Homes are selling again, but the market today is divided by price point. Your best strategy depends on where your home sits on that spectrum.
By Amanda Gengler, Money magazine writer
September 24, 2009: 10:03 AM ET
(Money Magazine) -- Home sales are rising. Builders are buying lots. And prices are no longer in free fall. After so much pain, there are signs of life in the housing market.
But the "recovery" is far from universal. In many cities cheaper homes are selling fast -- but mid-range properties are still lingering, and high-end homes are gathering dust. "The luxury market still looks ugly," says economist Joshua Shapiro at economics consultancy MFR. If you're selling or buying, your strategies should depend on the value of the home you want or own.
The bottom tier (hot)
The lowdown: A big chunk of the 1.9 million post-boom foreclosures have been among the least expensive 35% of homes. Bargain prices on these foreclosures and a new tax credit of up to $8,000 for first-time buyers have lured investors and would-be homeowners back to the market, even in hard-hit areas, says Pat Lashinsky, CEO of online brokerage ZipRealty.
Sales of homes between $100,000 and $250,000 are up 9% from a year ago. Meanwhile, many banks halted foreclosures earlier this year while waiting for details on the Obama administration's foreclosure-prevention plan. Greater demand combined with less supply is providing a strong spark to the market. "Buyers in most areas are now going up against multiple offers," says Lashinsky.
Buyers: See homes the first day they're listed, and if there's one you want, submit an offer immediately, says Phoenix realtor Susan Ramsey. Don't expect a deep discount; prices for lower-end homes are stabilizing. Put down 20% or more, if you can, to compete with cash-rich investors. Offer not accepted? Check in with the seller's agent a few more times; many deals fall through.
If you aren't under pressure to move, keep in mind that the supply crunch is probably temporary. The foreclosure rate is expected to stay at record highs for the rest of the year, and as prices stabilize, more sellers will jump back into the market.
Sellers: Forget trying to compete with foreclosures on price. Some buyers will pay more for a home in move-in condition, so spruce yours up and sell that fact hard in your marketing materials.
Many of the other listings are likely to be short sales in which the bank agrees to accept a price below what the owners owe on their mortgage. Since short sales can take months, offering a quick, flexible closing date will give you another advantage -- and attract first-time buyers aiming to take advantage of the tax credit before it expires at the end of November.
The middle tier (cool)
The lowdown: Demand is soft. That's because the likely buyers are trying to trade up -- difficult for people who bought in the past five years, because they have so little equity. In fact, about a third of all homeowners with a mortgage owe more than the home is worth, according to First American CoreLogic.
Buyers: Unload your current home first, so you know what you can afford to spend on a new place. When you find a home you like, offer 10% less than the asking price -- a realistic discount for a lukewarm market, says realtor Ramsey.
Sellers: If you have to move soon, it's all about standing out from the pack. If your home is sitting on the market, go for one big price cut instead of slowly ratcheting down. A bold move will attract attention and prevent the listing from going stale. Offer to cover closing costs, and since many buyers will be short on cash after the purchase, throw in some necessary improvements, such as new carpeting, blinds, or painting.
If your home is in the half-million-dollar range, try to set the price at a level that doesn't require a jumbo loan, normally $417,000 or less (up to $729,750 in pricey areas). The difference between a $400,000 conforming loan and a $420,000 jumbo loan is several hundred dollars a month. Finally, if you can hang in there, know that prices will likely start to recover within the next 12 to 18 months, says economist Shapiro.
The top tier (cold)
The lowdown: The recession and the credit crunch have almost shut down the top 10% of the market, says Joel Naroff, president of Naroff Economic Advisors. Fewer people can afford a luxury property, and since banks are hesitant to underwrite supersize loans, it's tough to finance them.
Moreover, foreclosures are rarer at this price level, and homeowners, unlike banks, are reluctant to slash their price. Given all that, the prices on high-end homes will probably fall another 10% until the market hits bottom, says Mark Zandi, chief economist at Moody's Economy.com.
Buyers: Get pre-approval before you shop: Jumbo mortgages are tougher to qualify for, require larger down payments (as much as 30% to 40%), and cost nearly a percentage point more than smaller loans. And ask for freebies: While sellers often balk at low-ball offers, they should be willing to negotiate, including paying closing costs and other extras. "You can set the terms," says ZipRealty's Lashinsky. If the seller refuses, move on.
Sellers: You'll need to seriously undercut the competition. (Your agent can provide comparable sales figures for the past three months.) You may want to finance the deal yourself. And motivate buyer's agents with a larger cut of the deal -- a total of 4%, says Sacramento realtor Larry Henderson. It may be painful, but the price of your home is likely to fall further if you wait -- and recovery for your market is a ways off.
Thursday, September 24, 2009
Monday, September 21, 2009
FHA Announces Several Policy Changes. Adopts HVCC Guidelines
by Adam Quinones on Sept 18, 2009 at 4:02pm
The Federal Housing Administration (FHA) today announced several significant policy changes that are intended to improve their exposure to risk. The changes, effective January 1, include:
Modification of Procedures for Streamline Refinance Transactions
Adoption of Home Valuation Code of Conduct Guidelines (some not all)
Updated Appraisal Validity Period
New Appraisal Portability Regs
New Requirement of Lenders to Submit of Audited Financial Statements for Review
Adjustments to the Approval Process for Participation in FHA Loan Origination
Increased Net-Worth Requirements for Lenders
Grabbing the attention of mortgage professionals was FHA's decision to adopt language from HVCC appraisal guidelines. The HVCC, which has been the subject of heated debate within the industry, was implemented by Fannie Mae and Freddie Mac on May 1, 2009. At that time the FHA decided not to adhere to the policy. This undoubtedly increased demand for FHA loan products as originators quickly learned of the multitude of problems associated with HVCC. The new requirements will prohibit any commissioned based lender staff member from ordering an FHA appraisal.
FHA will not require the use of AMCs or other third party organizations for appraisal ordering, if lenders do use AMCs and/or other third party organizations FHA-approved lenders must ensure that:
FHA Appraisers are not prohibited by the lender, AMC or other third party, from recording the fee the appraiser was paid for the performance of the appraisal in the appraisal report.
FHA Roster appraisers are compensated at a rate that is customary and reasonable for appraisal services performed in the market area of the property being appraised.
The fee for the actual completion of an FHA appraisal may not include a fee for management of the appraisal process or any activity other than the performance of the appraisal.
Any management fees charged by an AMC or other third party must be for actual services related to ordering, processing or reviewing of appraisals performed for FHA financing.
AMC and other third party fees must not exceed what is customary and reasonable for such services provided in the market area of the property being appraised.
Here are a few other notable changes...
Appraisals
In cases where a borrower has switched lenders, FHA did not allow a new appraisal to be ordered. Instead the first lender was required, at the borrower’s request, to transfer the case to the second lender. This guideline generally slowed the loan process as the original lender often times was unwilling to transfer the case in a timely manner.
The new guideline, effective January 1, allows a second appraisal to be ordered by the second lender under the following limited circumstances:
1. The first appraisal contains material deficiencies as determined by the Direct Endorsement underwriter for the second lender.
2. The appraiser performing the first appraisal is on the second lender’s exclusionary list of appraisers.
3. Failure of the first lender to provide a copy of the appraisal to the second lender in a timely manner would cause a delay in closing, posing potential harm to the borrower.
Potential harm includes events outside the control of the borrower such as loss of interest rate lock, purchase contract deadline, foreclosure proceedings, and late fees.
FHA also reduced the length of time that an appraisal could be considered valid for collateral underwriting. Previously, FHA considered an appraisal written within the last six months to be an acceptable property valuation. Today's announcement reduces that period from six months to four.
Advertising
FHA-approved mortgagees must use their HUD registered business names in all advertisements and promotional materials related to FHA programs. HUD registered business names include any alias or “doing business as” (DBA) on file with FHA. FHA-approved mortgagees must keep copies of all advertisements and promotional materials for a period of two years from the date that the materials are circulated or used to advertise.
Who can work with FHA and FHA originated loans
A lender or mortgagee shall not have any officer, partner, director, principal, manager, supervisor, loan processor, loan underwriter, or loan originator of the applicant mortgagee who is:
(1) currently suspended, debarred, under a limited denial of participation (LDP), or otherwise restricted under part 25 of title 24 of the Code of Federal Regulations, 2 Code of Federal Regulations, part 180 as implemented by part 2424, or any successor regulations to such parts, or under similar provisions of any other Federal agency;
(2) under indictment for, or has been convicted of, an offense that reflects adversely upon the applicant’s integrity, competence or fitness to meet the responsibilities of an approved mortgagee;
(3) subject to unresolved findings contained in a Department of Housing and Urban Development or other governmental audit, investigation, or review;
(4) engaged in business practices that do not conform to generally accepted practices of prudent mortgagees or that demonstrate irresponsibility;
(5) convicted of, or who has pled guilty or nolo contendre to, a felony related to participation in the real estate or mortgage loan industry—
(i) during the 7-year period preceding the date of the application for licensing and registration; or
(ii) at any time preceding such date of application, if such felony involved an act of fraud, dishonesty, or a breach of trust, or money laundering;
(6) in violation of provisions of the S.A.F.E. Mortgage Licensing Act of 2008 (12 U.S.C. 5101 et seq.) or any applicable provision of State law; or
(7) in violation of any other requirement as established by the Secretary.
Streamline Refinance Transactions
At the time of loan application, the borrower must have made at least 6 payments on the FHA-insured mortgage being refinanced.
At the time of loan application, the borrower must exhibit an acceptable payment history as described below.
1) For mortgages with less than a 12 months payment history, the borrower must have made all mortgage payments within the month due.
2) For mortgages with a 12 months payment history or greater, the borrower must have:
a) Experienced no more than one 30 day late payment in the preceding 12 months,
AND
b) Made all mortgage payments within the month due for the three months prior to the date of loan application.
The lender must determine that there is a net tangible benefit as a result of the streamline refinance transaction, with or without an appraisal. Net tangible benefit is defined as:
reduction in the total mortgage payment (principal, interest, taxes and insurances, homeowners’ association fees, ground rents, special assessments and all subordinate liens),
refinancing from an adjustable rate mortgage (ARM) to a fixed rate mortgage,
OR
reducing the term of the mortgage
If a credit score is available, the lender must enter the credit score into FHA Connection. If more than one credit score is available, lenders must enter all available credit scores.
If subordinate financing is remaining in place, the maximum combined loan-to-value ratio is 125 percent.
For streamline refinance transactions WITHOUT an appraisal, the CLTV is based on the original appraised value of the property.
For streamline refinance transactions WITH an appraisal, the CLTV is based on the new appraised value.
Revised Streamline Refinance Transactions WITHOUT an Appraisal
The maximum insurable mortgage cannot exceed:
The outstanding principal balance minus the applicable refund of the UFMIP,
PLUS
The new UFMIP that will be charged on the refinance.
Revised Streamline Transaction WITH an Appraisal
The maximum insurable mortgage is the lower of:
1) Outstanding principal balance minus the applicable refund of UFMIP, plus closing costs, prepaid items to establish the escrow account and the new UFMIP that will be charge on the refinance;
OR
2) 97.75 percent of the appraised value of the property plus the new UFMIP that will be charged on the refinance.
Discount points may not be included in the new mortgage. If the borrower has agreed to pay discount points, the lender must verify the borrower has the assets to pay them along with any other financing costs that are not included in the new mortgage amount.
Further Changes Currently Being Considered:
Modify Mortgagee Approval and Participation in FHA Loan Origination
Lenders seeking approval to originate, underwrite, or service an FHA loan must meet the eligibility criteria for a supervised or non-supervised mortgagee. Mortgagees with this approval status must assume liability for all the loans they originate and/or underwrite. Loan Correspondents (mortgage brokers) will continue to be able to originate FHA-insured loans through their relationships with approved mortgagees; however they will no longer receive independent FHA approval for origination eligibility.
These policy changes will require the FHA approved mortgagee to assume responsibility and liability for the FHA insured loan underwritten and closed by the approved mortgagee. These changes align FHA with the GSEs and will potentially increase the number of loan correspondents (mortgage brokers) who are eligible to originate FHA-insured loans while providing for more effective oversight of loan correspondents through the FHA approved mortgagees.
Increase Net-Worth Requirements for Mortgagees
The FHA plans to propose to increase the net worth requirement for approved mortgagees to meet industry standards. The requirement is currently at $250,000 and has not been increased since 1993. HUD is proposing an initial increase of approximately $1,000,000 that would be in place within one year of the enactment of this rule. To maintain consistency with industry standards, HUD may propose that the net worth requirements be increased further in future years to a level comparable to those required by GSEs and other market institutions. These changes will help to ensure that FHA lenders are sufficiently capitalized to meet potential needs, thereby permitting HUD to mitigate losses and decrease risks to the FHA insurance fund.
The Federal Housing Administration (FHA) today announced several significant policy changes that are intended to improve their exposure to risk. The changes, effective January 1, include:
Modification of Procedures for Streamline Refinance Transactions
Adoption of Home Valuation Code of Conduct Guidelines (some not all)
Updated Appraisal Validity Period
New Appraisal Portability Regs
New Requirement of Lenders to Submit of Audited Financial Statements for Review
Adjustments to the Approval Process for Participation in FHA Loan Origination
Increased Net-Worth Requirements for Lenders
Grabbing the attention of mortgage professionals was FHA's decision to adopt language from HVCC appraisal guidelines. The HVCC, which has been the subject of heated debate within the industry, was implemented by Fannie Mae and Freddie Mac on May 1, 2009. At that time the FHA decided not to adhere to the policy. This undoubtedly increased demand for FHA loan products as originators quickly learned of the multitude of problems associated with HVCC. The new requirements will prohibit any commissioned based lender staff member from ordering an FHA appraisal.
FHA will not require the use of AMCs or other third party organizations for appraisal ordering, if lenders do use AMCs and/or other third party organizations FHA-approved lenders must ensure that:
FHA Appraisers are not prohibited by the lender, AMC or other third party, from recording the fee the appraiser was paid for the performance of the appraisal in the appraisal report.
FHA Roster appraisers are compensated at a rate that is customary and reasonable for appraisal services performed in the market area of the property being appraised.
The fee for the actual completion of an FHA appraisal may not include a fee for management of the appraisal process or any activity other than the performance of the appraisal.
Any management fees charged by an AMC or other third party must be for actual services related to ordering, processing or reviewing of appraisals performed for FHA financing.
AMC and other third party fees must not exceed what is customary and reasonable for such services provided in the market area of the property being appraised.
Here are a few other notable changes...
Appraisals
In cases where a borrower has switched lenders, FHA did not allow a new appraisal to be ordered. Instead the first lender was required, at the borrower’s request, to transfer the case to the second lender. This guideline generally slowed the loan process as the original lender often times was unwilling to transfer the case in a timely manner.
The new guideline, effective January 1, allows a second appraisal to be ordered by the second lender under the following limited circumstances:
1. The first appraisal contains material deficiencies as determined by the Direct Endorsement underwriter for the second lender.
2. The appraiser performing the first appraisal is on the second lender’s exclusionary list of appraisers.
3. Failure of the first lender to provide a copy of the appraisal to the second lender in a timely manner would cause a delay in closing, posing potential harm to the borrower.
Potential harm includes events outside the control of the borrower such as loss of interest rate lock, purchase contract deadline, foreclosure proceedings, and late fees.
FHA also reduced the length of time that an appraisal could be considered valid for collateral underwriting. Previously, FHA considered an appraisal written within the last six months to be an acceptable property valuation. Today's announcement reduces that period from six months to four.
Advertising
FHA-approved mortgagees must use their HUD registered business names in all advertisements and promotional materials related to FHA programs. HUD registered business names include any alias or “doing business as” (DBA) on file with FHA. FHA-approved mortgagees must keep copies of all advertisements and promotional materials for a period of two years from the date that the materials are circulated or used to advertise.
Who can work with FHA and FHA originated loans
A lender or mortgagee shall not have any officer, partner, director, principal, manager, supervisor, loan processor, loan underwriter, or loan originator of the applicant mortgagee who is:
(1) currently suspended, debarred, under a limited denial of participation (LDP), or otherwise restricted under part 25 of title 24 of the Code of Federal Regulations, 2 Code of Federal Regulations, part 180 as implemented by part 2424, or any successor regulations to such parts, or under similar provisions of any other Federal agency;
(2) under indictment for, or has been convicted of, an offense that reflects adversely upon the applicant’s integrity, competence or fitness to meet the responsibilities of an approved mortgagee;
(3) subject to unresolved findings contained in a Department of Housing and Urban Development or other governmental audit, investigation, or review;
(4) engaged in business practices that do not conform to generally accepted practices of prudent mortgagees or that demonstrate irresponsibility;
(5) convicted of, or who has pled guilty or nolo contendre to, a felony related to participation in the real estate or mortgage loan industry—
(i) during the 7-year period preceding the date of the application for licensing and registration; or
(ii) at any time preceding such date of application, if such felony involved an act of fraud, dishonesty, or a breach of trust, or money laundering;
(6) in violation of provisions of the S.A.F.E. Mortgage Licensing Act of 2008 (12 U.S.C. 5101 et seq.) or any applicable provision of State law; or
(7) in violation of any other requirement as established by the Secretary.
Streamline Refinance Transactions
At the time of loan application, the borrower must have made at least 6 payments on the FHA-insured mortgage being refinanced.
At the time of loan application, the borrower must exhibit an acceptable payment history as described below.
1) For mortgages with less than a 12 months payment history, the borrower must have made all mortgage payments within the month due.
2) For mortgages with a 12 months payment history or greater, the borrower must have:
a) Experienced no more than one 30 day late payment in the preceding 12 months,
AND
b) Made all mortgage payments within the month due for the three months prior to the date of loan application.
The lender must determine that there is a net tangible benefit as a result of the streamline refinance transaction, with or without an appraisal. Net tangible benefit is defined as:
reduction in the total mortgage payment (principal, interest, taxes and insurances, homeowners’ association fees, ground rents, special assessments and all subordinate liens),
refinancing from an adjustable rate mortgage (ARM) to a fixed rate mortgage,
OR
reducing the term of the mortgage
If a credit score is available, the lender must enter the credit score into FHA Connection. If more than one credit score is available, lenders must enter all available credit scores.
If subordinate financing is remaining in place, the maximum combined loan-to-value ratio is 125 percent.
For streamline refinance transactions WITHOUT an appraisal, the CLTV is based on the original appraised value of the property.
For streamline refinance transactions WITH an appraisal, the CLTV is based on the new appraised value.
Revised Streamline Refinance Transactions WITHOUT an Appraisal
The maximum insurable mortgage cannot exceed:
The outstanding principal balance minus the applicable refund of the UFMIP,
PLUS
The new UFMIP that will be charged on the refinance.
Revised Streamline Transaction WITH an Appraisal
The maximum insurable mortgage is the lower of:
1) Outstanding principal balance minus the applicable refund of UFMIP, plus closing costs, prepaid items to establish the escrow account and the new UFMIP that will be charge on the refinance;
OR
2) 97.75 percent of the appraised value of the property plus the new UFMIP that will be charged on the refinance.
Discount points may not be included in the new mortgage. If the borrower has agreed to pay discount points, the lender must verify the borrower has the assets to pay them along with any other financing costs that are not included in the new mortgage amount.
Further Changes Currently Being Considered:
Modify Mortgagee Approval and Participation in FHA Loan Origination
Lenders seeking approval to originate, underwrite, or service an FHA loan must meet the eligibility criteria for a supervised or non-supervised mortgagee. Mortgagees with this approval status must assume liability for all the loans they originate and/or underwrite. Loan Correspondents (mortgage brokers) will continue to be able to originate FHA-insured loans through their relationships with approved mortgagees; however they will no longer receive independent FHA approval for origination eligibility.
These policy changes will require the FHA approved mortgagee to assume responsibility and liability for the FHA insured loan underwritten and closed by the approved mortgagee. These changes align FHA with the GSEs and will potentially increase the number of loan correspondents (mortgage brokers) who are eligible to originate FHA-insured loans while providing for more effective oversight of loan correspondents through the FHA approved mortgagees.
Increase Net-Worth Requirements for Mortgagees
The FHA plans to propose to increase the net worth requirement for approved mortgagees to meet industry standards. The requirement is currently at $250,000 and has not been increased since 1993. HUD is proposing an initial increase of approximately $1,000,000 that would be in place within one year of the enactment of this rule. To maintain consistency with industry standards, HUD may propose that the net worth requirements be increased further in future years to a level comparable to those required by GSEs and other market institutions. These changes will help to ensure that FHA lenders are sufficiently capitalized to meet potential needs, thereby permitting HUD to mitigate losses and decrease risks to the FHA insurance fund.
Housing: "Facing a triple whammy" at end of Year
Monday, September 21, 2009
by CalculatedRisk on 9/21/2009 08:43:00 AM
"We could be facing a triple whammy at the end of the year: the expiration of the tax credit, the end of the Fed mortgage-buying program and rising foreclosures.”
Thomas Lawler, housing economist
From Bloomberg: Housing Suffering Relapse Confronts Bernanke Credit Conundrum. A few excerpts:
The Fed’s purchases of mortgage-backed debt so far this year have dwarfed net issues of such securities by Fannie Mae, Freddie Mac and government-run mortgage-bond insurer Ginnie Mae, which totaled about $440 billion through the end of August, said Walt Schmidt, a mortgage-bond strategist in Chicago at FTN Financial.
Once the Fed exits the market, the spread between yields on mortgage-backed debt and Treasury securities will have to rise, perhaps by a half percentage point, in order to attract other buyers, he said.
...
The impact of terminating the tax credit will show up first in the new-home market, said David Crowe, chief economist of the home-builders’ association.
“It takes at least four months to build a house, and you need to buy it before Dec. 1 to qualify,” he said. “If you haven’t started building it by now, it’s too late.”
...
Residential construction and home sales led the way out of the previous seven recessions going back to 1960, according to David Berson, chief economist of PMI Group, a mortgage insurer in Walnut Creek, California.
These excerpts make three key points:
The spread between Mortgage rates and treasuries will increase when the Fed stops buying MBS (my guess is about 35 bps),
the end of the housing tax credit will probably show up in new home sales data first, and
housing is usually one of the key engines of recovery (along with consumer spending). The overall recovery will probably be sluggish because both housing and consumer spending will be under pressure for some time.
by CalculatedRisk on 9/21/2009 08:43:00 AM
"We could be facing a triple whammy at the end of the year: the expiration of the tax credit, the end of the Fed mortgage-buying program and rising foreclosures.”
Thomas Lawler, housing economist
From Bloomberg: Housing Suffering Relapse Confronts Bernanke Credit Conundrum. A few excerpts:
The Fed’s purchases of mortgage-backed debt so far this year have dwarfed net issues of such securities by Fannie Mae, Freddie Mac and government-run mortgage-bond insurer Ginnie Mae, which totaled about $440 billion through the end of August, said Walt Schmidt, a mortgage-bond strategist in Chicago at FTN Financial.
Once the Fed exits the market, the spread between yields on mortgage-backed debt and Treasury securities will have to rise, perhaps by a half percentage point, in order to attract other buyers, he said.
...
The impact of terminating the tax credit will show up first in the new-home market, said David Crowe, chief economist of the home-builders’ association.
“It takes at least four months to build a house, and you need to buy it before Dec. 1 to qualify,” he said. “If you haven’t started building it by now, it’s too late.”
...
Residential construction and home sales led the way out of the previous seven recessions going back to 1960, according to David Berson, chief economist of PMI Group, a mortgage insurer in Walnut Creek, California.
These excerpts make three key points:
The spread between Mortgage rates and treasuries will increase when the Fed stops buying MBS (my guess is about 35 bps),
the end of the housing tax credit will probably show up in new home sales data first, and
housing is usually one of the key engines of recovery (along with consumer spending). The overall recovery will probably be sluggish because both housing and consumer spending will be under pressure for some time.
Wednesday, September 16, 2009
Bernanke: Recession likely over but slog ahead
Fed chairman says he's 'confident' Congress will update rules for the financial system.
By Jennifer Liberto, CNNMoney.com senior writer
Last Updated: September 16, 2009: 6:37 AM ET
WASHINGTON (CNNMoney.com) -- In his first speech since he was reappointed, Federal Reserve Chairman Ben Bernanke said the recession is "very likely over" but detailed the tough road ahead for the economy.
Bernanke also said that despite delays, he is confident that Congress will pass changes to financial rules to ward off future collapses.
He hit hard on the "challenges" for the Fed and all policymakers in dealing with a sluggish unemployment rate as the economy recovers from a recession that began in December 2007.
"That's one reason why, even though from a technical perspective, the recession is very likely over at this point, it's still going to feel like a very weak economy for some time," Bernanke said. "As many people will still find their job security and employment status is not what they wish it was."
Bernanke's speech to experts and Washington insiders at the Brooking's Institution in Washington on Tuesday was a repeat of the one he gave to economists in Jackson Hole, Wyo., last month, when he cautioned the economy would start growing again, although slowly.
While answering questions, on Tuesday, Bernanke said the pace of recovery in 2010 would be "moderate" and added that the unemployment rate would come down "quite slowly," due to "headwinds" on ongoing credit problems and the effort by families to reduce household debt.
Stock investors took note of Bernanke's remarks, and the leading measures moved slightly higher.
Bernanke also said he believes Congress will pass changes to the nation's regulatory structure, while acknowledging that the effort had been slow-going.
"While maybe the focus on regulatory reform in the Congress has not yet been as intense as I expect it will be ... I feel quite confident that a comprehensive reform will be forthcoming," he said.
Bernanke played down concerns that turf wars between regulatory were getting in the way of legislation. "There are legitimate interests and there are interests that are more self-interested ... and that's just true with everybody, including all the members of Congress involved in the discussion," he said.
He said one proposal that he advocates "has nothing to do with the Fed's own powers" -- that's the creation of a new type of power, called "resolution authority," to unwind giant financial firms whose failure puts the economy at stake. Current proposals would give that power to the Federal Deposit Insurance Corp., since it already monitors and unwinds bad banks.
The economic downturn and slow recovery were also the subject of remarks Tuesday by President Obama. Obama spoke to employees at an assembly plant in Lordstown, Ohio.
"There's little debate that the decisions we have made and the steps we have taken have helped stop our economic free fall. In some places, they've helped us turn the corner," Obama said. "It's going to take some time to achieve a complete recovery."
Thursday, September 10, 2009
Fed’s Evans: Rate Hikes ‘Some Time Down the Road’
By Michael S. Derby
While interest rate hikes lie some time off, it’s likely a future tightening cycle will have to be more aggressive than what was seen over the last cycle of raising rates.
“We are going to want to be more aggressive” compared with the tightening cycle that occurred between 2004 and 2006, Federal Reserve Bank of Chicago President Charles Evans said Wednesday.
That tightening cycle was referred to as gradual and occurred in modest, steady increments. Evans said the pace of action then was not a major driver of the housing and financial market problems that ended up causing the recession. Instead, the official said that the Fed could have likely reached the end point of its rate hike cycle more quickly and that bigger rate hikes would not have been particularly harmful to the economy.
Evans also said that when it comes to rate hikes and major unwinding of other emergency support programs now, a shift lies “some time down the road.” In reaching a determination of whether rate hikes are needed, Evans said that “we are going to be looking very carefully at how the economic recovery is preceding,” and will be watching inflation and unemployment measures.
“As the economy continues to improve, and when we see rising inflation pressures, Fed policy will respond aggressively,” Evans said. When the time does come to raise rates, “we could have a pretty reasonable withdrawal of accommodation.”
Most Fed officials who have spoken recently have offered similar sentiments, and indicated the current zero percent interest rate policy stance will be maintained for some time, likely into 2010.
Evans added that he would prefer to see inflation at 2% and noted “at the moment we are under-running that,” amid price pressures that are “relatively muted.”
Evans sees inflation ranging around 1.5% and said expectations for future price gains are “pretty anchored.” He also said “neither a harmful deflationary episode nor a repetition of the Great Inflation [from 1965 to 1982] is very likely.”
The official said more broadly, the recovery “is beginning to start” and growth is likely to range around 2.5% to 3% into next year.
Evans was speaking before a gathering held by the Council on Foreign Relations in New York. The policy maker is a voting member of the interest rate setting Federal Open Market Committee. He spoke as the economy appears to be emerging from the worst recession since the Great Depression, amid continued trouble in labor markets.
He foresees continued trouble in the employment sector, and reckons the unemployment rate, now at 9.7%, will breach 10% before moving downward.
Evans expects the central bank to buy all the mortgage-backed securities it said it would buy, even as the economy shows signs of recovering.
“It’s a fair question” to ask if the Fed needs to buy all the securities it had originally planned to buy. “I would expect we continue with the entire amount” given the beneficial impact the program has had so far, Evans said.
He was referring to the Fed’s plans to buy up to $1.25 trillion in agency mortgage-backed securities and $200 billion in agency securities. The Fed will wind up a program to buy $300 billion in Treasury debt in October, having extended the buying period but not the size of the effort.
While interest rate hikes lie some time off, it’s likely a future tightening cycle will have to be more aggressive than what was seen over the last cycle of raising rates.
“We are going to want to be more aggressive” compared with the tightening cycle that occurred between 2004 and 2006, Federal Reserve Bank of Chicago President Charles Evans said Wednesday.
That tightening cycle was referred to as gradual and occurred in modest, steady increments. Evans said the pace of action then was not a major driver of the housing and financial market problems that ended up causing the recession. Instead, the official said that the Fed could have likely reached the end point of its rate hike cycle more quickly and that bigger rate hikes would not have been particularly harmful to the economy.
Evans also said that when it comes to rate hikes and major unwinding of other emergency support programs now, a shift lies “some time down the road.” In reaching a determination of whether rate hikes are needed, Evans said that “we are going to be looking very carefully at how the economic recovery is preceding,” and will be watching inflation and unemployment measures.
“As the economy continues to improve, and when we see rising inflation pressures, Fed policy will respond aggressively,” Evans said. When the time does come to raise rates, “we could have a pretty reasonable withdrawal of accommodation.”
Most Fed officials who have spoken recently have offered similar sentiments, and indicated the current zero percent interest rate policy stance will be maintained for some time, likely into 2010.
Evans added that he would prefer to see inflation at 2% and noted “at the moment we are under-running that,” amid price pressures that are “relatively muted.”
Evans sees inflation ranging around 1.5% and said expectations for future price gains are “pretty anchored.” He also said “neither a harmful deflationary episode nor a repetition of the Great Inflation [from 1965 to 1982] is very likely.”
The official said more broadly, the recovery “is beginning to start” and growth is likely to range around 2.5% to 3% into next year.
Evans was speaking before a gathering held by the Council on Foreign Relations in New York. The policy maker is a voting member of the interest rate setting Federal Open Market Committee. He spoke as the economy appears to be emerging from the worst recession since the Great Depression, amid continued trouble in labor markets.
He foresees continued trouble in the employment sector, and reckons the unemployment rate, now at 9.7%, will breach 10% before moving downward.
Evans expects the central bank to buy all the mortgage-backed securities it said it would buy, even as the economy shows signs of recovering.
“It’s a fair question” to ask if the Fed needs to buy all the securities it had originally planned to buy. “I would expect we continue with the entire amount” given the beneficial impact the program has had so far, Evans said.
He was referring to the Fed’s plans to buy up to $1.25 trillion in agency mortgage-backed securities and $200 billion in agency securities. The Fed will wind up a program to buy $300 billion in Treasury debt in October, having extended the buying period but not the size of the effort.
Thursday, September 3, 2009
Money Supply: The Myth of Hyperinflation
Article by Mark Sunshine Sept. 3, 2009
Conventional wisdom is that the Fed’s printing presses are running overtime and the economy is awash with liquidity. Earlier this week the National Association for Business Economics reported that almost half the economists they surveyed believed that Federal Reserve Policy is inflationary. Too bad the NABE-surveyed economists and conventional wisdom are wrong.
Economists, pundits and journalists who climb the soap box to lecture Bernanke & Company about the evils of printing too much money need to take a second look at Federal Reserve policy.
If the Fed critics were correct, then overly aggressive monetary policy would be increasing the amount of money supply and hyper-inflation would be right around the corner. But, inflation is in check and if the Fed keeps on its current monetary trajectory high inflation isn’t in the cards for the U.S.
As it turns out, every week the Federal Reserve publishes statistics on money supply and since December 15, 2008, money supply has increased only marginally. M1 and M2 are up by about 4% and 2.5%, respectively. Such small increases hardly signal an out of control Federal Reserve led by “helicopter Ben” dropping money on the economy.
Fed watchers are correct, however, since the Lehman collapse the size of the Federal Reserve’s balance sheet has more than doubled. However, this growth of Fed size isn’t a warning of impending monetary or economic Armageddon.
While in the last year the size of the Federal Reserve’s balance sheet has grown from a little less than $1 trillion to around $2 trillion, what the Fed detractors neglect to mention is that the Federal Reserve didn’t print money to pay for the purchase of its new assets but rather sucked money out of the banking system that was being hoarded by banks, corporations and individuals. As a result, there was only a tiny net increase in money supply from Federal Reserve intervention. And, with only a small increase in money supply, inflation fears are being blown out of proportion.
Instead of printing “new money” and increasing money supply, Bernanke got banks to deposit their “old money” with the Federal Reserve, which meant that money supply didn’t increase. The Federal Reserve used that old money on deposit to purchase its new assets and grow its balance sheet.
Bernanke encouraged banks to deposit their excess funds at the Federal Reserve by persuading Congress to pass a law that allows the Federal Reserve to pay interest on cash deposits at the Federal Reserve. Prior to the change in law, the Federal Reserve couldn’t pay interest on money deposited, and as a result banks didn’t leave their excess funds at the Federal Reserve Bank. This very technical change in Federal Reserve authority provided Bernanke the magic wand to pull the banking system out of its death spiral without sparking hyper-inflation or running the printing presses overtime. Excess reserves on deposit at the Fed (which are essentially deposits of excess cash by banks at the various Federal Reserve banks around the country) total approximately $800 million and by sucking up excess reserves the Federal Reserve financed about 80% of its policy initiatives.
By recycling existing excess cash, the Federal Reserve stopped the negative effects of cash hoarding and pulled the U.S. out of a full scale depression. Bank cash hoarding at the end of 2008 depressed the velocity of money (i.e., the number of times it turns over each year) which almost caused an economic calamity for the U.S.
In a simple closed economy, annual GDP must equal (a) the amount of money multiplied by (b) the number of times money turns over in a year. If the velocity of money slows down, i.e., the number of times it turns over goes down, then GDP must fall. When the economy was in big trouble, in late 2008, banks, consumers and businesses were hoarding cash, which meant money wasn’t turning over. As a result, velocity dropped like a stone and GDP began to crash.
Bernanke and his staff were brilliant when they figured out how to stabilize GDP by forcing the velocity of money to stabilize and start to rise. Since Bernanke & Co. couldn’t rely upon the banks to recycle excess cash, they used their new authority to vacuum up the hoarded money and had the Federal Reserve Bank assume the role of private banks as an intermediary for money.
Prior to the beginning of 2009, the only successful policy that stabilized velocity of money and stopped panic hoarding was large-scale deficit spending by the central government which ultimately results in wealth redistribution and other social problems. Bernanke didn’t accept the standard prescription of aggressive fiscal intervention and instead invented as new paradigm of monetary policy.
As Bernanke’s policies started to work and panic hoarding lessened, the Federal Reserve began quietly reversing course and pulled back from some of its most aggressive measures. Pundits who question whether or not the Fed has the courage to reverse course and pull out monetary stimulus as the economy recovers need to look at actual data. They will see that there is no shortage of courage at the Fed.
Quietly and without fanfare, the Fed has gotten out of the business of being the lender of last resort for most of the securities market and broker dealers. As of the date of the last Fed report, the Fed had essentially $0 outstanding in its primary dealer, securities repurchase and commercial paper purchase facilities. And, the overall size of the Fed’s balance sheet was down between $100 million and $200 million from its peak level. Even the amount of credit that the Fed is providing to AIG is lower than it was at the height of the crisis. Plus, last week Fed governors started discussing whether or not all of the open market purchases of mortgage that have been authorized will in fact take place.
Every two weeks the Federal Reserve publishes a report that details the composition of its assets and liabilities. It should be required reading for pundits, economists and journalists before they talk or write anything about the Federal Reserve, Bernanke or his staff.
While I don’t agree with everything that Bernanke has done (particularly in the area of regulation), Bernanke and his staff are perhaps the most skilled monetary economists ever.
Conventional wisdom is that the Fed’s printing presses are running overtime and the economy is awash with liquidity. Earlier this week the National Association for Business Economics reported that almost half the economists they surveyed believed that Federal Reserve Policy is inflationary. Too bad the NABE-surveyed economists and conventional wisdom are wrong.
Economists, pundits and journalists who climb the soap box to lecture Bernanke & Company about the evils of printing too much money need to take a second look at Federal Reserve policy.
If the Fed critics were correct, then overly aggressive monetary policy would be increasing the amount of money supply and hyper-inflation would be right around the corner. But, inflation is in check and if the Fed keeps on its current monetary trajectory high inflation isn’t in the cards for the U.S.
As it turns out, every week the Federal Reserve publishes statistics on money supply and since December 15, 2008, money supply has increased only marginally. M1 and M2 are up by about 4% and 2.5%, respectively. Such small increases hardly signal an out of control Federal Reserve led by “helicopter Ben” dropping money on the economy.
Fed watchers are correct, however, since the Lehman collapse the size of the Federal Reserve’s balance sheet has more than doubled. However, this growth of Fed size isn’t a warning of impending monetary or economic Armageddon.
While in the last year the size of the Federal Reserve’s balance sheet has grown from a little less than $1 trillion to around $2 trillion, what the Fed detractors neglect to mention is that the Federal Reserve didn’t print money to pay for the purchase of its new assets but rather sucked money out of the banking system that was being hoarded by banks, corporations and individuals. As a result, there was only a tiny net increase in money supply from Federal Reserve intervention. And, with only a small increase in money supply, inflation fears are being blown out of proportion.
Instead of printing “new money” and increasing money supply, Bernanke got banks to deposit their “old money” with the Federal Reserve, which meant that money supply didn’t increase. The Federal Reserve used that old money on deposit to purchase its new assets and grow its balance sheet.
Bernanke encouraged banks to deposit their excess funds at the Federal Reserve by persuading Congress to pass a law that allows the Federal Reserve to pay interest on cash deposits at the Federal Reserve. Prior to the change in law, the Federal Reserve couldn’t pay interest on money deposited, and as a result banks didn’t leave their excess funds at the Federal Reserve Bank. This very technical change in Federal Reserve authority provided Bernanke the magic wand to pull the banking system out of its death spiral without sparking hyper-inflation or running the printing presses overtime. Excess reserves on deposit at the Fed (which are essentially deposits of excess cash by banks at the various Federal Reserve banks around the country) total approximately $800 million and by sucking up excess reserves the Federal Reserve financed about 80% of its policy initiatives.
By recycling existing excess cash, the Federal Reserve stopped the negative effects of cash hoarding and pulled the U.S. out of a full scale depression. Bank cash hoarding at the end of 2008 depressed the velocity of money (i.e., the number of times it turns over each year) which almost caused an economic calamity for the U.S.
In a simple closed economy, annual GDP must equal (a) the amount of money multiplied by (b) the number of times money turns over in a year. If the velocity of money slows down, i.e., the number of times it turns over goes down, then GDP must fall. When the economy was in big trouble, in late 2008, banks, consumers and businesses were hoarding cash, which meant money wasn’t turning over. As a result, velocity dropped like a stone and GDP began to crash.
Bernanke and his staff were brilliant when they figured out how to stabilize GDP by forcing the velocity of money to stabilize and start to rise. Since Bernanke & Co. couldn’t rely upon the banks to recycle excess cash, they used their new authority to vacuum up the hoarded money and had the Federal Reserve Bank assume the role of private banks as an intermediary for money.
Prior to the beginning of 2009, the only successful policy that stabilized velocity of money and stopped panic hoarding was large-scale deficit spending by the central government which ultimately results in wealth redistribution and other social problems. Bernanke didn’t accept the standard prescription of aggressive fiscal intervention and instead invented as new paradigm of monetary policy.
As Bernanke’s policies started to work and panic hoarding lessened, the Federal Reserve began quietly reversing course and pulled back from some of its most aggressive measures. Pundits who question whether or not the Fed has the courage to reverse course and pull out monetary stimulus as the economy recovers need to look at actual data. They will see that there is no shortage of courage at the Fed.
Quietly and without fanfare, the Fed has gotten out of the business of being the lender of last resort for most of the securities market and broker dealers. As of the date of the last Fed report, the Fed had essentially $0 outstanding in its primary dealer, securities repurchase and commercial paper purchase facilities. And, the overall size of the Fed’s balance sheet was down between $100 million and $200 million from its peak level. Even the amount of credit that the Fed is providing to AIG is lower than it was at the height of the crisis. Plus, last week Fed governors started discussing whether or not all of the open market purchases of mortgage that have been authorized will in fact take place.
Every two weeks the Federal Reserve publishes a report that details the composition of its assets and liabilities. It should be required reading for pundits, economists and journalists before they talk or write anything about the Federal Reserve, Bernanke or his staff.
While I don’t agree with everything that Bernanke has done (particularly in the area of regulation), Bernanke and his staff are perhaps the most skilled monetary economists ever.
Wednesday, September 2, 2009
Should you convert your IRA to a Roth in 2010?
2010 Provides a unique opportunity for IRA owners.
In 2010, you have the opportunity to convert your traditional IRA to a Roth IRA. The usual income limitations that stand in the way for converting will not apply. So, should you convert? Let’s look at why this may or may not be a good idea.
Here’s why a Roth IRA conversion may make sense for you
Consider this: a Roth IRA allows tax-free growth and tax-free income distributions at age 59½ or older and as long as you have held your Roth account for 5 years or longer. While your contributions to a Roth IRA do not allow a tax-deduction, the younger you are, the longer time frame you have for tax-free growth.
Now realize converting to a Roth IRA comes with a price tag. You will have to pay ordinary income taxes on the amount you convert. Whatever amount is converted is added to your income for the year. However, there may be a silver lining: With the market being down, most likely your account value may be the lowest it has been in years. This means by converting now you may pay lower taxes.
It is also worth noting that with all of the reckless government spending, there is a great chance that tax rates could increase in the years ahead. This is another reason why now may be as good time as ever to convert. If converting may send you into a higher tax bracket, you could consider doing a partial conversion (only converting a portion of your Traditional IRA to avoid going into the next bracket).
Even if you are older, a Roth still may make sense. Normally with an IRA, at age 70 ½ you are required to withdraw from your IRA through mandatory required distributions. However, with a Roth, there is no mandatory withdrawal rule allowing you more time to accumulate tax-free. Also, under the present tax laws, converting a traditional IRA to a Roth can lower the size of your taxable estate. This type of prudent estate planning could allow for decades of tax-free growth for those converted assets.
A few additional estate planning points: If you name your spouse as the beneficiary of your Roth IRA, your spouse can treat the inherited IRA as his or her own after you die and forego withdrawals. This allows those Roth IRA assets to keep compounding untaxed across the rest of your spouse’s lifetime.
Your spouse could then name a son or daughter as a beneficiary. This would allow your children the choice to make minimum withdrawals according to his or her life expectancy. All the while these assets continue growing completely tax-free.
Here’s why you may want to think twice about converting to a Roth
For starters, you will pay taxes now! The IRS treats a conversion from a traditional IRA to a Roth IRA as a taxable event. You will have to pay taxes on the amount you convert. Do you have enough in savings to cover these taxes? If not, you do not, I repeat do not want to pay for the taxes out of your current IRA.
You may be tempted to use your current IRA assets to pay for the tax on the conversion. Here’s why that is not a good choice. First off, if you’re under 59½, you’re facing a 10% penalty on the amount you withdraw, and secondly they amount you take out to cover the taxes will lose the chance for tax-free compounding going forward.
Why wait until 2010?
For some who are under the $100,000 adjusted gross income level, you may consider converting in 2009. Here are a few reasons this may make some sense:
In 2009, any withdrawals from a traditional IRA can be used to fund a Roth IRA. In years past, mandatory withdrawals from a traditional IRA typically couldn’t be deposited into a Roth IRA. But the federal government has suspended mandatory IRA withdrawals for 2009. Any IRA withdrawals made in 2009 are thereby elective withdrawals. So, if your adjusted gross income (AGI) is $100,000 or less, you have an option to fund a Roth IRA with a withdrawal from a traditional IRA – at least through the end of 2009.
In 2009, you can fund a Roth IRA with after-tax contributions to a 401(k), 403(b) or 457 retirement savings plan. This year, you can take those contributions and convert them to a Roth IRA tax-free, provided your AGI is $100,000 or less. More good news: there is no limit to the conversion amount.
But don’t ignore the potential tax break for those who convert in 2010
If you do a Roth conversion during 2010, you can choose to divide the taxes on the conversion between your 2011 and 2012 federal returns. This does not apply if you convert in 2009.
Before converting from a traditional IRA to a Roth, be sure to consult your tax advisor. This is a very good idea before you arrange any rollover, trustee-to-trustee transfer, or same-trustee transfer of your IRA assets. In any year, you should fully understand the potential tax impact of a Roth conversion on your finances and your estate. Also, remember that while the income limit on Roth IRA conversions will go away in 2010, the income limits on Roth IRA contributions still apply next year and for the foreseeable future.
In 2010, you have the opportunity to convert your traditional IRA to a Roth IRA. The usual income limitations that stand in the way for converting will not apply. So, should you convert? Let’s look at why this may or may not be a good idea.
Here’s why a Roth IRA conversion may make sense for you
Consider this: a Roth IRA allows tax-free growth and tax-free income distributions at age 59½ or older and as long as you have held your Roth account for 5 years or longer. While your contributions to a Roth IRA do not allow a tax-deduction, the younger you are, the longer time frame you have for tax-free growth.
Now realize converting to a Roth IRA comes with a price tag. You will have to pay ordinary income taxes on the amount you convert. Whatever amount is converted is added to your income for the year. However, there may be a silver lining: With the market being down, most likely your account value may be the lowest it has been in years. This means by converting now you may pay lower taxes.
It is also worth noting that with all of the reckless government spending, there is a great chance that tax rates could increase in the years ahead. This is another reason why now may be as good time as ever to convert. If converting may send you into a higher tax bracket, you could consider doing a partial conversion (only converting a portion of your Traditional IRA to avoid going into the next bracket).
Even if you are older, a Roth still may make sense. Normally with an IRA, at age 70 ½ you are required to withdraw from your IRA through mandatory required distributions. However, with a Roth, there is no mandatory withdrawal rule allowing you more time to accumulate tax-free. Also, under the present tax laws, converting a traditional IRA to a Roth can lower the size of your taxable estate. This type of prudent estate planning could allow for decades of tax-free growth for those converted assets.
A few additional estate planning points: If you name your spouse as the beneficiary of your Roth IRA, your spouse can treat the inherited IRA as his or her own after you die and forego withdrawals. This allows those Roth IRA assets to keep compounding untaxed across the rest of your spouse’s lifetime.
Your spouse could then name a son or daughter as a beneficiary. This would allow your children the choice to make minimum withdrawals according to his or her life expectancy. All the while these assets continue growing completely tax-free.
Here’s why you may want to think twice about converting to a Roth
For starters, you will pay taxes now! The IRS treats a conversion from a traditional IRA to a Roth IRA as a taxable event. You will have to pay taxes on the amount you convert. Do you have enough in savings to cover these taxes? If not, you do not, I repeat do not want to pay for the taxes out of your current IRA.
You may be tempted to use your current IRA assets to pay for the tax on the conversion. Here’s why that is not a good choice. First off, if you’re under 59½, you’re facing a 10% penalty on the amount you withdraw, and secondly they amount you take out to cover the taxes will lose the chance for tax-free compounding going forward.
Why wait until 2010?
For some who are under the $100,000 adjusted gross income level, you may consider converting in 2009. Here are a few reasons this may make some sense:
In 2009, any withdrawals from a traditional IRA can be used to fund a Roth IRA. In years past, mandatory withdrawals from a traditional IRA typically couldn’t be deposited into a Roth IRA. But the federal government has suspended mandatory IRA withdrawals for 2009. Any IRA withdrawals made in 2009 are thereby elective withdrawals. So, if your adjusted gross income (AGI) is $100,000 or less, you have an option to fund a Roth IRA with a withdrawal from a traditional IRA – at least through the end of 2009.
In 2009, you can fund a Roth IRA with after-tax contributions to a 401(k), 403(b) or 457 retirement savings plan. This year, you can take those contributions and convert them to a Roth IRA tax-free, provided your AGI is $100,000 or less. More good news: there is no limit to the conversion amount.
But don’t ignore the potential tax break for those who convert in 2010
If you do a Roth conversion during 2010, you can choose to divide the taxes on the conversion between your 2011 and 2012 federal returns. This does not apply if you convert in 2009.
Before converting from a traditional IRA to a Roth, be sure to consult your tax advisor. This is a very good idea before you arrange any rollover, trustee-to-trustee transfer, or same-trustee transfer of your IRA assets. In any year, you should fully understand the potential tax impact of a Roth conversion on your finances and your estate. Also, remember that while the income limit on Roth IRA conversions will go away in 2010, the income limits on Roth IRA contributions still apply next year and for the foreseeable future.
This article was written by Jay Peroni, CFP®, who is a public speaker, registered christian financial advisor, and author of The Faith-Based Millionaire.
Tuesday, September 1, 2009
Mortgage Rates Benefit From Stock Selloff
by Victor Burek - September 1, 2009 10:36am
Many mortgage lenders began yeserday with a conservative rates strategy after ealy weakness in the mortgage backed securities market. But as the day progressed, and it became apparent that stocks were languishing, both treasuries and MBS improved to the best levels in nearly two months. This allowed many of the lenders, who were priced conservatively at the outset, to issue price improvements by day's end.
Though Friday brings us the extremely important Employment Situation report, today's data is certainly causing some commotion. First up was the ISM data, which came in at the highest level since 2006. That would normally be a huge benefits to stocks, but that was not the case. Stocks moved much lower and treasury prices rose after this "better than expected" data was released. Perhaps the stock market has run out of gas?
We also received two housing related reports this morning. First was Construction Spending which measures the monthly change in the dollar value of new construction activity. With a glut of existing homes on the market, the less new construction would help to liquidate the existing inventory. Last month’s reading on construction spending unexpectedly improved over the prior month and economists surveyed are expecting a flat reading for this report. The report indicates that construction spending for July declined more than expected posting a month over month decrease in construction spending of 0.2%.
The final report today was the Pending Home Sales Index from the National Association of Realtors. This tracks purchase transactions that are in process, but not yet closed. With tougher underwriting standards and the Home Valuation Code of Conduct creating roadblocks to qualification, many more purchase contracts are falling out. Despite that, today's number were improved and in fact marked the sixth consecutive increase. The current index level is the highest since June of 2007. It appears that the government stimulus for first time home buyers is having a positive effect on the housing sector along with low prices and attractive mortgage rates. I suppose the catastrophically lower prices might have something to do with it as well.
While on the subject of pending home sales, I would like to hear from you. Have any of you started to buy a home but the loan did not close? Or if you are in the industry, what percentage of new home purchases are falling out in your pipeline and what is the major cause of the fallout?
Reports from fellow mortgage professionals are indicating that the par 30 year conventional rate mortgage remains in the 5.125% range for well qualified consumers. If you are looking to secure a 15 year fixed rate mortgage, you should expect a par rate to average at 4.625%. As always, to secure a par interest rate you must have a loan to value of 80% or less and pay all closing costs including one point loan origination/discount/broker fee. If you are securing a 30 year fixed rate, you must have a FICO credit score of 740 to get a par rate. If your credit score is lower you will either have to pay additional fees or take a higher interest rate. For consumers looking to secure a 15 year fixed rate, you only need a FICO score of 620 to qualify for the par rate.
Mortgage backed securities remain at the top of the current trading range. With the Employment Situation report looming I will continue to advise that locking is the best strategy. Rates today are as low as they have been for the last couple months. Though positive economic data is generally expected to bring about weakness in MBS, recently, the market has been fond of throwing curveballs. Keep in mind that rates move higher faster than they move lower. If you have been floating over the last few weeks, you have already picked up some gains and now is time to cash in.
Many mortgage lenders began yeserday with a conservative rates strategy after ealy weakness in the mortgage backed securities market. But as the day progressed, and it became apparent that stocks were languishing, both treasuries and MBS improved to the best levels in nearly two months. This allowed many of the lenders, who were priced conservatively at the outset, to issue price improvements by day's end.
Though Friday brings us the extremely important Employment Situation report, today's data is certainly causing some commotion. First up was the ISM data, which came in at the highest level since 2006. That would normally be a huge benefits to stocks, but that was not the case. Stocks moved much lower and treasury prices rose after this "better than expected" data was released. Perhaps the stock market has run out of gas?
We also received two housing related reports this morning. First was Construction Spending which measures the monthly change in the dollar value of new construction activity. With a glut of existing homes on the market, the less new construction would help to liquidate the existing inventory. Last month’s reading on construction spending unexpectedly improved over the prior month and economists surveyed are expecting a flat reading for this report. The report indicates that construction spending for July declined more than expected posting a month over month decrease in construction spending of 0.2%.
The final report today was the Pending Home Sales Index from the National Association of Realtors. This tracks purchase transactions that are in process, but not yet closed. With tougher underwriting standards and the Home Valuation Code of Conduct creating roadblocks to qualification, many more purchase contracts are falling out. Despite that, today's number were improved and in fact marked the sixth consecutive increase. The current index level is the highest since June of 2007. It appears that the government stimulus for first time home buyers is having a positive effect on the housing sector along with low prices and attractive mortgage rates. I suppose the catastrophically lower prices might have something to do with it as well.
While on the subject of pending home sales, I would like to hear from you. Have any of you started to buy a home but the loan did not close? Or if you are in the industry, what percentage of new home purchases are falling out in your pipeline and what is the major cause of the fallout?
Reports from fellow mortgage professionals are indicating that the par 30 year conventional rate mortgage remains in the 5.125% range for well qualified consumers. If you are looking to secure a 15 year fixed rate mortgage, you should expect a par rate to average at 4.625%. As always, to secure a par interest rate you must have a loan to value of 80% or less and pay all closing costs including one point loan origination/discount/broker fee. If you are securing a 30 year fixed rate, you must have a FICO credit score of 740 to get a par rate. If your credit score is lower you will either have to pay additional fees or take a higher interest rate. For consumers looking to secure a 15 year fixed rate, you only need a FICO score of 620 to qualify for the par rate.
Mortgage backed securities remain at the top of the current trading range. With the Employment Situation report looming I will continue to advise that locking is the best strategy. Rates today are as low as they have been for the last couple months. Though positive economic data is generally expected to bring about weakness in MBS, recently, the market has been fond of throwing curveballs. Keep in mind that rates move higher faster than they move lower. If you have been floating over the last few weeks, you have already picked up some gains and now is time to cash in.
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