Advice, Community & Common Sense

Inside Story: False Illusions and What You Need to Know

The Fed has been at it again, offering words that sound encouraging at first blush, confirming that their buying program of Mortgage Backed Securities is in full swing and will continue as needed. Of course, the media will pick this up and offer their own interpretation, usually saying "Good news, the Fed's purchasing program means that rates will continue to drop lower, and remain low into the summer..."  But is this really what it means?  Not so fast...

Here's the truth.

Yes, the Fed has been buying Mortgage Bonds, and continues to do so.  But if you look at what they are purchasing, they are buying a lot of FNMA 30-yr 5.5% and 5.0% Bonds...which won't have much of an impact on present interest low rates.  Why?

First, see the Fed's actual purchases for yourself by hitting this link: Direct Link to View Fed Mortgage Bond Buying - http://www.newyorkfed.org/markets/mbs/index.html.

So why is the Fed buying these Bonds? Well if you think about it, it's very smart of the Fed...and maybe even a little sneaky...because 5.5% Bonds actually represent outstanding and performing mortgages (the ones you and your neighbors have) with rates of 5.75% - 6.50%, which are precisely the loans being refinanced at today's great interest rates.

Stay with me here...

With rates at present low levels, many of the mortgages in these FNMA 5.5% pools being bought up by the Fed will be refinanced and paid, thus giving the Fed a quick recoup on some of their investment. And this is likely a big reason why the Fed said they could continue this purchasing program beyond June, if necessary.  Bottom line, the Fed buying these higher rate coupons will not necessarily help rates to move lower, as their actions do not impact the loans being originated at today's low rates.

Here's the most important part.

Sometimes I talk to clients who are in a situation where it makes sense to refinance right now, and save $250 per month for example.  But after hearing the media throw around constant teases of lower rates ahead, they hold off on making the decision to save the $250 per month right now, in the hopes of gaining another $30 per month in additional savings with a lower rate than where the market stands presently.  Now, clearly, rates could turn higher, and this window of opportunity could pass them by entirely.  Worth considering:  During the previous "rate bottoms" of 1993, 1998 and 2003-04, using every tool and indicator available at those times, less than 1% of ALL borrowers across the country hit the absolute bottoms of those cycles.

The kicker is this:

Even if some clients ultimately are correct in timing the market within the 1% chance, and eventually grab that lower rate and save another $30 per month - think of what they have lost by waiting, and risking the bird in their hand.  While they delayed, they lost the savings they could have gained by taking action sooner - or in the example used, $250 - for every single month they waited.  So even if they do get lucky and obtain the rate they were looking for, it could take years to make up what they lost by waiting.  Each day delayed wastes over $8 to save almost $1 more, so you're getting behind the savings curve by $7/day!

I don't want anyone to miss an opportunity by either waiting, or not understanding what is at stake.  Let's talk further on this - call or email us and let's discuss what this might mean for you and see if you are a good fit for great savings!

Make it a great week! 

2009 Economic Stimulus Plan (aka, American Recovery and Reinvestment Act, or "ARRA")Benefits to the Housing and Mortgage Industries

Updated February 17, 2009 - Major contributions and thanks to Barry Habib & MMG.

Just signed and sealed…a $787 Billion Stimulus Plan made up of tax cuts and spending programs aims at reviving the US economy. Although the package was scaled down from nearly $1 Trillion, it still stands as the largest anti-recession effort since World War II.

Home owners and potential homebuyers stand to gain from key provisions in this stimulus plan. Full text of the Act is available by clicking here, and runs almost one page per Billion dollars....roughly.

Here is what we know as of today...

Tax Credit for Homebuyers

First-time homebuyers who purchase homes from the start of the year until the end of November 2009 may be eligible for the lower of an $8,000 or 10% of the value of the home tax credit.  Remember a tax credit is very different than a tax deduction – a tax credit is equivalent to money in your hand, as opposed to a tax deduction which only reduces your taxable income. Additionally, the final version is a true tax credit, versus a hidden and repayable loan against future tax years.

The tax credit starts phasing out for couples with incomes above $150,000 and single filers with incomes above $75,000.  Buyers will have to repay the credit if they sell their homes within three years.

Additional Housing-Related Provisions

Tax Incentives to Spur Energy Savings and Green Jobs — This provision is designed to help promote energy-efficient investments in homes by extending and expanding tax credits through 2010 for purchases such as new furnaces, energy-efficient windows and doors, or insulation.

Landmark Energy Savings — This provision provides $5 Billion for energy efficient improvements for more than one million modest-income homes through weatherization.  According to some estimates, this can help modest-income families save an average of $350 a year on heating and air conditioning bills.

Repairing Public Housing and Making Key Energy Efficiency Retrofits To HUD-Assisted Housing—This provision provides a total of $6.3 Billion for increasing energy efficiency in federally supported housing programs.Specifically, it establishes a new program to upgrade HUD-sponsored low-income housing (for elderly, disabled, and Section 8) to increase energy efficiency, including new insulation, windows, and frames.

Expanding Housing Assistance—This provision increases support for several critical housing programs. It includes $2 Billion for the Neighborhood Stabilization Program to help communities purchase and rehabilitate foreclosed, vacant properties.

More Help for Homeowners in the Future

Another thing to keep an eye on in the coming weeks is President Obama’s plan to help struggling borrowers before they are faced with a default on their mortgage.

According to reports, the Obama administration is discussing plans to help borrowers who are struggling to stay afloat, but who have not yet fallen behind on their payments. At this point, details are scarce; however, reports indicate that President Obama is looking to spend approximately $50 Billion to directly help homeowners before they face foreclosure and financial disaster.  At this time, we anticipate much, if not all, of the focus on the foreclosure prevention effort will be for loan amounts in the Conforming loan area.  We are checking into any benefits and effects to Jumbo loan holders, especially those whose businesses have suffered severely in this downturn.

While this is good news for individual homeowners, it will likely be good for the housing industry as a whole. That’s because, assisting struggling borrowers before they default should help stop the wave of foreclosures, which are estimated to top two million this year. That, in turn, will help stabilize home prices.

The Economic Stimulus Plan is huge, and impacts a number of industries. I’ve highlighted some of the major provisions that may impact you now and in the future.

As always, if you have any questions or would like to discuss how this may specifically impact you, I’d be happy to sit down with you. Just call or email me to set up an appointment.