Gabe's Blog

Due to all of the economic news and happenings over the last month, I wanted to pass on a very informative piece that I feel you might appreciate and find valuable. We are all uneasy given the current economy but I would like to point out that this article explains that in every market there is opportunity:

“However, prices are much lower than they were one and two years ago. A patient investor will seize on this opportunity and profit in the future just like Buffett and his crowd. This is why we constantly reinforce that there is always opportunity in the marketplace. However, instant gratification is not part of this equation.”

In our current housing market there are certainly opportunities but you must keep in mind a long-term investment mind set. Please read the article below and take note of the 5 investment tips at the bottom.

Special Market Update by William F. (Ted) Truscott, Chief Investment Officer, Ameriprise Financial on Sept. 15, 2008

The landscape of financial services is being radically altered and bringing to a rapid end the golden age of financial services that has been in place for almost 25 years. Just two major U.S. investment banks remain independent today — Morgan Stanley and Goldman Sachs. Lehman Brothers is reorganizing under Chapter 11 and will be a shadow of its former self. Merrill Lynch will now become a part of Bank of America and Bear Sterns has already become part of JP Morgan. As we have written in earlier updates, the chief culprit is excessive use of debt or leverage in an attempt to turn low returns into high returns. It all works fine until it doesn’t anymore. The merger of banks and investment banks brings us full circle — back to predepression era times when these two businesses were unified. While Citigroup started the trend a few years back, these more recent pairings are at best hastily arranged marriages.

There is more bad news on the horizon, barring the arrival of an unforeseen solution that comes out of nowhere — unlikely in our opinion. A major insurer is on the ropes and is in desperate need of capital. There is also more bad news to come for several commercial banks and thrifts.

What does this all mean from an investment point of view?

1. It is very clear that there will be additional mergers of financial firms. This is somewhat reminiscent of the early 1990s when many major banks merged in the wake of the commercial real estate and Latin American debt crises. While mergers may not salvage the value lost in the last year’s downturn, they do make some sense. Vicious cost-cutting will be the source of future profits as firms rid themselves of redundant employees, back-office technology and businesses that no longer make sense. It is no secret that there are entire lines of business on Wall Street that no longer make sense, since there is no longer any funding to support them.

2. Credit will continue to tighten and be scarce. The Federal Reserve is likely to ease further tomorrow in response, but tight credit will continue for consumers and businesses. This will affect firms on Main Street as well as Wall Street. The strong and well-capitalized firms will prosper, while weaker firms will continue to fail. This is one reason that we do not recommend high-yield debt as an investment yet. Default rates are set to go higher and yields will need to go higher as well. When yields further reflect anticipated default rates, high-yield debt will be a very good opportunity.

3. Capital is in short supply. Those who have plenty of it will prosper, while those who do not will suffer. Those who can obtain access to capital will do better than those who cannot. It’s always a good idea to invest where there are shortages and right now capital is in short supply and being priced at a premium. Legendary investor Warren Buffett has always had plenty of capital at his disposal. His companies and others like them will make a fortune buying businesses at distressed prices. This holds lessons for the individual investor and this is likely the only good news they will find. Financial assets are on sale! We are a remarkable society in that we will buy almost any good on sale, except financial assets. This is because we all fear financial loss and will do just about anything to avoid it. However, prices are much lower than they were one and two years ago. A patient investor will seize on this opportunity and profit in the future just like Buffett and his crowd. This is why we constantly reinforce that there is always opportunity in the marketplace. However, instant gratification is not part of this equation.

4. Markets will bottom at some point. As we have said in the past — everyone is always wrong at the turn. We cannot predict when this will happen but we are fairly certain that the government has decided to try and let markets settle without interfering any further. This may just be the beginning of that final “I can’t take it anymore” sell-off that usually marks the bottom.

5. As stated previously, the housing crisis, which is at the root cause of many of today’s problems, is not over and will not be over for at least another year. Look for an end to the decline of real estate prices as an indication that markets have bottomed.

6. Finally, we must emphasize that these are truly unprecedented times. It is fair to say that most people in the financial services business today have never seen anything like this in their working lifetimes. The lack of liquidity, dislocation in the system and general uncertainty will mean that stomach-churning volatility will continue until markets eventually reach bottom.

We will continue these updates as this situation unfolds. In the meantime, we also suggest that you meet with your financial advisor to review your plan and make adjustments as a result of the last year’s market declines, if needed. To some extent, we are all prisoners of what markets will give or take away from us, and just as we need to adjust to rising or falling paychecks, the same is true for rising or falling markets.

As always, the best advice we can give you is to stay focused on your long-term goals and objectives, and consider the following five tips for investing:

1. Review your financial plan — now is the time to make sure that your financial plan addresses the current volatility as well as your long-term goals, and to make adjustments if necessary.

2. Don’t let emotions affect your financial future — market ups and downs will always occur and the turbulent markets we have seen are likely to continue in the near term. Keep your long-term focus in mind and don’t let emotions drive your decisions.

3. Diversify, diversify, diversify — proper diversification and asset allocation is more important than ever during times like these. Don’t forget the importance of product diversification along with asset diversification.

4. Be disciplined — over time, disciplined investment strategies like dollar-cost averaging can help smooth out market fluctuations and help you weather these volatile markets.

5. Avoid market timing — being out of the market for even a short time can cost you significantly. Trying to predict the exact times the markets will rise and fall is almost impossible and creates undue risk. Simply put, market timing does not work.

This week President Bush signed H.R. 3221 into law on July 30, 2008. This bill is about 700 pages long and extremely complex and covers many issues associated with home ownership and home financing. Therefore, I am only including a few highlights on topics which I feel are extremely important to be aware of. Enjoy the reading below and as always, feel free to contact me for more information:

First-time homeowner tax credit

The law will extend a tax credit of up to $7,500 to first-time homebuyers. A first-time homebuyer is defined as someone who hasn't owned a home in the last three years.

The tax credit is for 10 percent of the purchase price, up to $7,500, but phases out for higher-income homeowners. Homeowners are eligible for the tax credit if they bought between April 9 of this year and before June 30, 2009.

This is a tax credit, not a deduction. It reduces the homeowners' tax bill by up to $7,500 for the tax year in which the purchase was made. If you buy a house this year, you get the tax credit for the 2008 tax year -- the one with a filing deadline of April 15, 2009. If you buy a house next year by the end of June, you get the tax credit for the 2009 tax year. It's a one-time credit; you don't get to keep taking it year after year.

There is a catch, and that is that the money has to be repaid over 15 years, starting two years after you buy the house. That makes the tax credit an interest-free loan. If you take the full $7,500 tax credit, your income tax bill will increase by $500 a year for 15 years. If you sell the house before then, you'll have to pay Uncle Sam the remaining balance.

Complex issues, such as divorce, death, sale of the house at a loss and conversion of the house into a vacation home are accounted for in the law.

Forgiveness to allow refinancing into FHA

A lot of people have fallen behind on their mortgage payments after the rates went up on their adjustable-rate mortgages, or ARMs. And they can't refinance into fixed-rate loans because their homes have lost value, and they owe more than their houses are worth.

The housing rescue law seeks to help these people get out of trouble. It encourages lenders to forgive some of their debt so they can refinance at lower amounts into mortgages insured by the Federal Housing Administration, or FHA.

It works like this: The lender has to forgive all the debt above 90 percent of the home's current appraised value. If that leaves you scratching your head, here is a hypothetical example, using round numbers:

Sometime before Jan. 1 this year, you bought a house for $125,000 and got an ARM for $110,000 after making a $15,000 down payment. But the house lost value. Now it's worth $100,000, based on an appraisal. Meanwhile, the ARM's rate went up and you can't afford the full payment every month.

Under this law, the lender would forgive everything you owe above $90,000.

Let's say that you owe $105,000 of that original $110,000 loan. The lender would forgive $15,000, and let you pay off the loan for $90,000. The lender would not be allowed to seek any of that $15,000 later.

That allows you to find another lender who would underwrite a $90,000 mortgage to be insured by the FHA. That loan amount would include the upfront FHA insurance premium of roughly $2,700.

Again, there is a catch. If you take refuge in this program, you'll have to share your home-price appreciation with the FHA. If you sell the house (or refinance the loan) less than a year after refinancing into the FHA loan, the FHA gets all of the house price appreciation. The FHA's cut decreases over the next five years -- but never goes below 50 percent.

What does this mean to the borrower? Take the example above. You refinanced when the house was appraised at $100,000. A little over two years later, you sell the house for $120,000. You split that $20,000 difference with the FHA.

In this case, because it's between two and three years later, the FHA gets 80 percent. The FHA would get $16,000 and you would get $4,000.

The equity-sharing arrangement goes like this: If you refinance or sell less than a year after getting the FHA loan, the government gets 100 percent of the home price appreciation. If it's more than a year but less than two years, the FHA gets 90 percent. The FHA's cut then decreases by 10 percent until the five-year mark. Anytime after that, the FHA gets half of the appreciation, no matter how long you have the loan or own the house.

This arrangement will encourage homeowners to keep their FHA-insured mortgages for at least five years, but to refinance before home prices zoom upward again.

Working with home equity debt

The government has been trying all year to encourage lenders to forgive debt so homeowners can refinance their loans for lesser amounts and remain in their houses. Lenders have been reluctant to forgive the debt. The FHA-refinance plan is another way of encouraging debt forgiveness.

Among the sticking points: Many homeowners have home equity lines of credit or home equity loans. In most cases, these lenders will lose that entire loan balance under the FHA-refinance plan. The new law is low on specifics, but it gives the FHA permission to give second lienholders a cut of the home price appreciation proceeds that the FHA collects.

Down payment assistance soon to be a thing of the past

The new housing rescue law bans down payment assistance programs such as the ones offered by Nehemiah and AmeriDream. The ban goes into effect Oct. 1.

Down payment assistance programs took advantage of a loophole in the way the FHA treats down payments. To get an FHA-insured mortgage, the homeowner has to make a down payment of at least 3 percent. Homeowners don't have to save even that much; the 3 percent can come as a gift from family members or nonprofit organizations.

Regulations don't allow the home seller to provide the down payment money.

That's where down payment assistance programs come in. They are nonprofits.

That allows the seller to give the 3 percent down payment money to Nehemiah or AmeriDream, and then Nehemiah or AmeriDream can turn around and "give"

the down payment to the homebuyer as a "donation."

Fannie Mae and Freddie Mac don't allow sellers to indirectly give down payments to buyers. But the FHA has allowed this type of transaction for years. The FHA has long complained that down payment assistance programs artificially inflate house prices, and that loans using down payment assistance are more likely to default. But prominent congressional democrats have protected the down payment assistance programs on the grounds that they allow many minority families to become first-time homebuyers.

House Democrats wanted to keep the loophole open, and Senate leaders wanted to close it. With this law, the Senate won.

Property tax deductions for all homeowners

Under current law, you can deduct your property taxes from federal income tax -- but only if you itemize deductions on Schedule A. That leaves out people who don't have enough deductions to justify filling out Schedule A.

They have to take the standard deduction -- and that means they can't deduct their property taxes.

The housing law changes that. For homeowners who pay property taxes, it increases the standard deduction by $500 for single filers and $1,000 for couples filing jointly. This will be a benefit to people, such as retirees, who own their houses outright, and therefore don't pay any mortgage interest, so they can't itemize.

You can't increase the standard deduction by more than the property-tax bill. So if you're married filing jointly and you pay $800 in property taxes, you get an $800 deduction, not a $1,000 deduction.

Loan limits extended permanently, but…

There are maximum amounts for loans that the FHA will insure, and that Fannie Mae and Freddie Mac will guarantee. Those limits were raised temporarily this year. The new law raises limits permanently.

For FHA-insured mortgages, the new limit will be 115 percent of the median home price in that area, up to $625,500. That provision will affect loan limits in higher-cost areas. In lower-cost areas, the current FHA limits won't decrease. However, FHA will also be requiring a minimum down payment of 3.5% versus the current 3% down payment.

For conforming mortgages -- those eligible to be bought by Fannie Mae and Freddie Mac -- the conforming limit will remain at least $417,000 for a single-family home. It can be higher than that. Starting next year, the new limit is either $417,000 or 115 percent of the area's median home price, whichever is higher -- up to $625,500. In our area we are expecting the new conforming loan limit to be $625,500 starting January 1, 2009. Therefore, the $729,750 conforming-jumbo loan will be a thing of the past after December 31, 2008.

More regulations on reverse mortgages

A reverse mortgage is an advance against home equity. It's for homeowners age 62 or older, and the reverse mortgage doesn't have to be repaid until the borrowers die or move out.

Because reverse mortgages are for elderly borrowers, there is concern that dishonest lenders and brokers take advantage of borrowers. Borrowers are required to get counseling first, to learn the pros and cons of reverse mortgages. The law will result in strengthened qualifications for counselors.

The law bars insurance salesmen from originating reverse mortgages and prohibits originators from requiring homeowners to buy annuities or insurance products. (There's one big exception: The FHA insures reverse mortgages, and borrowers will buy that coverage.)

Finally, the law limits origination fees on reverse mortgages. They can't exceed 2 percent of a reverse mortgage of up to $200,000. For a reverse mortgage amount above that, the limit is $4,000, plus 1 percent of the loan amount above $200,000. Origination fees can't exceed $6,000 in any case. In future years, this upper limit is indexed to inflation.

Veterans

Service members returning from active duty abroad will be given breaks, effective immediately now that the bill has been signed into law.

Some protections apply to service members whose military obligations affect their ability to repay debts -- primarily, reservists and members of the National Guard who are called to active duty. They have to leave their jobs and, in many cases, take pay cuts.

For these service members, there are protections having to do with foreclosures and interest rates. If a service member had a mortgage before entering active duty, a lender can't start foreclosure proceedings until nine months after the service member returns from active duty. Formerly, the protection period was 90 days.

Also, when someone with a mortgage is called up to active duty, the interest rates on all previously existing debt are capped at 6 percent. That goes for mortgages -- and for home loans, that 6 percent cap extends until one year after the service member returns from active duty.

The Defense Department will be required to provide foreclosure-prevention counseling upon request to service members who are returning from active duty abroad.

To read HR 3221 in its entirety, click on the link shown below:

http://www.house.gov/apps/list/press/financialsvcs_dem/hr3221_bill_text.pdf

Many clients are asking me the question, "So what financing options are still available with less than 20% or 25% as a down payment?"

It is true that many lenders are requiring 20-25% as a minimum down payment on loan amounts above the conventional conforming loan limit of $417K. However, if you are financing between $417K and $729,750 in the bay area, there are still options for you to buy a home with less than 20% down.

First, there is FHA financing up to $729,750 with as little as a 3% down payment. However, on all FHA loans you are required to pay MI (Mortgage Insurance) monthly and an up-front MI premium (at the time of closing your loan) of 1.5% points.

Additionally, there are a few other options available today for financing up to $729,750 with as little as 10% outside of an FHA loan. Here are the tricks:

1. If you finance up to $729,750 with 10% down, you can do (1) loan with Mortgage Insurance (MI). MI has been viewed as an added cost that nobody wanted to pay in the past but it is certainly a viable option today. Given this scenario, MI is about $372 per month.

2. If you are putting 10% as a down payment, we can do 1 loan up to $729,750 without monthly MI. This option is called LPMI (Lender Paid MI). The way this works is that the lender charges an extra 0.625% on top of your interest rate which alleviates the need to pay monthly MI.

Example-

$720K loan at 6.5%= $4550.89 per monthly for principal and interest plus roughly $372 per month for MI. (MI is not tax deductible if your household taxable income is over $110K per year. Please consult your tax advisor for more info.)

$720K loan at 7.125%= $4850.77 (no MI necessary). This is $72.12 less per month even with 0.625% higher interest rate and you have a larger tax deduction than the above if your income is above $110K per year.

3. The last option is to pay a one time MI premium up front and not pay MI monthly. This is called "Life of Loan" MI aka single premium. If you are putting 10% as a down payment with a loan amount up to $729,750 you will pay 1.6% points up front.

Example.....$650k loan x 1.6% = $10,400.00 life of loan single premium.

This premium can be paid for by the seller/builder and you would have your MI paid for for the life of the loan by seller/builder. If the loan is paid off (whether the property is sold or refinanced), the unused portion of MI will be deducted from principal balance owned.

I hope this information helps you understand what financing options are still available today with less than 20% as a down payment. These are definitely uncertain times in the banking and lending industry but rest assured there are still many banks and financial institutions who are making loans and who are committed to staying in the business. As always, if you or anyone you know has any questions regarding financing, please feel free to contact me at 650.492.4071.

Thanks,

Gabe

A: No. For drivers under the age of 18, this is considered a SECONDARY violation meaning that a law enforcement officer may cite you for using a hands-free wireless phone if you were pulled over for another violation. However, the prohibition against using a handheld wireless telephone while driving is a PRIMARY violation for which a law enforcement officer can pull you over.

Today the Federal Open Market Committee (FOMC) cut key interest rates by 0.25%. This will have a direct impact on your Home Equity Line of Credit, credit card rates and auto loans. However, as we have seen in the past it does not have a direct impact on mortgage rates. However, since the FOMC has signaled that this might be the last rate cut for a while, this means that inflation might now be under control and therefore we might see a positive reaction in the bond markets which will have a direct effect on mortgage rates. If the bond markets react positively, we will see mortgage rates come down slightly in the next few days.  If you are interested in reading more about the rate cuts, you can certainly read more below.

WASHINGTON (MarketWatch) - The Federal Reserve chose to cut short term interest rates on Wednesday for the fourth time this year, saying it remains troubled by the economic outlook, but signaling that it now may leave rates steady for a while.

The Fed lowered its benchmark federal funds rate by a quarter percentage point, to 2%.

Rates stood at 4.25% at the start of the year. Two Fed officials, Dallas Fed President Richard Fisher and Philadelphia Fed President Charles Plosser, dissented from today's decision in favor of no rate cut.

In its statement, the Fed seemed comfortable where rates are now.

"The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity," the statement said. Read Fed press statement.

The FOMC did tweak the statement to add slightly more emphasis that it was worried about inflationary pressures and less worried about further weakening, a signal that the committee may leave rates steady at the next meeting.

But this was not a strong hint that the Fed would hold rates steady going forward.

Steve Gallagher, chief economist at Societe General in New York, called the statement a "soft non-binding pause."

James Glassman, economist at J.P. Morgan/Chase had said before the statement was released that the Fed didn't need to strongly hint about the future course of policy. He said the Fed was comfortable with market expectations so didn't want to shake them any.

The rate cut was expected by investors. See full story.

They were pleased that there was no surprise. Stocks soared after the announcement. Read Market Snapshot.

It is important not to lose sight of the fact that the Fed has slowed the pace of rate cuts, economists said. The last move was a three-quarter of a percentage point cut on March 18. This is the seventh rate cut since last September. The central bank has reduced overnight lending rates by 3.25 percentage points over that time span.

But the central bank decided not to pause altogether in order to bolster the economy and provide insurance against risk that the credit crunch will set off a downward spiral of growth.

The economy is treading water, managing to avoid slipping into recession. The Commerce Department reported earlier Wednesday that growth remained at an anemic 0.6% rate for the second straight quarter. See full story.

But many analysts say the economy can't keep treading water forever and that a recession is likely. Treasury Secretary Henry Paulson is hoping that the fiscal stimulus package will act as a life-preserver and rescue the economy.

The money from the government may strengthen consumer spending but will also make it difficult to judge the underlying fundamentals, economists say.

The labor market has been weakening along with consumer spending as the housing market continues to sink to depression-era lows. In addition, gasoline prices have sky-rocketed.

But the export sector is strong and businesses appear to have inventory levels under control.

A pause now?

Many economists believe the Fed signaled in its statement that it will now pause from its aggressive interest rate cutting to assess whether the government economic stimulus checks can help turn the economy around.

Some economists believe the next interest rate move will be a rate hike at the end of the year.

"Our own forecast has been and remains for the Fed funds target to hold at 2.00% for as long as the eye can reasonably see," said Josh Shapiro, chief U.S. economist at MFR Inc.

Others believe the Fed will be forced to trim rates further to help the economy recover from the credit crunch.

Some Fed officials have argued that rate cuts alone cannot repair financial markets. In addition, they remain alarmed about inflation. The dollar has steadily eroded in recent months, putting upward pressure on import prices.

In the end, Ian Shepherdson, North American economist at High Frequency Economics, said that the Fed's intentions are not as important as the upcoming data.

"If the data deteriorate further, as we expect, the Fed will ease again. Today's statement is important - today. Tomorrow, the numbers are back in charge," Shepherdson said in note to clients.

Investors won't have to wait long for key economic reports. The Institute for Supply Management will release Thursday its key survey of conditions from inventory managers at manufacturers located around the country. And Friday, the Labor Department will release the April unemployment report.

Greg Robb is a senior reporter for MarketWatch in Washington.

As you might be aware of, getting a mortgage today is not as easy as it used to be.  I came across a very good article that discusses what lenders are doing and why which is demanding more from people who are attempting to get a mortgage.  Today it requires a very skilled mortgage professional more than ever to help structure your home financing versus a year ago when anyone could have gotten a loan.  Please read below and let me know if you have any questions at all.

Leery Lenders Demand More From Borrowers By ALAN ZIBEL and J.W. ELPHINSTONE,

AP Posted: 2008-03-20 18:12:54

WASHINGTON (AP) - Just when consumers and the U.S. economy need banks to lend more freely, the mortgage industry is making it harder to borrow - even for those with good credit.

Mortgage insurers, whose backing is required for borrowers who can't afford the traditional 20 percent down payment on a home, have already flagged nearly a quarter of the nation's ZIP codes where they refuse to insure some home loans.

That encompasses a wide variety of neighborhoods: McMansions in Scottsdale, Ariz.; luxury Miami condos; 1960 ranch houses in Flint, Mich.; and early 20th century kit homes in Metuchen, N.J.

The entire states of California, Florida, Arizona, Michigan, Ohio and Nevada - which have seen the highest foreclosure rates and the worst price declines - are blackballed on some mortgage insurers' lists.

Banks that have lost billions because of bad bets during the housing boom are now reverting to strict lending standards not seen in nearly 20 years, according to industry data and interviews with lenders.

For new home buyers and those seeking to refinance, it can mean higher down payments and a higher bar for credit scores, among other requirements. The toughest restrictions are in markets where home prices are falling, though regions where property values are rising are not immune.

"We're in the midst of an epic, broad, sweeping change in the mortgage industry," said Chris Sipe, a loan officer with America East Mortgage in Frederick, Md.

The reluctance to extend credit comes despite a flurry of government initiatives, including steady interest rate cuts by the Federal Reserve, intended to make it easier for would-be borrowers and those facing interest-rate resets on their mortgages.

Lenders' growing leeriness threatens to dampen sellers' already soggy prospects for the spring home-buying season - and that means more pain for the already battered housing sector and the broader economy.

In recent weeks, mortgage insurers have flagged more than 9,600 ZIP codes in at least 34 states where they won't insure certain types of home loans - those for investment properties or second homes, those with riskier adjustable-rate or interest-only mortgages, or for buyers making down payments of less than 3 percent.

With banks and mortgage insurers pulling back, state and federal programs for first-time buyers and people with poor credit are attempting to fill the void.

Don Brekke, an equipment operator from Colorado Springs, Colo., tried to buy a bank-owned 1950s ranch home for $113,000. At first he couldn't get a loan because the house was in a potentially declining market, and lenders required a 10 percent down payment, more than he could afford.

Ultimately, he was able to qualify for a 100 percent loan from Colorado's state financing authority, and he plans to close in the coming days.

"It was a bunch of headaches - going around and around to get this done," Brekke said.

The combination of sinking home prices and tighter lending standards has been a major aggravation for Ron Broussard, a 38-year-old sales representative for a home builder.

Broussard took advantage of soaring Southern California property prices three years ago to refinance a loan on a house he had owned since the late 1990s. Today he's still stuck with a $720,000 mortgage and has been renting it out since moving with his family to Texas a year ago. Once appraised for $1.1 million, Broussard's lender now says it's worth about $300,000 less.

He does not yet owe more than the property is worth, but Broussard worries that is a possibility.

"The way the market's going, you know, who knows?" he said.

Broussard has found little sympathy from his lender, Countrywide Financial Corp. While Broussard accepts responsibility for taking out a mortgage whose monthly payments are due to skyrocket once the unpaid principal exceeds the home's value by 15 percent, he feels betrayed by the lender's unwillingness to negotiate better terms.

The stinginess of banks is showing up in home loan statistics: The value of all new mortgages plummeted to $450 billion in the fourth quarter of 2007, down 38 percent from a year earlier, according to trade publication Inside Mortgage Finance.

Subprime loans, made to borrowers with poor credit, virtually disappeared from the market, plummeting 90 percent to $13.5 billion in the October-December quarter.

There is a silver lining: The Federal Reserve has repeatedly cut interest rates, helping borrowers whose mortgages were just about to reset to higher rates and people with student loans. Reflecting the Fed's efforts, rates on 30-year mortgages dropped below 6 percent this week for the first time in more than a month.

But the long-term impact of the Fed's move is far from certain, and the central bank's actions could end up feeding inflation and pushing up long-term rates.

"The credit crunch is much like the movie villain that refuses to die," said Greg McBride, a senior financial analyst at Bankrate.com. "The effects are spilling out, far beyond what was originally seen."

Amid the turmoil, the mortgage industry is playing hardball with borrowers.

Wells Fargo & Co. now requires a 25 percent down payment in the most distressed markets, according to a document sent to mortgage brokers last month. A company spokesman said in an e-mail message that Wells Fargo is "focused, as we've always been, on fair and responsible lending and sound credit risk management."

Some borrowers who took out home-equity loans or second mortgages are being blocked from refinancing. The problem is most common among consumers using two different lenders.

Companies that made second mortgages are now denying requests - common in a refinancing transaction - to take secondary status in the event of a foreclosure. Especially in markets where prices are declining, holders of those loans want to be paid off before a loan is refinanced rather than take on the risk of default, industry experts say.

Lenders' changes have removed 30 to 40 percent of the borrowers who could have qualified in recent years, estimated Tom LaMalfa, managing director at Wholesale Access, a Columbia, Md.-based mortgage research firm.

Lenders and mortgage insurers are also requiring proof of income and employment, something they didn't always do during the housing boom.

"It's no longer people buying pools of loans, strictly written by a computer, and no one knowing what's in a pool," said Marc Schwaber, chief executive of Preferred Empire Mortgage Co. in New York. "The loan is going to have to make sense."

Many in the real estate industry hope that the economic stimulus legislation signed by President Bush earlier this year allowing Fannie and Freddie to back loans larger than their former limit of $417,000 will kick-start the housing market.

And while this week's interest rate cut by the Federal Reserve could tempt banks to lend more, experts say they are likely to remain skittish for months to come.

"It's going to take time for banks to tiptoe back into the water," said Jefferson Harralson, a banking industry analyst with Keefe, Bruyette & Woods Inc.

Copyright 2008 The Associated Press. The information contained in the AP news report may not be published, broadcast, rewritten or otherwise distributed without the prior written authority of The Associated Press. All active hyperlinks have been inserted by AOL.

2008-03-20 18:12:54

A few weeks ago I posted some information regarding lenders freezing existing HELOCs and not allowing customers to take additional draws in the future.  Well, I just received an e-mail from Citi Home Equity (aka Citimortgage HELOCs) stating that they are going to "limit new draw activity upon these loans".  Please see the news release below.  If you have a Citi HELOC and you have questions, it says that you will be getting a letter which will have a customer service number to call and it also says that they will not speak to me so I am sorry that I will not be able to call on your behalf. 

This is one more change that is a sign of the times given the current lending environment.  Lenders are very cautious today in their current lending practices.  Many lenders are not even doing HELOCs or second mortgage at all anymore.  There are also many lenders who are requiring anywhere from 20%-25% as a down payment on a new home (or 20% equity in order to refinance).  We still have access to lenders who are offering "more aggressive" financing but even a client with perfect credit will be facing challenges of getting home financing with less than a 10% down payment today.  Please see the news release below and let me know if you have any questions at all! 

"Citi Home Equity has recently reviewed certain existing Home Equity Lines of
Credit (HELOC) in light of recent real estate market conditions. In accordance
with the terms of these loans, Citi Home Equity has taken steps to limit new
draw activity upon these loans. These actions limit new draw activity, and do
not impact existing balances. Borrowers are expected to pay their current
balances per the terms of their loan, and will receive a letter with the details
on their specific line if it has been impacted.

A customer service phone number is provided to the borrower in their letter.
If you are contacted by a borrower who has been impacted by these events,
we ask that you have the borrower call our customer service line if they have questions or concerns. Please remember that due to financial privacy
requirements, Citi Home Equity will only speak to the consumer about their
account. Citi Home Equity is unable to discuss the borrower's account with you.”

We may have a breakthrough...today Fannie Mae made an announcement on the timing of when they will be buying the new "Jumbo-Conforming Loans" as they are now calling loans between $417K and the increased limit of $729,750. It is a still a bit confusing but it sounds like they will not be buying loans until July 1, 2008. However, it sounds like they are authorizing lenders to underwrite loans staring April 1, 2008 (with an application date after March 1, 2008).

According to Fannie Mae's most recent update, they will have different (more stringent) guidelines for "Jumbo-Conforming Loans". This does not come as a huge surprise but from what I can see, the new "Jumbo-Conforming Loans" will be very limited in who will benefit. Here are a few of the high points from what I can tell in their guidelines:

· Only 1 unit properties (no 2-plex, 3-plex, or 4-plex)

· When purchasing a home, minimum down payment is 10% with a 700 FICO score (only on a fixed rate mortgage). The only ARM program available is a 5/1 ARM and a 20% down payment is required with a 660 minimum FICO.

· When refinancing a home, no cash out is allowed.

· On a second home or investment property, a minimum of 40% down payment is required.

· Consolidating a first mortgage and a second mortgage is not allowed.

· Refinancing within 6 months of a purchase is not allowed (you must have owned the property for at least 6 months before you can refinance the mortgage into a "Jumbo-Conforming loan").

Additionally, interest rates on conforming loans (and Jumbo loans) have risen anywhere from 0.5-1.0% in the last week (depending on the loan program). Therefore, conforming interest rates are close to what Jumbo rates were about 2 weeks ago which has negated much of the value in this whole loan limit increase package anyway. Overall, these new guidelines will help some people get into a better mortgage at a lower rate but I would not start jumping for joy and celebrating just yet. Hang in there and let's wait to see what pans out over the next month or so.

Below is a statement by Brian Faith Managing Director for Fannie Mae, Communications on the Conforming Loan Limit Increase

March 6, 2008

With HUD's designation of high-cost areas as directed by the economic stimulus package passed into law earlier this year, Fannie Mae will begin temporarily purchasing loans beyond the company's prevailing conventional loan limit in the designated areas. The company may purchase loans with a maximum original principal obligation of up to 125 percent of the area median home price in high-cost areas, not to exceed $729,750 except in Alaska, Hawaii, Guam and the U.S. Virgin Islands where higher limits may apply.

The company will only purchase jumbo-conforming mortgages that are originated from July 1, 2007 through December 31, 2008, and that are secured by one-unit properties. We will assist our lender customers with implementation by providing reference materials including an online loan limit reference tool and guidance on our loan limits based on a property's geography, both of which are expected to be available on April 1, 2008.

The company is working closely with its regulators, OFHEO and HUD, in implementing procedures to address the temporary increase in the prevailing conventional loan limit. We continue to support the increase as a constructive effort to help address the ongoing credit crunch and believe it is in keeping with our core mission to provide liquidity, stability and affordability to the mortgage markets.

For additional information, please see Announcement 08-05, "Temporary Increase to Our Conventional Loan Limits" at www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2008/0805.pdf

Do you have a Home Equity Line of Credit (HELOC) on your house?  Do you have any unused portion of your existing HELOC?  If you have answered yes, please read below:

Here is an example of what I mean, you have a HELOC for $100K but only have a $60K balance.  Therefore, you have $40K of unused funds available on your HELOC.  I have been told by several past clients, friends, and colleagues that lenders are putting a freeze on any "unused" portion of their HELOC or reducing the credit limit.  Several lenders have announced that they are putting a freeze on accounts for reasons including but not limited to: payments more than 2 days late, inactivity, zero balance, depreciating markets, etc.  

I have been watching lenders over the last 8 months tighten their guidelines and increase their lending criteria to qualify for a HELOC.  Some lenders are not even offering mortgages with less than 25% down.  Other lenders are no longer offering HELOCs or second mortgages at all.  Most lenders today are now requiring at least 5% down with a conforming loan amount and 10% down with a non-conforming (Jumbo) loan amount.

Here is an article in today's Washington Post if you would like to read more, http://www.washingtonpost.com/wp-dyn/content/article/2008/02/22/AR2008022202987_pf.html

Many people have asked me what the status is on the increase of the conforming loan limits and when will it take affect.  So here is the scoop... 

Last week on February 13th, President Bush signed off on the bill (H.R. 5140).  However, even though the President signed off on the bill, we still have some time before we can actually utilize the new loan limits and place consumers into mortgages with the higher loan limits. 

The new conforming limits are going to be based off the median home price in each metropolitan statistical area (MSA) throughout the United States.  Therefore, there will not be a standard conforming loan limit like there is today (currently $417,000).  Unofficially, the new conforming loan limit for a single family residence and condo will be $729,750 (175% of the current conforming loan limit) in most parts of Santa Clara County, San Francisco County, Santa Cruz County and San Mateo Counties.  In other areas like Napa, Santa Rosa, Petaluma, San Luis Obispo, Vallejo, Stockton, Modesto, and Sacramento, the conforming loan limit is expected to be less. 

One of the reasons that lenders are not ready to start utilizing the new conforming loan limits is due to the fact that HUD has 30 days to determine the median home prices across the country so Fannie Mae and Freddie Mac can establish the limits for each area as briefly described above and update their systems.  Fannie Mae and Freddie Mac need to update their systems and processes as well once the new limits are finalized.  Then...well after that each lender will need to update their systems and guidelines before they can approve any loans under the new conforming loan limit.  So, this leads me to believe that we have anywhere from 30 to 90 days (or more) before we can actually put a consumer into a loan under the new conforming loan limit. 

Here is what one lender representative said last week in regards to taking loan applications under the new conforming loan limits, "We will wait for the marching orders from Fannie Mae before we take in any loans with the new limits. Fannie Mae is working feverishly to reprogram their systems and come out with a planned strategy for possibly tier pricing. Also, there could be certain underwriting restrictions and possible limited amount of products issued under the new loan limits. So to take in applications at this point could be extremely risky."

Here is a statement from last week made by Amy Bonitatibus, Senior Manager, Communications, FNMA:

"The temporary increase in the GSE loan limit that President Bush signed into law today will help bring stability, liquidity and affordability to an important part of the housing finance system. Fannie Mae welcomes this opportunity to help support the housing market in high-cost areas, and we are working with our regulators and our lender partners to implement the change as quickly as possible."

http://www.fanniemae.com/media/statements/2008/021308.jhtml?p=Media&s=Statements

One last item that you should know.  As Fannie Mae is going to be increasing the conforming loan limits, this will most likely push interest rates higher.  This is due to many reasons but most of all because the higher loan amounts will increase the risk of the loans.  Additionally, this will increase the demand and the number of transactions so therefore, it will push rates higher as well.  Just my thoughts and my opinion on what we should all expect to see.