Interest rates have been good all year and lately have become very good! We have been well below 6.0% for the past week! With all the talk about this economic crisis and difficulty in borrowing money, let's look at the facts. First, there are no "stated income" loans available in the traditional lending arena. You have to prove that you have a job! And if you don't, why would you be buying a house anyway? That said, I've put together these two tables to give you an idea of what it takes to buy a home. Because down payment money is usually one of the biggest obstacles for the home buyer, I've used the FHA mortgage as an example which allows for only a 3% down payment. Each table uses three different housing prices and three different interest rates.

 

Now here's my legal disclaimer (The FHA loan amount is higher than 97% due to the inclusion of mortgage insurance. Rates are not to be construed as the APR and are used only as examples. Interest rates change on a daily basis. Risk based adjustments to interest rates may apply due to credit scores and credit history. Not all applicants will qualify. Additional closing costs may apply.)

 

Ok, now that the legal stuff is out of the way, one more thing. It is not uncommon today for sellers to pay for buyers closing costs. If that's the case, then all that is needed is the down payment indicated to buy a home! So let's take a look.

 

This table simply uses the basic monthly housing payment as your only debt for qualification.

 

FHA Purchase Example
House Price	Down Payment	Base Loan Amount	Loan Amount w/Mortgage Insurance	Interest Rate	Monthly Payment	Payment w/taxes, insurance & Mortgage Insurance	Monthly Income Required to Qualify	Hourly Wage Required to Qualify
$100,000	$3,000.00	$97,000.00	$98,697.50	6.25%	$607.70	$785.49	$1,963.72	$11.33
$100,000	$3,000.00	$97,000.00	$98,697.50	5.75%	$575.97	$753.76	$1,884.41	$10.87
$100,000	$3,000.00	$97,000.00	$98,697.50	5.25%	$545.01	$722.80	$1,807.01	$10.43
$150,000	$4,500.00	$145,500.00	$148,046.25	6.25%	$911.55	$1,178.23	$2,945.58	$16.99
$150,000	$4,500.00	$145,500.00	$148,046.25	5.75%	$863.96	$1,130.65	$2,826.61	$16.31
$150,000	$4,500.00	$145,500.00	$148,046.25	5.25%	$817.52	$1,084.20	$2,710.51	$15.64
$200,000	$6,000.00	$194,000.00	$197,395.00	6.25%	$1,215.39	$1,570.98	$3,927.45	$22.66
$200,000	$6,000.00	$194,000.00	$197,395.00	5.75%	$1,151.94	$1,507.53	$3,768.82	$21.74
$200,000	$6,000.00	$194,000.00	$197,395.00	5.25%	$1,090.02	$1,445.61	$3,614.01	$20.85

 

However, because most of us are not debt free, here is an example if you have $300.00 in monthly consumer debt.

 

FHA Purchase Example w/$300.00 in monthly debt
House Price	Down Payment	Base Loan Amount	Loan Amount w/Mortgage Insurance	Interest Rate	Monthly Payment	Pmt w/taxes, insurance & Mortgage Insurance	Monthly Income Required to Qualify	Hourly Wage Required to Qualify
$100,000	$3,000.00	$97,000.00	$98,697.50	6.25%	$607.70	$785.49	$2,713.72	$15.66
$100,000	$3,000.00	$97,000.00	$98,697.50	5.75%	$575.97	$753.76	$2,634.41	$15.20
$100,000	$3,000.00	$97,000.00	$98,697.50	5.25%	$545.01	$722.80	$2,557.01	$14.75
$150,000	$4,500.00	$145,500.00	$148,046.25	6.25%	$911.55	$1,178.23	$3,695.58	$21.32
$150,000	$4,500.00	$145,500.00	$148,046.25	5.75%	$863.96	$1,130.65	$3,576.61	$20.63
$150,000	$4,500.00	$145,500.00	$148,046.25	5.25%	$817.52	$1,084.20	$3,460.51	$19.96
$200,000	$6,000.00	$194,000.00	$197,395.00	6.25%	$1,215.39	$1,570.98	$4,677.45	$26.99
$200,000	$6,000.00	$194,000.00	$197,395.00	5.75%	$1,151.94	$1,507.53	$4,518.82	$26.07
$200,000	$6,000.00	$194,000.00	$197,395.00	5.25%	$1,090.02	$1,445.61	$4,364.01	$25.18

 

 

 

So, what's the point here? Housing prices and interest rates have come together to provide the greatest buying opportunity in decades! Even with some monthly debt, the "regular guy" working for a living at, let's say $14.00/hr, can buy a home today! Or if two people are each earning $9.00/hr that's $18.00/hr so just look at the table to see where they fall.

 

If you or anyone you know has questions or needs more information on specific situations, feel free to call me anytime. We can put the numbers together and see how much home you can buy!

Last week we saw mortgage interest rates fall to levels not seen since January this year and then again back in 2003. Falling from about 6.25% the week before, a 5.5% 30 year fixed rate mortgage became available once again. This was due to a surprise decision by the U S Treasury to invest billions of dollars in the mortgage bond market. Initially, I thought this was simply a knee-jerk market reaction to the influx of money and these rates would not last too long. I believed that the condition of the economy would continue to weigh heavily on investment decisions and rates would gradually start to rise again over the next several months until we were back to where we started. Then we got some more news from the U S Treasury. A Wall Street Journal article from December 1st discussed Treasury Secretary Paulson’s remarks from the same day and it read: “Also, the Fed said it would purchase up to $100 billion in GSE (government-sponsored enterprise) debt through a series of competitive auctions starting this week. The Fed also plans to purchase up to $500 billion in mortgage-backed securities backed by GSEs such as Fannie Mae and Freddie Mac. Officials aim to have that program running in the next several weeks.” Then came this analysis from CNBC: “The Treasury Department is considering a plan to boost the depressed housing market by easing mortgage rates on new home loans. The plan, which is in the development stages, would bring loan rates down as low as 4.5%, a full percentage point lower than the prevailing rates for 30-year fixed mortgages. The plan, which was first reported by the Wall Street Journal, was confirmed by CNBC. Under the plan, the Treasury would buy securities underpinning loans guaranteed by Fannie and Freddie which are temporarily under the control of the government, as well as those guaranteed by the Federal Housing Administration. Officials have said that this plan is different from the one that had previously been championed by FDIC’s chairman Sheila Bair. Earlier Wednesday, bond guru Bill Gross told CNBC that the 30-year fixed-rate mortgage could fall as low as 4.5 percent as the economy stabilizes. "The mortgage rate will come down another 50 to 100 basis points," Pimco's founder and chief investment officer said. "That's basically what the government needs. They need a 4 1/2 percent to 5 percent 30-year rate in order to support home prices and, yes, to encourage refinancing and the process of reliquification within the economy." 4.5%! Are you kidding me? Unbelievable! We have not seen the 30 year fixed rate under 5.0% in many decades. It’s completely absent from my memory! (Who cared what interest rates were when you’re a kid!) FreddieMac publishes rates back to 1971 and it simply has never been there. But then I read this opinion from Larry Baer of “Market Alert”, a mortgage market analyst. “I certainly don't want to rain on anybody's parade here - but there are a couple of things I think you ought to consider in order to put this story into perspective. The Treasury Department already has authority to buy billions of dollars of mortgage-backed securities - it has yet to use that authority to any large degree. Does additional purchase authority suddenly create a storm of mortgage-backed security purchase activity that didn't exist before? How much additional buying power is necessary to push 30-year fixed-rate mortgage-backed securities down to 4.5%? The Federal Reserve announced plans to buy $500 billion of mortgage-backed securities from Fannie and Freddie on Monday - which did cause rates to spike lower - for a couple of hours - before mortgage interest rates finished flat to slightly higher through this morning. “ and then he said “So in a nutshell, we're talking about a program that doesn't even exist, that has no qualifying parameters, no timeline for implementation if it actually takes form and that will - at best - offer a note rate that is roughly 50 basis-points less than is immediately available in the market today. “ Confused? Me too. But the one thing we now know is that the Federal government will do everything in its power to keep mortgage rates low in order to stimulate the housing market. Low housing prices and low interest rates make this the best real estate buying opportunity ever! It’s a great time to buy or refinance because this is mortgage rate history! I will analyze buying power in a later email so watch for it. As always, if you have any questions about this or any other mortgage subjects, feel free to call me anytime.

As you may have gathered, I usually have an opinion about everything mortgage related. I usually can't stay quiet about any news concerning my profession. However, lately I've been nothing but dumfounded. I walk around scratching my head or with my mouth open like I'm catching flies.  I have a pretty good handle on how the mortgage market works because I have to. I've become pretty good with short term predictions and feel confident in counseling clients concerning their mortgage plans. But not for the past eight weeks or so!

  There used to be problems that could actually be identified by people like me. GM had a problem because their sales were down and their employee benefits were too high. Apple's products weren't selling for a while until the Ipod came to life. The price of oil could be tied to a falling dollar and increased worldwide demand. All of these types of things I could wrap my small brain around and make them make sense. It was the same with the mortgage market. Bad market news was actually good for interest rates.

  Today, things are different. The economic problems facing the country are way too far reaching for me to even begin to understand. There is simply no one idea that is a fix-all solution. Most will tell you that the problem is bad mortgages, and that is certainly the major contributing factor to the banking problem but it goes much farther and much deeper than that. If that was the only issue, the so called "bailout" would be buying up mortgages and "voila!" no problems. But along with help in that arena, the U.S. Treasury is contributing money to the International Monetary Fund, the FDIC is now insuring loans between banks, we are loaning money to AIG, one of the largest financial companies in the world so it won't go under, the government re-acquired Fannie Mae and Freddie Mac and now the government is buying stock in the nine largest banks in the country! Although mo rtgages may have been where it started this problem is much bigger than I can fathom.

  The steps that have been taken go far beyond my economic educational background. So I won't pretend to express an intelligent opinion pro or con on the action so far taken. The solution here is a long term one. In our instant gratification society, we expect things to be fixed immediately. This won't happen here. We have been seeing a flurry of activity to help the situation but, believe me, this is just to stop the bleeding. It's sort of like an EMT at an accident scene. The hospital is where the real recovery takes place. We're still lying in the street at the scene. The healing will be slow but we will heal.

  I will continue to express opinions, as you well know, and I see the recovery already underway. Real estate sales are up today and prices will be up in the future as the housing inventory falls.

  So then what good can be said? This is an excellent time to consider the purchase of real estate. Money is available, albeit, a little harder to get. Interest rates are still excellent and home prices are low enough for the average renter to be able to afford a home! If you or anyone you know has the ability to purchase real estate today, it's a great time to do it. Real estate is and has always been a long term investment. As such, this period in time is the perfect opportunity to invest for the future whether for your first home or an investment. As always, if you have any questions about this or anything I may write, feel free to give me a call anytime.

Ok, this one is a little long but, bear with me, and I think you'll get a good understanding about what's going on.

 First a quick review. Fannie Mae was created in 1938 as part of Franklin Roosevelt's New Deal. The collapse of the national housing market in the wake of the Great Depression discouraged lenders from investing in home loans. Fannie Mae was created in order to provide local banks a place to sell their loans. These purchases were funded with federal money in an attempt to raise levels of home ownership and the availability of affordable housing. This provided lenders with a place to sell their loans giving them the opportunity to lend even more money. It established what we commonly call the secondary mortgage market. In 1968, part of Fannie Mae was converted to a private corporation. Congress chartered Freddie Mac as a private corporation to provide competition in the secondary mortgage market to end Fannie Mae's monopoly. Since then, these corporations have become huge. Although banks continue to lend without selling their loans to these entities, the great majority of loans move through this market.

  So what's the bad news? Unfortunately, the housing market is taking longer to recover than all had hoped. On Friday, the Mortgage Bankers Association said that more than 4 million American homeowners with a mortgage, a record 9 percent, were either behind on their payments or in foreclosure at the end of June.

  Because of this, banks continue to absorb mortgage losses due to the foreclosure of homes whose value has dropped below the mortgage balance. Since all banks are required by the government to keep a minimum reserve of cash, some have come precariously close to this minimum and have been unable to borrow enough to keep this reserve. When that happens, banks fail and the government comes in to take over. Should this continue, we shall see even more failures such as Indy Mac Bank, and more recently, Silver State bank in Nevada.

  I much the same way, falling home prices are the key to Fannie and Freddie's troubles. As prices fall, the value of mortgages the companies hold on their books drops. That means Fannie and Freddie are recovering far less money through foreclosure sales. Fannie and Freddie together hold about half of U.S. mortgage debt and are the largest source of funding for home mortgages. But they are seeing too many of those mortgages go into default. Losses between April and June for the two companies totaled $3.1 billion, and investors fear the losses will continue to grow.

  They raise money mostly through the issuance of company stock and through the sale of mortgage bonds. If investors lose confidence in either, it becomes more difficult to raise capital and harder to keep purchasing mortgages from banks. Without a place to sell their loans, borrowing from banks becomes more difficult.

  So what's the good news? The government plans to inject up to $100 billion in each of the government-chartered mortgage companies. This could not only help lower mortgage rates but, some investors are hoping, buoy the overall economy. The plan could help banks feel more open to write new mortgages and to refinance existing mortgages at lower rates, offering a possible lifeline to consumers struggling with increasing payments. Mark Zandi, chief economist at Moody's Economy.com, predicted that 30-year mortgage rates, currently averaging 6.35 percent nationwide, could dip to close to 5.5 percent. That's because investors will be more willing to buy the debt issued by Fannie and Freddie - and at lower rates - since the federal government is now explicitly standing behind that debt. Dave Rovelli, managing director of U.S. equity trading at Canaccord Adams in New York, said "It saves Armageddon from happening," he said. "If you think about it this helps the financials, this helps the housing market."

"Right now, Fannie and Freddie are the mortgage market, and that has been choked. If this helps to clear the way for the housing market to recover, it will filter through to the rest of the market," said Quincy Krosby, chief investment strategist at The Hartford. "Anything that helps bring a bottom to housing prices, helps put in a floor, is going to be a boon for the overall market."

The move puts the full-faith-and-credit of the United States government behind all the debt instruments of the two companies. As such, we have seen at least a 0.5% decrease in the 30 mortgage rate this morning! What a boost to today's home buyer! Housing has such a huge effect on the economy that this should help in all areas - especially jobs. If there was ever a time to purchase property, now is the time. Low prices and low interest rates! If you or anyone you know has a question about how much home they can afford or what refinancing might do for them, have them give me a call. I'd be happy to help. One school of thought with investing says "always do what the other guy ain't." As I've always said, my glass is half full! How about you?

 The new law that was signed by the President this week is intended to help with the housing market. Most items in this law are designed to stabilize the financial mortgage market and assist homeowners in trouble. Most of the points in the "Housing and Economic Recovery Act" are a good move in the right direction. However, there are a few things in this law that don't keep with the spirit of the rest of it. What were they thinking?

 It's obvious to most of us that we need to reduce the inventory of homes. This is simply done by helping people buy homes. One of the staple mortgage programs to help people buy homes is the FHA program. This requires a small 3.0% down payment with less restrictive qualification guidelines so more buyers can qualify without having a large down payment.

 FHA also allows for gift money to be used for a purchase. However, this gift money could not come from the seller (or any party having interest in the purchase) even though the seller was allowed to pay for closing costs. A creative company called Nehemiah began to provide this gift money to buyers by allowing the seller to give the gift amount to them. They then would gift the money back to the buyer to close the escrow. This made it possible for a buyer to purchase a home without the need for the down payment and, if the seller was willing, without up to 6% of the selling price for closing costs. The program helps sellers, including banks, to sell property and buyers to get into a home.

 The newly signed law hit the FHA home buying market with a double whammy. First, it has increased the down payment requirement to 3.5% from 3.0%. This may not sound like a lot but it can be huge for young first time homebuyers. Second, it disallows the practice of the Nehemiah program. According to the Nehemiah Company website, their program was used in about 40% of the FHA purchase transactions. According to the Government Accounting Office, FHA mortgages accounted for only 3.5% of all mortgages in 2004, the peak of easy credit loans. Since then, FHA mortgage market share has remained fairly steady but it is estimated that it is rising once again.

 So when the housing market is in such need of a boost, why are these rules in place? It has to do with risk. HUD insures FHA mortgages. If the borrower defaults, the insurance pays the lender for losses they may have incurred. The thinking here is that an increase in the down payment amount will result in fewer defaults. Although I can see the logic behind a bigger down payment but what about gifted money? We can no longer use the seller for gift money through Nehemiah. But if the gift comes from somewhere else besides the seller (parents, friend, employer, etc.), isn't the final result the same? The down payment is still not funded by the buyer. This makes no sense to me and the Nehemiah program should remain in place in these tough housing market times.

 Just my opinion. But if you feel the same, please email your congress person to encourage them to reinstate this helpful program.

 If you're breathing, you know there's been a lot of news lately concerning the financial markets and especially the mortgage market. Unfortunately, it generates a lot of fear in the average consumer. But let's look at the bigger picture.

 First a little background. If you unsure exactly what Fannie Mae and Freddie Mac are all about, I'll summarize. If you already know this, skip the paragraph. Fannie Mae was created in 1938 as part of Franklin Delano Roosevelt's New Deal. The collapse of the national housing market in the wake of the Great Depression discouraged lenders from investing in home loans. Fannie Mae was created in order to provide local banks a place to sell their loans. These purchases were funded with federal money in an attempt to raise levels of home ownership and the availability of affordable housing. This provided lenders with a place to sell their loans giving them the opportunity to lend even more money. This established what we commonly call the secondary mortgage market. In 1968, part of Fannie Mae was converted to a private corporation. To provide competition in the secondary mortgage market to end Fannie Mae's monopoly, Congress chartered Freddie Mac as a private corporation operating as an additional source on the secondary market for lenders. Since then, these corporations have become huge. Although banks continue to lend without selling their loans to these entities, the great majority of loans move through this market.

 After the creation of the secondary mortgage market by the government, we saw the inception of the mortgage backed securities market. These worked the same way but were non-government backed. A majority of these loans were for less-than-ideal borrowers and the market worked in much the same way. Banks made loans and investors purchased these loans for a return. As we moved into the last decade, these loans became more and more liberal in their qualification and increasingly risky to the investor. These were the so-called "subprime" loans. But because of this risk, the returns were higher for the investors and these securities became very popular. As these riskier loans started to default (hence the risky nature of the loan) lenders and investment houses with large portfolios of these types of loans began to take huge losses (i.e. IndyMac Bank and Countrywide). Lenders who remained conservative in their lending practices over the last decade are doing fine today.

 For the most part, Fannie Mae and Freddie Mac have been more conservative and didn't participate in the very risky loans. Their default rates are not nearly as high as the subprime lenders. But even they had more liberal lending guidelines during this period and their default rate is higher than they are used to.

 But here's the big picture. The housing market has a monstrous effect on our economy. What happens when someone buys a home? The first thing they do is hire a moving company or rent trucks in order to move. Then they go to the big box hardware store for paint, carpet or simply home improvement. Or they might go to department stores for new curtains, they hire a lawn service or maybe a pest control service, they might install a monitored security system or they might even need a new barbeque grill. The domino effect of a home purchase is enormous.

 If Fannie and Freddie can no longer purchase mortgages on the secondary market, home buying will come to a virtual standstill.

 In a June op-ed piece by Henry Paulson for "TheHill.com" he said:

 "Together, Fannie and Freddie's market share has grown substantially from 46 percent of all new mortgages in the second quarter of 2007 to nearly 70 percent in the first quarter of 2008. Because of the GSE guarantee, mortgage securities are more attractive to investors around the world, investors who are then more willing to purchase mortgage securities and finance new mortgages. It has never been more critical that markets have confidence in how Fannie Mae and Freddie Mac are overseen and regulated."

 And he followed that with:

  "In the simplest of terms, the housing market has slowed due to excess inventory and the reduced availability of mortgage finance. These two factors are working in tandem; we cannot reduce the inventory unless homebuyers can secure a mortgage. And the price of that mortgage will affect how many buyers come into the market and when. The secondary mortgage market has played an innovative and vital role in providing affordable mortgages in the past, but reduced investor confidence leads to higher mortgage rates."

 In essence, there is no way that we can afford to allow these entities to fail. Lending practices are much more conservative now than they were just four short years ago but people are still able to buy homes. What would happen if Freddie and Fannie, who are now responsible for 70% of the originated loans, went away? If you think the economy is bad now, if they fail this would seem like Shangri-La!

 Also let's not forget about the world economy. Regardless what you may think of the emerging economies taking our jobs through outsourcing or lower wages causing companies to leave the country for lower costs, we are still the 800 lb gorilla in the world's living room. When we stop consuming, the entire world suffers with us. We can virtually take down the world economy by ceasing to purchase products; ceasing to consume! Before that happens, foreign investors will be pouring money into the United States just to save their own economies. The better off our economy is the better for them. The more Americans that are working, the more we consume. Believe me, if there is an issue concerning a lack of available money to shore up our mortgage market, they will be the first to jump in to make sure the housing market doesn't collapse! This is why the federal government is stepping in now to make sure Fannie Mae and Freddie Mac continue business as usual. It is way too important to ignore!

So take all of this news with a grain of salt. The housing market will recover; it always has. As the population continues to increase, remember that there is a finite supply of land. Demand will increase and values will rise in the long term. If you have any thoughts, feel free to let me know. This is just one man's opinion.

As always, I want to keep my clients and working partners up to date with any changes that could affect your personal or business decisions. A few weeks ago, there was a change to mortgage qualifying standards in specific situations. Mortgage lending guidelines continue to tighten.

 First a simple quick review. Fannie Mae and Freddie Mac are corporations that supply liquidity in the national mortgage market. They facilitate the ability for lenders to continue to lend by purchasing loans on the secondary market. This keeps a supply of mortgage money available for consumers. Generally, these are the best loans available for the borrower. Lenders who want their loans to be sold (most lenders) must adhere to FNMA or Freddie Mac lending guidelines.

 There are now new requirements for moving from your old home and keeping it as a second home or a rental. These requirements are much more stringent and could affect you so keep this in mind as you plan your next purchase or move.

 Let's start with a few definitions.

 •·         PITI - This stands for Principal, Interest, property Taxes, and Insurance (hazard or fire).

•·         Reserves - This is the amount of liquid money the borrower has left after the transaction has closed. This can be in checking, savings, time deposits, stock brokerage accounts, 401k or IRA accounts (usually counted at 70% of current value), or even cash value life insurance.

•·         Equity - This is the difference between the value of a property and the existing liens (i.e. mortgage). Documented equity must be proven with an appraisal.

 Selling your old home and moving to a new one is what most people do when moving. However, if your home doesn't sell or has sold but not yet closed escrow and you intend to complete the purchase of your replacement home immediately, you must qualify with both payments included as debt against your income. This usually forces most buyers to complete the sale of their present property before completing the purchase of the replacement. This is not unusual.

 Now for the real changes:

 If you intend to keep your home as a rental property the old requirement was to simply produce a signed lease for the old home. Then 75% of the monthly lease income could be used to offset the PITI payment of the rental. But, the new guidelines state the following:

•·         75% of the lease income can still be used to offset the rental property PITI payment but there must be at least 30% documented equity remaining in the property.

•·         If there is not 30% equity remaining, rental income may not be used to offset expenses AND:

•§         Both the current and the proposed PITI mortgage payments must be used to qualify the borrower for the new transaction and

•§         6 months of PITI payments for both properties will be required as reserves.

•·         In either case, rental income must be documented with a fully executed lease agreement, proof of a security deposit tenant and proof of its deposit into the borrower's (landlord's) account.

 If you intend to keep your property as a second home:

•·         Both the current and the proposed new PITI mortgage payments must be included as debt against your income to qualify for the new transaction.

•·         6 months PITI reserves for both properties will be required. 2 months of reserves for both properties might be considered if there is at least 30% documented equity remaining in the property.

 What does this all mean? It makes it very difficult for people to abandon their old homes in order to purchase a less expensive one simply because values have fallen and more is owed on the property than it might be worth. This has been happening of late as you may have heard or read about. However, it is also much more difficult for the average Joe to keep the home they purchased as a rental and move on to a different property in which to live. However, for the person who has been relatively stable and has built equity in their home, it should not be too much more difficult to make this sort of move.

 As always, please remember, I'm here to offer advice and to be your sounding board for ideas in your financial future. My business depends on doing a good job for you so that you will tell your family, friends and co-workers where to go for mortgage counseling. Should you run into someone trying to make a decision or in need of information, just give me a call with their name and number and I'd be happy to follow up with them for you! And remember, I'm never to busy for any of your referrals!

 

Mortgage rates have increased more than 0.5% in just the past two weeks! So what's up? Let me throw in my two cents.

We have seen a lot of volatility in the mortgage bond market, much more than we've used to. If you've read previous information from me, you understand that mortgage rates are determined by mortgage bond prices. The more money that pours into the bond market, the higher bond prices get and the lower the yield of these bonds become. These yields determine mortgage interest rates. Generally, if the stock market does poorly, investors turn to the guaranteed returns of the bond market. This could be treasury bonds, municipal bonds, corporate bonds, mortgage bonds, etc. These bonds are purchased at a discount with a fixed return to the investor. So instead of fearing losses in the stock market, they move to the safety of bonds. When there is a good economy and a rising stock market, the reverse happens.

This all sounds reasonable but, lately we've been seeing another phenomenon...the commodities market. Trading commodities has never been for the faint of heart. It is sometimes referred to as legalized gambling. This is where large gains or losses can occur. You are actually betting that the price of a commodity (wheat, corn, pork bellies, gold, silver, oil, natural gas, etc.) will go up or down and if you're wrong, you lose. Because of the mechanics in commodity trading, this has always been a place of high risk and big gains or big losses. Most conservative investors stayed away from this market because of this. However, since the price of oil has continued to rise, some of the rise caused by speculation, this has affected almost every commodity you can think of. Oil and gasoline are used to get, grow or maintain just about everything. It now costs more to mine gold, to grow crops and to feed cattle. This means the price of everything is rising (as if you didn't know). As these commodities continue to rise, it has recently been a much less risky place to invest.

From the mortgage bond perspective, instead of the flow of money moving from risk (the stock market) to safety (the bond market) more money is now sitting in the commodity markets. There are simply less buyers and less money available for bonds. We are now seeing times when the stock market and the bond markets fall simultaneously because money moves to commodities. We used to wait for the stock market to fall in order to see falling mortgage rates and vice versa. The commodities market has now become the 3^rd place to invest. Will this continue?

Probably not. I believe that when we see oil stabilize, we'll return to the old standards of investing. This will bring about more mortgage stability. Will rates rise or fall? No one knows but I'm guessing that rates will remain low for the coming year.

As we saw in the housing market, prices cannot continue to go up indefinitely. There will be a commodities "crash" and money will flow from the commodities market to stocks or bonds. I believe we'll see more money move into bonds because retail prices are continuing to rise. As that happens, demand will fall, the stock market will not return what investors want, and they will wait it out in the bond market. All that will help mortgage rates to remain at low levels

This is just my two cents. All we can do is watch but while we're waiting, hang on for the ride!

One of the most common subjects of conversation around the water cooler these days is the price of real estate. Let's talk about that for a minute. What is the "price" of real estate? Simply put, it is the amount of money a ready, willing and able buyer will pay for a property. It is just supply and demand. The price of anything will go up if more people want a particular item and there is not enough to go around. As we have recently seen, the reverse is also true. If there are fewer people who want the item, prices will fall.

  Rising and Falling Values

Several years ago home prices rose dramatically. Demand was very high and financing was much easier to obtain. Over the past three years we have seen the reverse. Low housing demand and less available financing cause values to fall. Neither is uncommon but it concerns lenders. Lenders are always concerned with real estate value because a property is the collateral for their loan. They worry what will happen should the borrower default on the loan and they have to foreclose on and sell the property.

  Risk

Lender will require appraisals to determine value before they will lend money. They then determine risk by the ratio of the total amount of the loan compared to the value of the property. This percentage is commonly referred to as loan-to-value ratio or LTV. Generally, any loan at 80% of the value or lower is considered a good risk. Loans can be done at a higher LTV but usually for a higher rate or with an added mortgage insurance premium.

So What Is Value?

So how is value determined?  Value on appraisals is mostly determined by what has recently sold. I often hear people saying, "The Jones' home is on the market for $300,000.00 and mine is the same size but better so my home must be worth $310,000.00." We have to remember, asking prices have very little to do with value. Only homes that have sold can truly determine value. In addition, only homes of approximately the same size and location can be used to compare with the subject property. It is not uncommon for a lender to reject an appraisal because value was determined by comparing unlike properties or properties too far away from the subject of the appraisal.

What Else Can An Appraisal Tell?

Lenders require appraisals not just for value but for other reasons. Appraisals will show the floor plan and the condition of the home reassuring lenders it would be marketable should they have to resell after foreclosure. They will also present photos of the property and its location. There will be a description by the appraiser of any abnormal conditions or adjustments in value. There will even be comments concerning nearby railroad tracks, commercial or industrial zoning or whether or not the property has been on the market or sold recently. (Many lenders won't refinance a property if it has been recently listed.)

So What About Today's Market?

Lender's today are scrutinizing appraisals more than ever before. Falling real estate prices have made them more wary of a property's true value. The risk involved with the previously mentioned LTV of a loan remains the same and they are being much more careful today than in the past. In fact, several market areas in the country have been designated as "declining value" markets. Designated by county or metropolitan areas, Florida, Nevada, California and several others are included in this list. In these areas, lenders have reduced the LTV's for particular programs. For example, if a lender was previously willing to lend 90% of the appraised value of a home for a particular loan program, to has been reduced to a maximum of 85%.

An experienced lender can tell you if an appraisal might be an issue for your loan, whether purchasing or refinancing. He also probably has established relationships with reputable appraisers where many issues that concerns lenders will not be a problem. Remember, we are here as you mortgage professionals. Please feel free to email or call anytime with questions.

If you've followed my emails and blogs for some time, you know that bad economic news can sometimes push mortgage rates down. That's about all it seems we've been hearing lately! You would also know that the Federal Reserve doesn't necessarily control the mortgage market. Here is a good example.

We spent the entirety of last week with 30 year mortgage rates under 6.0%. Much of that had to do with the bad news concerning Bear Stearns, one of the biggest financial institutions in the country, almost folding. This was due to its previous over exuberant investment in the sub prime mortgage world. This sent a shudder through the financial markets.

Then the Federal Reserve lowered it funds rate once more on Thursday. The market was closed on Friday but, as usual, mortgage rates rose again today after the rate cut. This has happened immediately after the last four rate cuts. Let's look at this a little more logically. Since last summer, 30 year fixed mortgage rates have fluctuated to a high of about 6.875% and a low of 5.625%. In the summer, the fed funds rate was 5.25% and has been steadily lowered to 2.25% today. If there was a direct correlation, wouldn't the 30 year mortgage rate today be less than 4.0%?

The mortgage market is dependent upon mortgage bonds, their purchase or sale. As demand rises from investors for the safety of bond investments, prices for these securities rise and the yield or rate falls. That is why bad economic news sometimes affects mortgage rates in a positive way. A Fed move one way or the other could signal good or bad future news dependent on the interpretation of the rate adjustment. Good and bad economic news has the same effect.

I follow this on a daily basis and am happy to answer all you questions concerning rates and programs available to you in the mortgage market. Feel free to give me a call anytime. I'm always happy to help!