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.

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.

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!

200 is the number of financial institutions that have gone out of business since the “credit crunch” of early August. Many, many more have gone out of business but they are too small to make this list. Losses at the major financial institutions are expected to top $100B. Although this seems like a lot of money, it’s a drop in the bucket compared to the US GDP of over $13 trillion in 2007. See Source.

The problem as I see it is the real cost in financial losses and suffering for American families who will lose their homes to foreclosure. No government program or loan alteration plan is going to save most of these people, they will have to suffer the consequences of the loans they took. Yes, I believe many were steered into loans they could not afford and who is responsible for this is a hotly debated topic. The reality is that the borrower is going to suffer the negative consequences in the vast majority of these situations. The plans I am hearing about will delay the inevitable for many and may save a few from losing their homes but the consequences will eventually come to most. They took on loans they did not understand and could not ultimately afford.

The lesson is that you need to understand what you are signing when dealing with financial institutions. Get yourself educated and find good, competent, trustworthy help. One axiom I have heard is that the more complicated the program is, the more dangerous it is to your financial health. This certainly turned out to be true for Option ARM’s.

The first line of this is curious as anyone who is studying the finances of the baby boomers would not be surprised that the reverse mortgage market is hot.  The vast majority of boomers simply have not saved enough to pay for their retirement so they will be looking anywhere and everywhere for help to continue to pay for even their most basic needs.  Their home equity is one of those obvious places.  Also, lenders have seen a dramatic drop in their loan volume so they have every incentive to offer products to the baby boomers who need to use home equity.  This is no surprise at all if you know how to look at it. 

Reverse Mortgages: The Choices Expand By KELLY GREENE and VALERIE BAUERLEIN November 13, 2007; Page D1 It may sound hard to believe, but one part of the mortgage market is hot: reverse mortgages. And that’s giving older homeowners more options to tap the equity in their homes — but also opening the door to more confusion and mistakes. Only a year ago, homeowners interested in reverse mortgages had little to choose from beyond the plain-vanilla, government-backed products that have long dominated the market. Such mortgages essentially allow homeowners at least 62 years old to sell a large chunk of their home equity back to a bank or other lender in exchange for a lump sum, monthly payments or a line of credit. Now, nearly a dozen large banks and mortgage lenders have launched reverse-mortgage products with lower fees and larger payouts. One lender has reduced the minimum age requirement to 60; others are making loans on second homes and vacation rentals. “Jumbo” reverse mortgages — for houses valued at as much as $10 million — are becoming more common. With a reverse mortgage, instead of the borrower making payments to the lender, the lender makes a payment or payments to the borrower. The borrower keeps control of the house and doesn’t have to pay back the money as long as he or she lives there. When the homeowner dies or moves out, the loan is typically paid off by selling the house, and any money left over goes to the homeowner or the homeowner’s estate. The product is evolving from meeting basic needs to fulfilling the desires of a new generation of retirees, from funding a vacation getaway or a recreational vehicle to renting a Paris pied-a-terre. The new options, though, mean more potential for confusion among consumers — and a bigger chance that they could miss out on getting the best loan for their situation. And as home prices fall around the country, some homeowners stand to be disappointed. “We’re seeing people apply for a reverse mortgage and find out their home is worth 5% less than they thought,” says Jeff Taylor, vice president of Wells Fargo & Co.’s senior product group in Greensboro, N.C. With so many competing offers to choose from, homeowners could easily wind up paying more in fees and interest rates than they should. Fees are typically steep — more than 5% of the home’s value — and most borrowing limits are capped based on where the homeowner lives. Fees are paid upfront or financed, while interest rates affect how much of your equity the lender ultimately takes. Reverse mortgage lenders traditionally have charged variable interest rates; now, fixed rates are available, but they may cost you more, says Barbara Stucki, director of the National Council on Aging’s home-equity initiative. Because of all the choices, homeowners need to be “a lot more strategic” in how they shop for a reverse mortgage, Ms. Stucki says, factoring in how they want to take the payments and how much money they want to take upfront. The boom in reverse mortgages helped Ronald Prast, a 74-year-old Phoenix retiree. When he first applied two years ago, he was told by a loan officer that he wasn’t a good candidate; government rules would have allowed him to cash out only a small portion of the value of his half-million-dollar home. But last November, when Bank of America Corp. introduced a reverse mortgage that allows homeowners to borrow as much as 65% of a property’s value, up to $10 million, Mr. Prast and his wife, Carolann, quickly signed up. The couple’s house, for which they paid $105,000 in 1981, was appraised at $540,000, Mr. Prast says. They used an initial draw of $208,000 to pay off their outstanding mortgage, home-equity loan, one year’s property tax and the loan fees, freeing up an extra $21,000 a year formerly used to make mortgage payments for travel and indulgences like paying for a granddaughter’s semester in Australia. They also have a credit line worth $75,000 that they are setting aside for medical expenses. “We were comfortably well off, and we wanted to release some of the funds we had tied up in our home,” Mrs. Prast says. Taking out a reverse mortgage to travel or spoil grandchildren is a far cry from just a few years ago, when such products generally were considered loans of last resort for seniors to avoid foreclosure or simply cover living costs, such as prescription drugs or hospital bills. In the past, the reverse-mortgage market has been constrained by having one main buyer, Fannie Mae. But a half-dozen investment banks, including units of Lehman Brothers Holdings Inc. and Bank of America, have started buying reverse mortgages in the past few years, with plans eventually to package and sell them. On Thursday, Ginnie Mae, the federal agency charged with making real-estate investment more attractive to institutional investors, said it’s rolling out a standardized government bond issue backed by reverse mortgages — a key step in creating a secondary market that could help lower borrowers’ costs and increase the loans’ availability. The result: The reverse-mortgage business is booming. Though reverse mortgages represent less than 1% of the overall U.S. home-loan market, valued at about $10 trillion, the number of federally backed reverse mortgages surged 41% in the year ended Sept. 30, according to the Department of Housing and Urban Development. Bank of America plans to expand its Arizona test of reverse-mortgage products nationwide within six months, says Colin McCormick, the bank’s top reverse-mortgage executive. In April, BofA announced it was buying the reverse-mortgage business of Seattle Mortgage Co., the third-largest reverse-mortgage lender by number of loans. The new products — and new bells and whistles — mean that homeowners considering a reverse mortgage are facing more homework than ever before. There are two questions they should ask first: What index does the loan use? It could affect your cost. Financial Freedom, the Irvine, Calif., reverse-mortgage unit of IndyMac Bancorp Inc., launched a product last month that bases its interest rate on the one-month London interbank offered rate, or Libor, index. Reverse mortgages traditionally have used the CMT index, which is based on Treasury bonds. Using the Libor index should lower interest rates “over the long run” for reverse-mortgage users, says Michelle Minier, Financial Freedom’s chief executive. But the borrower may have to give up “a small measure of cash, from 2% to 5%,” to get the lower rate, she adds. Still, consumers should investigate products that use the CMT index. Different products tack on varying amounts of extra interest to whichever index they use. One product might add 0.65 percentage point; another might add 2.00. What are the fees? Fees typically run up to 7% on government-backed loans — in which the Federal Housing Administration insures lenders’ and borrowers’ risk — but are as low as 2% on proprietary loans. If you’re seeking a lump-sum payout for a reverse mortgage on a high-value home, some lenders are willing to eliminate or reduce the upfront costs. And if you borrow less, you can often lower your fees, too. But you may pay higher interest rates in exchange for lower fees, says David Certner, legislative-policy director at AARP, the Washington-based advocacy group. For a 62-year-old Atlanta couple with a $500,000 house, for example, Financial Freedom’s proprietary product would provide up to $148,289, with a 7.79% interest rate. The homeowners would pay fees worth 1.4% of their home value, or $7,000. The same couple could get only $140,596 through a FHA-backed Home-Equity Conversion Mortgage, or HECM, from Financial Freedom. In contrast, the interest charged is only 4.93%. But they would pay a higher fee — 5.2%, or $13,262 — based on the federal lending limit for their county, which is $252,890. If a couple uses the money as a line of credit, though, the balances earn different rates of interest depending on the loan. For instance, the credit line for Financial Freedom’s proprietary loan would increase by 5% a year, compared with 6% for its HECM product. But those rates, being variable, are subject to change. Write to Kelly Greene at kelly.greene@wsj.com1 and Valerie Bauerlein at valerie.bauerlein@wsj.com2

Thanks Manuel for a photo of this cow moving against the herd.

I just looked at the San Jose Mercury News’s real estate blog, Square Feet. It appears they, like many news outlets, are having an identity crisis with the current condition of the real estate economy. Below are 2 postings that were posted on the Square Feet blog, by the same writer. They were posted on consecutive days, the 18th and 19th of October 2007.

Take a look at this story they posted on October 18th entitled Bay Area Home Sales at a Two-Decade Low In September.

… And in Santa Clara County, again for all types of homes (new and resale, houses and condos), the rock-bottom month was Feb. 1991, when 997 homes sold. For sales of just resale houses, the lowest month was Feb. 95, with 684 houses changing hands. Let’s bear in mind, though, that there were a lot fewer homes to sell in the Bay Area back in the early 1990s, so it’s possible that last month’s numbers are in fact scraping near record-low territory.

They make it appear as if the Bay area real estate economy is tanking. Yet, before you make that assessment read the posting, Silicon Valley Luxury Market Soldiers On which was posted on the 19th of October.

A report out this week from Alain Pinel Realtors showed that 227 homes sold for $2.5 million or more in the third quarter in seven of the Bay Area counties, compared to 195 of those high-ticket homes that sold last year during the same period. That’s an increase of 16 percent. The counties in the survey were San Francisco, San Mateo, Santa Clara, Santa Cruz, Monterey, Alameda and Contra Costa.

Reading the October 18th article could cause arrhythmia, while reading the October 19th article may make you bullish beyond belief. So, how can these 2 articles be written just 2 days apart and paint such a different picture of our real estate economy? This answer is complicated. First, the media is often behind the real estate curve. Second, it is my opinion that the media is not a good place to get tips and tactics for you next real estate sale or purchase strategy.

So, my interpretation of the disjointed news above, is that our markets have been made more volatile by a lack of liquidity and the negative press this crisis has created. This means that we will see many ups and downs in the months to come. Don’t fret over the downs and jump for joy over the ups. There is much opportunity in change, if you are able to take advantage of the situation.

Get good representation from a successful Realtor in your area who can help asses your ability to act. Then look at the facts when deciding to make your next transaction. Rates are still low compared to historical averages. In general listed homes are having less buyer activity and are more willing to negotiate. This is a fantastic buyers market for those that are qualified buyers with good down payments. Get a qualified mortgage adviser that can help you navigate the complicated mortgage markets.

It is my interpretation that the robust high end real estate surge that the above October 19th article refers to, as smart action by top 1% income earners to enter a market where they get both a good rate and a great price. Having both these opportunities at once is rare and will not last for ever. These movers in the market are truly buying against the herd.

By Curt Van Emon

The opportunity to move against the herd is in front of us right now.

Common sense tells us to buy when rates are low.  Sounds reasonable, right?  But let’s take that thought further and see where it leads.

If we accept that common sense tells us to buy when rates are low, then:
Common sense tells us to buy when there are the most competitors because common sense by definition means that most everyone will arrive at the same conclusion.
Common sense tells us that if we are to get the house we want, then we must outbid every competitor who is bidding on that house.

Remembering the principles of supply and demand, we know that this will drive the price higher.   This must sound familiar to those who have been in the Bay Area real estate market over the past few years and who have routinely witnessed 10 to 15 offers on homes for sale. 

Now that rates are higher relative to the last five years, common sense is that maybe buying right now is not such a great idea.  If common sense is telling you to not buy now because rates are higher, then:  
Common sense is telling you not to buy when there are fewer competitors and less pressure for a house price to be bid up
Common sense tells you to sit on the sidelines when it is a “buyer’s” market

It seems that common sense leads one into taking actions that have them compete with the most bidders and to sit on the sidelines when there are fewer bidders.

Might it be better to buy when rates are high and there are fewer competitors?  We always hear that it is more effective to not follow the herd and we see an excellent example of this in today’s higher interest rate market.

The borrower always has the option to refinance if rates drop. This gives buyers the opportunity to buy a house where there are fewer competitors and then to lower the costs later if rates decline.

Some buyers cannot afford or qualify for loans at the higher rate.  This is good news for those buyers who can afford and can qualify.  This is what it means to have fewer competitors.  Some will choose to not buy because of higher rates and others will be forced out of the opportunity by the market mechanisms at work.

Talk with your Realtor® to get specific grounding about what is happening with properties in the area where you’d like to buy.  Are the days on market increasing?  Are there multiple offers or are properties selling to one offer? 

Come talk with us at Opes. We’ll work with your situation with our proprietary Future Value Tool™ which creates a personalized financial forecast for each of our clients.   With the results, we can help you assess what you can responsibly afford that still enables you to fund your retirement, college expenses and lifestyle expenses. 

Perhaps going against common sense will enrich you in ways you never expected.       
If there was ever an opportunity to move against the herd, it is in front of us right now.

 
Thanks Hendo101 for this image of Northern California’s Point Arena Lighthouse

I just read an article posted on MSN about investing in real estate. It was entitled Real Estate Investors’ 10 Big Mistakes. Although the title sounds like another bubble bursting article, it was not. The article spoke about the philosophy of investing in real estate and how individual investors should act when making real estate investments. It made me think, have we begun to turn the corner on the current down real estate cycle?

I believe one of the signs that we have begun to cycle back towards a more robust market will be when buyers realize that there are good deals in the market. As I have posted in just the last couple of weeks, I have experienced many of qualified home buyers are getting good deals. I am seeing that qualified buyers are able to leverage their financial strength and are getting good value for their financial power in this market. This is very different from past markets were anyone who could fog a mirror could get enough financing to write a winning offer and also to financially hang themselves.

Don’t get me wrong, we still have mechanical problems that will continue to be a drag on the real estate markets. The liquidity crisis has drastically consolidated the number of lenders offering loans. This consolidation has a profound effect on controlling the supply, pricing and diversity of loan products available. This limits the number of buyers that are able to get financing. Yet, I have begun to hear lenders say this consolidation has gone too far and that it is cutting too many qualified buyers out of the market that would have access in a normalized market.

This week the Federal Reserve acted to cut the prime interest rate by 50 basis points (1/2%). This is evidence that not just the lending community is thinking things have gone too far. Even if the rate cuts will not directly effect the housing markets fundamentals, it is a signal to the markets that change has begun. The bulls rallied on Wall Street and the Dow Jones Industrial Average adjusted positively on the rate cut news by over 330 points.

So, what does this mean for buyers and sellers? It means they need excellent professional help to advise them in this ever changing market. For sellers the days are gone where a sign in your front yard brought 10 offers and more money than you ever thought possible. For buyers, the reality of getting good financial, mortgage, insurance, and real estate advice is more important than ever. Below is an excerpt from the article that inspired me to write this post. Bankrate spoke with established, full-time real-estate investors and with professionals, such as bankers, to identify the 10 types of traps into which real-estate investors most often fall. Item #3 on the list illustrates that successful real estate investors understand they need good help to make highly effective decisions. Might I add we offer all of our residential and investor clients a team of highly valued professionals that meet all the criteria below.

3. Playing Lone Ranger

A key to success is building the right team of professionals. At the very least, you need good relationships with at least one real-estate agent, an appraiser, a home inspector, a closing attorney (we do not use closing attorney’s in California) and a lender, both for your own deals and to assist with financing for prospective buyers.

In the remodeling and maintenance segment of the business, the team includes a plumber, an electrician, a roofer, a painter, a heating and air-conditioning contractor, a flooring installer, a lawn maintenance service, a cleaning service and an all-around handyman.

You can’t build a business as an investor if you’re spending all your time fixing leaky faucets and putting up ceiling fans.

September 19, 2007
Wall Street Journal
 
What the Rate Cut Means for You
Fed’s Half-Point Move Likely to Trim Payments on Credit Cards,
Home-Equity Lines, but Offer Scant Relief on Certain Mortgages
By JANE J. KIM and RUTH SIMON
September 19, 2007; Page D1
Consumers should soon start feeling the impact of yesterday’s Fed rate cut in the form of lower borrowing costs and stingier savings rates. But the rate cut doesn’t offer much help for the key problems bedeviling many mortgage borrowers.
The Federal Reserve said it lowered short-term interest rates by half a percentage point, to 4.75%, to combat the effects of a weaker housing market and tighter credit on the broader economy. The steep reduction in the Fed funds rate surprised many on Wall Street who expected a more modest rate cut. Stocks rose sharply after the Fed’s announcement, with the Dow Jones Industrial Average gaining 335.97 points, or 2.5%, to 13739.39.
The rate cut should reduce payments on many home-equity lines of credit, credit cards and some car loans. Perversely, however, some economists say it could lead to higher rates on fixed-rate mortgages down the road if bond markets expect the Fed move will spur higher economic growth or inflation.
There also is likely to be little immediate relief for borrowers with certain types of adjustable-rate mortgages. (more…)

Thanks Roboppy for this tasty image.

I just finalized a transaction in Campbell, California. The property was put into contract post credit crunch so it is a good estimate of the type of rate you can get on a jumbo loan if you have good credit and a stable job. Through the process of selling this home and working with this buyer, I found something I have not heard often in this market. There is a lot of opportunity floating around in all of this volatility.

The client purchased an approximately $1,200,000 home from a developer. The property was the last home the developer had to sell in this community. In fact, the home was in contract with another buyer and fell out because of financing issues due to the credit crisis. We negotiated with the developer and knocked the price down by over $100,000. We also negotiated that the seller would pay 3 points (approximately $30,000) towards buying down our buyer’s loan interest rate. Negotiations like this did not exist in our previous market. In terms of a buyers ability to negotiate, this is the best market in Campbell I have ever seen!

Well now, you may be asking, “What was the buyer’s rate?” The buyer financed approximately $1,000,000 on a 10 year fixed loan. We used the points (paid for by the seller) to buy the client’s rate down to 6.125%. This experience really made me think. My client’s rate ended up being lower then the average 10 year fixed rates (average rates were around 6.5%-6.75%) before the credit crisis.

This experience has convinced me more than ever that this is a great buyer’s market. Well qualified buyers in this market can negotiate with sellers like never before and still get great rates. It is highly uncommon in the Bay Area real estate market to get both the benefit of negotiation power and a good rate in the same transaction. Undoubtedly, you will continue to hear many news outlets speak of the crisis and how volatile the market is. But, remember the facts in this case study the next time you hear the media speculate about the national or Bay Area real estate markets. I know one thing is for sure, some buyers are using this turmoil to get tremendous deals in this market.

Mind the Gap
New Programs Promise to Bridge
The Analog-to-Digital Divide

By Jeremy Wagstaff, Wall Street Journal
September 7, 2007
JAKARTA, Indonesia — If you’ve ever lost a receipt, tried to remember an important idea you had while driving, or pondered why people rattle off the vital information — their names and numbers — in voicemails so quickly you have to listen to them four times, then you’ve encountered something I’ll pompously call the Analog To Digital Gap. It’s when we can’t move something from atoms to bits as easily as we’d like.

And for some reason it’s still with us. We seem to have spent most of the past few years fiddling with what’s already digital. Web 2.0, the cutting edge of the online revolution, is mostly about sharing stuff that’s already in bit form: photos, videos, music, blogs — all that kind of thing. Very little effort, from what I can see, has been spent on actually getting stuff into that form.

True, there are exceptions. Who uses a camera with film anymore? Most of our snaps are digital, making it relatively easy to store, share and edit them. And a large proportion of music is now digital, meaning we can listen to it on our iPods. But neither media is particularly kind in helping us move our old analog photos, videos and music to a digital format. Services and products do exist, but they’re either expensive or time-consuming or both.

Then there’s the world we move around in. (more…)

Good information at this site about the current market. We continue to look for more liquidity in the system and for certainty to return to the market and have seen some signs of this recently.

149

September 6, 2007
Libor Pops Up
September 6, 2007; Page A16
In the game of international credit-market Whac-a-Mole, the Libor rate just popped up, literally. Libor, short for London Interbank Offered Rate, climbed to 5.72% Wednesday, the 10th day in a row it has tracked higher. Libor is the rate at which banks lend to each other for the short term, and the rate pop represents greater apprehension among banks about whom they are lending to.

In normal market conditions, Libor tracks the Federal Funds rate pretty closely, and as recently as July the two were just 13 basis points, or hundredths of a percent, apart. As of Wednesday’s close, that gap had grown to nearly 50 basis points, or half a percent. With exposure to the U.S. mortgage market cropping up in seemingly unlikely places, such as banks around Europe, banks that lend at Libor are expressing concern, through the rising rates, that borrowers who appear safe may prove to have something ugly hiding on their balance sheets.

This suggests that the shakeout that started with a handful of hedge funds in the U.S. and has spread to the asset-backed commercial paper market is finding its way into the international banking system. Weeks after the credit-market turmoil began, no one is quite sure which hole the mole is going to pop out of next. The rising interbank lending rates are a proxy of sorts for the increased risk that some banks, somewhere, may go belly up.

The best thing regulators can do is make sure they’re on top of the banks they are supposed to be regulating, so we don’t get surprise bank failures that spook the markets and confirm the worst fears being whispered about. This is something for which Treasury Secretary Hank Paulson, late of Wall Street, ought to be eminently well-qualified.

Instead, what we have is regulators across the board leaning on banks to hand out forbearances, per Tuesday’s concerted regulatory push against the banks. There’s nothing wrong with forbearance in principle, and it’s often beneficial for borrower and lender alike. But the regulators stood aside while the loans that are in trouble now were being made. The FDIC, which joined the forbearance chorus this week, was notably late in promulgating stricter underwriting standards while the party lasted. Loan forbearance may have awkward consequences for banks most exposed to bad loans, and so it’s a decision that ought to be made without Washington breathing down the banks’ necks.

At some point, the markets will start to clear. Until then, regulators would do well to focus on preventing further financial accidents, fear of which is one factor that has now driven Libor out of sync with the Fed Funds rate.
 

This sounds right from my own experience listening to people’s financial strategies over the past few years.  More than a handful of people told me their strategy was to buy many investment properties in Nevada, central California and even Tennessee.  They had pretty graphs and intricate Excel spreadsheets showing how a 10% annual appreciation with increasing rents would make them rich.  When I asked them ‘what if’ questions, they told me I was just being a downer and that they were sure it would all work out given how housing prices had been rising so dramatically. 

click here to read article

September 5, 2007 11:47 a.m. EDT 
 
  
Steel Says Uncertainty Has Spread
Beyond Subprime-Mortgage Sector
By DAMIAN PALETTA
September 5, 2007 11:47 a.m.

WASHINGTON — Uncertainty in how credit markets appraise risk has spread from the isolated subprime mortgage sector into much broader segments of the economy, such as securitized products and buy-out transactions, Treasury Department Under Secretary for Domestic Finance Robert K. Steel said Wednesday.

“Valuation became extremely difficult as a no-bid environment seized certain segments of the market,” Mr. Steel said in testimony to the House Financial Services Committee, according to prepared marks. “This reappraisal has spread across the credit market spectrum, first affecting residential-mortgage backed securities and then spreading to other asset classes and, particularly, securitized products.”

Mr. Steel called the risk reappraisal “normal” and said it “typically follows periods of widely available credit when markets have undervalued risk.”

This summer, credit markets froze in certain sectors as concerns grew about credit performance, exacerbated by growing problems in the performance of both subprime- and jumbo-mortgage products. Several large lenders scrambled to find liquidity. Federal Reserve, White House and Treasury Department officials have worked to calm the jittery markets with limited impact.

“I do want to caution policy-makers that this process is far from over,” Mr. Steel said. “It will take more time to play out and certain segments of the capital markets are stressed.”

Mr. Steel’s appearance at Wednesday’s hearing, alongside federal bank and securities officials, marked the first Congressional hearing on the matter since Congress returned from its August recess. He said the “ultimate impact of these events on the economy has yet to play out.”

Erik Sirri, director of market regulation at the Securities and Exchange Commission, said questions about credit and risk appraisal have had a broad impact on a wide range of participants.

“As liquidity for structured products diminished, market participants needing to raise funds to meet margin calls and investor redemptions sold less complex financial instruments such as equities and municipal securities, placing downward pressure on prices in those markets,” Mr. Sirri said. “Overall, these dynamics have significantly impacted a wide range of market participants, from individual investors to systemically important financial institutions.”

Mr. Steel, Federal Deposit Insurance Corp. Chairman Sheila Bair and Comptroller of the Currency John Dugan all said weakened underwriting standards fueled problems in mortgage markets as liquidity prompted lenders to develop new products.

“To satisfy…demand and their excess capacity, some mortgage originators relaxed their underwriting standards, lending to individuals with a lower standard of documentation and selling mortgage products, which for some borrowers would become unaffordable,” Mr. Steel said.

Mr. Dugan, whose agency supervises national banks, said the most severe credit market issues have occurred outside of the commercial banking sector.

“The national banking system remains safe and sound,” he said.

Mr. Dugan also said that the current strain on the banking system could end up having a positive impact as the industry reprices and reevaluates risk.

“While recent market conditions have certainly been painful, and may continue to be so for some time, we believe they are likely to cause some positive changes in the longer term as markets reevaluate and re-price risk,” he said.

Ms. Bair said the uneven mortgage industry standards created a dangerous backdrop that is now having a widespread impact.

The mortgage industry is overseen by a patchwork of state and federal regulators, which some Democrats in Congress are trying to overhaul this year.

“Failure to uphold uniform high standards in these areas across our increasingly diverse mortgage lending industry has resulted in serious adverse consequences for consumers, lenders, and, potentially, the U.S. economy,” Ms. Bair said. She said credit concerns have now extended to leveraged commercial lending.

Mr. Steel said Treasury officials shared the Fed’s view that “recent market developments pose downside risks to economic growth.” Still, he said the “underlying strength of the economy” should fuel further growth.

He said the President’s Working Group on Financial Markets planned to study the broad market issues related to recent market events, including the roles of securitization and the credit rating agencies.

Mr. Steel said the U.S. Department of Housing and Urban Development planned to propose new settlement procedures this fall, a process that the agency has long struggled to finalize because of harsh turf battles between different industries involved in the mortgage closing process.

Mr. Sirri said issues in the subprime and credit markets have prompted the SEC to begin a review of the credit rating agencies services, potential conflicts of interests, disclosures, and rating performance, among other things.
 

This is the kind of news that mortgage industry people are looking for to signal a loosening in the liquidity crisis.  I am not reading too much into this as it’s a small amount relative to what’s currently at stake.  Good borrowers are going to get loans.  Anyone who you wouldn’t want to personally loan your money to probably isn’t going to get a loan.  Those are the kinds of standards being put in place now, if it is your money, would you lend to them? Indymac Bancorp in Pasadena said that last Friday it traded $240 million of AAA bonds backed by jumbo fixed-rate home loans and $350 million of AAA bonds backed by jumbo adjustable-rate loans — the first bonds it’s traded in 36 days.    

The market for jumbo loans, which are prime loans greater than $417,000 in most states, has been rocked by a lack of investor confidence in all home loans except those with some kind of government guarantee.

Here’s more from Indymac’s blog:

While the trade prices on these sales are still outside historical ranges, they do reflect an improvement over several “fire sale” trades made by others in recent weeks. We are encouraged by these sales as they represent the first small sign that the ice is beginning to melt, and some modest liquidity is beginning to return to the private-label mortgage market. It appears as though, given the current historically wide spreads, significant tightening of underwriting standards by lenders, and the updated rating agency models requiring stronger subordination levels, investors are beginning to recognize that private mortgage-backed bonds may offer strong risk-adjusted returns. This further supports our decision last week to re-enter the prime jumbo mortgage market after a brief hiatus.

Inside the Countrywide Lending Spree
By GRETCHEN MORGENSON
Published: August 26, 2007 New York Times
ON its way to becoming the nation’s largest mortgage lender, the Countrywide Financial Corporation encouraged its sales force to court customers over the telephone with a seductive pitch that seldom varied. “I want to be sure you are getting the best loan possible,” the sales representatives would say.

Angelo R. Mozilo, chief executive of the Countrywide Financial Corporation, remains undaunted as the mortgage market has cooled.
But providing “the best loan possible” to customers wasn’t always the bank’s main goal, say some former employees. Instead, potential borrowers were often led to high-cost and sometimes unfavorable loans that resulted in richer commissions for Countrywide’s smooth-talking sales force, outsize fees to company affiliates providing services on the loans, and a roaring stock price that made Countrywide executives among the highest paid in America.

Countrywide’s entire operation, from its computer system to its incentive pay structure and financing arrangements, is intended to wring maximum profits out of the mortgage lending boom no matter what it costs borrowers, (more…)

Fed Has to See States on the Brink From Housing

By Jim Cramer
RealMoney.com Columnist
8/23/2007 2:51 PM EDT

Can we do without Florida, Arizona, California, Nevada and Michigan? Does it matter if we lose them? Do we care if the builders who dominate in those areas go under? Do we care if the homeowners who have home equity loans on top of regular loans who bought homes from 2005 become squatters?

These are the questions that you have to ask when you consider the Fed’s next move. You have to ask them because of the giant resets. We are in month one of a two-year cycle of resets that should drive 7 million homeowners out of their homes if the Fed doesn’t cut.

How do I get those projections? The spring selling season of 2005 is when our problems really began. That’s when 50% of the buyers started taking these mortgages that are so deadly, the ones with the teasers that often were soon after accompanied by home equity loans. These people bought homes in the spring and closed in June and their loans are resetting now, at astronomical rates.

You have to ask these harsh questions because the most recent filings of the major homebuilders show a dramatic decline in cash and a continuation of the building of new homes that is just killing us. You must ask these questions because the states I have mentioned could be crippled by these defaults.

These are the reasons that the Fed must ease. The Fed can pretend that it won’t matter. And I am not averse to every homebuilder going under; they were reckless lenders. But I can’t help think that the employment claims and the retail sales and the basic economy will be hurt badly by this domino chain that has just begun.

When I hear talking head after talking head say the fundamentals are sound in the country, they are saying that none of this stuff matters or that it won’t happen at all. I can’t buy that. I read too many 10-k’s and follow too many real estate situations for me to think that it won’t matter.

Oh, and if I hear one more rich person come on-air and say that these buyers all made the wrong choices, I am going the throw a brick at the TV. If there is a more innocent group than these people I can’t think of it:

1. Alan Greenspan pushed these mortgages as a great way to buy a house.
2. The mortgage companies didn’t help as they let a lot of loans out that they shouldn’t have because the investment banks would buy anything.
3. Many people bought homes because it was the way the American dream has played out: it’s been a great way to build equity and to get a tax break.
4. I hear ads constantly for home equity loans, they sound incredibly enticing and I can’t blame anyone who took them.
5. The Fed raised rates 17 straight times for heaven’s sake so even if your house stayed the same price it would be a problem anyway.

These are the people we can’t help? Meanwhile, the homebuilders keep debasing the value of these homes with more building?

Now, understand that this is a relative issue. We set up Fannie MaeFNM - commentary - Cramer’s Take - Rating to help this situation, but the government has decided that’s not right anymore. We just subsidized the farmers who are rich as Croesus for no reason at all. We build everything in Iraq and a few months later the stuff seems to get blown up or torn down. - - - to help this situation, but the government has decided that’s not right anymore. We just subsidized the farmers who are rich as Croesus . We build everything in Iraq and a few months later the stuff seems to get blown up or torn down.Excuse me for caring about not-so-wealthy Americans.

Are things better than they were a week ago, before the Fed cut of the discount rate? No, not at all. We continue to deteriorate. Do I think that things will be better by year-end? Yes, if the Fed cuts and cuts but without it, things will really get ugly and we will lose all of those states. Lose them in a way that I think is unforgivable and just plain stupid because it doesn’t have to happen.

Random musings: I am not a big Bill Gross fan, but I think he is right about the need to get the Federal Housing Administration and Fannie Mae and the Federal Home Loan Banks moving, and about the need for a Resolution Trust — as he puts it in his September client letter, “an RMC — Reconstruction Mortgage Corporation” — for homeowners. He’s being a real statesman.

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Here’s where I go to watch the continued implosion of the mortgage market.  There are many articles and explanations of what’s happening.  If you have specific questions about your loan situation and I am sure that many of you do, give me a call and I’ll help you get settled.