Refinance Applications Rise as Rates Decline

The number of applications to refinance homes rose 4 percent last week, as mortgage rates declined,
REALTOR® Magazine Online
according to the weekly mortgage applications survey by the Mortgage Bankers Association.

Overall, mortgage applications rose slightly on an adjusted basis from 656.3 to 656.5. On an unadjusted basis, they increased 11.2 percent compared with the previous week and were up 11.5 compared with the same week a year ago, an anomaly attributed to the Columbus holiday.

Mortgage rates fell slightly during the week:

    • 30-year fixed-rate mortgages decreased to 6.21 percent from 6.4 percent.
    • 15-year fixed-rate mortgages decreased to 5.86 from 6.09 percent.
    • 1-year ARMs decreased to 6.1 from 6.17 percent.

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Is this a good time to buy a house?

Also: How do I know if my 'credit counselor' is giving me good advice?
By: John W. Schoen: MSNBC
The ongoing slide in U.S. housing prices has scared some first-time buyers out of the market and kept them on the sidelines. While there’s always the risk that prices will fall further, young couples and growing families still need a place to live. And, if they do their homework, stick to a budget and shop carefully, this may be a great time to take the plunge.

My wife and I are currently in the market as first-time home buyers with excellent credit. We're not interested in flipping or land speculation, we simply want the little white-picket-fence home we've always wanted. Our worry is if we become homeowners and the housing market worsens even more that somehow we'll go down with it too. If we avoid the pitfalls of variable rate mortgages and make the "right" choices with quality lenders, are we naive to think that we might be resistant to problems if the market worsens?
— Bryan L. New Haven, Conn.

There are never guarantees in real estate, and there are plenty of signs that things may get worse before they get better. But no matter what kind of economic conditions prevail, life goes on. And so should yours.

If it’s time for you and your wife to buy a home – you’ve saved something for a down payment, you’ve found a part of the world you’d like to spend time in, you’re tired of paying rent – by all means this can be a great time to buy a home. In many markets, there are a lot more homes for sale than there are buyers. That means you should be able to negotiate a better price than if there were multiple buyers for each house for sale.

As for your risks as a borrower, if you stick with good lender, read every document carefully, ask questions until you’re convinced you understand the answers, you should be fine. If you think the lender or mortgage broker isn’t giving complete answers, go find another one. Good lenders are always looking for people with good credit. If you don’t feel you’re not able to sort out the documents to your satisfaction, you may want to hire a lawyer. A few hundred dollars in legal fees now could save you thousands in interest payments later if you don’t understand your loan.

The harder part is determining a reasonable price for your new home. Some sellers have still not come to terms with the recent drop in prices and are holding out for an asking price that’s too high. Others are pricing more in line with market demand. After you’ve seen a half dozen houses or so in your price range, ask to see examples of recent actual — not asking — sale prices of comparable houses. (You can also look up recent home sales online on sites like Zillow.com.) The only way to determine what the market is paying is by looking at actual sale prices. And the only way to determine the true price of a specific home is to make a bid. If the seller says no, move on to the next house on your list.

The risk that most buyers face today is paying too much for the property. It’s impossible to predict how much longer — or how much further — housing prices will fall. Let’s go over that one more time. Some of the same real estate agents who assured buyers during the boom that they needed “get in now” before prices rose further are now reassuring potential buyers, for example, that recent interest rate cuts mean the worst is over. The only honest answer to the question: “Have prices bottomed?” is “No one knows.”

You also need to keep in mind that the national statistics about home sales, median prices, and foreclosures are averages. Areas where the boom in housing sales and prices was the strongest (places like California, Florida, Nevada) are now seeing the biggest drops. In other areas, where price gains were not as rapid, the market has remained relatively stable. So your risk of further price declines in these areas is more limited.

Though national median price of an existing home was down 1.5 percent in the second quarter compared to a year ago, it was up 1.3 percent in the New Haven-Milford market. Some areas are seeing much bigger swings: the median price for the same period fell 11.3 percent in Sarasota, Fla. but rose 21.9 percent in Salt Lake city, Utah. (Here’s how other markets are doing.)

Above all, figure out how much you can afford, and don’t get talked into a bigger house by real estate agents, mortgage brokers or builders who tell you the “guidelines” say you can afford a bigger mortgage. No one knows how much you can comfortably afford by you. So make a sensible budget, decide how much you can spend and stick to it.

And don’t forget to budget for a bucket of fresh, white paint for that picket fence.

My friend was told by a "debt counselor" that he should keep his credit utilization ratio at about 30 percent because having it too low would hurt his score. I dispute this notion. My (credit ration) generally sits between 1 and 4 percent based on monthly purchases (paid in full) during a statement period. Can you settle this dispute?
- John R., Phoenix Ariz.

In general, making generalizations about credit scores is not a good idea.

According to the people who created the scoring system, a lower credit utilization is usually gives you a better score. That's why closing credit accounts without paying down debt on open accounts can lower your score. By reducing your total credit limit without a corresponding drop in your debt balance, you raise the ratio of debt to credit limit.

Still, your score is based on a complex formula that takes a number of factors into account. For more on how it works, check out the Fair Isaac & Co (FICO) Web site. They used to be fairly secretive about how the scoring works, but these days they’re happy to share the criteria with the public.

As for your friends “credit counselor,” in my opinion many of those holding themselves out as counselors are simply selling more credit. The common scam is to consolidate loans into a new one, charge a higher interest rate and then stretch out the term for many more years to lower the monthly payment. Since most people are so fixed on monthly payments they go along with this. But they end up paying much more interest before the loans are paid off.

The only credit counselors we believe to be legit are those certified and affiliated with the National Federation of Credit Counselors. You can find one in your area by going to www.nfcc.org.
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Treasury Secretary urges action on housing downturn

Paulson says correction is 'most significant current risk' to economy
Inman News
Treasury Secretary Henry M. Paulson on Tuesday called for aggressive action to work through the current housing correction that he says will continue to adversely impact the U.S. economy and struggling homeowners for some time.

"The ongoing housing correction is not ending as quickly as it might have appeared late last year," Paulson said in remarks to students at the Georgetown Law Center this morning.

Despite strong economic fundamentals in the current economy, the secretary views the housing downturn as "the most significant current risk to our economy. The longer housing prices remain stagnant or fall, the greater the penalty to our future economic growth," he said.

In his most sobering view of the housing downturn to date, Paulson said the government and financial industry need to act to minimize the impact on the overall economy. He called on the financial industry to help as many borrowers as possible stay in their homes, but warned against relieving investors of the "costs of bad decisions."

"I have no interest in bailing out lenders or property speculators," Paulson said.

The secretary also called for public policy changes that would reduce the chances of a similar situation building up in the future, while maintaining access to credit for able homeowners.

Paulson's speech came a day after officials from three of the nation's largest banks announced a plan to establish a multibillion-dollar investment fund aimed at lessening the credit crunch by providing up to $100 billion in liquidity for mortgage securities and other investments.

The Treasury department facilitated the discussions leading up the announcement, but no government resources have been pegged for it.

Federal Reserve Chairman Ben Bernanke also spoke on the housing slump Monday, saying the situation will continue to drag on the U.S. economy at least through early 2008.

While the housing market "is likely to be a significant drag on growth" over the next several months, Bernanke added, "it remains too early to assess the extent to which household and business spending will be affected by the weakness in housing and the tightening in credit conditions."

The Fed in September cut its target for the federal funds rate by 50 basis points in response to tightening credit conditions brought on by troubles in the mortgage lending market.

The September reduction in the federal funds rate, to 4.75 percent, was the first rate cut since June 2003. The Fed had raised the rate 17 straight times from June 2004 to June 2006.
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NAR: Mortgage Conditions Bode Well for Housing

Ample availability of financing and advantageous pricing create conditions for improved sales in 2008.
NAR: REALTOR® Magazine Online
Conditions in the mortgage market are improving for consumers, which should help to release some pent-up demand in early 2008, according to the latest forecast by the NATIONAL ASSOCIATION OF REALTORS®.

Lawrence Yun, NAR vice president of research, notes that widening credit availability will help turn around home sales. “Conforming loans are abundantly available at historically favorable mortgage rates. Pricing has steadily improved on jumbo mortgages since the August credit crunch, and FHA loans are replacing subprime mortgages,” he said.

Yun said it’s important to place the current housing market in perspective, and that 2007 will be the fifth highest year on record for existing-home sales. “Although sales are off from an unsustainable peak in 2005, there is a historically high level of home sales taking place this year – a lot of people are, in fact, buying homes,” he said. “One out of 16 American households is buying a home this year. The speculative excesses have been removed from the market and home sales are returning to fundamentally healthy levels, while prices remain near record highs, reflecting favorable mortgage rates and positive job gains.”

He emphasized all real estate is local with naturally large variations within a given area. “Markets like Austin, Salt Lake City and Raleigh have been outperforming recently and will continue to do well next year,” Yun said. “Other areas like Denver and Wichita will likely move up in the price growth rankings due to very positive local economic developments.”
Existing-home sales are expected to total 5.78 million in 2007 and then rise to 6.12 million next year, in contrast with 6.48 million in 2006. New-home sales are forecast at 804,000 this year and 752,000 in 2008, down from 1.05 million in 2006; a recovery for new homes will be delayed until next spring.

“A cutback in housing construction is a positive sign for the market because it will help lower inventory and firm up home prices,” Yun said. Housing starts, including multifamily units, are likely to total 1.37 million in 2007 and 1.24 million next year, down from 1.80 million in 2006.
NAR President Pat V. Combs, from Grand Rapids, Mich., and vice president of Coldwell Banker-AJS-Schmidt, said, “Housing is still a good long-term investment, and we’ll be seeing a broad, modest improvement in home prices in 2008. With widely varying conditions, the best advice for consumers is to consult a REALTOR® in their area to learn about local market conditions because supply and demand can change from one neighborhood to the next.”

Existing-home prices will probably slip 1.3 percent to a median of $219,000 in 2007 before rising 1.3 percent next year to $221,800. The median new-home price should drop 2.1 percent to $241,400 this year, and then increase 1.0 percent in 2008 to $243,900.

The 30-year fixed-rate mortgage is expected to average 6.4 percent for the next two quarters and then edge up to the 6.6 percent range in the second half 2008. Additional cuts expected in the Fed funds rate will help to keep mortgage interest rates historically favorable.
Growth in the U.S. gross domestic product (GDP) is estimated at 2.0 percent this year, below the 2.9 percent growth rate in 2006; GDP is likely to grow 2.7 percent next year.

The unemployment rate is forecast to average 4.6 percent this year, unchanged from 2006. Inflation, as measured by the Consumer Price Index, is expected to be 2.8 percent in 2007, compared with 3.2 percent last year. Inflation-adjusted disposable personal income will probably increase 3.6 percent in 2007, up from 3.1 percent last year.
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Risk of house-price declines falling in many areas

Drop in PMI risk index does not indicate market has hit bottom
By: Matt Carter: Inman News
Declining home prices boosted affordability during the second quarter, reducing the risk of price declines in 28 of the 50 largest metropolitan areas, according to an analysis by PMI Mortgage Insurance Co.

PMI said its U.S. Market Risk Index - which takes into account economic factors like home-price appreciation and volatility, affordability and employment - fell for the first time in 2 1/2 years during the second quarter.

While that's an encouraging sign that housing markets are beginning to correct, it's not evidence that they've hit bottom. Scores in many areas remain elevated, and risk remains high nationwide, said Mark Milner, PMI's chief risk officer.

"We have seen a significant slowdown in price appreciation nationwide, and appreciation has gone negative in some areas," Milner said. "That's improved affordability, which is being reflected in the risk scores. But risk is still high and it's way too early to say we're at an inflection point."

The average risk score for the 50 largest metropolitan statistical areas (MSAs) remained near an all-time high of 329, which translates into a projected 32.9 percent chance of price decline in those areas during the next two years. That's down from 346 during the first quarter (see Inman News story), but still well above the national average of 289 for all 381 MSAs studied.

During the second quarter, 11 MSAs had risk scores of 500 or above, correlating to an estimated 50 percent or greater chance of price declines in the next two years, compared with 15 MSAs in the first quarter. The 11 MSAs were:

    • Riverside-San Bernardino-Ontario, Calif. (608)

    • Las Vegas-Paradise, Nev. (587)

    • Santa Ana-Anaheim-Irvine, Calif. (579)

    • Phoenix-Mesa-Scottsdale, Ariz. (575)

    • Los Angeles-Long Beach-Glendale, Calif. (536)

    • West Palm Beach-Boca Raton-Boynton Beach, Fla. (532)

    • Sacramento-Arden-Arcade-Roseville, Calif. (522)

    • San Diego-Carlsbad-San Marcos, Calif. (521)

    • Oakland-Fremont-Hayward, Calif. (516)

    • Ft. Lauderdale-Pompano Beach-Deerfield Beach, Fla. (507)

    • Orlando-Kissimmee, Fla. (506)

Dropping off the list of MSAs with risk scores of 500 or higher were Miami-Miami Beach-Kendall, Fla. (466), Tampa-St. Petersburg-Clearwater, Fla. (462), Boston-Quincy, Mass. (400) and Washington, D.C.-Arlington-Alexandria, Va. (439).

Boston, Phoenix and West Palm Beach, Fla., saw the largest quarter-to-quarter drop in risk scores, although all three cities remained well above the national average. Boston has seen price declines in four of the last five quarters, helping the city shave 101 points from its risk score, while West Palm Beach (down 75 points) and Phoenix (down 71 points) saw improvements not only in housing affordability, but employment.

Housing affordability, which improves when income growth outpaces home-price appreciation, showed gains in 297 MSAs, or 78 percent of all of those studied. In the top 50 MSAs, all but two saw improvements in affordability. Some areas, such as Phoenix, saw affordability gains even as prices appreciated modestly during the second quarter, because income growth outpaced home-price appreciation.

The MSAs that saw the largest improvements in affordability were in areas that were already at low to moderate risk of price declines. On average, MSAs in the Western states scored the highest for risk (451), followed by the Northeast (273) and the South (243). MSAs in the Midwest had the lowest average risk score (187).

Risk scores are generally low in the Midwest because the region did not experience the rapid and sustained price appreciation places such as California, Nevada and Florida saw during the boom years, said LaVaughn Henry, PMI's director of economic analysis.

"Our model is fundamentally based on price volatility, and much of the Midwest and areas of the South have had low price volatility, and didn't participate in the rise in prices we had" during the boom, Henry said, attributing much of the rise in delinquencies and foreclosures in the Midwest to increased unemployment.

While PMI found weakening employment was not a significant issue for most of the 50 largest MSAs, nine of the 25 MSAs with the largest increases in unemployment were in Ohio (seven of the top 25 MSAs) and Michigan (two). California (seven) and Louisiana (five) also had a large proportion of the 25 MSAs experiencing the largest increases in unemployment.

Home-price appreciation, which peaked in the second quarter of 2005, has been "decelerating" in seven in the last eight quarters. In other words, while prices are still going up on average, they are not going up as fast. Homes with conforming mortgages appreciated at a rate of 3.2 percent per year during the second quarter, compared with 4.5 percent in the first quarter.

Prices were actually falling in an increasing number of MSAs during the second quarter, with 28 percent of the 50 largest MSAs seeing price declines, compared with 16 percent of the remaining 331 MSAs.

The fact that large MSAs were more likely to experience price declines in the second quarter - a reversal of past trends - indicates that price declines are starting to take hold even in more populated areas where prices and employment are typically more stable, the report concluded.

In an attempt to help prospective home buyers decide whether it's a good time to buy, PMI's fall 2007 Economic Real Estate Trends report also looked at how those who bought homes during the three worst downturns in the last 25 years fared.

That analysis, which assumed the average homeowner made a 20 percent down payment, found that home ownership produced a positive return on investment 98.9 percent of the time over 10 years. In the worst of the three scenarios studied - Houston's housing downturn during the 1980s following layoffs in the oil industry - it took homeowners who bought at the peak of the cycle 15 years to show a positive return.

Milner said the analysis demonstrates that "home ownership is a good way to build long-term wealth, and that (home buyers) shouldn't panic when we are going through a phase like that."
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Come on, the mortgage industry isn't that bad

The term "mortgage meltdown" has become so commonplace that borrowers might assume that this is a tough time to get a mortgage.
By: Kenneth R. Harney: latimes.com
But the reality is starkly different: Mortgage money is plentiful, the majority of mortgage products remain relatively unaffected by troubles in the sub-prime segment, and interest rates for 30-year fixed-rate loans remain in the low 6% range for people with reasonably good - not necessarily perfect - credit backgrounds.Before text or link:
Even interest rates on jumbo loans over $417,000 have fallen after spiking this summer.

The main change over the last several months, in the words of Ted Grose, president of Los Angeles-based 1st Mortgage Advisors Inc., is that "the products and underwriting that allowed people to buy houses they couldn't afford have disappeared."

Nonetheless, say lenders and brokers, there is a widespread and persistent belief by consumers that the entire mortgage market is in crisis.

Kit Crowne, a loan officer with Right Trac Financial Group in Manchester, Conn., said even sophisticated homeowners with high incomes are under this impression. He recently handled a relocation financing for a professional couple moving from New Jersey to Connecticut. During the initial discussion, according to Crowne, one spouse said, "I'm really not sure that we're going to be able to even qualify for a mortgage. We've got a lot of graduate and dental school loan debt, and I hear it's a terrible time in the mortgage market."

Crowne checked the couple's credit, verified assets and put them into a cream-puff fixed-rate first mortgage at 6.25% for 30 years. "You'd be amazed," he said, "at how often we run into this" pessimistic attitude, despite the fact that rates are lower than they were in midsummer.

Jumbo mortgages, which always have carried higher rates than "conforming" loans eligible for purchase by Fannie Mae and Freddie Mac, have recently been in the low 7% range, according to Crowne, down from the 8% and higher levels of a couple of months ago.

In Everett, Wash., Jim Brown, chief executive of Veteran Mortgage, agrees that "the 'mortgage meltdown' idea is way overstated." Even in his part of the country, where home prices are rising, "a lot of people think that the mortgage market is in much worse shape" than it actually is.

"Other than sub-prime and high LTV (loan-to-value) stated-income" programs, he said, "we've got pretty much everything now that we did before. We've got a lot of outlets." For example, Brown's company offers buyers with limited resources five different loan programs that allow zero down payments and fixed rates around 6% to 6.25%.

Most lenders and investors are quick to note that while mortgage money is plentiful, underwriting standards are stricter than they were a year ago. Jumbo loans, for example, often require two appraisals - one by an appraiser selected by the lender and the other by the investor.

"And they better line up," said Crowne, or they won't do the deal.

Similarly, FICO score standards generally are higher than a year ago, stated-income mortgages with no verifications are hard to find, and major investors are on the prowl for anything hinting at fraud. Lenders and investors are especially wary of excessive "layering of risk" - combining low down payments with marginal FICO scores and high debt-to-income ratios - in markets where prices are trending lower.

A major legislative development underway on Capitol Hill could expand consumers' range of good mortgage choices even further: Congress appears to be on the verge of transforming the once-stodgy Federal Housing Administration program into a competitive home loan option nationwide, with lower minimum down payments and maximum mortgage amounts generous enough to fund loans even in pricey California.

Under a bill passed by the House on Sept. 18, FHA loans could go as high as 125% of an area's median home price or 175% of the limit for loans purchased by Fannie Mae and Freddie Mac. In California, where the statewide median is in the mid-$500,000 range, that could mean FHA-insured mortgages well above $600,000. A companion bill approved by the Senate Banking Committee would cap FHA loans at the Fannie Mae-Freddie Mac limit, currently $417,000.

A key strength of the FHA that many borrowers may not know about is that its funding base is virtually bulletproof: Its mortgages are pooled into federally guaranteed bonds issued by the Government National Mortgage Assn. (Ginnie Mae) and are considered nearly as safe as Treasury securities. Better yet, FHA loans are consumer-friendly: no prepayment penalties, flexible and generous for consumers with past credit challenges, but old-fashioned strict about documenting income and assets.
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Bill Tightens Tax Rules For Second Homes

Legislation to ease the burden on struggling homeowners could hit an unexpected constituency: people with vacation houses. Owners facing foreclosure could get a break, however.
By: John Godfrey: The Wall Street Journal Online
Popular legislation to ease the tax burden on struggling homeowners could hit an unexpected constituency: people with second homes.

The Ways and Means Committee, the House's tax-writing panel, approved a bill yesterday under which homeowners facing foreclosure won't get stuck with a tax bill if part of their debt is forgiven by lenders. Currently, forgiven debt is treated as income to the borrower and is subject to tax.

The committee decided to pay for the tax break, as required by congressional budget rules, by restricting homeowners' ability to avoid or reduce the taxes on the sale of second homes. The gain in revenue would be equal to roughly $2 billion over 10 years.

Some Republicans complained that the move would hurt the second-home market. Rep. Kevin Brady (R., Texas) said the change would punish those who had saved to purchase a second home. Rep. Sam Johnson (R., Texas) called it a "luxury tax on retirement homes."

There is little evidence that such opposition could threaten the underlying bill. The bill, which came in response to the subprime-lending crisis, has broad bipartisan support in both the House and Senate. The Senate hasn't said how it would pay for the bill.

Treasury tax counsel Michael Desmond said that while the Bush administration differed with the bill on several fronts, it supported the committee's vote. A White House proposal would shield homeowners from the debt-forgiveness tax for three years. The House bill makes that change permanent.

Industry groups, such as the Mortgage Bankers Association and the National Association of Realtors, weren't thrilled at the tighter tax rules for second homes but still supported the overall bill. "No one likes to be the pay-for," said Linda Goold, tax counsel at the Realtors' group. But, she added, "a tax benefit has been curtailed, but nothing has been eliminated."

Under current law, a person can exclude from taxes up to $250,000 in capital gains on the sale of a principal residence. Up to $500,000 of gains can be excluded for married couples. A second home can become a principal residence as long as the taxpayer has lived there for two of the previous five years.The bill approved yesterday would change those rules. Under it, the size of the tax break for a second home would be tied to the portion of time, out of all the years a house is owned, that it serves as a principal residence. Living in a property longer would result in a larger tax break on any gains when it is sold.
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California home sales drop 28% in August

Median prices fall in most cities compared to last year
EXCEPT notice LA County, Westside of LA and West Hollywood!
Inman News
Resale single-family median home prices fell in 11 of 20 regions in California while sales dropped 27.8 percent in August compared to the same month last year, the California Association of Realtors trade group reported this week.

Median single-family existing-home prices increased 2 percent statewide in August compared to August 2006, despite falling in most regions. Meanwhile, the statewide median price in the entry-level price range of less than $500,000 dropped 5.1 percent in August to $349,360 compared to $368,210 in August 2006.

And the median price per square foot for a single-family home fell 4.3 percent this year to $336 compared with last year's record high of $351 per square foot, the association reported.

August median home prices for all types of homes in the state, including new and existing single-family homes and condos, dropped in about 74 percent of the 326 cities and city areas tracked compared to August 2006, according to statistics provided by DataQuick Information Systems, a real estate data company.

DataQuick also reported that median prices fell in 24 of 31 California counties that it tracked in August compared to August 2006 - the state has 58 counties.

Median home prices fell 18.9 percent in Merced County in August compared to August 2006 - the highest price drop among counties tracked by DataQuick - while dropping 15.8 percent in San Joaquin County, 14 percent in Sacramento County, 13.9 percent in Stanislaus County and 12 percent in Nevada County.

The highest year-over-year median price increase in August was in Marin County, at 12.4 percent, followed by San Francisco County, at 5.9 percent; San Mateo County, at 5.8 percent; Santa Clara County, at 5.2 percent; and Los Angeles County, at 4.8 percent.

Nipomo, in San Luis Obispo County, topped the list of cities and city areas with a 37.6 percent year-over-year median price decline in August, followed by Twentynine Palms with a 33.9 percent drop; North Highlands with a 33.7 percent drop; Patterson with a 32.9 percent drop; and Fallbrook with a 32.3 percent drop.

The Westside area of Los Angeles experienced a 42.5 percent rise in median price from August 2006 to August 2007 - the highest among all cities and city areas in the state - followed by West Hollywood, 35.8 percent; Los Gatos, 35.7 percent; Encinitas, 27.7 percent; and Los Altos, 26.2 percent.

Single-family existing-home sales fell in all 20 regions of the state year-over-year in August, the association reported, dropping most in the High Desert region. That region had a sales drop of 56.2 percent, and sales fell 47.3 percent in the Riverside/San Bernardino region, 37.1 percent in the Monterey County area, and 33.8 percent in the Central Valley region.

Statewide, the 10 cities and communities with the highest median home prices in California in August were: Los Altos, $1.82 million; Manhattan Beach, $1.7 million; Saratoga, $1.6 million; Newport Beach, $1.6 million; Burlingame and Palos Verdes Estates, $1.5 million; and Calabasas, La Canada/Flintridge, Coronado, and Los Gatos, at $1.3 million.
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Law Would Keep IRS from Taxing Foreclosures

The U.S. House Ways and Means Committee is considering a bill that would end the practice of taxing the mortgage debt forgiven in a foreclosure.
NAR: REALTOR® Magazine Online
The U.S. House Ways and Means Committee is considering legislation that would end IRS's practice of classifying mortgage debt forgiven in a foreclosure as taxable income.

Panel Chairman Charles Rangel scheduled a committee vote on the legislation for this Wednesday and spokesman Matthew Beck says the New York Democrat hopes to win broad bipartisan support for the bill.

Since the 1990s, the NATIONAL ASSOCIATION OF REALTORS® has supported efforts to change the so-called "phantom tax" law. "It will relieve a tax burden at a time when an individual has experienced a true economic loss," NAR President Pat V. Combs has said.

The bill also would extend a current tax deduction for mortgage insurance.

Sens. Debbie Stabenow, a Michigan Democrat, and George Voinovich, an Ohio Republican, have sponsored similar legislation in the Senate, but no date has been set for its consideration.
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5 Ways to Cash In on the Fed Rate Cut

Now that the Fed has cut interest rates by one-half point, here's advice on how to take advantage.
By: Emily Brandon: Yahoo!Finance
Mortgages, home equity lines of credit, auto loans, credit card rates, certificates of deposit, and money market accounts can all be influenced by changes in short-term interest rates set by the Federal Reserve. But don't count on getting a lower interest rate; first, read the fine print in whatever contract you're signing. The only interest rate that will automatically drop is the federal funds rate, which is what banks charge each other on overnight loans. Here are some ways to make the most of the rate cut announced by the Fed Tuesday:

Watch the market for lower rates. The Fed's rate cut should provide a measure of relief to borrowers anticipating rising payments on their adjustable-rate mortgages. "Borrowers facing resets will still see a sizable payment increase compared to the initial payment when the loan was initiated several years ago, but that increase will be substantially lower than it would have been had the Fed not changed interest rates," says Greg McBride, a senior financial analyst with Bankrate.com. The savings won't be huge, though. "If your adjustable-rate mortgage is due for a reset in October, you're going to see some benefit right off the top, so instead of jumping to 7 percent, it's going to jump to 6¾ percent." But many adjustable-rate mortgages are not tied directly to the prime rate, which is affected by the Fed's federal funds rate. "A reduction in the prime rate may not affect their payment at all or may not affect it for some time," warns David Jones, president of the nonprofit Association of Independent Consumer Credit Counseling Agencies.

Switch to a fixed rate. It might be a good time to consider converting to a fixed-rate mortgage. "Switching to a fixed rate would be a great idea, particularly if you can refinance and your adjustable-rate mortgage is still adjusting higher," says Mark Zandi, chief economist at Moody's Economy.com. Thirty-year fixed-rate mortgages dropped to 6.25 percent this week, down from 6.42 percent last week in anticipation of the Fed rate cut, according to the Mortgage Bankers Association. "You may want to wait a little longer because you'll probably get an even better deal sometime between now and the end of the year," says Zandi. But be sure to carefully weigh the effect of closing costs and fees before refinancing. And try to avoid late payments before you make changes, as even a single late payment can make it much more difficult to refinance and lock in a lower rate.

Tap home equity. "You will see lower home equity lines of credit because they're tied to the prime rate, so they'll come down one for one," says Zandi. If you can tap into your home equity to pay off higher-interest credit card debt, there are savings to be had. But watch rates closely before you sign up for a HELOC. "If you have a home equity line of credit, your rate will adjust lower following a Fed rate cut, but it often comes with a lag of one to three months," cautions McBride.

Switch credit cards. "Consumers should shop around and look for credit cards where the rate is tied to short-term interest rates and see if they can take advantage of that," says Gus Faucher, director of macroeconomics for Moody's Economy.com. Although credit card rates are heavily influenced by your own credit history, now is a great time to shop around for the lowest-rate card and aggressively pay down debt. "If it's a variable-rate credit card, chances are pretty good your rate will come down. With a fixed-rate credit card, it probably won't," says McBride. "If you consolidate onto a variable-rate card, you can do that now because as variable rates decline you will get that value."

Keep saving. Although borrowers may be getting a slightly better deal in the coming months, savers who sock money away in money market accounts and bank-issued certificates of deposit may see their interest rates decline. "Banks are going to be quick to lower their deposit rates, in part because they don't need the deposits because they are not making as many loans," says Zandi. With interest rates now topping 5 percent at many financial institutions, stashing your cash in a CD is one way to lock in high interest rates before they drop. "If you've been looking for an opportunity to put money into a long-term CD, now is the time to do it before rates decline," says McBride. But even if rates drop, risk-averse investors may still want to stick with these safe savings vehicles. "If interest rates fell 1 full percentage point, you're still looking at money market accounts or CDs at 4 percent and 4¼ percent," says McBride. If you have $10,000 to invest, the latter rate will yield you $425 interest earned per year.
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Inflation news gives Fed room to maneuver

But cutting interest rates too fast could stoke future price pressures
By: John W. Schoen: MSNBC
Tuesday’s report that inflation appears to be under control will give the Federal Reserve’s interest rate-setting committee a little breathing room to make a widely-expected cut in its target federal funds rate for the first time in more than four years.

Forecasters are divided on whether the Fed will cut the benchmark rate by a quarter-percentage point or a more aggressive half-point at its policy meeting Tuesday, as central bankers respond to the first economic crisis since Chairman Ben Bernanke took office 19 months ago.

No matter which course they choose, central bankers still face significant risks. A course of gradual rate cuts could come too slowly to keep the slowing U.S. economy from being dragged into a downturn by the housing recession. On the other hand, rapid, aggressive cuts could spark another round of the kind of easy credit that created the housing bubble — and risk eroding gains in the Fed’s hard-fought battle to keep inflation under control.

The Fed’s rate-setting Open Market Committee got two more pieces of economic data to chew on ahead of Tuesday’s widely-watched rate announcement, which is expected at 2:15 p.m. ET. Wholesale prices fell by 1.4 percent in August, led by a big pullback in energy prices; even without that drop, so-called "core" inflation rose just 0.2 percent, according the Labor Department.

Meanwhile, the ongoing mortgage mess continued to widen in August. As the financial markets remained skittish about the risk of rising defaults, the number of foreclosure filings more than doubled from a year ago and jumped 36 percent from July, according to a RealtyTrac, a Web site that specializes in foreclosures.

As a result, Fed watchers say, the central bank is fighting a battle on two fronts. On one side, it is trying to push money into the banking system, recently cutting the rate on direct loans to banks through its so-called discount window, to calm the storm that hit the financial markets a month ago.

Those moves to pump money into the banking system have already pushed the cost of money well below the Fed’s official target rate. According to the Fed’s own data, the “effective” federal funds rate fell as low as 4.54 percent Aug. 14 as the central bank added liquidity to put out the fires sweeping through money markets.

The Fed tries to maintain its target rate through daily sales or purchases of Treasury securities from primary dealers, adding or draining cash to try to balance the supply of money with demand.

Though the target rate has since moved back above 5 percent, some analysts suggest that the widely expected quarter-point cut Tuesday would merely ratify what is already happening in the financial system. That has led to some speculation that the FOMC could move more aggressively with a half-point cut in the federal funds rate target.

Still, the Fed remains wary of letting up on its other perennial battle front — the fight against inflation. Despite Tuesday's good news on wholesale prices, oil prices are moving higher again — breaking $80 a barrel earlier this month. If the Fed cuts rates too far, it risks creating another credit bubble, or stoking inflation.

Former Fed Gov. Wayne Angell, now a private economist, believes the central bankers can’t have it both ways.

“It's just nonsense to say that the Fed can supply reserves to the discount window and to open market operations and without affecting the target (federal) funds rate,” he said. “There is only one monetary policy. And this monetary policy is apparently confusion.”

Regardless of what the FOMC announces as its target rate, Fed watchers will also be scrutinizing the statement that accompanies the new rate — looking for clues about the outcome of the next regularly scheduled meeting six weeks from now.

“I would like to see the Fed (cut a half point),” said former Fed Gov. Lyle Grimly, now a senior adviser at Stanford Washington Research Group. “But I think the key issue if they go (a quarter-point) is whether the (press) release indicates more help is on the way if needed.”

Despite the recent addition of cash to the U.S. banking system, the global credit markets remain skittish following the implosion of subprime mortgage-backed bonds and the collateral damage to hedge funds, banks and other investors that are holding them. A widening fear about the prospect of further defaults rocked the stock and bond markets last month and raised market-based rates for some other types of lending.

Even as short-term rates have fallen in the U.S., a widely used lending benchmark called the London Interbank Overnight Rate, or Libor, has risen. That’s a sign that banks and investors are afraid of further credit fallout, so they’re demanding higher rates from borrowers to compensate for that risk.

A cut by the U.S. central bank could help calm those lenders and investors and restore flows of cash to some forms of borrowing that have dried up since the credit squeeze began in early August.

“Financial conditions are tighter today than they were a month or two ago,” said Jay Bryson, global economist at Wachovia. “In order to offset that the Fed needs to be easing to try to bring some of those rates down.”

But a move to cut rates is not without risks. The recent turmoil in the credit markets is due in part to a period of easy money policy after the dot-com bubble burst — when the Fed, under the leadership of former Chairman Alan Greenspan, cut the benchmark overnight rate to as low as 1 percent. That policy helped fuel the lending spree that pumped U.S. housing prices to unsustainable levels. Now that the excesses of the housing boom have been reined in, the Fed is loath to begin another round of cheap credit.

The Fed has also long maintained that its primary goal is to fight inflation. On that front, it’s shown good progress: A key inflation indicator the Fed watches closely has recently fallen below the central bank’s perceived target of 2 percent annual price growth.

But loosening credit now could set the stage for higher inflation down the road. Strong demand for crops used for both food and biofuels have driven up food prices. Crude oil recently topped $80 a barrel. A strong global economy has tightened supplies of others commodities like steel and other building materials.

“Longer term, if the Fed is sowing the seeds of an inflation problem and the economy turns out not to be this weak, there could be a price to pay for this long-term,” said Michael Darda, chief economist at MKM Partners.

Assessing the health of the economy is probably the Fed’s toughest task at the moment. Its own survey of economic conditions at the 12 regional member banks last month found that while the pace of economic growth is slowing, business conditions are still relatively healthy. Recent data on industrial production seem to confirm that view.

But last month’s weak employment report — showing a net loss of 4,000 jobs in August — came as a surprise to economists and analysts who had been looking for gains of over 100,000 new jobs. The report also said job growth was weaker than initially reported in June and July.

The rising pace of home foreclosures and the slowdown in mortgage lending also poses a threat to future growth — and raises the possibility that the recession now gripping the housing market spills over to the broader economy. Though such a full-blown recession isn’t inevitable, say many economists, the odds of one occurring have risen as the housing and mortgage markets have fallen.

Former Fed governor Lyle Gramley notes that since World War II, every downturn in housing has been followed by a recession – with the exception of housing slumps in 1950 and 1966 “when we had big increases in defense spending that kept the wolf at bay,” he said.

While some FOMC members may want to cut rates more quickly — by a half percentage point — Fed watchers note that it will be easier to reach a consensus for a quarter point cut. But Bryon is in the camp who thinks that recent signs of economic weakness indicate that a more aggressive cut is needed.

“If over the next few months we find out that (economic) growth is really stronger than we think, and the economy didn’t really need the (half point) cut, they can reverse it and they can reverse it pretty quickly,” he said. “But I think that downside risks to growth are starting to build at this point.”
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Fed Expected to Cut Interest Rates Tuesday

Many economists believe the Federal Reserve will cut the federal funds rate for the first time in more than four years.
By: Ron Scherer: REALTOR® Magazine Online
Many economists believe the Federal Reserve will institute the first cut to the federal funds rate in more than four years when it meets on Tuesday, with some anticipating a 0.25-percentage point cut and others a drop of 0.50 of a percentage point.

A decline in the short-term interest rate, according to experts, will indicate that rising inflation is not as big a concern as an economic slowdown and likely will be made in response to a household survey revealing that 300,000 jobs were lost in August and that an average of 17,000 were lost per month since the start of the year.

However, National City Corp. chief economist Richard DeKaser is worried the central bank could further weaken the dollar and impact inflation by cutting short-term interest rates. Experts do not believe such action would have much affect on mortgage costs, as they are tied to long-term interest rates.
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Fed rate cut likely next week

Commentary: Credit crunch's effect on housing could intensify
By: Lou Barnes: Inman News
The credit panic appeared to stabilize on Wednesday, interest rates rising a bit, but the crunch found new legs today on news of sinking retail sales. At week's end conforming mortgages are a hair under 6.5 percent, the gap to vanilla jumbos closing to roughly a 0.5 percent premium, half of the worst in August. Everything else - even high-quality off-brand loans - is as-was: pricey or gone.

The Fed meets Tuesday, will cut its overnight rate a bit, will have something murky and inane to say about following developments as they develop and taking appropriate action when appropriate - all completely as expected by the markets and built into the current rate structure.

The next big move in long-term rates will depend on economic data weeks away: We won't get trend confirmation of last Friday's weak employment data until the next report on Oct. 5. Thursday's report of no change in early September unemployment claims says that hiring may have slowed, but we're not yet facing a spike in layoffs.

We won't get comprehensive housing data until well into October, and even then, news of deepening trouble will not push rates lower unless companion reports show weakness spreading into the larger economy. The preliminary data says that the credit crunch didn't push housing off a table, but the July slope of deterioration steepened in August and is doing so again in September. Just not quite vertical.

The astonishment here continues at the absence of grip and clarity among the authorities about the extent and character of the credit crisis. Simon Johnson, director of International Monetary Fund research, told the Herald Tribune that the subprime crisis has not been resolved, and the IMF doesn't understand why.

The European Central Bank poured $100 billion in 90-day money into its banks -- an extraordinary throwing-in-of-towel, as central banks typically inject liquidity only overnight or for a few days. On that same day, Bank of England governor Mervyn King derided all of these liquidity injections as "... ex-post insurance for risky behavior" that would only encourage more. Two days later, last night, the BOE had to bail out the UK's largest mortgage lender - the first bank bailout there in 30 years.

Federal Reserve Chair Ben Bernanke traveled all the way to Europe to deliver a re-print of a 2-year-old speech on the "savings glut," and offered not a syllable of insight into current matters. He cannot tip his policy intentions; however, in a moment crying for leadership he might have had descriptive things to say, defining the edges of the crunch. He employs the largest group of economists anywhere, and they must have some clues. I hope.

The Secretary of the Treasury, Hank Paulson, late Grand Poobah of Goldman Sachs, said he is focused on the commercial paper evaporation (I will sleep so much better tonight), and on Wednesday gathered a group of mortgage wholesalers, asking them to offer more products to help prevent foreclosures. He knows perfectly well that the Structured Finance department at Goldman and its cousins are the source of such products and are paralyzed in the credit panic, able to wiggle only a single finger to the crowd, pointing blame for this fiasco at somebody else.

Paulson of all officials has the capacity to find out what and where the trouble is, and to understand it, and to offer measures to repair it and to prevent its recurrence. "Playing dumb" hardly describes his contributions in public in six weeks of crunch.

The very worst of the blame-shifting profiteers, led by commercial bankers, claim that the whole problem here is the practice of selling loans, the maker immune to the pain of the ultimate holder (this theory joined, incredibly, by Bernanke). Loans have been sold since the beginning of banks, and securitized and sold in vast quantity for 50 years - successfully, an essential component of economic growth, so long as properly underwritten at transfer, not merely at origination. Who, Mr. Paulson, failed at that?

The call here continues for blanket-yanking and sunshine: Re-underwrite to discover who sold what to whom, where it is now, and who has loaned how much against it.
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