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    Saturday, December 29, 2007

    Happy New Year!

    Happy New Year!

    Well I’d say it’s about time… this week we are watching the geo-political environment with the assassination of Pakistani opposition leader Benazir Bhutto. This is a great example of external forces and their effect on mortgage market. After loosing some ground in mortgage bonds earlier in the week we are back above the 50-day moving average which is good for pricing. New home sales were reported at 647,000 which came in less than expected at 715,000. This could also be a result of home sales which are typically a bit slower before the holidays.

    Keep in mind this information is nationally based. There has been a pick up in loan applications and I hear a buzz in the market regarding contracts flying about. Have a VERY Happy New Year, be SAFE, and I look forward to speaking with you soon!


    Oh by the way, I’m NEVER too busy for any of your purchase or refinance mortgage referrals and I’ll be sure to treat them like family.

    Sunday, December 23, 2007

    Happy Holidays!

    Good Afternoon and Happy Holidays!

    Mortgage pricing is up slightly this week as investors moved money out of bonds after the PCE-Core report came in today slightly above expectations…. Okay okay what does this mean? The PCE measures consumer spending and is a report to measure inflation. We’ll be watching inflation to make sure it doesn’t get too far out of control. But if inflation continues to be a problem rates will continue to go up. If you are working with clients be sure to pass along this information so they can get locked in at the low of 2 year mortgage rates.


    Give me a call if I can help. I’m never too busy for any of your referrals.

    Friday, December 14, 2007

    8 Day Loan Close

    This week the mortgage market proved to be volatile when we got news Tuesday about the Fed cut. With the Fed fund and discount rate cut by .25% this has pulled money out of bonds and into stocks this is driving mortgage pricing slightly higher today. Over the next week or two, rates should again stabilize and turn lower. Mortgage applications are at a two year high this week as refinancing has become a popular choice for many homeowners. If you have a friend or client interested in refinancing out of a pay-option ARM or Interest Only payments and wants a 30 year fixed mortgage I’d be happy to meet with them. I’m never too busy for any of your referrals! Have a great weekend!

    -Sean La Rue

    P.S. Need help getting a deal closed? This week I closed a loan in 8 days from loan application to funding! Call me to get your deals closed…

    Thursday, December 6, 2007

    Sunday, December 2, 2007

    Pros and Cons of Bi-weekly Payments

    Refinance Your ARM Mortgage

    Now that some of the dust from the credit crisis has settled, many borrowers are in serious need of a mortgage review. We take our job as mortgage planners very seriously and would welcome the opportunity to do a 10-minute mortgage review to determine if there are other options you should consider regarding your home financing.

    If you currently have a 3-, 5-, 7- or 10-year fixed-rate or adjustable loan OR you have purchased in the last few years, it would be well worth your while to give us a call to review the options available to protect your financial future. It could be time to secure a longer-term fixed-rate option so that you are shielded from future market fluctuations. Also, if property values decline due to credit tightening, it may impact your ability to secure new financing.

    Give us a call to discuss your options today. We value our relationships and want to ensure that we are doing everything possible to help our borrowers make the right lending choice for their future.

    Many analysts still believe that the credit crunch is far from over and that additional tightening may occur. So it is critical for you to be proactive TODAY in order to protect your financial future!

    We are here to help and would welcome your call.

    Wednesday, November 28, 2007

    Lowest Rates in 25 Months

    Lowest Rates in 25 Months
    We couldn't have asked for a better Thanksgiving treat than the one we got on Monday: the lowest 30-year fixed-rate in over two years. That's right. For those of you who have been patiently waiting, here's your chance to save anywhere from $5,000 to $7,500 or even more on the mortgage financing you've been looking for. Do not miss this great opportunity to cash in on the lowest rates since October 2005.

    Here's why you should act now:

    Monday saw the lowest 30-year fixed interest rate in over two years. However, each time this interest rate reached previous low points, both last year and earlier this year, it began increasing and didn't stop, climbing over 0.50% in the months that followed!

    Fannie Mae and Freddie Mac tightened guidelines, announcing new Loan-Level Price Adjustments. In the first quarter of 2008, most borrowers who have good credit, but have FICO scores below 680, will now be forced either to pay more points at closing or incur a higher interest rate.
    The amount that a borrower could be forced to pay, even if they've never been late on a payment, could be as much as 2.00% in points or an interest rate that's 1.00% higher than the going rate.

    On a $250,000 home loan, a borrower could have to pay up to $5,000 in order to receive normal market rates! Borrowers choosing the higher interest rate, under the worse case scenario, would stand to lose over $7,500 in just the first three years of the loan.

    Choosing to wait could cost you money both in the form of higher market rates and points. This could well be the greatest holiday present you could treat yourself to this year, but only if you act fast!

    Call me today for a FREE loan evaluation to determine what we can do to help you improve your financial situation before these great rates disappear.

    Friday, November 16, 2007

    Mortgage Update

    After a shortened holiday week mortgage bonds are basically where we started on Tuesday. Next on the economic calendar building permits and housing starts come out mid-week, which are not a high impact, but moderate, for mortgage bonds and interest rate pricing.

    You are receiving the weekly mortgage market updates sent out on Mondays. I highly recommend taking 5 minutes to start your day to keep yourself up to date.

    This week we found that investors are coming back to the market with new programs for “expanded criteria”. Expanded criteria loans are for borrowers who do not fit into the typically 20% down, high fico, money in the bank, verifiable income profile. This is great news as we continue to see the credit markets shift. If you have any questions don’t hesitate to call.

    Wednesday, October 31, 2007

    Fed Cut is Good News for Those Who Act Fast

    Fed Cut is Good News for Those Who Act Fast
    Today the Fed announced its second consecutive decrease in rates, cutting another 0.25% from the Fed Funds Rate. This change could directly impact millions of American borrowers.

    Are you one of them?

    Adjustable Rate Mortgages
    If you currently have an ARM that is scheduled to reset in the next 14 months, then today's news is good for you. Now is the time to investigate your options. Even if you have a pre-payment penalty or you're behind in your payments, don't delay. There may still be options available to get you out of your ARM and into a mortgage you can afford, including FHA or the new FHASecure program introduced by the President.

    Important: The FOMC does not meet in November, so ask yourself this: Can you really afford to roll the dice until its next meeting in mid-December?

    Buying at the Bottom of the Market
    If you're looking to invest in real estate in the next six to twelve months, and recent rate cuts have inspired you to start taking action, now is the time to prepare yourself for intense credit scrutiny. There are a lot of great real estate deals to be had today. But if your credit doesn't stand up in today's tight-fisted credit environment, then you could easily miss out on an exceptional opportunity.

    What's the point of taking advantage of discounted home prices if you can't qualify for the right mortgage or interest rate that makes it all worthwhile? Get pre-approved now and know exactly what you can afford. And with the right REALTOR® on your side, you can have incredible negotiating power in a buyers' market!

    Refinancing – Know Your Options
    While rate cuts often spark ideas of refinancing, this may not be the best choice for everyone. In some cases – especially in a market where home values are declining – refinancing may be impossible or disadvantageous. Call me today for a free mortgage review. Based on your individual goals and financial needs, we can explore every available option for you and your family.

    I look forward to hearing from you soon.

    Friday, October 19, 2007

    Wow what a week

    Wow what a week! I hope you are continuing to see an increase in activity this week! This week the stock markets lost some ground, but remember that’s good for anyone looking for a mortgage. We reduced interest rate by about .125% basically across the board. Mortgage bonds are touching their highest levels in months and it’s a GREAT TIME TO LOCK IN before losing ground!

    I continue to look forward at the next fed meeting on October 31st where we’ll learn what the fed decides to do: lower rates or keep them the same. Economists think rate cuts are still to come in the next 3 meetings!

    Need helping getting buyers off the fence? Call me today to give you one of my strategies to help you open more escrows!

    Practical Financial Tips Q3 2007

    Oil Prices Heat Up
    Despite oil's recent rally into record highs, the U.S. Energy Information Administration (EIA) predicted that "increased supply and lower seasonal crude demand in the United States" will likely lead to "crude prices easing slightly over the winter" in its monthly Short-Term Energy Outlook report.

    While the EIA's research seems to suggest lower prices for consumers at the pump, the report was far less positive for consumers of U.S. heating oil. Prices for this commodity are expected to increase sharply due to "colder winter" conditions predicted by the government. Americans who utilize natural gas to heat their homes should anticipate increases as well.
    Opt for a Better Deal
    Cars these days have a dazzling array of extra bells and whistles that really add nothing but zeros to the car's price tag. Following are a few expensive extras that most drivers could probably do without.

    Automatic Stick Shift: Beyond adding $1,000 or more to the price, this useless feature allows the driver to "shift" gears without a clutch. The car, however, has an automatic engine and will shift on its own either way. Purely for show, this feature quickly loses its appeal.

    Individual Climate Control: This expensive feature claims to allow the driver and passenger to control the temperature of his or her own "zone". But how much more effective is this feature than individually controlling the vents and windows?

    Keyless Ignition: With this $300 to $500 feature, a driver can start the engine with the push of a button. For this to work seamlessly, however, a key fob must be on the driver at all times. At least with a key, you can always call a locksmith if you lose it.

    Power Folding Seats: Up to $700 or more! Enough said.

    Navigation System: You can save $1000 or more by skipping the factory-installed system and purchasing a quality portable one that you can use in any car.

    Loophole for Telemarketers
    Thanks to the Federal Trade Commission's Do Not Call Registry, 150 million Americans have enjoyed far fewer unwanted sales calls over the last few years. It hasn't been perfect, but progress has clearly been made due to this important program.

    But, just when you thought it was safe to eat dinner with your family, the telemarketers may be back in your life for good when your 5-year Do Not Call Registration expires in June 2008.

    The good news is, you can always re-register for another five years, and continue to enjoy the peace and quiet. Simply call 1-888-382-1222 or visit to register any or all of your home and cell phone numbers. Don't forget. Telemarketing companies are counting on millions of Americans to drop the ball. Don't be one of them.

    Home Sweet Deals
    When it comes to real estate, foreclosures aren't the only big story in the news. Builders and sellers are reportedly offering huge savings and massive incentives in order to pull in buyers and compete in today's marketplace.

    Business Week recently revealed that some big builders have been auctioning homes discounted by as much as 50% in selected markets, while other large builders have been providing up to $100,000 in savings and incentives. Many individual sellers are getting in on it, too, by offering incentives like special financing, plasma TVs, vacations, and even motorcycles, cars, and boats.

    But, be wary. While there are many sweet deals to be found in today's market, there are also scams, lemons, and unreliable builders, sellers, and industry professionals. Make sure that any deals or incentives you're receiving or providing make sense for your own financial goals and needs. For home buyers and home sellers, this means working with knowledgeable, experienced real estate agents and mortgage professionals you can trust.

    Tuesday, October 9, 2007

    Credit Industry Cracks Down By Linda Ferrari, President, Credit Resource Corp.

    Credit Industry Cracks Down By Linda Ferrari, President, Credit Resource Corp.

    With just a click of a mouse or a touch of a screen, technology has put the world at our fingertips. Not too long ago, the technology revolution even marched its way into instant credit improvement. For a large fee per account, an individual with a bad or nonexistent credit history could immediately be added to the account of a stranger with a good credit history, helping to boost the score of the high-risk borrower. Now the high-risk borrower appears to be a far better credit risk than they actually are. This is a far cry from the traditional authorized user strategy that families and spouses have been using for years.

    It was an easy fix for those who needed it, but just recently, Fair Isaac Corporation, the early developer of the credit report and scoring system, determined that they will no longer allow credit points that come from "piggybacking" on another person's credit score. Their key decision deals a knockout blow to consumers and lenders who rely on instant credit building to boost scores for a home purchase or refi.

    A Little Background
    The instant credit building industry exploded in popularity as homeowners and buyers scurried to wriggle free from the subprime mortgage fallout. Individuals with good credit made instant cash by "renting out" their credit lines to those with inferior credit.

    Fair Isaac has unceremoniously pulled the plug on allowing the inclusion of any credit history that relies on the credit histories of any parties beyond those being considered. The ruling also applies to parents who want to help their children establish a stellar credit history by hitching a ride on their parents' good credit.

    I have never been a proponent of this new instant credit-building approach of buying a stranger's credit history, and I have viewed it as a Band-Aid approach, at best. I have always been a supporter of the traditional concept of the basics of credit education and improvement.

    Piggybacking can be a bad idea, and here are the reasons why:

    1. It's potentially dangerous.
    When you become an authorized user on someone else's card, you do so because you are in desperate need of a credit boost. But what will happen to your credit if the owner of that credit has a late pay or runs up a huge balance? That will sabotage your score, and it is completely out of your control. Just as their good score can boost yours, their subsequent recklessness can sink you deeper than ever – and it's just not worth the risk.

    2. It's unnecessarily expensive.
    Under this new scam, piggybacking on someone else's credit requires that you pay a percentage of the credit limit of the card. People could pay thousands based on the limit. However, we all know that this makes no sense because the dollar amount of the credit limit does not factor into the scoring system. Rather, it's the percentage ratio between the balance and the limit. It's important to keep your balances below 30% of their limit when trying to improve your credit score, and under 50% when trying to maintain.

    A Superior Alternative
    There is a far better alternative to piggybacking credit that you can put into action right now. That alternative is a secured credit card account. (Note: A secured credit card means that you put up your own money as collateral. The amount of the limit does not matter to the scoring system, only that you use it and pay it on time.)

    The only real difference between piggybacking and secured cards is that those who use the piggybacking approach will have an instant credit history of a few years or even more. Don't let this stand in your way of getting the secured card, however. While you do not have an instant credit history with it, you do establish a credit rating. The length of credit history is ONLY a part of the 15% that makes up a credit score.

    Secured credit cards are helpful to new credit users, those who have filed bankruptcy, or for those who have closed all of their credit cards. Secured cards are beneficial when you have credit challenges because they enable you to have active tradelines. Remember, 30% of your credit score is made up of how you use and manage your credit card debt, so you MUST have active credit card tradelines to maximize your credit score.

    Secured credit cards can have a wonderful impact on lower scores. In fact, I have seen scores increase by as much as 50+ points in the first two months when a client implements and uses a secured account. For new credit users, a score can be generated in 3-6 months.

    There are hundreds of secured credit card companies on the web, but the ones to look for are the type of accounts offered by Orchard Bank. Orchard guarantees to report to all three credit bureaus every 30 days, which is important to improving your scores quickly.

    If you would like to obtain a list of credit card companies who work with less than perfect credit, you may do so here.

    Kids and Credit
    One unfortunate fallout of Fair Isaac's crackdown on authorized users is that it makes it tougher for kids to establish credit. It used to be that kids and spouses could establish credit by becoming an authorized user on a spousal or parental account. The credit-selling scam ruined that opportunity, especially for students who are trying to build credit. The secured credit card is a perfect alternative. An equally-inviting opportunity for students is one of the many student credit cards offered. Click here for a list of companies that offer cards for students.

    Long-term Credit Improvement is Easier Than You Think
    If your credit score is lower than you would like, you can improve both your score and your credit for good. Improved credit management is not complicated. In fact, it's really quite simple.

    Everyone can better their credit score by taking exacting and specific steps, and although it doesn't happen overnight, generally speaking, it takes 3-6 months for lasting credit improvement to start taking place. With that, it's time to get serious and to get started.

    Simple Steps to Credit Improvement:
    1. Start with the basics.
    Order all three of your credit reports and all three of your credit scores. You are entitled under the law to a free copy of your credit report from all three credit bureaus each year when you order it from Annual Credit Report Request Service. To order, visit, call toll-free 877-322-8228, or complete the Annual Credit Report Request Form and mail it to: Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281.

    You will have to pay an additional fee for the credit score from each bureau. Scan your report for any errors. Is there an account on there that you didn't apply for? Is there a company reporting a debt that is inaccurate? Are all of your credit card limits reporting? Are your balances up-to-date? Are your name, birth date and Social Security number correct?

    If there are any errors on your report, no matter how small, they can lead to big problems. Not only can they inhibit you from obtaining credit, they can also keep you from getting the interest rate you deserve on your mortgage or refinance.

    2. Start improving what you can immediately.
    Late payments and delinquent accounts will affect your score negatively, so take care of them – the sooner, the better. If you have a good relationship with your creditor, call them to see if they'll work with you on removing a late payment. They do it all the time.

    If you have past due accounts, call your creditors to see if you can negotiate a better interest rate, lower payments, or make other arrangements to pay off your debt sooner. Also, don't carry high balances on your credit cards. If you carry more than 50% of your limit every month, this reflects negatively in your score.

    3. Dispute errors on your report.
    Errors can appear on your credit report. These could be human error in reporting information from a creditor or one of the credit bureaus. They could even be unauthorized accounts set up in your name by an identity thief. Before you apply for a loan, you should verify the information in your credit report. If you find errors, you should correct them immediately.

    Here are the 5 rules in sending dispute letters to the credit bureaus:

    Rule 1: Make sure that you only send the letter to the bureau(s) that is reporting the derogatory information. Not all creditors report to all bureaus. If you send a dispute letter to one of the three bureaus that is NOT reporting the information, you take the risk of having the derogatory information added to that bureau, and your score will go down.

    Rule 2: Make sure that you send everything certified so that you can prove delivery.
    Rule 3: Include copies of any supporting documentation you may have to verify your claim.
    Rule 4: Keeping a log of activities is very important for successful credit repair. Click here to obtain a sample log you can use.
    Rule 5: Mail any disputes to the bureaus at their different addresses. Each bureau has several addresses. If your first dispute comes back without change, send it to another address for that bureau. You may obtain a list of credit bureau addresses here.

    4. If you feel that the credit challenges you are facing are too much, or if you don't have the time or stamina to do the homework necessary to get the ball rolling, then it's time to consider using a professional service to help you reach your goals. I recommend that you reach out to the professional who gave you the subscription to YOU Magazine and have a frank conversation about what the next step should be on your path to good credit.

    While Fair Isaac's crackdown on the piggybacking of credit may feel like an obstacle in your path to credit score improvement, don't get discouraged. There are specific ways to establish and improve credit that don't involve risky schemes and elaborate shell games. The bottom line is that you don't need to play games to boost your credit score. Real credit history and credit improvement is within your reach. Simply follow the steps I have given you, and you will go a long way toward improving your score – for good!

    Setting the Right Price: Selling a Home In a Buyer's Market

    Setting the Right Price: Selling a Home In a Buyer's Market

    To set the right price on a home, you should combine an objective evaluation of your property with a realistic assessment of market conditions.

    In good markets and bad, you are more likely to benefit by determining a fair value and sticking close to it than you are by asking an unrealistic figure and waiting for buyer response to sift out the "right" price. And in a buyer's market, setting the right price from the outset may be the only effective strategy.

    You could set a fair price and then refuse to bargain. But that would deter all those people who hate to pay full price for anything and like to feel they're "getting a deal."

    Better to leave a little room for negotiation by asking slightly more than you expect to get – 5% to 10% above appraised value could be a good starting point. If sales are brisk in your area, you might just end up getting top dollar.

    Don't Overprice
    What many sellers don't realize is that overpricing can result in their getting less for their house than if they priced it right to begin with. The reason: Knowledgeable agents and buyers often won't bid on a severely overpriced house. By the time the seller wises up, many of his best prospects will have bought other houses, decreasing demand for the now properly priced property. An overpriced house can end up being sold for less than it would have a few months earlier.

    Occasionally, an agent may agree to list a property for far more than it is worth – usually at the owner's insistence. The agent knows that, if the owner is serious about selling, the price will have to come down sooner or later. But sometimes an agent who is competing against other agents for a listing will give a seller an unrealistically high estimate of value, to ensure getting the listing. After the house sits on the market awhile, the agent will suggest a new, lower price more in line with what other agents suggested in the first place.

    Some sellers who don't have a deadline for selling ("unmotivated sellers," they're called) will cling for a long time to their overly high asking price – say, 20% higher than it should be. They probably won't get their asking price, and even if they do manage to sell a year later for the original price, it will be because a rising market finally caught up with their price.

    They might think that they were smart to hold firm, but in fact they were naive, ignoring the time value of money. In the year (or even six months) that they clung to their high price, the rest of the real estate market probably wasn't standing still. The next home they buy may have gone up in value by at least the same margin, and possibly more.

    Study the Comparables
    Learn the offering and selling prices of similar properties. Find out how long each took to sell.

    To be comparable, a house that sold has to be close to yours in age, style, size, condition, and location. You should also know the terms under which a house was sold. Try to find at least three comparables no more than six months old.

    If you are listing your home with an agent, this kind of market research should be prepared and presented to you.

    Get an Appraisal
    If your idea of what your property is worth and the listing broker's recommendation doesn’t coincide, an appraisal may be in order.

    Reprinted with permission. All Contents © 2007 The Kiplinger Washington Editors

    Thursday, October 4, 2007

    Practical Financial Tips 3rd Quarter 2007

    Practical Financial Tips 3rd Quarter 2007

    New Law Encourages Saving
    In late 2006, The Pension Protection Act was signed into law, making saving money a whole lot easier for many Americans. Well over 900 pages in length, the law not only protects pensions, it makes permanent many features introduced in the Economic Growth and Tax Relief Act of 2001 (EGTRRA), which were set to expire in January, 2011. This includes enhancements to 403(b), 457(b), and 401(k) plans, IRAs, and 529 college savings plans. With pension plans becoming more and more rare, and the uncertainty surrounding the viability of Social Security, consumers need to take advantage of what many financial experts call "generous" benefits designed to hold Americans accountable for their own retirement planning.

    For instance, maximum 2007 contributions to 401(k) plans and IRAs not only increase to $15,500 and $4,000 respectively, these limits will be linked to an inflation index and could increase significantly in the future. For taxpayers fifty years and older, the contributions limits to their 401(k)s and IRAs increased to $20,500 and $5,000, respectively. There's still plenty of time to make the most of the new tax laws for 2007. Schedule an appointment with a CPA or a Certified Financial Planner, and start preparing for your retirement today.

    Passport Perplexities
    In January, the Western Hemisphere Travel Initiative (WHTI) imposed new passport requirements on American travelers visiting Mexico, the Caribbean, and Canada. In June, the new initiative was revised temporarily, but only for those travelers with passport applications in place. If you think this is confusing, just wait. This was just the first phase of new border security measures the State Department will introduce in the next few years.

    If you're planning to travel any time in the near future, save yourself the time, money, and hassle and get your passport application or renewal in early. According to the US Postal Service, applicants can expect to wait at least 10 to 12 weeks to get through the entire process. And, considering the fact that less than 20% of Americans actually have valid passports, this problem isn't likely to go away any time soon. Even expedited service at the Post Office, which adds $60 to the current $97 price tag, may not result in your passport being processed in time to make your flight. Although private expediting services do exist and can produce passports relatively quickly, expect to pay up to $300 or more!

    Outrageous Airline Fees
    Once your passport finally does arrive and you're ready to book your flight, prepare yourself for a flood of new and increased fees from the airlines − especially if you don't make arrangements online.

    According to CNN research, a fee of up to $75 could be added to the price of your flight if you choose a paper ticket over an e−ticket. Buy your paper ticket at the counter, and you can add another $5 to $20 fee just for talking to an agent. While you're there, don't change your flight. Rebooking could cost up to $250, depending on the airline and class of service you use. Do, however, be choosy about where you sit. A fee to reserve an aisle or exit−row seat could add a hefty $15 to $75 in fees before you even check your bag. And, speaking of that, exceed the 2 bag/50 pound bag limit at some airlines and you'll be charged anywhere from $50 to $200 in fees, depending on the price of your flight.

    If you're not feeling thoroughly nickled−and−dimed yet, rent a car at the airport in some cities, and not only is insurance mandatory (even if your personal insurance covers rentals), but mandatory excise taxes can increase your bill 2%−5%, depending on which city you visit. According to Travelocity, these taxes are typically higher at airport car rentals as opposed to surrounding neighborhood companies.

    Put Your Money Where Your Heart Is
    Hurricanes Katrina and Rita sparked a remarkable wave of philanthropy in the U.S. Not only were billions of dollars raised for relief, investors like Warren Buffet and others gave some of the largest single financial gifts in recent history.

    While few can afford to give that much away, charity of any amount can not only make you feel rich, it can also pay off in tax deductions against your income if you itemize. Be it money, clothes, furniture, vehicles, or even stocks, donations of all types can benefit you on your tax return. If you'd like more control over how your donations are spent, ask your Tax Specialist about a charitable gift fund. Immediately tax−deductible, your initial gift is liquidated and the resulting "donor−advised" account is invested tax−free and distributed over time. You then, just like Bill and Melinda Gates, give grants to any public charities of your choice! Gift funds start at about $5,000, too, so you don't need to be a billionaire to give like one.

    Tuesday, September 18, 2007

    Lower Fed Rate Means Opportunities on the Rise

    Lower Fed Rate Means Opportunities on the Rise
    For the first time in more than four years, the Federal Reserve cut its Fed Funds Rate, which directly impacts millions of American borrowers. And while this important decision has many implications, there’s still some debate among experts about what this means to the economy as a whole.
    The Federal Reserve meets again in six weeks, and no one is certain how market volatility and inflation concerns will affect their future policy and decision-making. Bottom line: Take advantage of this opportunity while you still can. Call me right away.
    • If you’re looking to capture a lower interest rate for refinancing or buying a home, this could be your best opportunity to do so.
    • If you have an Adjustable Rate Mortgage, while this rate cut might help to improve your situation, now is the time to refinance into a fixed-rate loan.
    • If you have a Home Equity Line of Credit (HELOC) or credit cards tied to the Prime Rate, the Fed’s cut in the Fed Funds Rate just put a little money in your pocket.
    Borrowers waiting for a lower fixed-rate mortgage may be waiting for a long time. The chart below clearly shows how Fed Funds Rate cuts do not translate into cuts in fixed-rate mortgages. In January 2001, the Fed Funds Rate was at 6% and 30-year fixed rates averaged 7.03%. By December 2001, following 4.25% in cuts throughout the year, home loan rates were actually up to 7.07%.

    Yes, we may experience some temporary improvements in rates in the coming weeks, but the markets will remain volatile as long as inflation and recession are a possible threat to the Federal Reserve's long-term economic policies.
    If you’re looking to refinance or buy a new home, call me. I will show you why waiting can cost you a lot of money.

    Sunday, September 9, 2007

    Choosing the Right Real Estate Agent

    Choosing the Right Real Estate Agent

    Choosing the right person to represent you in negotiating your home purchase is a major decision. Whenever you see the designation of REALTOR® (with a registered trademark) you can rest assured that person is a member of the NATIONAL ASSOCIATION OF REALTORS® (NAR), and has a commitment to meeting the standards of the organization. My team and I have a network of professionals that have done a great job for our clients in the past, and we can provide you with a referral to a qualified representative, and pre-approval to shop as a cash buyer.

    How will you know which REALTOR® is right for you?

    Seek to work with an experienced Real Estate professional that works with buyers on a regular basis. A real pro will go the extra mile to show you that they will look out for your best interest and gain your respect. Sincerity is a key word here. This type of Real Estate Agent will act promptly to get you information about their team and their methods of doing business, along with quotes and references from past clients.

    Once you set an appointment to meet with a Real Estate Agent and his/her team, they should be rolling out the red carpet for you. You should have a personal introduction to each person you are expected to have contact with throughout the buying process. They should go out of their way to establish a long-term relationship with you, rather than thinking of you as a one-time transaction.

    An experienced buyer's representative will ask many questions regarding your goals rather than tell you what they think you want to hear. He/she will also take your finances into consideration so that they can help you make the purchase you qualify for. They will seek to exceed your expectations in every way by having a system in place that provides complete customer satisfaction.

    What can an experienced REALTOR® do for you?

    An experienced professional will have access to the computerized Multiple Listing Service (MLS), which changes daily. He or she can provide you with new listings to consider as they become available, and will also include important demographics and market value information on the area you are seeking to buy a home. This person will serve as a strong negotiator on your behalf and provide guidance every step of the way. In the long run, using a trained professional will save you time and money. It is important to let your Real Estate Agent know what your goals are so he/she can eliminate the listings that do not meet your criteria.

    Likewise, it is equally important to let my team know what your goals are so we can provide you with financing that fits your current and long-term goals. Our job is not just to close a loan for you, but to help you build a strong financial future by assisting you with managing that debt in the future. We use an extensive database system that allows us to run reports and determine when refinancing is appropriate and beneficial.

    Call me directly for help finding a qualified REALTOR® you can trust.


    Tuesday, September 4, 2007


    States News Service
    States News Service
    August 31, 2007
    Copyright 2007 States News Service


    The following information was released by the Federal Reserve Board:

    CHAIRMAN BERNANKE: Over the years, Tom Hoenig and his colleagues at the Federal Reserve Bank of Kansas City have done an excellent job of selecting interesting and relevant topics for this annual symposium. I think I can safely say that this year they have outdone themselves. Recently, the subject of housing finance has preoccupied financial-market participants and observers in the United States and around the world. The financial turbulence we have seen had its immediate origins in the problems in the subprime mortgage market, but the effects have been felt in the broader mortgage market and in financial markets more generally, with potential consequences for the performance of the overall economy.

    In my remarks this morning, I will begin with some observations about recent market developments and their economic implications. I will then try to place recent events in a broader historical context by discussing the evolution of housing markets and housing finance in the United States. In particular, I will argue that, over the years, institutional changes in U.S. housing and mortgage markets have significantly influenced both the transmission of monetary policy and the economy's cyclical dynamics. As our system of housing finance continues to evolve, understanding these linkages not only provides useful insights into the past but also holds the promise of helping us better cope with the implications of future developments.

    Recent Developments in Financial Markets and the Economy

    I will begin my review of recent developments by discussing the housing situation. As you know, the downturn in the housing market, which began in the summer of 2005, has been sharp. Sales of new and existing homes have declined significantly from their mid-2005 peaks and have remained slow in recent months. As demand has weakened, house prices have decelerated or even declined by some measures, and homebuilders have scaled back their construction of new homes. The cutback in residential construction has directly reduced the annual rate of U.S. economic growth about 3/4 percentage point on average over the past year and a half. Despite the slowdown in construction, the stock of unsold new homes remains quite elevated relative to sales, suggesting that further declines in homebuilding are likely.

    The outlook for home sales and construction will also depend on unfolding developments in mortgage markets. A substantial increase in lending to nonprime borrowers contributed to the bulge in residential investment in 2004 and 2005, and the tightening of credit conditions for these borrowers likely accounts for some of the continued softening in demand we have seen this year. As I will discuss, recent market developments have resulted in additional tightening of rates and terms for nonprime borrowers as well as for potential borrowers through "jumbo" mortgages. Obviously, if current conditions persist in mortgage markets, the demand for homes could weaken further, with possible implications for the broader economy. We are following these developments closely.

    As house prices have softened, and as interest rates have risen from the low levels of a couple of years ago, we have seen a marked deterioration in the performance of nonprime mortgages. The problems have been most severe for subprime mortgages with adjustable rates: the proportion of those loans with serious delinquencies rose to about 13-1/2 percent in June, more than double the recent low seen in mid-2005.1 The adjustable-rate subprime mortgages originated in late 2005 and in 2006 have performed the worst, in part because of slippage in underwriting standards, reflected for example in high loan-to-value ratios and incomplete documentation. With many of these borrowers facing their first interest rate resets in coming quarters, and with softness in house prices expected to continue to impede refinancing, delinquencies among this class of mortgages are likely to rise further. Apart from adjustable-rate subprime mortgages, however, the deterioration in performance has been less pronounced, at least to this point. For subprime mortgages with fixed rather than variable rates, for example, serious delinquencies have been fairly stable at about 5-1/2 percent. The rate of serious delinquencies on alt-A securitized pools rose to nearly 3 percent in June, from a low of less than 1 percent in mid-2005. Delinquency rates on prime jumbo mortgages have also risen, though they are lower than those for prime conforming loans, and both rates are below 1 percent.

    Investors' concerns about mortgage credit performance have intensified sharply in recent weeks, reflecting, among other factors, worries about the housing market and the effects of impending interest-rate resets on borrowers' ability to remain current. Credit spreads on new securities backed by subprime mortgages, which had jumped earlier this year, rose significantly more in July. Issuance of such securities has been negligible since then, as dealers have faced difficulties placing even the AAA-rated tranches. Issuance of securities backed by alt-A and prime jumbo mortgages also has fallen sharply, as investors have evidently become concerned that the losses associated with these types of mortgages may be higher than had been expected.

    With securitization impaired, some major lenders have announced the cancellation of their adjustable-rate subprime lending programs. A number of others that specialize in nontraditional mortgages have been forced by funding pressures to scale back or close down. Some lenders that sponsor asset-backed commercial paper conduits as bridge financing for their mortgage originations have been unable to "roll" the maturing paper, forcing them to draw on back-up liquidity facilities or to exercise options to extend the maturity of their paper. As a result of these developments, borrowers face noticeably tighter terms and standards for all but conforming mortgages.

    As you know, the financial stress has not been confined to mortgage markets. The markets for asset-backed commercial paper and for lower-rated unsecured commercial paper market also have suffered from pronounced declines in investor demand, and the associated flight to quality has contributed to surges in the demand for short-dated Treasury bills, pushing T-bill rates down sharply on some days. Swings in stock prices have been sharp, with implied price volatilities rising to about twice the levels seen in the spring. Credit spreads for a range of financial instruments have widened, notably for lower-rated corporate credits. Diminished demand for loans and bonds to finance highly leveraged transactions has increased some banks' concerns that they may have to bring significant quantities of these instruments onto their balance sheets. These banks, as well as those that have committed to serve as back-up facilities to commercial paper programs, have become more protective of their liquidity and balance-sheet capacity.

    Although this episode appears to have been triggered largely by heightened concerns about subprime mortgages, global financial losses have far exceeded even the most pessimistic projections of credit losses on those loans. In part, these wider losses likely reflect concerns that weakness in U.S. housing will restrain overall economic growth. But other factors are also at work. Investor uncertainty has increased significantly, as the difficulty of evaluating the risks of structured products that can be opaque or have complex payoffs has become more evident. Also, as in many episodes of financial stress, uncertainty about possible forced sales by leveraged participants and a higher cost of risk capital seem to have made investors hesitant to take advantage of possible buying opportunities. More generally, investors may have become less willing to assume risk. Some increase in the premiums that investors require to take risk is probably a healthy development on the whole, as these premiums have been exceptionally low for some time. However, in this episode, the shift in risk attitudes has interacted with heightened concerns about credit risks and uncertainty about how to evaluate those risks to create significant market stress. On the positive side of the ledger, we should recognize that past efforts to strengthen capital positions and the financial infrastructure place the global financial system in a relatively strong position to work through this process.

    In the statement following its August 7 meeting, the Federal Open Market Committee (FOMC) recognized that the rise in financial volatility and the tightening of credit conditions for some households and businesses had increased the downside risks to growth somewhat but reiterated that inflation risks remained its predominant policy concern. In subsequent days, however, following several events that led investors to believe that credit risks might be larger and more pervasive than previously thought, the functioning of financial markets became increasingly impaired. Liquidity dried up and spreads widened as many market participants sought to retreat from certain types of asset exposures altogether.

    Well-functioning financial markets are essential for a prosperous economy. As the nation's central bank, the Federal Reserve seeks to promote general financial stability and to help to ensure that financial markets function in an orderly manner. In response to the developments in the financial markets in the period following the FOMC meeting, the Federal Reserve provided reserves to address unusual strains in money markets. On August 17, the Federal Reserve Board announced a cut in the discount rate of 50 basis points and adjustments in the Reserve Banks' usual discount window practices to facilitate the provision of term financing for as long as thirty days, renewable by the borrower. The Federal Reserve also took a number of supplemental actions, such as cutting the fee charged for lending Treasury securities. The purpose of the discount window actions was to assure depositories of the ready availability of a backstop source of liquidity. Even if banks find that borrowing from the discount window is not immediately necessary, the knowledge that liquidity is available should help alleviate concerns about funding that might otherwise constrain depositories from extending credit or making markets. The Federal Reserve stands ready to take additional actions as needed to provide liquidity and promote the orderly functioning of markets.

    It is not the responsibility of the Federal Reserve--nor would it be appropriate--to protect lenders and investors from the consequences of their financial decisions. But developments in financial markets can have broad economic effects felt by many outside the markets, and the Federal Reserve must take those effects into account when determining policy. In a statement issued simultaneously with the discount window announcement, the FOMC indicated that the deterioration in financial market conditions and the tightening of credit since its August 7 meeting had appreciably increased the downside risks to growth. In particular, the further tightening of credit conditions, if sustained, would increase the risk that the current weakness in housing could be deeper or more prolonged than previously expected, with possible adverse effects on consumer spending and the economy more generally.

    The incoming data indicate that the economy continued to expand at a moderate pace into the summer, despite the sharp correction in the housing sector. However, in light of recent financial developments, economic data bearing on past months or quarters may be less useful than usual for our forecasts of economic activity and inflation. Consequently, we will pay particularly close attention to the timeliest indicators, as well as information gleaned from our business and banking contacts around the country. Inevitably, the uncertainty surrounding the outlook will be greater than normal, presenting a challenge to policymakers to manage the risks to their growth and price stability objectives. The Committee continues to monitor the situation and will act as needed to limit the adverse effects on the broader economy that may arise from the disruptions in financial markets.

    Beginnings: Mortgage Markets in the Early Twentieth Century

    Like us, our predecessors grappled with the economic and policy implications of innovations and institutional changes in housing finance. In the remainder of my remarks, I will try to set the stage for this weekend's conference by discussing the historical evolution of the mortgage market and some of the implications of that evolution for monetary policy and the economy.

    The early decades of the twentieth century are a good starting point for this review, as urbanization and the exceptionally rapid population growth of that period created a strong demand for new housing. Between 1890 and 1930, the number of housing units in the United States grew from about 10 million to about 30 million; the pace of homebuilding was particularly brisk during the economic boom of the 1920s.

    Remarkably, this rapid expansion of the housing stock took place despite limited sources of mortgage financing and typical lending terms that were far less attractive than those to which we are accustomed today. Required down payments, usually about half of the home's purchase price, excluded many households from the market. Also, by comparison with today's standards, the duration of mortgage loans was short, usually ten years or less. A "balloon" payment at the end of the loan often created problems for borrowers.2

    High interest rates on loans reflected the illiquidity and the essentially unhedgeable interest rate risk and default risk associated with mortgages. Nationwide, the average spread between mortgage rates and high-grade corporate bond yields during the 1920s was about 200 basis points, compared with about 50 basis points on average since the mid-1980s. The absence of a national capital market also produced significant regional disparities in borrowing costs. Hard as it may be to conceive today, rates on mortgage loans before World War I were at times as much as 2 to 4 percentage points higher in some parts of the country than in others, and even in 1930, regional differences in rates could be more than a full percentage point.3

    Despite the underdevelopment of the mortgage market, homeownership rates rose steadily after the turn of the century. As would often be the case in the future, government policy provided some inducement for homebuilding. When the federal income tax was introduced in 1913, it included an exemption for mortgage interest payments, a provision that is a powerful stimulus to housing demand even today. By 1930, about 46 percent of nonfarm households owned their own homes, up from about 37 percent in 1890.

    The limited availability of data prior to 1929 makes it hard to quantify the role of housing in the monetary policy transmission mechanism during the early twentieth century. Comparisons are also complicated by great differences between then and now in monetary policy frameworks and tools. Still, then as now, periods of tight money were reflected in higher interest rates and a greater reluctance of banks to lend, which affected conditions in mortgage markets. Moreover, students of the business cycle, such as Arthur Burns and Wesley Mitchell, have observed that residential construction was highly cyclical and contributed significantly to fluctuations in the overall economy (Burns and Mitchell, 1946). Indeed, if we take the somewhat less reliable data for 1901 to 1929 at face value, real housing investment was about three times as volatile during that era as it has been over the past half-century.

    During the past century we have seen two great sea changes in the market for housing finance. The first of these was the product of the New Deal. The second arose from financial innovation and a series of crises from the 1960s to the mid-1980s in depository funding of mortgages. I will turn first to the New Deal period.

    The New Deal and the Housing Market

    The housing sector, like the rest of the economy, was profoundly affected by the Great Depression. When Franklin Roosevelt took office in 1933, almost 10 percent of all homes were in foreclosure (Green and Wachter, 2005), construction employment had fallen by half from its late 1920s peak, and a banking system near collapse was providing little new credit. As in other sectors, New Deal reforms in housing and housing finance aimed to foster economic revival through government programs that either provided financing directly or strengthened the institutional and regulatory structure of private credit markets.

    Actually, one of the first steps in this direction was taken not by Roosevelt but by his predecessor, Herbert Hoover, who oversaw the creation of the Federal Home Loan Banking System in 1932. This measure reorganized the thrift industry (savings and loans and mutual savings banks) under federally chartered associations and established a credit reserve system modeled after the Federal Reserve. The Roosevelt administration pushed this and other programs affecting housing finance much further. In 1934, his administration oversaw the creation of the Federal Housing Administration (FHA). By providing a federally backed insurance system for mortgage lenders, the FHA was designed to encourage lenders to offer mortgages on more attractive terms. This intervention appears to have worked in that, by the 1950s, most new mortgages were for thirty years at fixed rates, and down payment requirements had fallen to about 20 percent. In 1938, the Congress chartered the Federal National Mortgage Association, or Fannie Mae, as it came to be known. The new institution was authorized to issue bonds and use the proceeds to purchase FHA mortgages from lenders, with the objectives of increasing the supply of mortgage credit and reducing variations in the terms and supply of credit across regions.4

    Shaped to a considerable extent by New Deal reforms and regulations, the postwar mortgage market took on the form that would last for several decades. The market had two main sectors. One, the descendant of the pre-Depression market sector, consisted of savings and loan associations, mutual savings banks, and, to a lesser extent, commercial banks. With financing from short-term deposits, these institutions made conventional fixed-rate long-term loans to homebuyers. Notably, federal and state regulations limited geographical diversification for these lenders, restricting interstate banking and obliging thrifts to make mortgage loans in small local areas--within 50 miles of the home office until 1964, and within 100 miles after that. In the other sector, the product of New Deal programs, private mortgage brokers and other lenders originated standardized loans backed by the FHA and the Veterans' Administration (VA). These guaranteed loans could be held in portfolio or sold to institutional investors through a nationwide secondary market.

    No discussion of the New Deal's effect on the housing market and the monetary transmission mechanism would be complete without reference to Regulation Q--which was eventually to exemplify the law of unintended consequences. The Banking Acts of 1933 and 1935 gave the Federal Reserve the authority to impose deposit-rate ceilings on banks, an authority that was later expanded to cover thrift institutions. The Fed used this authority in establishing its Regulation Q. The so-called Reg Q ceilings remained in place in one form or another until the mid-1980s.5

    The original rationale for deposit ceilings was to reduce "excessive" competition for bank deposits, which some blamed as a cause of bank failures in the early 1930s. In retrospect, of course, this was a dubious bit of economic analysis. In any case, the principal effects of the ceilings were not on bank competition but on the supply of credit. With the ceilings in place, banks and thrifts experienced what came to be known as disintermediation--an outflow of funds from depositories that occurred whenever short-term money-market rates rose above the maximum that these institutions could pay. In the absence of alternative funding sources, the loss of deposits prevented banks and thrifts from extending mortgage credit to new customers.

    The Transmission Mechanism and the New Deal Reforms

    Under the New Deal system, housing construction soared after World War II, driven by the removal of wartime building restrictions, the need to replace an aging housing stock, rapid family formation that accompanied the beginning of the baby boom, and large-scale internal migration. The stock of housing units grew 20 percent between 1940 and 1950, with most of the new construction occurring after 1945.

    In 1951, the Treasury-Federal Reserve Accord freed the Fed from the obligation to support Treasury bond prices. Monetary policy began to focus on influencing short-term money markets as a means of affecting economic activity and inflation, foreshadowing the Federal Reserve's current use of the federal funds rate as a policy instrument. Over the next few decades, housing assumed a leading role in the monetary transmission mechanism, largely for two reasons: Reg Q and the advent of high inflation.

    The Reg Q ceilings were seldom binding before the mid-1960s, but disintermediation induced by the ceilings occurred episodically from the mid-1960s until Reg Q began to be phased out aggressively in the early 1980s. The impact of disintermediation on the housing market could be quite significant; for example, a moderate tightening of monetary policy in 1966 contributed to a 23 percent decline in residential construction between the first quarter of 1966 and the first quarter of 1967. State usury laws and branching restrictions worsened the episodes of disintermediation by placing ceilings on lending rates and limiting the flow of funds between local markets. For the period 1960 to 1982, when Reg Q assumed its greatest importance, statistical analysis shows a high correlation between single-family housing starts and the growth of small time deposits at thrifts, suggesting that disintermediation effects were powerful; in contrast, since 1983 this correlation is essentially zero.6

    Economists at the time were well aware of the importance of the disintermediation phenomenon for monetary policy. Frank de Leeuw and Edward Gramlich highlighted this particular channel in their description of an early version of the MPS macroeconometric model, a joint product of researchers at the Federal Reserve, MIT, and the University of Pennsylvania (de Leeuw and Gramlich, 1969). The model attributed almost one-half of the direct first-year effects of monetary policy on the real economy--which were estimated to be substantial--to disintermediation and other housing-related factors, despite the fact that residential construction accounted for only 4 percent of nominal gross domestic product (GDP) at the time.

    As time went on, however, monetary policy mistakes and weaknesses in the structure of the mortgage market combined to create deeper economic problems. For reasons that have been much analyzed, in the late 1960s and the 1970s the Federal Reserve allowed inflation to rise, which led to corresponding increases in nominal interest rates. Increases in short-term nominal rates not matched by contractually set rates on existing mortgages exposed a fundamental weakness in the system of housing finance, namely, the maturity mismatch between long-term mortgage credit and the short-term deposits that commercial banks and thrifts used to finance mortgage lending. This mismatch led to a series of liquidity crises and, ultimately, to a rash of insolvencies among mortgage lenders. High inflation was also ultimately reflected in high nominal long-term rates on new mortgages, which had the effect of "front loading" the real payments made by holders of long-term, fixed-rate mortgages. This front-loading reduced affordability and further limited the extension of mortgage credit, thereby restraining construction activity. Reflecting these factors, housing construction experienced a series of pronounced boom and bust cycles from the early 1960s through the mid-1980s, which contributed in turn to substantial swings in overall economic growth.

    The Emergence of Capital Markets as a Source of Housing Finance

    The manifest problems associated with relying on short-term deposits to fund long-term mortgage lending set in train major changes in financial markets and financial instruments, which collectively served to link mortgage lending more closely to the broader capital markets. The shift from reliance on specialized portfolio lenders financed by deposits to a greater use of capital markets represented the second great sea change in mortgage finance, equaled in importance only by the events of the New Deal.

    Government actions had considerable influence in shaping this second revolution. In 1968, Fannie Mae was split into two agencies: the Government National Mortgage Association (Ginnie Mae) and the re-chartered Fannie Mae, which became a privately owned government-sponsored enterprise (GSE), authorized to operate in the secondary market for conventional as well as guaranteed mortgage loans. In 1970, to compete with Fannie Mae in the secondary market, another GSE was created--the Federal Home Loan Mortgage Corporation, or Freddie Mac. Also in 1970, Ginnie Mae issued the first mortgage pass-through security, followed soon after by Freddie Mac. In the early 1980s, Freddie Mac introduced collateralized mortgage obligations (CMOs), which separated the payments from a pooled set of mortgages into "strips" carrying different effective maturities and credit risks. Since 1980, the outstanding volume of GSE mortgage-backed securities has risen from less than $200 billion to more than $4 trillion today. Alongside these developments came the establishment of private mortgage insurers, which competed with the FHA, and private mortgage pools, which bundled loans not handled by the GSEs, including loans that did not meet GSE eligibility criteria--so-called nonconforming loans. Today, these private pools account for around $2 trillion in residential mortgage debt.

    These developments did not occur in time to prevent a large fraction of the thrift industry from becoming effectively insolvent by the early 1980s in the wake of the late-1970s surge in inflation.7 In this instance, the government abandoned attempts to patch up the system and instead undertook sweeping deregulation. Reg Q was phased out during the 1980s; state usury laws capping mortgage rates were abolished; restrictions on interstate banking were lifted by the mid-1990s; and lenders were permitted to offer adjustable-rate mortgages as well as mortgages that did not fully amortize and which therefore involved balloon payments at the end of the loan period. Critically, the savings and loan crisis of the late 1980s ended the dominance of deposit-taking portfolio lenders in the mortgage market. By the 1990s, increased reliance on securitization led to a greater separation between mortgage lending and mortgage investing even as the mortgage and capital markets became more closely integrated. About 56 percent of the home mortgage market is now securitized, compared with only 10 percent in 1980 and less than 1 percent in 1970.

    In some ways, the new mortgage market came to look more like a textbook financial market, with fewer institutional "frictions" to impede trading and pricing of event-contingent securities. Securitization and the development of deep and liquid derivatives markets eased the spreading and trading of risk. New types of mortgage products were created. Recent developments notwithstanding, mortgages became more liquid instruments, for both lenders and borrowers. Technological advances facilitated these changes; for example, computerization and innovations such as credit scores reduced the costs of making loans and led to a "commoditization" of mortgages. Access to mortgage credit also widened; notably, loans to subprime borrowers accounted for about 13 percent of outstanding mortgages in 2006.

    I suggested that the mortgage market has become more like the frictionless financial market of the textbook, with fewer institutional or regulatory barriers to efficient operation. In one important respect, however, that characterization is not entirely accurate. A key function of efficient capital markets is to overcome problems of information and incentives in the extension of credit. The traditional model of mortgage markets, based on portfolio lending, solved these problems in a straightforward way: Because banks and thrifts kept the loans they made on their own books, they had strong incentives to underwrite carefully and to invest in gathering information about borrowers and communities. In contrast, when most loans are securitized and originators have little financial or reputational capital at risk, the danger exists that the originators of loans will be less diligent. In securitization markets, therefore, monitoring the originators and ensuring that they have incentives to make good loans is critical. I have argued elsewhere that, in some cases, the failure of investors to provide adequate oversight of originators and to ensure that originators' incentives were properly aligned was a major cause of the problems that we see today in the subprime mortgage market (Bernanke, 2007). In recent months we have seen a reassessment of the problems of maintaining adequate monitoring and incentives in the lending process, with investors insisting on tighter underwriting standards and some large lenders pulling back from the use of brokers and other agents. We will not return to the days in which all mortgage lending was portfolio lending, but clearly the originate-to-distribute model will be modified--is already being modified--to provide stronger protection for investors and better incentives for originators to underwrite prudently.

    The Monetary Transmission Mechanism Since the Mid-1980s

    The dramatic changes in mortgage finance that I have described appear to have significantly affected the role of housing in the monetary transmission mechanism. Importantly, the easing of some traditional institutional and regulatory frictions seems to have reduced the sensitivity of residential construction to monetary policy, so that housing is no longer so central to monetary transmission as it was.8 In particular, in the absence of Reg Q ceilings on deposit rates and with a much-reduced role for deposits as a source of housing finance, the availability of mortgage credit today is generally less dependent on conditions in short-term money markets, where the central bank operates most directly.

    Most estimates suggest that, because of the reduced sensitivity of housing to short-term interest rates, the response of the economy to a given change in the federal funds rate is modestly smaller and more balanced across sectors than in the past.9 These results are embodied in the Federal Reserve's large econometric model of the economy, which implies that only about 14 percent of the overall response of output to monetary policy is now attributable to movements in residential investment, in contrast to the model's estimate of 25 percent or so under what I have called the New Deal system.

    The econometric findings seem consistent with the reduced synchronization of the housing cycle and the business cycle during the present decade. In all but one recession during the period from 1960 to 1999, declines in residential investment accounted for at least 40 percent of the decline in overall real GDP, and the sole exception--the 1970 recession--was preceded by a substantial decline in housing activity before the official start of the downturn. In contrast, residential investment boosted overall real GDP growth during the 2001 recession. More recently, the sharp slowdown in housing has been accompanied, at least thus far, by relatively good performance in other sectors. That said, the current episode demonstrates that pronounced housing cycles are not a thing of the past.

    My discussion so far has focused primarily on the role of variations in housing finance and residential construction in monetary transmission. But, of course, housing may have indirect effects on economic activity, most notably by influencing consumer spending. With regard to household consumption, perhaps the most significant effect of recent developments in mortgage finance is that home equity, which was once a highly illiquid asset, has become instead quite liquid, the result of the development of home equity lines of credit and the relatively low cost of cash-out refinancing. Economic theory suggests that the greater liquidity of home equity should allow households to better smooth consumption over time. This smoothing in turn should reduce the dependence of their spending on current income, which, by limiting the power of conventional multiplier effects, should tend to increase macroeconomic stability and reduce the effects of a given change in the short-term interest rate. These inferences are supported by some empirical evidence.10

    On the other hand, the increased liquidity of home equity may lead consumer spending to respond more than in past years to changes in the values of their homes; some evidence does suggest that the correlation of consumption and house prices is higher in countries, like the United States, that have more sophisticated mortgage markets (Calza, Monacelli, and Stracca, 2007). Whether the development of home equity loans and easier mortgage refinancing has increased the magnitude of the real estate wealth effect--and if so, by how much--is a much-debated question that I will leave to another occasion.


    I hope this exploration of the history of housing finance has persuaded you that institutional factors can matter quite a bit in determining the influence of monetary policy on housing and the role of housing in the business cycle. Certainly, recent developments have added yet further evidence in support of that proposition. The interaction of housing, housing finance, and economic activity has for years been of central importance for understanding the behavior of the economy, and it will continue to be central to our thinking as we try to anticipate economic and financial developments.

    In closing, I would like to express my particular appreciation for an individual whom I count as a friend, as I know many of you do: Edward Gramlich. Ned was scheduled to be on the program but his illness prevented him from making the trip. As many of you know, Ned has been a research leader in the topics we are discussing this weekend, and he has just finished a very interesting book on subprime mortgage markets. We will miss not only Ned's insights over the course of this conference but his warmth and wit as well. Ned and his wife Ruth will be in the thoughts of all of us.


    Benito, A., J. Thompson, M. Waldron, and R. Wood (2006). "House Prices and Consumer Spending" (420 KB PDF), Bank of England Quarterly Bulletin, vol. 46 (Summer), 142-54.

    Bennett, P., R. Peach, and S. Peristiani (2001). "Structural Change in the Mortgage Market and the Propensity to Refinance," Journal of Money, Credit and Banking, vol. 33 (no. 4), pp. 955-75.

    Bernanke, Ben S. (2007). "The Subprime Mortgage Market," speech delivered at the Federal Reserve Bank of Chicago's 43rd Annual Conference on Bank Structure and Competition, Chicago, May 17.

    Burns, Arthur F., and Wesley C. Mitchell (1946). Measuring Business Cycles (New York: National Bureau of Economic Research).

    Calza, A., T. Monacelli, and L. Stracca (2007). "Mortgage Markets, Collateral Constraints, and Monetary Policy: Do Institutional Factors Matter?" CFS Working Paper Series No. 2007/10 (Frankfurt: Center for Financial Studies).

    de Leeuw, Frank, and Edward M. Gramlich (1969). "The Channels of Monetary Policy: A Further Report on the Federal Reserve-MIT Model," Journal of Finance, vol. 24 (May, Papers and Proceedings of the American Finance Association), pp. 265-90.

    Dynan, Karen E., Douglas W. Elmendorf, and Daniel E. Sichel (2005). "Can Financial Innovation Help to Explain the Reduced Volatility of Economic Activity?" (424 KB PDF), Journal of Monetary Economics, vol. 53 (January), pp. 123-50.

    Estrella, Arturo (2002). "Securitization and the Efficacy of Monetary Policy" (568 KB PDF), Federal Reserve Bank of New York, Economic Policy Review, vol. 9 (May), pp. 243-55.

    Green, Richard K., and Susan M. Wachter (2005). "The American Mortgage in Historical and International Context" (190 KB PDF), Journal of Economic Perspectives, vol. 19 (no. 4), pp. 93-114.

    Hurst, E., and F. Stafford (2004). "Home is Where the Equity Is: Mortgage Refinancing and Household Consumption," Journal of Money, Credit and Banking, vol. 36 (no. 6), pp. 985-1014.

    Mahoney, Patrick I., and Alice P. White (1985). "The Thrift Industry in Transition," Federal Reserve Bulletin, vol. 71 (March), pp. 137-56.

    McCarthy, J., and R. Peach (2002). "Monetary Policy Transmission to Residential Investment," Federal Reserve Bank of New York, Economic Policy Review, vol. 8 (no. 1), pp. 139-58.

    Snowden, Kenneth A. (1987). "Mortgage Rates and American Capital Market Development in the Late Nineteenth Century," Journal of Economic History, vol. 47 (no. 3), pp. 671-91.

    U.S. Department of Commerce (1937). Financial Survey of Urban Housing (Washington: Government Printing Office).

    Weiss, Marc A. (1989). "Marketing and Financing Home Ownership: Mortgage Lending and Public Policy in the United States, 1918-1989" (617 KB PDF), in Business and Economic History,series 2, vol. 18, William J. Hausman, ed., Wilmington, Del.: Business History Conference, pp. 109-18.


    1. Estimates of delinquencies are based on data from First American Loan Performance. Return to text

    2. Weiss (1989) provides an overview of the evolution of mortgage lending over the past 100 years. Return to text

    3. Snowden (1987) discusses regional variations in home mortgage rates at the end of the nineteenth century. In addition, the U.S. Department of Commerce (1937) provides information on mortgage rates for various U.S. cities for the 1920s and early 1930s. Return to text

    4. Later, in anticipation of the end of World War II, the Congress created the Veterans' Administration Home Loan Guarantee Program, which supported mortgage lending to returning GIs on attractive terms, often including little or no down-payment requirement. In 1948, the Congress authorized Fannie Mae to purchase these VA loans as well. Return to text

    5. Regulation Q provisions that still exist restrict banks' ability to pay interest on some deposits, but these remaining provisions have little effect on the ability of depository institutions to raise funds. Return to text

    6. In detrended data, the correlation between quarterly single-family housing starts and the growth of small time deposits at thrifts during the preceding quarter was 0.53 for the 1960-1982 period; since 1983, this correlation has fallen to -0.02. Return to text

    7. Mahoney and White (1985) reported that the net worth of 156 thrift institutions was less than 1 percent of assets in 1984; when reported net worth was adjusted to exclude regulatory additions that did not represent true capital, this figure swelled to 253. Return to text

    8. Institutional factors can still be relevant, however, as can be seen by international comparisons. For example, in the United Kingdom, where the predominance of adjustable-rate mortgages makes changes in short-term interest rates quite visible to borrowers and homeowners, housing has a significant role in the monetary transmission mechanism through cash-flow effects on consumption, among other channels (Benito, Thompson, Waldron and Wood, 2006). Although adjustable-rate mortgages have become more important in the United States and now account for about 40 percent of the market, most adjustable-rate mortgages here are actually hybrids in that they bear a fixed rate for the first several years of the loan. Return to text

    9. For example, McCarthy and Peach (2002) report a substantial decline in the short-run, though not long-run, interest elasticity of residential investment and real GDP after the early 1980s. Work by Dynan, Elmendorf, and Sichel (2006) supports this conclusion as does other work at the Federal Reserve on models for forecasting residential investment. Modeling work at the Fed also shows that the short-run sensitivity of residential investment to nominal mortgage rates fell by more than half after the end of the New Deal system, but, in line with the findings of McCarthy and Peach, remained largely static after 1982. Estrella (2002) finds that secular changes in mortgage securitization have reduced the interest sensitivity of housing to short-term interest rates and the response of real output to an unanticipated change in monetary policy. Return to text

    10. Dynan, Elmendorf and Sichel (2006) argue that financial innovation has made it easier for households to use the equity in their homes to buffer their spending against income shocks, thereby reducing the volatility of aggregate consumption. Studies by Hurst and Stafford (2004) and Bennett, Peach and Peristiani (2001) provide indirect evidence supporting this argument. Return to text


    Tuesday, August 28, 2007

    Home Buyer Survey Ranks Features Buyers Want

    Home Buyer Survey Ranks Features That Are Important To Buyers
    A recent survey of recent home buyers conducted by the National Association of Realtors (NAR) pointed out a bunch of home features that rank high with homeowners.
    The 2007 Profile of Buyers' Home Feature Preferences found that buyers preference for oversized garages (two car or more) was increasing more than their preference for any of the other 75 home features and room types on the survey. Among those individuals who purchased homes in 2006, 57 percent considered a big garage to be very important up from 41 percent when the last survey was conducted in 2004, and in spite of the fact that gas prices were spiraling through most of the year. Of those people who did not purchase a home with an oversized garage 56 percent said they would have paid a premium for this feature compared to only 6 percent who were willing to do so two years earlier. 61 percent of people living in the Midwest put oversized garages high on their list of preferences as did 66 percent of Westerners.

    The largest number of respondents, approximately 75 percent, ranked air conditioning as a "very important" feature in their homes. Among those who purchased a home without it, 65 percent of buyers said they would be willing to pay a median $1,880 extra for central air conditioning; a number we suspect would be much higher if the question had been asked anytime in the last two weeks. As might be expected, many more home buyers in the South and Midwest voted for central air conditioning as a priority, with 91 percent and 81 percent, respectively, saying this feature was very important.
    53 percent of all respondents viewed a walk-in-closet in the master bedroom as a priority but Southerners were particularly fond of this feature with 66 percent prioritizing it. Hardwood floors ranked high with 28 percent of respondents and granite countertops with 23 percent, an increase of 7 percent for each over the last two years.
    Having a satellite or cable TV ready home was highly ranked by 46 percent of respondents which seems a little strange given the wide availability of free installation of those systems.
    While much has been written about a growing buyer preference for "green homes," those buyers who purchase existing homes are not nearly as demanding of such features as are buyers of new homes. The former place a high priority on energy efficiency in 39 percent of the cases compared to 65 percent of new home buyers who said it was very important. Older buyers, however, placed greater importance on energy efficiency than did younger buyers. 63 percent of buyers 75 and older said it was very important but only 32 percent of buyers in the 18 to 24 age group agreed.
    Age, in fact, was overall the biggest determinant of home amenities. 74 percent of older buyers (those over 75) wanted a single-level home. A home that was less than 10 years of age was preferred by 43 percent and a walk-in-closet by 74 percent. More than half of buyers over 65 wanted a separate shower in the master bedroom compared to only 25 percent of those in the 25-34 age group. The younger buyers were more likely (60 percent) to want a backyard or play area.
    Buyers still want bigger homes and newer homes, but they also want fewer bedrooms. In the two years between surveys the size of the typical home bought by survey respondents increased by about 100 square feet to 1,840 square feet but the median number of bedrooms went from four to three. The median age of the houses purchased was 12 years compared to 15 years in 2004.
    Some good news for the construction industry; nearly 60 percent of recent home buyers undertook a remodeling or home improvement project almost immediately after purchasing their home. About half made improvements in the kitchen and half remodeled or improved a bathroom within three months after closing. These new homeowners spent a median of $4,350 on projects in that time period.
    Finally, more than 50 percent of buyers believe that their home has high investment potential and another 40 percent think that the investment potential is at least moderate. Only 3 percent viewed the investment potential of their new home as low.

    Monday, August 27, 2007

    Understanding Costs for 2nd Mortgages

    Understanding the Cost of a Second Mortgage Loan

    You wouldn't fill up your car's gas tank without knowing the cost, would you? The same goes for second mortgages. Here are some tips to you understand the price of your loan.

    There are two major costs for getting a second mortgage: banker fees and loan interest. Fees and closing costs are paid upfront, at the time of signing. Interest is paid over the entire life of the mortgage.

    Lender fees

    A homeowner can expect the same fees for a second mortgage as would come on a first mortgage. For example:

    * Appraisal
    * Application fee
    * Credit report fee
    * Attorney costs

    But these fees are likely to cost less than a full-blown mortgage. According to lending information website, the fees usually total two to five percent of the loan balance.

    Some of these fees are fixed; costs regulated by the government or other institution. But some fees are negotiable, such as the application fee.

    The Cost of Money

    Interest is often called the cost of money. Interest is how banks, lenders and financial institutions make the lion’s share of their money.

    Second mortgages are a fixed rate loan. This means that the interest rate you agree to at signing is the interest rate you will pay for the entire life of the loan. The fixed interest rate that you get on your loan depends on a bunch of factors, including the length of the mortgage, supply and demand and the interest rate environment. Most lenders compete to offer the best rate, but it is still wise shop around.

    More information on the cost of a second mortgage can be found at or


    Changes in Credit Scoring

    Change in FICO Scoring System Could Affect Mortgage Loan Availability

    Aug 13, 2007 -- Fair Isaac Corp. will make some major changes to the FICO scoring system. Those in the know call this overhaul a very big deal, one likely to result in plummeting credit scores.

    FICO Facts

    * The scheduled changes to the FICO system will affect 60 million consumers (30 percent of the credit report population).
    * The FICO overhaul is most likely to impact the scores of young adults, women, and individuals trying to re-establish credit by piggybacking off another's card.
    * Out of 50 top mortgage lenders in the U.S., 40 use FICO scores to determine loan eligibility and interest rates.
    * Fair Isaac is changing the system in light of complaints about abuse from the lending industry.

    FICO 08
    The new scoring model that Fair Isaac plans to roll out in September is known as FICO 08. Very few details have been released about the new scoring system - Fair Isaac does not publish much about their model for fear that someone will copy it - and as a result, most consumers are completely unaware that their credit scores could be in danger.

    Fair Isaac spokesman Chris Watts has downplayed the changes, saying that the new system will be more dependable for lenders who are analyzing the scores of higher-risk consumers and those with little credit history.

    Whether FICO 08 will really be more dependable for lenders is yet to be seen, but there is no doubt that it will have a huge impact on credit scores across the country.

    Instead of dividing the population into 8 segments of good credit and 2 segments of bad credit, the new FICO model will divide the population into 12 segments-8 for good credit and 4 for bad.

    For individuals who already have good credit, this change doesn't mean much. But for those trying to establish or re-establish credit, the new system may well cause problems.

    Another huge change to the FICO scoring system involves the authorized user (AU).

    Come September, being an AU on someone else's credit account will no longer be beneficial. An estimated 60 million consumers (most of them students or spouses) currently 'piggyback' on someone else's account as an authorized user. This means that they can use the account and share the benefits when the main account holder uses credit responsibly.

    John Ulzheimer, current president of and former manager at Fair Isaac, has gone on record as saying the AU change to the FICO system is a very, very big deal, because it will eliminate the benefit of being an authorized user and cause scores to go down.

    'While FICO's move has largely remained under consumers' radar screen, its impact will be clearly felt when the change starts taking place in September, particularly among newly divorced women and a fresh crop of college students who will face a new hurdle in establishing credit for the first time,' says Ulzheimer.

    Why the Change?

    The change Fair Isaac will be making to the model is largely a result of complaints from the lending industry and trade groups like the National Association of Mortgage Brokers (NAMB ) who say that authorized users are undermining the system.

    Most of the complaints about 'piggybacking' center on the practice of renting good credit from a third party service - a practice that has been growing in popularity.

    There are already a number of companies out there acting as middlemen between people with good credit looking to make money and people with bad credit looking to boost their credit scores, and more services like this are cropping up every month.

    The cost of renting credit depends on the service that you use. Most services charge somewhere between $300 and $3,000. It may sound expensive, but consumers can boost their score by as much as 200 points in a very short period of time.

    A shady practice? NAMB says yes.

    'We believe that renting the credit history of an unknown or unrelated individual in order to obtain a loan with a lower interest rate is an unethical practice,' said NAMB President Harry Dinham. 'This practice defeats the very purpose of credit scores.'

    How Will the Change Affect Mortgage Loan Availability?

    If credit scores do begin to drop in September as predicted, mortgage borrowers will feel the impact. Lenders are already tightening credit standards because of problems in both the prime and subprime sectors. Lower credit scores are bound to leave some borrowers out in the cold.

    There is also a chance you may receive a rejection simply because you're an authorized user on someone else's account. According to an article by, there have been unconfirmed reports from around the country that any loans containing authorized user trade lines are being rejected by several of the major mortgage lenders.

    What Can Consumers Do?

    If you're an authorized user on someone else's account and want to maintain this benefit, the best thing you can do is become a joint account holder. This is the only loophole that will be left once the FICO model changes.

    If you disagree with overhaul, you can also sign one of the many petitions currently circling the web. An example of one such petition can be found at