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.