May 9, 2008
Demand for Oil Keeps Prices Rising
The price of oil continues to rise, reaching nearly $126 a barrel today, as consumer demand coupled with strong stock performances have escalated crude oil 13% since the start of the month. Experts are concerned the rise in crude is happening too fast. The U.S. Energy Information Administration (EIA) said stockpiles depleted by 100,000 barrels last week alone, against forecasts of a rise.
The ever-rising cost of gas has once again turned the focus back to the Organization of the Petroleum Exporting Countries (OPEC), who for months has resisted pumping more oil to suppress gas prices. An OPEC source said today the organization will consider discussing the matter before their scheduled meeting in September. Experts predict OPEC would have to pump an additional 500,000 barrels a day to make a dent in gas prices.
What can consumers do to find cheaper gas? Consumers are turning to technology to help them find it. Websites comparing gas prices have been around for years, but now they are growing more sophisticated. Alerts on cheap gas prices can be sent to cell phones, while websites are now offering updated services like fuel consumption calculators, fuel efficiency comparisons for various vehicles, and mass transit and alternative fuel options. Gas prices are up 16% already this year, and up 18% from this time last year.
May 8, 2008
Retail Initiatives Designed to Keep Consumers Spending
Retailers and manufacturers are taking steps to cut down on a growing number of product returns by consumers. The U.S. electronic industry spent $13.8 billion last year to re-box and re-stock returned items. In a study conducted by technology consultants Accenture Ltd., defective products only accounted for 5% of returns. Manufacturers are realizing many returns are preventable. Consumers are citing product dissatisfaction, difficulty in operating, and high prices as common reasons for returns. Manufacturers are including more information on outside packaging and simpler, shorter instructions to ensure consumers can understand and operate their products properly.
May 7, 2008
Positive Signs in the Housing Market
Mortgage applications rose for the first time in three weeks, as interest rates dropped for the week ending May 2. Both purchase and refinance applications were up; experts are hoping this trend will continue in this critical spring home-buying season. According to the Mortgage Bankers Association, mortgage applications rose 15.6%, as purchase applications shot up 12.1% and refinance applications rose 19.3%.
U.S. Treasury Secretary Henry Paulson believes markets are beginning to emerge from the credit crunch. “I do believe that the worst is likely to be behind us,” said Paulson in one of the most positive statements to come out of the Bush administration regarding the economy in some time. Paulson believes Congress will likely soon pass two initiatives vital to stimulating the housing market – an improved regulation of Fannie Mae and Freddie Mac, two government-sponsored mortgage companies, and the overhaul of the Federal Housing Authority (FHA).
The House is due to begin debating the latest housing rescue bill today. The government has come under fire for their momentous bailout of Wall Street giant Bear Stearns, and their lack of aid for the American homeowner. The bill offers tax credits and a cash infusion to buy up abandoned homes and help an estimated half million homeowners facing foreclosures, as well as the FHA guaranteeing $300 billion in home loans. Critics fault the plan for putting too much government money at risk.
May 6, 2008
A Shift in the Labor Market
A decline in jobs producing consumer goods has led to an increase in jobs providing services as well. 2007 labor statistics reveal professional and business, education and health, and leisure and hospitality services are way up compared to durable and nondurable goods manufacturing.
Steady increases in gasoline prices coupled with a strained economy have caused Americans to buy fewer cars. The Kiplinger letter predicts Americans will purchase a meager 15 million cars, SUVs, and trucks in 2008, a million less than last year and the worst number in 10 years. Predictions suggest half of all ’08 auto purchases will be foreign brands, further crippling the manufacturing industry.
Manufacturers are not the only ones dealing with the shift in the job market. MBAs and business undergrads are searching harder for jobs, making less money early on, and are settling for jobs in fields other than business. One study suggests individuals who graduate in an economic downturn earn six percent less in the first 10 years of their career.
May 5, 2008
HSH Traffic Doubles as Refi Opportunities Increase
More and more consumers are contacting HSH.com for additional information on refinance loans. Since last year, traffic on HSH’s Refinance Showcase has more than doubled. Recent trends in the housing market – primarily shrinking home prices – have made many homeowners consider refinancing for a better interest rate and hopes of converting some equity into cash.
May 5, 2008
Will the Positive Trends Continue?
The dollar was up 1% last week, posting its third consecutive week of gains. Dollar gains reached their highest level against common currencies in more than a month on Friday. The euro fell 1.3% against the dollar, while the dollar gained 0.9% against the yen. It was the second straight week of gains against the euro, and the third straight week of gains against the yen.
U.S. employers cut jobs in April for the fourth straight month. The losses of 20,000 were far better than the 80,000 predicted for the month, and an improvement over March’s unemployment numbers of nearly 60,000. Salaries increased in April by 0.8% while benefits increased 0.6%.
Friday’s move by the Fed to increase the dollar amount auctioned at the Term Auction Facility (TAF) to the European Central Bank (ECB) and the Swiss National Bank (SNB), as well as their currency increase to the overseas central banks, should increase the demand for the dollar in European markets and continue to make the dollar stronger.
Be sure to read HSH’s Market Trends for a full recap of last week’s market activity.
May 2, 2008
New York Imposes Online Sales Tax
New York State has passed a bill that would require online retailers to collect sales tax on purchases made by out-of-state buyers.
Amazon.com is suing to void the law, citing a 1992 Supreme Court decision. Online shopping is not supposed to be tax-free; shoppers are required by law to remit sales tax on out-of-state and online purchases. NY estimates that forcing online retailers to collect sales tax would net as much as $100 million more in state and local tax revenue.
The focus of NY’s case states there are countless affiliates within NY of online retailers, notably Amazon.com, that link to e-retailers like Amazon for a shared commission, and that their internet presence is the equivalent of an in-state sales force. Amazon’s lawsuit argues in part that any out-of-state retailer, online or not, that runs any form of radio or television advertisement should also be required to collect sales tax.
Legal experts agree that Amazon.com has the stronger argument and should prevail. Why you should care: If NY ultimately prevails you will pay sales tax on every online purchase.
May 2, 2008
Fed Working With Overseas Central Banks
In an attempt to alleviate chronic strains in the credit markets, the Fed is continuing to team up with the European Central Bank (ECB) and the Swiss National Bank (SNB) to ease liquidity pressures in term funding markets. The Fed announced today they are increasing the amount of money auctioned at the bi-weekly Term Auction Facility (TAF) to $75 billion from $50 billion. Launched back in December, the TAF has consistently increased the amount of money offered to financial institutions to assist the credit markets.
In correlation with increasing TAF’s resources, the Federal Reserve has temporarily increased currency swap lines with the ECB and SNB to fulfill the demand for the dollar in European markets. These provisions will provide $50 billion in U.S. dollars to the ECB and $12 billion U.S. dollars to the SNB.
Also, the Fed is expanding the pool of collateral that can be pledged in the Term Securities Lending Facility (TSLF). AAA rated asset-backed securities will be able to be pledged by May 9 of this year. Expanding the pool of collateral should help to boost conditions in a wider range of financial markets.
What does all this mean to mortgage shoppers? The intent is to stabilize and return some normalcy to U.S. credit markets – which will in turn make mortgage money more readily available.
May 1, 2008
Does the Fed Control Mortgage Rates?
Simply stated, no, the Fed has no direct control over mortgage rates. The Fed funds rate is the over-night interest rate which banks charge each other when a bank needs to borrow money to meet end-of-day reserve requirements, whereas a fixed mortgage rate is a loan that can last up to 30 years. Yet, Fed rate cuts can indirectly influence the movement of mortgage rates combined with many additional factors such as the economy and consumers.
The Fed cuts short-term rates to grease the economy and keeps it flowing at healthy levels. Lower interest rates help banks to more readily lend to consumers and businesses -- which generates more economic growth. Lower rates can also maintain high product demand, which increases the possibility of inflation.
Investor demand for a given product such as mortgages is heavily influenced upon higher yields. One factor that has been moving mortgages rates higher is the yield on 10-year treasury notes, a sound place for investors to stash their money during poor economic times.
For a more complete explanation, read HSH’s “What Moves Mortgage Rates.”
April 30, 2008
Read Our Analysis of Today’s Fed Meeting
As expected the Fed cut the Federal Funds rate this afternoon by 0.25% to land at 2%. Click here for the analysis of today’s meeting.
April 30, 2008
Will This Be the Last Rate Cut?
Market expectations for the finale of today’s Federal Open Market Committee meeting are that the Federal Funds rate will be cut by 0.25%, lowering it to 2%. The question on everyone’s mind remains: “Will this be the last rate cut of the cycle?” If the result of today’s meeting is different from market expectations, the economic effect could be damaging. The market must be given a chance to prepare for Fed activity.
HSH Vice President Keith Gumbinger believes, “Absent a tremendous new emergency the Fed is done cutting rates. However, within the past six months we’ve had several emergencies, so there remains a chance that rates could be lowered yet.”
Gumbinger points out that, more importantly than change in policy, is the Fed’s characterization of growth and inflation concerns. The need to curb inflation could set the stage for a future rate increase, possibly later this year.
The Fed began to cut rates last September to cope with failing credit markets. At that time the Federal Funds rate was 5.25%.
Check back later today for our analysis of today’s Fed meeting.
April 29, 2008
Just How Bad is the Foreclosure Problem
Home foreclosures are up 23% in the first quarter of 2008 compared to the previous quarter – more than double the amount from the first quarter of 2007. In the seventh straight quarter of rising foreclosures, one out of every 194 households surrendered their homes in the first three months of the year.
On an annual basis, foreclosures rose in 46 states, and in 90 out of 100 U.S. metropolitan cities. The hardest hit states include California, Arizona, Nevada, and Florida. Some experts believe the worst of the housing market is yet to come.
According to this week’s HSH Market Trends, new and existing homes sales were down for the month of March, although the existing homes that did sell did so at a slightly higher price.
For buyers looking to make a long term investment, the distressed market has provided affordable home prices and eager sellers, according to realty experts. Quality loans are still being made to those with excellent credit.
April 28, 2008
Mortgage Debt Cancellation Relief – Public Law 110-142
Until recently, when any portion of mortgage debt was forgiven, the government viewed it as taxable income that the borrower was responsible for. When Public Law 110-142 passed in December 2007, a borrower is no longer required to pay taxes on the forgiven amount. This program will run between January 1, 2007 and December 31, 2009.
This means no huge tax liability for a homeowner who conducts a short sale, where a home is sold for less than the amount due on the outstanding mortgage against the property. Applying only to principal residences, this law allows all borrowers to receive this relief no matter their annual income. To find out more on insurance deductability, click here.
Did You Know…
The deductibility of mortgage insurance premiums was slated to expire January 1, 2008, but was extended to December 31, 2010. This means that mortgage insurance premiums that homeowners pay for “qualified mortgage insurance” are now deductible as home mortgage interest. The amount deductible is reduced by 10% for every $1,000 over $100,000 recorded in combined gross income, or 10% for every $500 over $50,000 if your filing status is “married filing separately.”
Qualified mortgage insurance is provided by federal agencies such as the Veterans Administration, the Federal Housing Administration, or the Rural Housing Administration, and private mortgage insurance.
April 28, 2008
End of the Rate-Cut Cycle?
The Fed is expected to cut interest rates one more time. Economists are predicting between 0.25% - 0.50%, when they conclude their two-day meeting on Wednesday. Having already cut the benchmark rate three times this year, the Fed will likely end their cycle of rate cuts, fearing a further decrease will only spur inflation on top of an already weak dollar.
The Fed hopes past interest rate cuts and the $168 billion economic stimulus package will begin to turn the economic tide. Barring further economic turmoil, Wednesday’s rate cut will likely be the last for a while. Past interest rate cuts have widely opened up credit to commercial and investment banks that was not otherwise available in the market.
April 25, 2008
Oil Prices: No Solution in Sight
Oil prices peaked at $119 a barrel today after tensions in Nigeria and Iran put a continued strain on the already volatile commodity. A strike by Nigerian Exxon Mobil workers continued for a second day today as a Nigerian rebel group claimed responsibility for yet another pipeline bombing. A U.S. cargo ship fired flares and warning shots at two Iranian ships today when the vessels did not respond to warnings that they were getting too close.
In an effort to solve the nation’s dependence on oil, U.S. ethanol production has come under fire due to global and environmental concerns. The global demand for corn has raised its price to three times what it went for two years ago. Critics complain corn should be grown to feed people, not to produce the inefficient and expensive ethanol. The average ethanol plant uses 400,000 gallons of water per day, and when the product is completed, the ethanol must be shipped to market in large fuel-consuming trucks, instead of via less-costly pipelines.
April 25, 2008
The Credit Cardholders’ Bill of Rights
Dubbed as House Bill 5244, the Credit Cardholders’ Bill of Rights, has been hashed out by federal law makers over the past year in order to clean up what its sponsors call “unfair” practices by credit card companies that critics says keep cardholders in debt. Consumers, public interest groups, and federal regulators recently testified before the House Subcommittee regarding a variety of concerns.
The “Bill of Rights” aims to corral such practices as unannounced rate increases, unannounced changes in due dates, universal default – in which a non-payment to another creditor increases the card’s interest rate – and two-cycle billing, in which interest is charged to the previous month’s balance even if the bill has been paid off.
Last year Citigroup discontinued its “universal default” policy, and Chase eliminated “two-cycle billing.” Credit card companies have reformed their policies for fear that Congress would legislate a policy that would make credit cards more expensive and harder to get.
Retailers are joining the fight against card companies, pushing for a bill that would renegotiate the fee they pay when consumers use credit purchases.
April 24, 2008
Short Sales: Better Than Foreclosing
For homeowners who are unable to afford their mortgage payments, another option exists besides foreclosure. Called a short sale, this remedy occurs when a borrower sells their home for less than the amount owed, and the lender agrees to forgive the rest of the debt. Less damaging to a borrower’s credit and borrowing reputation, a short sale also minimizes losses to banks and investors; foreclosure costs include legal fees, taxes, insurance, and maintenance cost to the property.
According to the National Association of Realtors, short sales currently account for 18% of all home sales. The snag in this otherwise positive solution is that the lender must approve the sale price along with the buyer and seller. Long delays in approval over the sale price have spoiled many potential deals for borrowers and lenders, costing them more in the end when the home is eventually foreclosed.
Fannie Mae and Freddie Mac have been working on ways to speed the short-sale process and make it more efficient. Short sales, although time-consuming and frustrating, are a much less devastating option to foreclosure.
April 23, 2008
Free Money With Many Catches
Community Land Trusts (CLTs), developed more than 30 years ago to revitalize neighborhoods wasting away in the Rust Belt, are now being used to help low- to mid-level income, credit-worthy, first-time homebuyers. These home purchase assistance programs, numbering about 200 across the country, are tapping federal, state, county, municipal, and private funds to establish affordable neighborhoods for low-paid, yet vital community employees such as teachers, firemen, and police officers.
In communities where home and condo purchase prices are out of the reach of specific buyers, CLTs are utilized to boost ownership and investments. CLTs provide buyers access to government-sponsored mortgage programs.
Here’s the catch: The buyer owns the home and the CLT owns the land. Essentially CLTs remove the price of the land from the purchase price. When the homeowner goes to sell, the home is priced well below the market value, and CLT owns the right to purchase the home.
CLTs are for very specific buyers; if you’re looking move again soon or make a profit on your home purchase, a CLT is not for you. For a nationwide list of CLTs click here.
April 22, 2008
Why Your Credit Score Means So Much
In just one year, consumer credit scores that once proved worthy in the eyes of lenders no longer guarantee getting the best rates. Higher credit scores are more difficult to obtain, and a less than stellar credit score makes life more difficult. In addition, potential employers, landlords, and insurers are using credit scores to judge you.
Credit experts say that a year ago a score of 680 to 720 would guarantee you a loan; now that threshold has been raised to 720 to 750. So how can you improve your credit score?
- “Pay your bills on time, that’s at the top of the list,” says HSH’s Keith Gumbinger.
- “It takes time,” say Gumbinger, “the longer you have had an account, the better the effect on your score.”
- Pull your credit report and search for errors. Too often mistakes that you are not even aware of can tarnish your score.
- Develop a mix of credit. Credit cards, installment loans -- if all paid on time -- will boost your score.
“The problem with credit scores is that lenders relied too heavily on them, and they haven’t turned out to be such a good predictor,” said Gumbinger. Fair Issac is developing “FICO 08,” a new credit score indicator, designed to be a better predictor of borrowers who will potentially default.
To read more about credit scoring, and how your score affects you, read the HSH article, The Scoring Game.
April 21, 2008
Why it Will Cost More to Heat Your Home
Consumers are already hurting over rising gasoline prices, now they must face another spike in the cost of a different type of fuel. Since last August Liquefied Natural Gas (LNG) prices have risen 93% in the U.S., and prices should continue to increase. Natural gas heats half of all U.S. homes, produces 20% of the country’s electricity, and is utilized in producing many different products. The spike in LNG prices will continue to affect the recession and inflation, already raising production prices by 1.1%.
Over recent years, global LNG production has increased along with prices. The U.S., a large importer of natural gas, has seen prices rise because of the weak dollar value. For a tanker of liquefied natural gas, Japan can command double of what the U.S. can sell for.
Cheniere Energy Inc., which controls the largest U.S. import terminal of LNG, has seen its stock drop 70% earlier this year, because few foreign tankers choose to unload cargo for such low prices.
April 18, 2008
Freddie Commits Over $10 Billion to "Expanded Conforming" Market
In an announcement Thursday, Freddie Mac noted that it was prepared to commit up to $15 billion to help stimulate the market for the newly-introduced "jumbo conforming" loans. These expanded loans are available in 71 high-cost markets up to a maximum amount of $729,750, but lenders have yet to slow to roll them out in full force.
Four lenders - Chase, Washington Mutual, Wells Fargo, and Citigroup - have all signed on with Freddie in a fixed-price arrangement intended to help produce a known price when a lender sells these loans to Freddie. Despite having the ability to offer these products since early April, the market for these new products is still undeveloped as investors remain wary about buying any mortgage-backed products, let alone new variants. With Freddie committed to buying them, likely for its own portfolio, lenders can be assured that a market will exist for them, even if investors remain shy.
Freddie's actions are designed to help these expanded conformings become available to borrowers at interest rates closer to those seen for "true conforming" loans, perhaps only a half-percentage point above those rates. Presently, these products are three-quarters of a percentage point or more above conforming rates.
April 17, 2008
Expanding FHA’s Role in the Mortgage Market
U.S. law makers are pushing to expand the roles and responsibilities of the Federal Housing Authority. Touted as a savior to the mortgage mess, the White House may sign an FHA modernization law, allowing them to insure mortgages with larger loan amounts, into effect as soon as June.
A few different FHA proposals are floating through Congress, including one under which the FHA would guarantee several hundred billion dollars in insured home loans. Despite the potential impact the FHA expansion could have on the mortgage market, concern abounds that billions of dollars in delinquent loans could end up on government books.
The FHA is currently teaming up with major U.S. lenders, some of which are offering riskier loans with as little as 3% down to home buyers. Delinquencies on FHA loans are already high, so the results of this plan will be closely watched by the markets as well as the regulators.
April 16, 2008
Home Loan Applications Rise, as Rates Fall
Mortgage applications rose 2.5% last week, as mortgage rates fell slightly. Triggered by a surge in refinance applications, the Mortgage Brokers Association’s weekly application index reported an increase for the second straight week.
Refinance volume increased 5.2% last week, accounting for over 50% of mortgage applications. Purchase applications for loans backed by government agencies like the Federal Housing Administration (FHA) are up 3.5% from a year ago.
Many Americans feel now is a good time to buy a house, citing lower home prices and last week’s drop in rates, according to a Reuters/Zogby poll. Existing home sales were up in February, the first time since July.
April 15, 2008
Inflation is Taking its Toll
With inflation rising at records rates, consumers are guarding their wallets, forcing many businesses to file for bankruptcy protection.
Wholesale prices -- prices at which goods are sold to businesses -- rose 1.1% in March, the second largest increase in 33 years. Over the past year, wholesale prices have risen 6.9% due to the soaring costs of food and energy.
Oil prices have risen 17% since the start of the year, and are predicted to continue to rise as the year goes on. The weak value of the dollar is driving oil prices higher and higher. Core inflation, which excludes food and energy costs, rose 0.2% last month.
Retail sales rose 0.2% in March, thanks mainly to record high gas prices. Nonetheless, inflation is stunting consumer spending. Sixty four quarters of positive spending ended in the first quarter of this year.
Accumulating debt and a lack of sales has forced thousands of businesses across the country to seek bankruptcy protection; including several mid-sized chains, like the Sharper Image and Levitz furniture stores. Linens ‘n Things, a larger chain with 500 stores in 47 states, is expected to follow suit as early as this week.
April 14, 2008
U.S. Housing Crisis Effects Felt Across the Globe
The U.S. housing crisis has spread across the globe, affecting markets from India to Ireland. The fall of U.S. home prices has caused a chain reaction in Europe and Asia, affecting their housing and job markets.
Britain, which once had a bustling housing market, saw mortgage approvals drop by 31% compared to last year. With home prices down 2.5%, the most since 1992, Britain’s rate of new construction has diminished and the unemployment rate has soared.
In Spain, where in the past decade the number of new homes outnumbered England, France, and Germany combined, has seen thousands of homes sit empty. The unemployment rate in Spain rose to 11%, from 8.6% in 2007.
Normally productive global housing markets have declined due to of the U.S. sub-prime mortgage mess. Problematic U.S. mortgages have ended up on the books of many European banks. When the U.S. economy struggles, the world struggles with it.
April 11, 2008
Mortgage Rates Fall in Daily Survey
The national average 30-year conforming FRM fell to 5.86% today, down from 5.90% on Thursday. More details to come later today in the emailed version of HSH Market Trends. (Haven't subscribe?) Sign up now!
HUD Revises Good Faith Estimate
In an effort to help borrowers better understand the terms and conditions of their mortgage loans, the U.S. Department of Housing and Urban Development (HUD) recently released its proposed revision to the Good Faith Estimate (GFE) for public comment. HUD's proposal would add new consumer guidance to the more than 30-year old Real Estate Settlement Procedures Act (RESPA).
Many of the problems that surfaced in the mortgage crisis stemmed from borrowers who did not fully understand the terms of their home loans. The GFE is designed to better educate consumers.
The list of revisions is currently undergoing public comment through May 13. Industry representatives feel the 60-day public comment period is too short, and will not properly reflect public opinion. To comment on this proposal, go to www.regulations.gov and search for “fr-5180.” The final rule is scheduled to be published in November.
April 10, 2008
Senate Passes Housing Rescue Bill
The Senate passed the housing rescue bill today by a notable 84-12 vote. The bill will move onto the House of Representatives, who are currently working on their version, and then to the White House.
The House of Representatives seems likely to reject specific portions of the bill, including tax breaks for certain businesses, such as home builders who lost big in the housing crisis or tax credits for buyers of foreclosed properties. The opposition claims these expensive measures would negatively affect the economy.
The Senate appears optimistic about the outcome of the bill. They acknowledged there will be changes made by the House of Representatives, but that this is another step towards fixing failing housing markets.
April 10, 2008
High Food Cost Spurs Global Inflation
Global inflation of food and energy costs has seen food prices worldwide rise 75% since 2000, causing social unrest in many countries around the world. The United Nations reports that the cost of food rose an average 40% since mid-2007. Rice, the chief food for half of the globe, has doubled in price in the past year.
Importers are struggling to meet their country's food demands due to the price increase forced upon exporters. Thailand, the world's largest rice exporter, may see prices increase an additional 25% this year.
Food stockpiles are at their lowest level since the 1980's, and the demand for grain has risen 40% in two decades. Dozens of people have died in food riots and long bread lines in Haiti and Egypt. Nearly 10 countries have reported social unrest due to the food shortage, according to the UN.
April 9, 2008
Mortgage Applications Rose Thanks to Fed Programs
Mortgage applications rose 5.4% last week, thanks to government-backed loan programs designed to stimulate the housing market. The Mortgage Bankers Association's application index report noted an 8.1% increase in purchase loans, and a 3.4% increase in refinance applications.
The MBA's sub-index report of applications saw a 12.9% rise in applications for government-backed loan programs from agencies such as the Federal Housing Authority. Borrowers are looking towards government-backed programs since lenders that once competed for their business have now either closed their doors or tightened their loan restrictions.
April 8, 2008
Home Equity Disappears as Home Values Decrease
Homeowners have discovered, much to their surprise, that they can no longer borrow money on their home equity line of credit, because decreased home values have left them with little to no equity at all. Banks have become so reluctant to lend money because of the losses they have sustained, they have begun cutting off equity credit lines to responsible, debt free homeowners.
The decline in property values have evaporated homeowners' ability to borrow against the value of their homes, since their homes are not worth as much. Banks are lending less money, offering higher interest rates and stiffer qualifications to ensure they do not get burned.
By 2004 the Fed reported that Americans received $180.5 billion in home equity loans. Borrowed money finances a wide range of purchases for homeowners, from home improvements, to college tuition, to new cars. By the end of 2007, the annual rate of home equity borrowing dropped to 26 billion.
The ripple effect- If consumers can not borrow money, they buy less, stunting any chance for economic growth. Consumer spending represents 70% of economic activity. For the economy to recover, banks must at least be willing to lend to qualified borrowers. Yet, with falling property values, exactly who is qualified?
April 7, 2008
The Cost of Falling Home Prices
Coast to coast across the U.S., areas from urban cities like Detroit to small towns like Scranton, Pa, have been affected by stale home sales and falling home prices.
Analysts and economists largely agree that home prices could plummet 15% or more this year. But not every sector of the U.S. is seeing falling home prices. Certain areas surrounding Denver for example, have not seen the decrease in home value other areas of the country have seen. Certain wealthy, historic areas across the country have stayed afloat because their property remains in a limited supply.
While home prices seem to be plummeting in almost every neighborhood, some have seen minimal declines. In King County, Washington, home prices have actually risen in February. The explanation resides in sellers' unwillingness to lower the price of their homes, a term economist call “stickiness.”
Nouriel Roubini, Professor of Economy at the Stern School of Business at NYU, believes home prices have fell 30% over the past two years. Roubini says a 30% drop in home prices translates to $21 million households in negative equity and over $1 trillion in loses for the financial system.
April 4, 2008
U.S. Stocks Rise, Despite Job Cuts
The stock market is working its way towards weekly gains this afternoon, despite the largest monthly job losses in five years.
April 4, 2008
March Payroll Cuts Reach 80,000
The unemployment rate rose to 5.1 percent in March, as 80,000 jobs were slashed, the largest number of payroll cuts seen in five years, according to the non-farm payroll report released this morning by the Labor Department. Economists predicted about 60,000 and an unemployment rate of five percent.
The decline of U.S. jobs for the third consecutive month reiterates nation-wide sentiment that we are in fact already in a recession. Fed Chairman Ben Bernanke admitted for the first time this week that a recession was possible, and the central bank would do whatever necessary to respond to any financial distress.
Market watchers are predicting another drop in interest rates at the Fed's monthly meeting later this month. The Fed is likely to cut interest rates again to jumpstart the sputtering economy.
April 3, 2008
Senate Agrees to Help “Main Street”
Since the momentous bailout of Bear Stearns, there has been an outcry for the government to support and rescue the people of “Main Street.” The Senate has agreed to revamp and discuss a widespread bill intended to offer billions of dollars to home owners and communities hit hard by the housing crisis. Some 7-8,000 people enter into foreclosures every day in this country, according to Senate Banking Committee Chairman Chris Dodd.
The current bill is expected to cost between $15 and $20 billion. The bill calls for, among other things, tax credits, property tax deductions, and an expanded role of the Federal Housing Authority (FHA), granting them more influence in the mortgage market, allowing them to increase the size of the loan they can back.
The bipartisan bill dropped the controversial bankruptcy provision. The parties could not agree upon allowing bankruptcy judges the power to alter mortgage terms in bankruptcy hearings. Since many of the terms discussed in the housing bill have been current topics of discussion in the House Financial Service Committee, this bill is expected to land on the President's desk sooner rather than later.
April 2, 2008
Senate Drafting a Housing Rescue Bill
Democratic and Republican Senators are working together to draft a housing rescue bill that could grant billions of dollars to homeowners facing foreclosures, and perhaps help steer the economy away from a worsening recession. Foreclosures jumped 60% last month after reaching a record rate in the latter months of 2007.
Democrats are pushing for the government to pay for more mortgage counselors, additional rehab projects to revamp empty homes, and tax breaks for borrowers caught in unaffordable loans. A controversial proponent of the bill is that Democrats want bankruptcy judges to erase some mortgage debt. Republican and White House critics insist that will raise costs for borrowers. The bipartisan report could be released as soon as today.
For a complete list of Foreclosure Resources for Consumers from the Federal Reserve, click here.
April 1, 2008
HUD Secretary Resigns
Housing and Urban Development (HUD) Secretary Alphonso Jackson resigned yesterday amid allegations of favoritism, and awarding HUD contracts to a personal friend. For two years Jackson has been the focus of a lawsuit and criminal investigation by the FBI and Justice Department.
Critics hope the resignation will bring positive change to the troubled housing market. Jackson has been heavily criticized for how he has handled the sub-prime mortgage crisis. His favoritism in awarding building contracts was said to be hampering HUD's effectiveness in dealing with the country's mortgage crisis.
March 31, 2008
The Fed's New Financial Overhaul
Federal Reserve Treasury Secretary Henry Paulson is set to announce plans this morning that would broaden Federal power and designate them as a “market stability regulator,” giving the central bank the power to examine the books of any financial institution to prevent future market disasters.
Paulson will propose important changes in the blue print that would, among other things, create the “Mortgage Origination Committee,” designed to reinforce consumer protection against faulty mortgage lenders. This is the latest attempt by the Fed to stabilize the financial market against the housing slump, credit crisis and rising energy costs.
This plan is expected to encounter intense criticism and will most likely not be enacted until after the presidential election.
March 28, 2008
OFHEO: U.S. Home Prices Fall 1.1%
The price of U.S. homes dropped 1.1% on the month-to-month, seasonally adjusted House Price Index report for the period of December 2007 to January 2008. The 12-month reading ending in January of this year saw home prices fall 3%. The price of homes for 2007 peaked in April but since then dropped 4.1%.
OFHEO's new monthly House Price Index report is calculated by taking the purchase price of home mortgages sold to or guaranteed by Fannie Mae and Freddie Mac.
March 27, 2008
Want to Understand What's Going on With the Mortgage Market?
Since late January, the Federal Government has instituted several actions in order to stabilize the mortgage market. They have cut the Discount Rate, added billions of available funds for government sponsored mortgage buyers to purchase new mortgages, and made their lending funds directly accessible to not only the suffering banks, but now to financial and investment firms as well.
With these attempts to bolster the market with cash, the Fed, and everyone else, hopes these measures will be enough to provide stability to the mortgage market, lower interest rates, and regain the confidence of investors. Whether or not these measures will correct the sagging market has yet to be seen. It does mean that at least some vehicles are in place at critical financial points in the economy.
To learn all about the recent changes in the mortgage market, check out the newest article from HSH, "A Summary of Recent Mortgage Market Changes - March 2008."
March 27, 2008
Continued Economic Sputtering
Economists are predicting that the economic growth of the first quarter of 2008 will be even weaker than the .6% growth reported in the fourth quarter of last year, the lowest sprout since late 2002. The report from the third quarter of 2007 sited the increase of U.S. Gross Domestic Product (GDP) at an impressive 4.9%.
The number of first-time jobless applications fell by 9,000 last week, as listed in today's weekly jobless claims report. The four week moving average, a more accurate portrayal of jobless trends, projected the highest number of jobless claims since October 2005.
March 26, 2008
Mortgage Applications Rose Last Week
Last week saw an 82% surge in refinance applications, and a 10.6% rise in home purchase loans, after the Fed took numerous actions to stabilize the mortgage-backed securities market. U.S. mortgage applications spiked nearly 50% last week, the highest level reported since February.
March 25, 2008
Dangers of "Payday Loans"
As mortgage lenders are restricting home equity credit lines, some home owners are resorting to the often dangerous “payday loans.”
Payday loans are short-term loans, usually for a term of two weeks, with mile-high interest rates that can be as high as 800%. According to the Center for Responsible Lending (CRL), these types of loans are on the rise, a bad sign for economic recovery.
The average borrower ends up paying back $793 for a $325 loan, says the CRL. The most recent numbers show $28 billion in payday loans were handed out in 2005.
March 24, 2008
JPMorgan Chase Raises Their Bid
JPMorgan Chase raised their bid to purchase Bear Stearns to almost $10 a share, nearly a 70% increase from their original offer of $2 a share last week.
In a deal that may cement as early as today, JPMorgan Chase's all-stock purchase of Bear Stearns will have increased their bid to over $1 billion. If the board of Bear Stearns agrees to the deal, JPMorgan Chase could own nearly 40% of the investment firm.
For more information check out our weekly Market Trends Newsletter.
March 21, 2008
A Busy Week for the Market
The Fed was busy this past week ushering a handful of last-ditch efforts to save the market. Starting early in the week with the Fed's rescue of Bear Stearns, the central bank proved it was willing to stand behind the market and our financial system.
With two days of rate cuts inside a week, the Fed slashed the Discount Rate down to 2.50%, and the Fed Fund Rate down to 2.25%. Despite borrowers' hopes, mortgage rates have not seen much of a change.
Yesterday, the Fed loosened the capital reserve requirement for Fannie and Freddie, thus attempting to flood the market with liquidity, allowing them to lend more money and buy billions in mortgages. See our Market Trends Newsletter for an in-depth recap of the past few weeks' market news.
March 20, 2008
Fannie and Freddie Join The Fight
A further attempt to inject stability and liquidity into the markets was agreed upon yesterday, when the Office of Federal Housing Enterprise Oversight (OFHEO) reduced the capital reserve requirement for Fannie Mae and Freddie Mac.
This easing of capital restriction will allow Fannie and Freddie to buy up to $200 billion in mortgages, which may help to reduce mortgage rates.
March 19, 2008
Fed Funds Rate: No Direct Control Over Mortgage Rates
As expected, the Fed Funds rate was cut yesterday by the Feds. Although changes in the Fed Funds rate have no direct control over the direction of mortgage rates, Home Equity Lines of Credit should see their rates shrink in the coming weeks.
March 18, 2008
The Fed Cuts, Again
Hot on the heels of yesterday's quarter-point cut, the Federal Reserve sliced another three-quarters of a percent from the Fed Funds Rate. Market expectations had been looking for a full percentage point. Read more here.
The Fed Funds rate now stands at 2.25%; the Discount Rate was also cut by 3/4 of a percent and is 2.50%. The Prime Rate will also fall.
March 17, 2008
More Fed Intervention
Much news today: First, another emergency move by the Fed, which this morning cut the Discount Rate from 3.5% to 3.25%.
Second, the Fed has established the Primary Dealer Credit Facility, which allows primary securities dealers (like Bearn Stearns) to borrow directly from the Fed window. In essence, it's a discount window for financial firms, like the one banks use.
The Fed also set up a $30 billion line of credit to assist JPMorgan Chase. This follows on the heels of Friday's plan to prop up the troubled Wall Street entity which had been buffeted by margin calls, threatening its solvency.
March 14, 2008
Mortgage Applications Drop
According to the Mortgage Bankers Association, mortgage applications declined by 1.9%. For the week ended March 7 the index dropped to 671.7 from 684.9. The refinancing index fell 4.7%, down to 2448.2 from 2569.0. Purchasing decreased to 898.0 from 929.0, a 3.3% decline for the prior week. The four week moving average fell 12.1% to 711.1 from 809.1.
March 12, 2008
ARM Resets and Foreclosures: A Fading Concern
March 12, 2008 -- One of the major issues of the mortgage mess has been said to be the expectation of massive hikes in homeowners' monthly payments when billions of dollars of adjustable rate mortgages (ARMs) are reset (adjusted) in 2008. The conventional thinking has been that ARM rates would skyrocket from the discounted rates they started with, threatening to push untold numbers of homeowners into default.
That's no longer the case, especially for borrowers holding 'prime' ARMs. Circumstances have, for now, acted to favor ARM holders. Instead of facing a sizeable payment hike, they may see little change in their payment. Many, in fact, could enjoy a decrease in their monthly payments.
Read the full article here.
March 11, 2008
Meet the TSLF
In the latest move to combat the financial firestorm in the nation's credit markets, the Federal Reserve announced today an expansion of its ability to push cash and liquidity out into non-bank financial markets.
The Term Securities Lending Facility (TSLF) -- a sister to the successful Term Auction Facility (TAF) for banks -- will allow non-bank primary securities dealers to pledge certain hard-to-value or trade debts as collateral for rock-solid Treasury Securities for a period of up to 28 days. (See the Fed's TSLF press release here.)
What does the TSLF do?
Read the full article here.
March 5, 2008
Mortgage Application Volume Up
For the week ended February 29, mortgage application volume increased according to the Mortgage Bankers Association. Increasing by 3%, it was the first increase in about a month, rising from 665.1 the prior week to 684.9. Refinancing increased to 4.5% to 2,569 and purchasing also increased, rising 1.4% to 363.1.
