we don't have. So how do we pay for it? The US prints money so to speak by issuing Bonds which are purchased by investors.

And these hundreds of Billions of dollars of new Bond SUPPLY have to be absorbed by the market, so the additional supply literally weighs on the entire Bond market (Treasury Bonds and Mortgage Bonds) and drags prices lower. Lower prices means higher home loan rates.

Also, when you think of supply, consider all the tons of refinances recently - and all those loans have been bundled, packaged and sold on Wall Street...and this additional SUPPLY has now started to hit the secondary market as those closed loans are now getting turned around and sold. This supply also must be absorbed.

The Fed recently became a large purchaser of Bonds in an effort to help shore up the housing market and keep home loan rates low. In January they made a commitment to invest $500B in Mortgage Backed Securities (aka Mortgage Bonds) over the six month period, ending June 30^th. on March 18, they expanded that commitment by another $750B bringing the grand total to 1.25 Trillion and extended the time frame thru the end of 2009, possibly into 2010.

While the Fed has been a buyer, they simply can't buy enough to balance all the selling...or all the new paper they are auctioning off to pay for the stimulus and bailout packages. Anytime supply vastly exceeds demand prices will move lower. And as prices move lower, yields rise - that rise in yield will attract new buyers as they get a higher return on their investment. This is how the market finds balance. It's like a see-saw.

More is coming...more Bond supply...as next week brings another enormous round of Bond auctions with three separate auctions scheduled to take place. Seeing how badly Bond pricing behaved during last week's round it would seem Traders are likely getting very jittery thinking about how the Bond market will react leading up to and during these events. It can't be good news for home loan rates either.

Since falling thru important support levels on May 26, Mortgage Bonds have lost 256 points driving home loan rates solidly above 5%. While we've had a few weak attempts to improve, the supply continues to weigh heavily on the market. It could be tough from here to get much better.

Fed Action Sends Bond South

Elizabeth Rose - Certified Mortgage Planning Spec - Texas (Network Funding, LP) — Thu, 30 Apr 2009 09:43:19 -0700

Many people are still listening to main street media....and the one thing we know about main stream media is that they tend to get it wrong. There is still a lot of misinformation floating around...in fact, I received a call last week from a person considering a refinance. And he "informed" me that the Fed was meeting this week and he had heard the Fed might cut rates again. I was very perplexed by this comment and unsure of its origin (The media? The internet? Talk around the watercooler?). First, the Fed Funds Rate is already at ZERO. So...cut what? Secondly, the Fed Funds Rate does not translate to mortgage rates.

The Fed Funds Rate (FFR) is the overnight rate that banks charge one another. Mortgage Rates are tied to the Mortgage Backed Security Bond Market. Two different animals. Mortgage rates do respond to the FFR, but in the opposite direction. This is due to inflation.

The Fed's role is to set monetary policy to help promote economic stability and growth.

Yesterday the Fed concluded their 2-day meeting with their policy statement. As expected, they left the Fed funds target on hold. Their policy statement indicated no real change in the Fed's current purchase program of Treasuries and mortgage backed securities. However, traders were hoping the Fed would announce an increase in the amounts they would buy in an effort to keep rates low. Trader's disappointment resulted in a hard knee-jerk sell off before slowing recovering most of the loss.

Mortgage bonds have some headwinds to conquer for rates to improve from here. Watch for my coming report on the elusive (or is it mythical?) 4% mortgage interest rate.

Mark-to-Market Changes Give Financials a Boost

Elizabeth Rose - Certified Mortgage Planning Spec - Texas (Network Funding, LP) — Thu, 02 Apr 2009 10:07:09 -0700

Finally! Changes to Mark to Market are coming. The Financial Accounting Standards Board (FASB) voted favorably to relax mark-to-market and help financial institutions. Financial companies will now be allowed to use alternate models, like cash flow analysis, in marking their assets. No longer will institutions be limited to using last-sale data in marking assets. This enormous change will significantly reduce the write-downs banks have been taking on investments like mortgage-backed securities. You can revisit my blog post of December 29, 2008 to learn more about mark-to-market and its impact on our current environment.

This change to mark to market is effective for the second quarter, but can applied to first quarter earnings. Rumors are swirling that this change will boost earnings of banks by 20% or more in the first quarter. It is too bad that it has taken so long for this enormous issue to be fixed. But finally Congress stepped in demanding a revisit to this concern and common sense prevailed. Stocks are loving this news, but as you might imagine, the Bond market is suffering. Look for interest rates to be a bit worse today on this news.

Welcome Back, Carter - Tax Move May Hurt Home Purchases, Despite Historic Low Rates

Elizabeth Rose - Certified Mortgage Planning Spec - Texas (Network Funding, LP) — Sun, 01 Mar 2009 19:15:29 -0800

I must admit, I'm still scratching my head trying to figure out how an annual income of $250K was determined to be associated with someone "rich" and "wealthy".

The move to increase taxes and limit deductions will have far reaching impact.

I agree with NAR that there could be further erosion of home prices and values as home ownership doesn't look as sexy anymore.

It's clear that Obama and his team believe that people making over $250K per year are "rich"...however there is a huge separation in this income level and the real rich.

By the way, approximately 80% of this group of people (making more than $250k) are small business owners!!! Hard working Americans that believed in the American dream and worked their tale off to make it come true for themselves. And they are employing 8.4 million people. When company revenues decline the first thing businesses do is cut head count.

But the biggest challenge to the housing problem is not....falling home prices, interest rates (of course they are at historic lows), but JOBS. If people don't have Jobs they will not buy a house no matter what the price, no matter how low interest rates go, no matter if there are tax credits to buy (the new $8,000 credit), or if we do or don't get to deduct mortgage interest.

Obama is planning to pursue taxing this "rich" group further, which will have additional negative impact on our economy...

"The Bush tax cuts will be allowed to expire in 2011, upping taxes on couples making $250,000 or more. The top rate will rise from 35% to 39.6%." (Kiplingers 2/26/08)

And if that wasn't enough...Obama also plans to add new caps on ALL itemized deductions of these folks and cap the charitable deductions they make too.

Here is a short lesson in taxes...only the amount above $250K is taxed at the higher rate. Here is how it works...if you are married, your first $16,700 is taxed at 15%, then from $16,701 to $67,900 your tax goes up to 25%. From $67,901 to $137,050 you jump again to 28% and so on. However regardless of how much money you make or what bracket you fall, you will be paying taxes until mid-May every single year.

Where do you fall? Here are the Taxes Brackets for 2009 -

Tax Bracket Thresholds (2009)
Bracket	Single	Head of Household	Married/Joint	Married/Separate
10%	0	0	0	0
15%	8,350	11,950	16,700	8,350
25%	33,950	45,500	67,900	33,950
28%	82,250	117,450	137,050	68,525
33%	171,550	190,200	208,850	104,425
35%	372,950	352,950	372,950	186,475

The liberals that are cheering Obama's tax levy on the $250K income earners might want to pause a little as Obama has a little something in store for everyone. Obama also plans to allow the Bush tax cuts to lapse. What would this mean to EVERYONE? Income taxes would return to the 2000 level. Now keep in mind that in Obama's world, this isn't a tax increase...it's just not re-enacting a prior cut. Hmmm. Looks like an increase to me.

Take a look at the 2000 figures and compare to 2009 above:

Tax Bracket Thresholds 2000
Bracket	Single	Head of Household	Married/Joint	Married/Separate
15%	26,250	35,150	43,850	21,925
28%	63,550	90,800	105,950	52,975
31%	132,600	147,050	161,450	80,725
36%	288,350	288,350	288,350	144,175
39.6%	over 288,350	over 288,350	over 288,350	over 288,350

Let's not forget the small businesses - small business owners will see more taxes in 2011.

Our country is struggling thru this recession and an increase in taxes to will impact the overall economy. It isn't rocket science, if people have less money in their pocket they tend to buy less goods and services.

What would happen if the "rich" folks slightly pulled back. What if they get fed up with this negative attitude towards them? The government continues to say "screw you" rich people...what if the rich people decide they are tired of carrying the load with no respect and say "screw you Uncle Sam, I'm through helping you"? They slow down buying bigger houses...or houses period; they slow down buying cars; they slow down going to the movies, shopping, and dining out. What happens to our economy then??? They provide more than 50% of the revenues to the government.

One third of American's pay no tax at all. Who are they?

People - stand up a fight for the Fair Tax. What is it? How does it work? There are NO taxes on income, capital gains, etc. EVERYONE pays tax at the level of consumption. The Fair Tax is very transparent. When you go the store to purchase, you pay taxes...but you are taking your entire paycheck with you - not just a portion of it.

It's worth repeating again...you work until the middle of May before you start earning money for your family.

The Fair Tax will ends the underground economy. It's a simple tax form that an 8 year old can complete. It would bring in the same revenue to the government...just change the way we collect them.

Until then...hope you loved the 80's. Welcome back, Jimmy Carter.

Jobs Slide Again

Elizabeth Rose - Certified Mortgage Planning Spec - Texas (Network Funding, LP) — Fri, 06 Feb 2009 09:21:51 -0800

This morning the all important Job Report was released and it was ugly...worse than expected. The 525,000 forecast came in at a loss of 598,000 jobs. This is the greatest job loss since 1974.

Job losses for all of 2008 were also adjusted higher...at 3 million. The government said employment at the end of the year (08) was 138.2 million, a little bit better than initially reported.

Our unemployment rate jumps to 7.6% and the highest unemployment rate since September 1992. But wait...7.6% represent those who are unemployed and looking for work. After adding in those who are too discouraged to look for work and those who are forced to take a cut back in hours to part-time, the alternative unemployment rate rises to 13.9%.

Last night at the Democratic Retreat, President Obama addressed democrats in a message that seemed directly aimed at the US Senate. The Senate is still working on the stimulus bill and looking to tear down some of the spending. Obama proclaimed in his message last night that a stimulus bill is a spending bill. He went on to say that we are "not going to get relief by turning back to the same policies of the last 8 years." It seems this bill has a lot of spending in it - in fact, even the infamous ACORN is getting a piece of the pie. According to Ben Stein, almost half of the proposed spending will directly benefit the unions...here's more:

•· $50 million to the National Endowment for the Arts

•· $75 million to fund anti-smoking programs

•· $650 million for the switch from analog television to digital

•· $335 million to help prevent the spread of sexually transmitted diseases

•· $600 million for "climate change" research programs

That is just a snapshot of the shopping list in this bill. What happened to Job creation? What happened to shoring up our financial sector?

The ugly miss on the Jobs report in a more "normal" climate would have been good news for bonds. Instead, Stocks held their gain as traders likely view this report and understand that the government is hard at work to stimulate the economy and create jobs which would benefit the financial sector. Renewed talks of "mark to market" gave Stocks a boost yesterday carrying thru to today. This momentum in Stocks is weighing on Mortgage Bonds. Bonds are lower on the day, but improved from the worst levels seen this morning.

Mortgage Bonds have moved mostly sideways in a downward trend, attempting to stabilize.

Jobs, Jobs, Jobs...

Elizabeth Rose - Certified Mortgage Planning Spec - Texas (Network Funding, LP) — Thu, 05 Feb 2009 09:58:32 -0800

It's been a busy and bleak week in the markets with numerous economic reports, stimulus chatter, corporate earnings (losses) reports, and the list goes on.

The unemployment lines are growing longer. On Wednesday, the ADP survey showed a grim private sector job loss of 522,000 for January. Today, Initial Jobless Claims (these are people filling for the first time) registered at 626,000 which is just a little higher than the estimates of 580,000. This is the highest level since 1982 and points to an ugly report tomorrow. Tomorrow is the Grandaddy of Jobs Reports - and the markets are already braced for a bad report. Economist are expecting 500,000 jobs lost in January. Unemployment numbers are also expected to show an uptick and many believe the "real" number is actually higher.

Typically these reports of job losses everywhere would give Mortgage Bonds a boost and improve home loan rates. But this is not a "normal" world we are living in today. Home loan rates are well past the glory days of Dec 17, Jan 8 and Jan 9^th.

In addition to the economic reports this week, the Stimulus Plan has been on the table in Washington. After making its way thru the House last week, Senate Republicans were seeking changes to the plan. Senator Ensign of Nevada shared on CNBC that Republicans would like to see the government bring down home loan rates to 4%. Not that we all wouldn't like to see those rates, but the government cannot mandate home loan rates. The only rate they can control is the Fed Funds Rate. Home loan rates are the result of the performance of Mortgage Backed Securities. To drive home loan rates further, there needs to be a tremendous amount of purchase activity in the 4.0% and 4.5% coupons.

But if the Fed is purchasing mortgage backed securities, why aren't rates lower? The Fed purchase program of Mortgage Backed Securities isn't working. Why? They are purchasing mostly the higher rate bonds - 5.5% coupons. These represent mortgages around 6.125% -6.25% and will likely be prepaid due to the refinance flurry. Currently mortgages are bundled and sold into the 4.0% and 4.5% coupon. So the Fed isn't really helping home loan rates.

Repulicans have expressed their concern that this "stimulus" plan, which they had hoped would boost Jobs and the economy, is more of a "spending" plan.

Last night, the Senate voted to include in the stimulus plan an increase in the current $7,500 tax credit for home purchases to10% of the value of new or existing homes, up to a limit of $15,000. The details are not known...and the bill is not yet passed. As it unfolds, I'll be sure to share with you.

Many say that it all starts with housing. While owning a home is the American dream, it isn't what supports our economy. It's Jobs. People without Jobs don't buy homes.

Mortgage Bond Market Losing Steam

Elizabeth Rose - Certified Mortgage Planning Spec - Texas (Network Funding, LP) — Fri, 30 Jan 2009 09:48:08 -0800

Bonds are getting beaten up today. There's a saying in the market... "the trend is your friend" meaning that the trend helps you make proactive decisions to better manage your investments and your expectations.

While it is our friend it sure isn't being so friendly in the current direction. It was a mixed bag of economic news this morning with more poor corporate earnings reports, oil on the increase, and GDP coming in better than expected. This mixed news had bonds bouncing around this morning.

I'm not sure the Fed is really helping us much either. As I mentioned yesterday, the Fed is purchasing higher rate coupons which are having little impact on the lower rate coupons (bonds) where new mortgages are being bundled. To date, they have purchased $16.8 billion in the past week (Jan 22 - Jan 28) for a total of $70 billion.

The market has lost 137 basis points since Wednesday's high as you can see in the chart below. That translates to a worsening in home loan rates of approximately .375%. And lenders are very quick to pull the trigger and increase rates when the market worsens because they are striving to protect their balance sheets.

Remember the old saying... "snooze, you lose"? If you are considering either a purchase or a refinance, get your paperwork in order, you application completed and submitted so you are positioned to take advantage of the next dip.

Where is the 4.5% Interest Rate?

Elizabeth Rose - Certified Mortgage Planning Spec - Texas (Network Funding, LP) — Thu, 29 Jan 2009 10:13:22 -0800

Yesterday it was no surprise when the Federal Reserve said they would keep the Fed Funds Rate steady at 0 to .25%. However, the committee did offer some positive expectations for homeowners. They said that they continue to anticipate that "inflation pressures will remain subdued in coming quarters". This forecast on inflation is bond friendly and will help keep home loan rates low.

The Fed said they will continue to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets. They went on to say they "stand ready to expand the quantity of such purchases...as conditions warrant." Now this does not guarantee that rates will drop to the rumored 4.5% (yes, it was just a rumor). While the Fed is actively purchasing Mortgage Bonds, they are purchasing higher rate coupons - 5.5% coupons, which represents existing 6% - 6.125% mortgages...which won't have much positive effect on present day rates.

So if you are sitting the fence, waiting on a magic rate it may be wise to evaluate the risks of waiting. Consider this - if you are waiting to save an extra $20 (the difference between today's rate and that "magic" rate you desire) you could wait 90, 120 days for that rate to appear and have lost the current savings opportunity. It could take years of saving $20 to make up what you missed saving right now. In addition, that magic rate may never appear, and the downside risk is that you miss out completely. Be careful and don't be too greedy.

More bad economic news today. New home sales slide some more to their lowest level on record. Durable goods orders are down on weaker demand for products. And Jobs...well, continuing claims also sets a record.

And last but not least - the House passes an $819 billion Stimulus Package. I'm not sure if this is good news or bad news...only time will tell.

Rates worsened yesterday after a very brief bond rally following the Fed statement. The rally was short lived and since then the bond has eroded 72 basis points. Stock and Bonds are having a rough start to the day and there is room for more loss.

Bad Bank By Big Brother?

Elizabeth Rose - Certified Mortgage Planning Spec - Texas (Network Funding, LP) — Wed, 28 Jan 2009 09:50:39 -0800

Big Brother Washington is looking to put together a "Bad Bank" and it could be announced next week. What the heck is a "bad bank?" It's not quite what the name implies. This Bad Bank is essentially set up to buy the toxic assets, segregate them into a so-called "bad bank", clean them up, then manage the sale of these assets.

If business can't manage this...why do we think the government can? Well, it's been done before - successfully. The FDIC might manage the plan. Yesterday Former FDIC Chairman, Bill Seidman (1985 - 1991) said that in the past they took over a bank, nationalized it, fired the management, took out the bad assets, and sold it back into the private sector..."but," he says "you have to be pretty tough to do that."

FDIC Chair Sheila Bair is pushing to run the operation, saying that her agency has the expertise to do so, and could actually help finance the program by issuing Bonds guaranteed by the FDIC. Some estimates have the government buying up to $1 Trillion of bad assets via this program. This is yet another very creative way for the government to breathe life back into the financial sector. The bad bank idea is not exclusive to all the other ideas out there. The banks that are "too big to fail" will still get loan guarantees.

The pricing problem of assets would have to be addressed. Business has consistently been wrong in valuating their assets. In addition, the financial community has struggled with the "mark to market" accounting rule which many believe is the single most destructive force in the financial system. Even Former FDIC Chairman Bill Isaac (1981-85) agrees.

There is speculation of what role the Fed will play. They would probably bring something to the table. After all, how do we pay for it?

And speaking of the Fed...today they conclude their two day meeting with some kind of statement. What will it be? Hope is in the air with expectations of positive stimulus plan comments - I hope it isn't anything like Hope for Homeowners, which was a bust.

Yesterday afternoon Mortgage Bonds experienced a nice bounce after the Treasury Auction - which was a bit surprising since the market was deluged with supply. This morning mortgage bonds continue to move modestly higher and are currently up 25 basis points attempting to crossover the rising trendline and 25 day moving average. If Mortgage Bonds can muster enough momentum to do this, then it is likely the trend will continue higher and Mortgage rates improve.

Confidence Disappoints Stocks, Will Bonds Benefit?

Elizabeth Rose - Certified Mortgage Planning Spec - Texas (Network Funding, LP) — Tue, 27 Jan 2009 09:17:09 -0800

Last night the Senate confirmed Timothy Geithner as Secretary of the Treasure. Obama showed up to swear him in, which is a bit unusual. It will be interesting to see how Obama's recovery plan will advance.

Consumer Confidence comes in lower than expectations and knocked the life out of stocks. Mortgage Bonds catch a slight bounce. The conference board said they are beginning to see improvements in consumer expectations...could this be the result of renewed hope with a new President?

This afternoon a big supply of Bonds will hit the market at 1pm ET, when the Treasury will auctions off $40B in 2-year T-Notes. This could put some downward pressure on Mortgage Bonds as this additional supply will need to be soaked up by the market. It's the old supply and demand rule.

The Fed begins its two day meeting this morning with the big interest rate decision and policy statement coming tomorrow. As I said yesterday, the world will be listening and holding on to every word when the statement is released tomorrow. It could be a market mover.

Mortgage Bonds continue to hover in mid air between the floor of support, which was tested several days last week, and overhead resistance. Bonds will be responding to both stocks and the added supply today, which could result in a jittery day.

Bonds Do the Hip Hop

Elizabeth Rose - Certified Mortgage Planning Spec - Texas (Network Funding, LP) — Mon, 26 Jan 2009 10:48:41 -0800

Kicking off the week, Mortgage Bonds continue their sideways hip hop dance along a floor of support and have improved since testing this floor last week. However some good news for Existing Home Sales this morning has put a little pressure on bonds, pulling them down.

Stocks are fairing pretty nicely despite missed earnings reports of Caterpillar and McDonald's. More ugly news as the list of job cuts grows...Home Depot and Caterpillar add 7,000 and 20,000 respectively.

In economic news, first up today is Existing Home Sales - which came in better than expectations. Here's the skinny...sales were down for December 3.5% over the prior December as the median prices feel to $175,400 down 15.3% from a year earlier. It has been said by chief economist that this is likely the largest price decline since the Great Depression in the 1930's. On Thursday we will get a read on New Home Sales.

This week will host the first Fed Meeting of 2009 and the new presidential term. What will they talk about? Even E.F.Hutton will be listening carefully for their take on the economy, stimulus & recovery plan, their Mortgage Bond purchase program and future direction. Will we hear the "D" Deflation word? Or will it be the "I" Inflation word?

Currently the technical signals for bonds are encouraging. When coupled with the Fed's purchase program, it's a good recipe for rates moving lower.

What? Bonds Hear "Inflation"?

Elizabeth Rose - Certified Mortgage Planning Spec - Texas (Network Funding, LP) — Fri, 23 Jan 2009 09:46:25 -0800

This morning, the entire Bond market, including Mortgage Bonds, are contending with the "I" word...inflation. It may sounds a bit odd, however the traders in the pits have recently been talking about Obama's stimulus and rescue packages and the reemergence of inflation should they have a positive effect on the economy.

To add to the trader chatter, this morning Fed member Frederic Mishkin was on CNBC saying that "inflation could come to the forefront given all of the government programs". He went on to say that "once the economy recovers, liquidity must be taken out of the markets" - this means the Fed may need to hike rates down the road.

As I've been reporting and recent reports have been confirming there isn't even a hint of inflation at this time - however, traders are looking into the future and taking positions on where they see things headed. Just the chatter of inflation is putting pressure on bond prices. Any spike in inflation may make it difficult for the Fed to drive mortgage rates lower through their purchase program.

As you can see from the candlestick chart, we've had many consecutive days of price deterioration in Mortgage Backed Securities. Prices have just broken below the Rising Trendline...not a good sign. If prices break below yesterday's low, it will be a time to lock for technical reasons as further price erosion will be likely.

The Fed still has $450B in buying power to deliver the market, and this could help pricing improve, thus improve home loan rates.

Rates continue to be very attractive and people would be wise to get their application submitted and at the ready because as we have seen recently, the good pricing can get away from us rather quickly.

Silver Lining in Economic Data for Bonds

Elizabeth Rose - Certified Mortgage Planning Spec - Texas (Network Funding, LP) — Thu, 22 Jan 2009 09:35:56 -0800

The morning has been a rocky start for Mortgage Bonds. While Bonds are attempting to nudge higher off of the Rising Trendline, the volatility has picked up on disappointing economic data as well as reacting to the early sell off in Stocks due to ugly corporate earnings reports.

The disappointing economic data begins with the Initial Jobless Claims which jumped to 589,000 and worse than expectations. It is pretty safe to assume that the job market will continue to get worse in the coming months as corporations cut jobs in order to cut costs.

Housing continues to remain weak, setting records. December figures show that Housing Starts were anemic, falling more than 15%. This takes us to a seasonally adjusted annual rate of 550,000 which is the lowest on record. Building Permits also fell - 12.3% dropping to a record low 363,000. Even total permits, which includes Apartments dropped, setting a record low.

Here's an interesting tidbit to consider, especially if you are in the market for purchasing a new home or working with someone who is....Nationwide, prices of new and existing homes are now just a mere 7% away from being as affordable as they were during the 1980's - a time when the housing market was booming. In the 80's, median home prices equaled 2.9 times the median household incomes. To get some perspective on this, in 2006, at the apex of the housing growth, median home prices sold for about 4.5 times the median household income, and some markets even higher.

The only silver lining from all this negative economic data is that it has for the moment helped Mortgage Bonds improve from their multi-day slide lower. Hopefully a little Fed buying today will help give Bonds a boost.

Bonds Hanging In Mid-Air

Elizabeth Rose - Certified Mortgage Planning Spec - Texas (Network Funding, LP) — Wed, 21 Jan 2009 09:21:03 -0800

Yesterday, the stock market dropped sharply with its worst-ever performance on an Inauguration Day. More often than not, the stock market has declined as a new presidential term is greeted.

What may be surprising to some is that the Bonds didn't benefit. Trading was thin as Washington was essentially shut down and our Fed wasn't buying Bonds. Seems everyone tuned into the Inauguration. This thin trading exacerbates the volatility in the market.

Today, Obama's pick for Treasury Secretary, Tim Geithner will be in the spotlight as he appears before the Senate and answer to his tax "mistakes". However it appears this is not a deal breaker. What's interesting is that as Treasury Secretary, he will be responsible for the IRS...yet he mishandled his taxes? Hmmm. Geithner (most recently president of New York Fed), will have a lot on his plate as Treasury Secretary as he defends the $700 billion bailout, convince Senate to support new fixes for the sector, and address the deficit forecast concerns.

This morning the bulls show some muscle and the stock market grabs some gains at the start. IBM sure helped turn things around with 4^th Quarter results that exceeded expectations and a rosy forecast for 2009 that put a smile on Wall Street.

Treasuries drop significantly for the third day in a row. There has been a deluge of Treasury Bond supply to pay for the rescue plans and stimulus packages. This added supply has to be absorbed by the market. And like you learned in school...when there is more supply than meets demand, prices drop.

Today, no economic reports are on the docket. Mortgage Bonds are currently hanging in mid air...between a strong support level further strengthened by the important rising trend line and overhead resistance with a lot of breathing room between both. We are currently 149 basis points worse than the best pricing of 2009. Bonds are currently "oversold" which creates a nice opportunity for a reversal and move higher (improvement). If you have the stomach for it, hold on...rates could improve from here.

Will Hope Float Bonds on Inauguration Day?

Elizabeth Rose - Certified Mortgage Planning Spec - Texas (Network Funding, LP) — Tue, 20 Jan 2009 09:23:56 -0800

After being closed for 3 days, there are no fireworks for Mortgage Backed Securities (MBS) this Inauguration morning. In fact, they are lacking any enthusiasm as they opened lower... below the 25 day moving average and support, plunged 38 basis points searching for the next support level, and thankfully caught a slight bounce back. Currently MBS are down 9...and rates are higher from Friday.

Banks continue to feel the pain. Bank of America announces they are cutting 4,000 jobs in New York. Regions Financial is reporting losses, State Street reporting drop in profits of 71%. Financial stocks opened lower this morning for top banks - Wells Fargo, Bank of America, JP Morgan Chase, and Citigroup.

No economic reports are set for release today...in fact, the only reports this week are on Thursday when we will get a read on the housing industry by way of building permits and housing starts. Also in the mix are the Weekly Initial Jobless Claims and Crude Inventories. These reports will have little impact on bonds this week.

Bonds will react to fundamentals today...specifically Obama's Inauguration speech. Markets are tuned into issues of stimulus and how we pay for it. One UBS economists stated, "President-elect Obama's inauguration speech is expected to be long on hope but short on specifics." Is hope enough to move the markets this afternoon? Any euphoria might be short lived. It will be an interesting day.

From a technical standpoint, bonds have broken thru two support levels, touching a third and bouncing back. Intersecting this 3^rd support level is a rising trend line that hopefully will add additional support. Currently stocks are getting beaten up. Should Bonds benefit...we will continue in a mostly sideways pattern with rates remaining fairly steady. However, should Bonds break below this trendline...put on your crash helmet - it will be a nasty, fast nose dive.

Who is the Big Loser?

Elizabeth Rose - Certified Mortgage Planning Spec - Texas (Network Funding, LP) — Fri, 16 Jan 2009 09:37:39 -0800

It's an action packed morning - already! The headlines were coming in well before 7 am screaming the news of more bank challenges. The effect on our Bond Market? Not pretty. Bonds are taking it on the chin by opening lower and still trading at their worst levels of the day.

In banking:

•· HSBC stocks hit a 10 year low on capital fears. Deterioration in corporate bond leveraged loans this week increased the prospect of HSBC having to raise more capital to maintain their requirements.

•· Citigroup reported a net loss $8.29 billion citing decline in investments, lower mortgage servicing revenues, credit costs including credit losses and increases to loan loss reserves. Citigroup is being dissected and will realign into two businesses - Citcorp and Citi Holdings. Not sure yet which company will perform what.

•· Bank of America loses $1.79 billion on escalating credit costs, increases to reserves and significant write downs and losses in capital markets. Remember, this is the same Bank of America that bought Countrywide and Merrill Lynch and was throwing money all over the place.

•· And the REAL BIG Loser - Merrill Lynch, pummelled by the financial crisis, reported a loss $15.31 billion. Merrill's loses were not reflected in Bank of America's quarterly numbers.

More bailout on the way. The government announced a plan to inject $20 billion into Bank of America and to guarantee another $118 billion of losses. This guarantee is similar to the one Citi received late last year. Both transactions are in exchange for preferred stock. The funds come from the $700 Billion TARP (Troubled Asset Relief Program) fund which was put into place late last year.

Also in the news - consumer price index waddles in with the smallest increase in 54 years! This inflation data continues to illustrate the lagging economy and gives further question to the possibility of deflation.

On the heels of the CPI report, we got a read on December's industrial production...which has fallen and can't get up. Output has fallen in four out of the last five months. Capacity utilization, a gauge of inflationary pressures fell to their lowest level since December 2001.

With these super tame inflation reports (in a "normal" environment) would have led to a party for bonds. However, these aren't normal times and the fundamentals have taken a back seat. In fact, we are seeing money leave the safe haven of Bonds and make a move to Stocks.

And remember the Fed? Each Thursday they report on their purchasing plan. Yesterday they reported having purchased $23 Billion in Mortgage Backed Securities between Jan 8^th and Jan 14^th for a grand total of $33 billion. They have committed to purchase $500 billion by the end of June.

Today we see the Bond hanging out near a floor of support, further strengthened by the 25 day moving average just below. It would sure be nice to see a bounce off this floor, but the tame inflation numbers didn't cause a reaction...likely because the market already knows inflation is non-existent. The buying demand from the Fed should continue to help Bonds.