At the conclusion of their meeting this week, the Federal Open Market Committee (FOMC) reduced the overnight borrowing rate for US banks by another ½%. This was on the heals of a similar move the Fed last week with a reduction of ¾%. For most consumers they will benefit with a reduction to the prime rate to 6.0%. Most Home Equity Lines of Credit (HELOCs) are tied to the prime rate.

But for traditional mortgages, this will not have a direct or immediate impact. There may be other events, trends and opportunities for considering refinancing. But the Fed’s move is not the trigger or reason those opportunities and choices will occur.
To understand why, read Chris Kissell’s article: Smart Mortgage Strategies After the Fed Cut.

“As you listen to news reports about the Federal Reserve’s latest rate cut, Bob Walters would like you to keep one thing in mind…. ‘Ninety percent of the media is getting this dead wrong,’ says Walters, chief economist at Quicken Loans”

In 1985, the owners and agents of Red Oak Realty formed a non-profit charitable foundation in order to give back a portion of their earnings to the local community. Since the beginning, the Red Oak Opportunity Foundation (ROOF) has given over $550,000 to East Bay non-profit organizations. This year ROOF raised and distributed $83,000.

R.O.O.F has no administrative costs. Red Oak Realty pays all administrative costs for ROOF. This means that 100% of all donations go directly to the grant recipients. Proudly, whenever someone uses my services to buy or sell a house, I contribute part of my earnings to ROOF. I also sit on ROOF’s advisory and grant recipient board.

On January, 23 we held our 2007 grant recipients award ceremony. As always it was a heart warming experience. The Cantare Con Vivo Children’s Choirs started off the evening with song. Next, the mayor of Berkeley Tom Bates gave ROOF his blessing as well as spoke on Berkeley’s solar financing program. We then announced ROOF’s new web site where others can learn more about the history of ROOF and receive grant applications. At the end of the evening, the grant checks (this year they ranged from $500 to $5,000) were given to the attending grant recipients. The ROOF awards night is always a great way to start the New Year!

It means easier mortgage qualifying, lower interest rates relative to current jumbo rates and more buyers able to qualify for larger loans. Although the White House and congress appear to have agreed upon the economic stimulus package that includes the increase in conforming loan limits through the end of 2008, it still has to be voted into law. For the Bay Area, this should be a unique opportunity for many homeowners to lower their current interest rate, and/or lower their mortgage payment and/or stabilize their mortgage.
“This will have a big, immediate impact, especially in California where sales have been down most significantly,” said Lawrence Yun, chief economist for the National Association of Realtors.

Read More At: CNN Money

Dan Green, a mortgage broker in Illinois, recently posted this interesting video about how changing mortgage guidelines are affecting the real estate markets. I found it to be a nice simple explanation.

As interest rates move lower, on the heels of yesterdays global stock market sell off, many are wondering if the real estate markets will begin to bounce upward. This video shows that more than just interest rates are affecting the US real estate markets. The liquidity of money is an important mechanic of our market.

This video also illustrates why our current market is such a tremendous buying opportunity for qualified long term Bay Area buyers. With the contraction of the mortgage guidelines we have seen less qualified buyers in the market. As we are seeing in the Bay Area this has led to less competition for homes. This is an unusual shift in the moods of Bay Area home owners. The Bay Area typically has a robust history and a diverse stable economic base. Thus, those who can meet the guidelines have an entrance into an exclusive group of buyers that are seeing real purchasing power. Now, if you are also a buyer who is looking to stay in your next home for, lets say 5-10 years, then you have a solid base for riding out future fluctuations in the real estate markets. It is my assessment, that we are currently experiencing a rare buying opportunity in the Bay Area real estate markets, where rates are low and the competition for homes has slimmed.

Boomer 411 has just posted part 2 of my interview with them.

The Wall Street Journal today reports on what is happening in the home equity line market that may affect you.  If you have an equity line and you have questions about accessing the balance on the line, call your mortgage advisor asap.

See the full Wall Street Journal article here.

There have been a handful of incidents where lenders are “freezing” existing Home Equity Lines of Credit (HELOC). This means that if you have an available balance to draw on from your HELOC, your lender will not let you do so. This is happening in California and the Bay Area. Who would have guessed a year ago that Countrywide Home Loans, the largest independent home lender in the U.S., would be on the verge of bankruptcy (presumably saved by Bank of America’s purchase of the mortgage monolith)? Countrywide is freezing some HELOCs. So are Chase and other major lenders.

Why is this happening and what options may you have? I’ll do my best to address these issues here.

First, it is important to understand that HELOCs, although secured by your real estate, are treated by lenders as consumer credit. So just as a lender will unilaterally revise the terms of your credit cards, or even cancel them, they’ll do the same with your HELOC. Prior to the national mortgage meltdown and real estate slump, the typical things that would trigger a freezing of your HELOC were problems with your payments, declining credit scores, bankruptcy, etc. And on some occasions after a natural disaster (fires, earthquakes, flooding, etc.) a lender would freeze credit lines until they could verify that their collateral (your home) was still standing. These still hold true today.

Currently the issue has been two-fold. One is the concern of the value of your real estate. Lenders are proactively assessing the value of the properties they have used for collateral on HELOCs. If they have reason to believe that the value has declined to the point of being a risk, they will likely freeze your credit line. The other issue is the significant cash reserves a lender needs to maintain for each HELOC that has a potential future draw. That is, if you have $100,000 available on your credit line, your lender needs to make sure they have access to enough cash should you draw on your line. In this current “credit crunch” environment, this has become a difficult and costly situation to maintain.

What to do? First, decide if it is important or critical to your financial stability and well-being to have any remaining available credit on your HELOC over the next 12-18 months. If it is not important to you, then there is probably nothing to do. If it is important, then try to assess if you are in any jeopardy of having your HELOC frozen. Specifically get a current assessment of value on your property. Although Zillow (and other on-line real estate valuation tools) can appear like a reliable source for establishing values on real estate, it can be wildly off, especially in the current market. So having your Realtor provide comparable sales may be a good starting place. Having the appraiser who completed your last appraisal give you an update of the current value is another possibility (but may cost money). See if the current value is consistent with the value that was used when you had your HELOC established. If it does support the value when you first set up the HELOC, and you are confident that you can use the evidence should you need to provide it to your lender (if they freeze your account on the grounds of the property value dropping), then again probably not an issue for you now. But if the value has declined (at least from what would be used as comparable sales in the current market), then consider drawing on the HELOC now so that you have the cash available. You will incur the cost of the additional interest, but you should be able to off-set that cost by getting a nominal return from savings accounts and CD’s.

I do want to make a point about value. What you can sell your property for and what the empirical evidence of an appraisal (or other valuation processes and tools) support can differ. We are in a very unique market for real estate and financing, which makes this potential discrepancy even greater. There are great opportunities as well as risks because of this turmoil. The best advice I can give in this environment is to seek out and use expert advice from your Realtor and financial & mortgage advisor.

We are pleased to announce a new writer on Financial Ambition.

Jeffrey Smith is the Marin County branch manager for Opes Advisors. He has his MBA from the Haas School of Business at UC Berkeley and over 20 years of real estate, business and finance experience. Jeff is a Series 65 licensed Investment Advisory Representative and a Personal Finance Advisor®. He writes a monthly column for the Pacific Sun titled Focus On Finance and was appointed by the Marin County Board of Supervisors to the Strawberry Design Review Board in Mill Valley.

We welcome Jeff and his uncommon commentary on business, tax, finance, real estate, and mortgage.

Thanks blmurch for the above photo.

There is a fantastic tax break for homeowners. You know the one – where you can deduct the interest and property taxes before calculating your income tax obligation. Here’s the thing: there are limits on how much and what you can deduct. We haven’t heard much about people getting into trouble, but the word on the street is the IRS is cracking down. If you’re not sure of the rules and limitations, read on so that you don’t end up sitting across the table from your friendly IRS auditor.With the disclaimer that you must seek tax advice from your CPA or tax preparer, let’s review generally what you are allowed to deduct. Simply put, if you own your principal residence or second home, and meet all of the conditions, you can deduct the interest and property taxes that you pay over the course of the year. Here’s an example: If a married couple had a 2006 adjusted gross income of $125,000, and spent $36,000 on qualified mortgage interest and real estate taxes, they calculated their income tax obligation based on $89,000 ($125,000 - $36,000). With a combined Federal & California marginal tax rate of about 34%, this couple received more than a $12,000 tax break.

So what’s the problem? Well, it’s not quite as simple as it may appear to meet all of the conditions for deducting the interest and property tax. Here are some of the hot topics and where we’re likely to see the crack down:

Qualifying Mortgage – You are generally allowed to deduct interest for your primary residence and second home if the mortgages (a) were used for the acquisition and/or substantial improvement of your home, (b) you are legally liable for the debt, (c) they are secured against your residence, and (d) they do not total more that $1 million. You are also allowed to deduct the interest on an additional debt of up to $100,000.

Let’s say that someone bought their home for $500,000 with $100,000 down and a 1^st loan for $400,000. After a few years, they took out an equity line for $100,000 to pay for things like a car, children’s college expense and some other things, using up the whole $100,000. Then more recently they decided to refinance for $600,000 (since their home was now worth closer to $1 million) and roll both loans into a new 1^st loan and pay off some other debts. They also have a new equity line for $200,000. Are they allowed to deduct all of the interest on the new $600,000 1^st loan and interest on the equity line? NO. And the IRS has made it a priority to investigate cases where they believe homeowners are taking mortgage interest deductions that are for loans greater than their acquisition debts.

Points – (a.k.a origination fee, discount points, etc.) This is considered pre-paid interest and is treated as such. One point equals 1% of the loan amount. If you pay points when you are purchasing your primary residence, you can usually deduct the full amount of the points in the year that you paid them. If you pay points on a refinance, you have to spread the deduction over the term of the loan (or typically 1/30^th each year on a 30-year loan).

I recently had a client who said that a lender offered to pay all of their closing costs (title insurance, escrow fee, appraisal, etc.). The lender required that they pay more points to get an equivalent interest rate (since the lender was going to pay for the closing costs). The loan officer suggested that they would be able to deduct the points. But the IRS states that in order to take the deduction, the points cannot be paid in place amounts that ordinarily are stated separately on the settlement statement, such as the “appraisal fees, inspection fees, title fees, attorney fees, and property taxes.”We’re just touching the metaphorical tip of the iceberg. There are a variety of things that will impact your ability to take home ownership deductions (Alternative Minimum Tax, 2^nd homes, businesses at home, etc.). For the down-and-dirty, read through IRS Publication 936 (available at www.opesadvisors.com/resource/links.html). Additionally, talk with your CPA and Financial & Mortgage Advisor. It’s a lot of money. Be wise.

Copyright © Jeffrey T. Smith

We sighted Boomer 411 a new baby boomer web portal in a previous posting. They really have a unique approach to aggragating relevent content for the baby boomers. Their goal that is posted on thier home page is, “…to help people access Trusted and Relevant content related to baby boomers quickly.”

There are 2 new major events surroundiung Boomer 411. First, they have launched the portal. Financial Ambition has been assisting Boomer 411 to tag stories that are relevant real estate and finance information for baby boomers. You can check out many of our tags under the real estate and financial portions of the portal.

Second, I was interviewed for Boomer 411. The interview is being released in 2 parts. This is the first part of the interview. More to come as they post it.

Why do we talk about earning in the top 5%, knowing how much you need to have for your loooooooooong unemployment (often called retirement) and saving as much as you can while you are young and using compound interest to your benefit?  Read the disturbing article below for some grounding for our position.

The Change No One Will Talk About

Thanks Stuart100 for this photo.

As I have been preparing for 2008, I have taken some time to be an observer of others around me. For instance, I recently observed those in my office who were complaining about the lack of good housing inventory currently on the market. This is perhaps a seasonal observation, but I began to ask them, “working with some buyers?” I got replies, “Yes, and I have nothing to sell them.”

I also have been observing the new news in the last couple of days and I began to pick up on the speculation of the interest rate markets. It appears the recent bad jobs data has sent the stock market into a serious dive. It has also begun to send interest rates and bond rates lower. Behind the Mortgage blog had a nice illustration of this trend and even went as far as to say rates would continue a choppy downward trend for the rest of the week.

So, where is the inventory? In past years, inventory started to hit the market in the end of January and early February as we all get back from holiday vacations. Will a flood of inventory hit the market this year? Will the seeming pent up buyer aggression cause a rise in median prices? Will more buyers hit the markets as interest rates drop?

It is my speculation that just like our current volatile stock market, our local real estate market will see volatility in 2008. This means we will experience spurts of buying and times of stagnation. We will experience tremendous selling opportunities in specific micro climates and we will experience great buying opportunities in others.

Having your finger on the pulse of the market will be paramount for a successful transaction in 2008. I also believe that buyers and sellers will continue to benefit from this volatility as many of my clients did in 2007. It will be interesting to see how the Bay Area market ebbs and flows. How the global economy, the stock markets, bond markets, the US Federal Reserve, political elections and other changing environments will affect the Bay Area for buyers and sellers.

Any interesting changes you are seeing? Let us know!