Fed drops rates to 0%?

At some point my posts will not be related to history-making benchmark days that seem to be taking place on a weekly basis.  But today's post is a day late and specifically related to the Fed dropping the Fed funds rate to a range of 0-.25%, and the fury that ensued in the mortgage market after their meeting.  Along with the dropping of short-term rates, there were promises to stay vigilant in turning the economy around and buying up mortgage-backed securities to keep rates low.  

Just a quick lesson on when you hear the Fed cut or raised rates:

First of all, if the Fed cuts rates, that does does not mean mortgage rates are dropping.  This was a rare situation where a short-term rate cut correlated with a drop in mortgage rates.  Again, this had to do with the Fed's language toward our current economic situation, not the rate cut itself.  

What's next?

That is what is so tough about our market.  Day-to-day, many times throughout the day we have huge swings in mortgage rates.  I don't know what tomorrow will bring, but I do know if rates stay around 5% or below for any period of time...housing is going to take off!  

Rates make a big move!!!

Mortgage interest rates were going to drop. We knew it was going to happen, but not this fast and not this soon. With the Fed throwing money around like Pac-man at a strip club, some of it would eventually have to make its way to mortgage-backed securities. This morning it did!

The Fed announced this morning it will purchase direct obligations of housing-related GSEs from Fannie, Freddie, Ginnie and Federal Home Loan Banks. In addition they will be purchasing Mortgage Backed Securities from these institutions. What does all that mean? Basically, if the Fed is buying it, so should everyone else. With that assurance from the Fed, 30 year fixed rates dropped to 5.25% this morning.

Just as Citibank stock soared on news of a Fed infusion of cash yesterday, mortgage rates drop based on the same action today. I do want to make sure I don't lose anyone here:

What causes a stock price to go up? People buying shares.

What causes bond prices to go up? People buying bonds. That being said, bonds have something else to factor in...the yeild they pay. Bond prices inversely relate to the yield (interest rate) that is paid on the price of the bond. Bond price goes up, interest rates go down.

Where do we go from here?

1.) If you are currently in a home with an interest rate over 6%, you need to have your situation closely evaluated to see if refinancing is right for you. A general rule is: if you are going to be in your home for more than 3 years, it will probably make sense.

2.) If rates can maintain these levels for the next 6-8 months, it should produce a very strong real estate market for 2009. Rates being low was a major contributing factor to the housing boom from 2002-2005.

3.) Know your facts if you are thinking about buying. Target a couple specific areas and take a look at what has been going on the last couple years. Sellers are still very nervous and scared. This means you do not have to find a foreclosure or short sale to get a good deal. Plenty of properties are being sold under the market in a traditional fashion. Find an agent that can go through the numbers with you and advise you on your situation.

"Be fearful when others are greedy. Be greedy when others are fearful." - Warren Buffet

4.) The Fed is so aggressive with stimulating the economy right now, that these are probably the best interest rates we are going to see for a long time. Once the economy turns around, the first indicator is inflation. When inflation starts to rise, so do mortgage rates.


All of this tells us that now is the time to buy. If you have been thinking about selling your house to move up to the next one, now might be the time. But I can't sell my house right now. Yes you can if it is priced correctly. Houses are flying off the market in certain areas as long as they are priced right. It is ok to take a little less than you were hoping for on your current property to take advantage of the opportunity out there right now!

Credit Scoring

One of the greatest assets someone can possess is one that doesn't show up on a financial statement.  When meeting with a financial planner he or she won't even ask you about this asset. This asset can save you or cost you hundreds of thousands of dollars over your lifetime. Of course I am talking about credit.

Most people do not think about credit until they are thinking about or in the process of purchasing a home.  The reality is, by going through some simple steps throughout the year, everyone can keep their credit in good shape and be in "loan condition" at all times.  Here is a scenario with some results that may be surprising:

Take an average couple that buys a home with a $150,000 mortgage on a 30 year fixed, and buys a $20,000 car every 5 years for the next 30 years.  This couple would cost themselves over $125,000 by having a 620 credit score, compared to a 720 credit score over that same 30 year period.  

With the recent credit crunch and lenders becoming more and more strict with their lending guidelines, here are some tips to make sure your credit stays loan ready at all times:

1.)  Collections - Often times I will pull a client's credit and they have no idea about a small collection just hanging around and killing their credit.  In this situation, it is best to contact the company that issued the collection right away.  These companies are very tough, they deal with people everyday who are rude to them and intentionally deceive them to get out of paying. The best way to handle this is be nice and be prepared to pay the item when you call for the first time.  These companies keep very detailed records of every phone conversation you have with them.  Tell the agency you just had a credit report pulled and found out there was something on your credit.  Ask them if they can help you find out where it came from.  If this sounds remotely accurate, it probably is. Explain to them that your credit is very important and this is the first time you are hearing of the collection.  At that point, ask them about the possibility of obtaining a "deletion letter" if you pay the collection right then over the phone. A deletion letter is like the holy grail of credit repair.  With a deletion letter in hand, it is as if the collection account never happened.  Use your payment as leverage to obtain this letter.  If the first person does not give it to you, kindly ask to speak with a manager.  This will almost always be required to obtain a letter.  Unfortunately this will not always work, which will require you to look at your specific scenario before paying the collection.  Always remember to be nice!

If you are within 60 days of making a major purchase, paying a collection can actually hurt your credit score.  Yes, you read that correctly as ridiculous as it sounds.  The problem is many collections are old and eventually do not report as active accounts.  Well, as soon as you make a payment, this account becomes an active collection and can hurt your score significantly. 

Again, your best bet when faced with the collection is to seek the deletion letter, and if that does not work, consult with your mortgage consultant as to the best way to handle it.

2.)  Avoid late payments - 

Late payments can ruin a credit report like a fart in church.  Occasionally it will sneak up on you, and once you realize it, it is too late.  The only thing you can do is wait it out and hope no one else notices.  These (late payments, not farts) are always well documented by your creditor, and nearly impossible to disprove unless you have enough supporting documentation to make an IRS auditor's head spin.  Your only hope if a late payment proves to be correct is call and ask for a one-time "good faith adjustment" to your account.  Yelling and screaming is not usually the preferred route to getting this done.  Remember, any time you are nice to these people, you are in the minority of people that call, which might just work.  You have a better chance of getting struck by lighting than this actually happening, but who knows...it is worth a shot!

If you have made it this far into this post, please award yourself by grabbing some sort of caffeine laced drink, so you can fight through to the end because this next section is very important.

3.)  Credit cards -

While not everyone has collections or the occasional late payments, almost everyone out there carries credit cards.  Some of you use them and pay them off immediately, others might use them for big purchases or take advantage of a 0% interest offer from time-to-time.  No matter what your level of credit card usage, here are some tips to help:

a.  Make sure that your "high limit" is reporting and reporting correctly on your report.  By not having a high limit report, your credit report will score the credit card as if it is maxed-out.

b.  Keep your balances under 50% of the limit at all times, and if possible under 30%.  Having credit card balances over 70% of limit can cause serious problems to your credit score.   Ex:

American Express with a $10,000 limit.  Ideally you want to keep your balance monthly under $3,000 or at a minimum $5,000.  

c.  Keep credit cards open and active as long as possible.  15% of your score is based on the length of time you have had an account open.  Even if you don't want to use a credit card, charge something small every few months and pay it off immediately.  This will help your score significantly.

d.  Parents, how can you help your college age kids get a head start on their credit?  Add them to your accounts.  I'm not saying you have to tell your children or give them access to the funds. But once you add them to your account, they pick up all your years of hard-earned credit history.  

Again, maintaining your credit will give you the peace of mind to know that you will always be spending as little money on financing as possible!!!

What the heck is mark to market?

It is the beginning of October, the credit markets are frozen and banks are going bust every day. This has a lot to do with FASB 157, also known as "mark to market".  Each day, lenders must mark their assets to the marketplace. It's like you having to appraise your home everyday and, if your neighbor was under duress because she got very ill, divorced, lost her job and was forced to sell her home quickly, she may have sold it super cheap. Now, does that mean your house is worth that super cheap price, too? Clearly not. Why? Because you are not under duress. You have the time to sell your home and get a more normal price, which more accurately reflects true market conditions. 

But "mark to market" does not allow for this, which creates a vicious cycle.  Why is this so bad? Because as lenders mark down their assets, the amount that they have previously loaned becomes much riskier in relation to their assets. For example, say a bank has $1 million in assets and say they have $15 million in loans outstanding. Their ratio is an acceptable 15 to 1. But should they take a paper write down of $500 thousand due to "mark to market" requirements, their ratio suddenly changes to 30 to 1. This is because their assets are now only $500 thousand after taking the paper loss, while their loans outstanding are still $15 million. And at 30 to 1 this bank is viewed as a risky investment. So the stock price starts to get hit, it becomes harder to borrow, and most importantly harder to make money. The bank is then forced to sell some of its loans to reduce its ratio...at cheap prices. And this makes the vicious cycle continue. A quick look at the holdings of these loans show that 95% are problem free.  Now add to all this, the opportunistic "shorting" done on the financial stocks (much of it illegal because those shorts did not legitimately borrow shares) and you exacerbate this whole problem. 

Another issue being widely discussed is the take over of Fannie Mae and Freddie Mac.  Many people feel like the government should not have stepped in and taken over these companies, but rather let them experience whatever the free markets had in store for them.  Letting that happen would have crippled the real estate markets even in areas like DFW.  Rates would have shot up to around 10% and real estate transactions would have come to a standstill.  What we need to remember is the people making the financial decisions for our country like Ben Bernanke are brilliant. The biggest fear circulating around Fannie and Freddie is that they would become short on capital and not be able to pay their investors on notes coming due.  

 

Well, how do Fannie and Freddie raise capital and ease investor concerns? By selling new notes of course. So, by the government simply stating that they are going to back Fannie and Freddie bonds, they solved their liquidity problems.  Like I said, brilliant.

$7,500 Tax Credit!

This year has been filled with unprecedented changes in the financial sector, and more specifically the mortgage industry.  Because of the down-turn in the real estate market, congress has stepped in and passed legislation to provide some relief to these problems.  The most significant of this legislation comes in the form of HR 3221.  This bill will provide a much needed shot in the arm for the real estate market, and most importantly keep the majority of the DFW area from experiencing the woes being felt in other parts of the country.  HR 3221 eliminated down payment assistance programs (to be covered in another post), raised the FHA loan limit through 2009 and added the provision for a $7,500 tax credit.  So what does the $7,500 tax credit mean for the average person?  

1. Any 1st time home buyer purchasing a home between April 9, 2008 and June 30, 2009 will be eligible for a direct $7,500 tax credit on either their 2008 or 2009 tax return.
   
2. Keep in mind this is a $7,500 credit, not just an additional deduction.  That means if you were going to get a refund of $1,000, you will now be getting a refund of $8,500.
3. Single purchasers must make under $75,000 and married couples must make under $150,000 to qualify.
4. A 1st time home buyer is classified as someone who has not had an ownership interest in a property in the last 3 years.
5. Buyers who purchase after January 1, 2009 have the option to file for their credit on their 2008 or 2009 as there is a clause that allows the 2009 purchase to be counted as if it occurred before December 31, 2008.

This is not just free money from the government, but it is about as close to it as we will ever get. The $7,500 must be paid back in $500 increments over a 15 year period making it essentially an interest free loan.  This pay back has received some criticism in the media, but what most people don't realize is a homeowner's itemized deductions jump so much after the purchase of a home, that the $500 a year will not even be noticed.  With the elimination of the down payment assistance programs (DPA), buyers must now come up with 3% to put into an FHA transaction which have loan amounts available up to $271,050.  I feel like the elimination of the DPA programs were ultimately a good thing for the mortgage industry.  Over 60% of the foreclosures FHA had in 2007 were attributed to buyers that used DPA.  There is something to be said for working hard, saving for a down payment and putting your hard-earned money towards the purchase of a home.  Now with the this tax credit in place, a buyer could purchase their new home in January,  shortly after they could file their 2008 tax return and have the $7,500 to replace the money they had to put down.  Overall this credit is a great thing, and hopefully buyers will realize that as they contemplate the purchase of their 1st home!

Getting Started...

First of all, I wanted to set the record straight on any posts you might be reading.  Yes, some of this may seem boring to you.  If that is the case, then you may not be at a point where this information is extremely relevant to you.  Next, you are likely to see some amazing run-on sentences, the occasional grammatical error and quite a few "...'s" which seem to make fragments ok.  Just remember I am a numbers guy, not a words guy.  I am asking you to look beyond that, and just imagine how my Mom (an editor for over 20 years) feels when reading.  Please feel free to make comments or email me with any questions you may have on any of the topics discussed.  While we now have access to more information than we ever have, knowledge is what we crave most.  There is a distinct difference between information and knowledge.  I hope this blog will give you the knowledge you need to help you wherever you are in your financial timeline...