Foreclosure is a hot topic among the press lately.  It’s hard to turn on the television or open up a newspaper without seeing a story about it.

But what’s most interesting about foreclosures is that they appear to be concentrated in certain areas of the country.

According to the foreclosure-tracking service RealtyTrac, 4 states accounted for more than half of nation’s foreclosures last month.

And those 4 states — California, Florida, Arizona, and Nevada — share some very similar characteristics including:

1. Their respective popularity with retirees and real estate investors
2. Their large home value increases earlier this decade

In looking at the rest of the country’s foreclosure data, the remaining 46 states combined accounted for just 48.8 percent of October’s foreclosures.

That’s 1.06% per state on average.

Now, this isn’t meant to diminish the impact of foreclosures on the economy — quite the opposite.  Foreclosures harm to the national housing market because most mortgage lenders are national.  But, we highlight statistics like this to show that the foreclosure “problem” isn’t so bad in most parts of the country, relative.

Furthermore, mortgage lenders are intervening to slow the flow of defaults nationwide.  Following the lead of JP Morgan and Bank of America, CitiMortgage just announced a sweeping plan to help homeowners avoid default and keep their homes.

In a way, for as good as this news is for homeowners, it’s equally bad news for home buyers.  As the number of foreclosures decrease in any given market, it reduces the inventory of homes for sale.  Lower supply levels often lead to higher sale prices and less room to negotiate.  And this may be what the banks are trying to accomplish.

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For the 4th consecutive year, the government has set the conforming mortgage loan size limit at $417,000.

A conforming mortgage is one that, quite literally, conforms to the mortgage guidelines set forth by Fannie Mae or Freddie Mac.

The 2009 conforming loan limits, as released by the government, are:

• 1-unit properties : $417,000
• 2-unit properties : $533,850
• 3-unit properties : $645,300
• 4-unit properties : $801,950

Loans in excess of conforming loan limits are more commonly called “jumbo”, or “super jumbo” home loans, depending on their size.

Out-sized mortgages like these are often more costly than their conforming-mortgage counterparts because jumbo loans are not guaranteed by the U.S. government like Fannie Mae loans are.

There are loan limit exceptions, however.

Left over from the Economic Stimulus Act of 2008, specific, “high-cost” areas around the country have their own conforming loan limits, not to exceed $625,500.  There are 59 designated high-cost regions in the U.S., most of which are in California.

Loan limits are re-assigned each year, based on “typical” housing costs around the country.  Since 1980, as home prices have increased, so have conforming loan limits.  As home prices have fallen in recent years nationwide, however, the conforming loan limit has not.

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Mortgage rates fell last week, marking just the second time since September that rates improved on a weekly basis.The biggest news of the week was the U.S. Presidential Election.  Markets appeared to cheer the Republican-to-Democrat transfer of power, posting large gains Tuesday, Wednesday and Thursday.

This in spite of a spate of negative economic news:

• Auto makers are bleeding cash
• Jobless claims at a 25-year high
• Retail sales appear to be stalling

Instead, mortgage markets shrugged it off.

The general consensus among traders last week was that the Democratic White House will make every effort to ignite the economy and, if those efforts fail, it will try again. This bodes well for businesses and for the banking system and is one reason why mortgage rates dropped post-election.

This week, without much new data, markets should move on corporate earnings and momentum.  It’s been a while since corporate earnings meant so much to mortgage rates.

U.S. businesses are the backbone of the economy, spending money on goods and services and employing 144 million Americans.  When business is strong, more workers get hired who then, in turn, spend their money and force the hiring of even more workers.

It’s a self-reinforcing cycle so if retailers post better-than-expected numbers this week, expect stock markets to gain favor worldwide as investors chase returns.  This will money to pull out from bond markets of all kinds  – including mortgage-backed bonds.

Less demand for bonds causes mortgage rates to rise.

Also, look at Friday as a volatile trading day.  Not only will October’s Retail Sales figures be announced, but Fed Chairman Ben Bernanke is sharing the stage with his European Central Bank counterpart, talking about monetary policy.

Word choice is a delicate matter on Wall Street so if Bernanke’s comments are viewed as too anti-inflation, or too pro-inflation, expect for mortgage rates to move by a lot.  If you’re shopping for a mortgage right now, consider locking before Bernanke’s 9:00 AM speech.

(Image courtesy: The Wall Street Journal Online)

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On the first Friday of every month, the Bureau of Labor Statistics releases its Non-Farm Payrolls report.  More commonly, it’s called the “jobs report” and the October’s data is trending with the rest of 2008.After shedding another 240,000 jobs last month, the economy has now put 1.2 million Americans out of work this year and unemployment rates have climbed to 14-year highs.

As a strange twist, though, today’s weak jobs data may lead to a positive turn for the economy and for housing in 2009.

In the wake of the jobs report, members of Congress are already calling for both tax cuts and direct stimulus to reverse the course of the economy.  Both of these actions would put money back into U.S. citizens’ household budgets, spurring consumer spending nationwide.

Because consumer spending accounts for 70 percent of the economy, this would be expected to push the economy forward at a time when it natural forces are slowing it down.

In addition, markets are betting that the Federal Reserve will cut the Fed Funds Rate below its current 1.000 percent level.  This, too, would spur spending because the Fed Funds Rate is directly tied to consumer credit card rates and business credit lines.

Expectations for stimulus are one reason why mortgage rates have not risen today as high as they otherwise would have if this were a “normal” market.

Mortgage rates are slightly elevated as we head into the weekend, but don’t be surprised if there’s a late-afternoon push that brings them lower. For active home buyers, this could help home affordability as we cruise towards the holiday season.

(Image courtesy: USA Today)

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The interest rate against which adjustable-rate mortgages change is falling — evidence that the global banking system is starting to stabilize.

On any adjustable-rate mortgage, the initial “starter rate” remains fixed for some period of time, and then adjusts according to some pre-determined rules.

For a conforming mortgage, an ARM will typically adjust once per year, based on this formula:

(Adjusted Rate) = (Variable) + (Constant)

Where the variable is often assigned to 12-month LIBOR, and the constant is often fixed at 2.250 percent.

LIBOR is the equation’s variable.  Therefore, it’s of paramount import to holders of ARMs.  LIBOR is the rate at which banks lend money to each other.  The 12-month LIBOR, therefore, is the borrowing rate for a 1-year, interbank loan.

So, to take the formula and apply to an real live mortgage, a homeowner’s adjusted mortgage rate would be equal to whatever the 12-month LIBOR is at the time of adjustment, plus another 2.250 percent.

Looking at the chart, note LIBOR spiked in September.  It’s a direct correlation to the September 15 failure of Lehman Brothers.  That bank shutdown started a wave of “who’s going to be next?” anxiety on Wall Street but as global governments stepped up support for banks, LIBOR predictably fell.

For homeowners with adjusting mortgages, this is terrific news.

However, mortgage markets have rallied a bit this week, created an interesting opportunity for some holders of ARMs.  Depending on credit scores and the amount of home equity, mortgage rates on a new loan may be lower that the soon-to-be-adjusted mortgage rate of the old one.

In other words, getting a new loan may be smarter than letting your current mortgage change.  Contact us to see which plan fits you best.

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The Federal Reserve confirmed what most of us already knew — getting qualified for a “prime mortgage” is increasingly more difficult.In a quarterly survey of 84 banks, 75 percent of respondent banks tightened mortgage guidelines over the last 3 months for the most qualified of home loan applicants.

“Prime” is a vague term when it comes to mortgages, but, historically, a prime borrower is one that can document:

• A well-documented credit history
• Very high credit scores
• Very low debt-to-incomes

Historically, banks bent over backwards to lend money to this class of borrower.  Today, they’re thinking twice.

The chart’s steep ascent reinforces that members of all tax brackets face consequences from the current credit market turmoil.  And, although some corners of credit looked poised to recover — interbank lending, for one — the mortgage market is yet unaffected and should be among the last to thaw.

All prospective home buyers should prepare for the likelihood that mortgage guidelines continue to toughen before they start to ease.  Mortgage applicants on the cusp of being approved today will almost certainly be turned down for a mortgage in 2009.

Owning real estate can require a tremendous amount of advance planning and, sometimes, looking at the past is the best way to prepare for what’s coming ahead.

According to the Federal Reserve’s survey, what’s coming ahead is more mortgage application scrutiny.

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More than a handful would-be home buyers stayed on the sidelines this year, waiting for Election Day to pass.The prevailing thought was that once the new President-Elect was identified, credit markets will systemically unfreeze and housing markets will return to normal.

If history is a guide, this is an unlikely scenario.

Election Day doesn’t figure to alter markets any more in 2008 than it did after the four previous presidential elections.

If anything, post-Election Day market reaction has been muted:

• 1992 : Dow closes down 0.9 percent the day after Election Day
• 1996 : Dow closes up 1.6 percent the day after Election Day
• 2000 : Dow closes down 0.4 percent the day after Election Day
• 2004 : Dow closes up 1.0 percent the day after Election Day

But just because the stock market has a history of idling on the day after the election doesn’t mean that mortgage rates will rest easy this week.  The likely outcome is the opposite, actually.

If investors believe the President-elect will successfully stimulate the economy, stock markets would likely rally, causing mortgage bonds to sell off and mortgage rates to rise.

Or, if investors think the winning candidate will fail to revive the economy, money would flock to government bonds as a place of safety.  This dollar flow would occur at the expense of the mortgage market, causing rates to rise in this scenario, too.

Of course, it’s as difficult to predict post-Election market conditions as it is to predict the election itself but one thing is for certain — rates may rise and fall before the week is out, but credit guidelines will remain extra-tight.  Getting approved for a mortgage won’t be any easier — no matter which party wins the Presidential Election.

Source
Will the election drive the Dow?
Eamon Javers
Politico

http://news.yahoo.com/s/politico/20081022/pl_politico/14826

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As global credit markets deteriorated in October, mortgage markets displayed an unnerving amount of volatility.

Last week was no different.

But, unlike in previous weeks in which rates improved on some days and worsened on others, mortgage rates were mostly higher last week, finishing the month on a surge.

The biggest reason why mortgage rates rose last week is that hedge funds and other investors are still hard-pressed for cash and are dumping their mortgage-backed bond portfolios into the market. The excess mortgage bond supply drove prices lower last week, which, in turn, caused rates to rise.

However, forced selling by hedge funds wasn’t the only force working against mortgage rate shoppers last week.

In a move meant to stimulate the economy, the Federal Reserve cut the Fed Funds Rate to 1.000 percent — the same level widely attributed to starting the global credit crisis several years ago.  Low interest rates may stimulate the economy in the short-term, but long-term, they can lead to runaway inflation.

This is terrible for home buyers because inflation causes mortgage rates to rise.

Looking ahead to this week, mortgage markets have a lot of information to digest.

First, there will be four separate speeches from members of the Federal Reserve, plus one appearance by Treasury Secretary Paulson.  In each speech, each mention of the word “inflation” will cause mortgage markets to flinch and rates to tick higher.

In addition, Friday is the first Friday of the month which means that the Employment Report hits the wires.

Because markets expect to see high unemployment rates, they’re also predicting a slow holiday shopping season.  If the jobs data is stronger-than-expected, expect stock markets to gain and mortgage markets to lose, pushing rates higher.

And, lastly, Tuesday is Election Day.  Presumably, markets already priced in the likelihood of either candidate winning the election.  However, as the voter’s President-elect becomes clearer throughout the day, expect volatility in rates as traders rush to change their positions.

Mortgage markets should move lot Tuesday — we just won’t know in which direction until it happens.

(Images courtesy: The Wall Street Journal Online)

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