After a weak holiday shopping season, annual retail sales declined in 2008.It marks the first annual Retail Sales decline since the government started tracking the data 40 years ago.

It also gives credence to the notion that the U.S. economy is suffering through a deeper recession that previously thought.  A pullback in spending — especially during the shopping-heavy month of December — highlights the cautious nature of today’s American shoppers.

And in a strange sort of way, all of this may end up being good news for Spring home buyers.

Because Retail Sales are reflective of consumer spending, a dramatic pullback helps to keep the economy in slow gear, countering the inflationary impact of government stimulus and direct intervention.  Inflation, you’ll remember, causes mortgage rates to rise.  It’s absence, therefore, helps to keep mortgage rates low.

In addition, it’s earnings season on Wall Street and weak corporate guidance has spurred a 6-day decline in the Dow Jones Industrial Average.  As dollars leave the stock market, investors are parking them in the safer world of bonds.  This includes mortgage bonds, of course, which further pressures rates lower.

As we’re seeing, economic weakness — to a point — can be the friend of a person in need of a new home loan.  For active home buyers or people entering the market this Spring, therefore, the timing may be just right.

(Image courtesy: The Wall Street Journal Online)

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An oft-touted benefit of homeownership is its tax benefits.  However, like most IRS-related items, understanding how the benefits work is not always clear.

In general, homeowners are entitled to two home-related tax deductions — one for annual mortgage interest paid, and one for real estate tax bills paid.

Not everyone is eligible, though.  Some of the exclusionary traits include total amount borrowed, and whether or not the home is a primary or secondary residence.

The official IRS publication is filled with notes and explanations but, in general, you can calculate your approximate mortgage interest tax deduction using the following math:

1. Sum your annual mortgage interest and real estate taxes paid
2. Find your tax rate on the IRS tax bracket schedule
3. Multiple your tax rate by the sum from Step 1

This is grossly simplified, but fairly accurate.

As an example, a homeowner paying a combined $20,000 in 2008 mortgage interest and real estate taxes, and who is in the 28% tax bracket, may be due $5,600 in tax credits.

The availability of mortgage interest tax deductions is one reason why loan officers make reference to “after-tax mortgage rates”.  An after-tax mortgage rate is effective interest rate, post-tax code, and can be calculated using the formula below:

(After-Tax Mortgage Rate) = (Mortgage Rate) * (1 – Marginal Tax Rate)

The same homeowner with a 5.000% mortgage rate, therefore, has an after-tax mortgage rate of 3.600%.

Because not every homeowner is eligible for home-related deductions, and because not every homeowner should claim them, talk with your personal accountant before making any tax-related decisions.

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Home prices are largely based on Supply and Demand.

• If demand outweighs supply, home prices rise
• If supply outweighs demand, home prices fall

It’s good news for home sellers, therefore, that “used” homes for sale fell 6 percent nationally last month.  Less supply often means higher prices.

Of the 29 metropolitan areas tracked in real estate brokerage firm ZipRealty’s survey, only Philadelphia showed an increase.

But the survey isn’t perfect.  For example, it doesn’t track the demand side of the equation — buyer activity.

Anecdotally, November and December are slower for buyer foot traffic than, say, March and April.  December’s drop in supply, therefore, may reflect the expectation of reduced buyer interest.

In addition, the ZipRealty survey ignores the supply of newly-built homes, and of foreclosed properties.  In some cities, that can amount to a quarter-percent of the market supply or more.

And lastly, the survey addresses the nation and not the nation’s neighborhoods.  This is an important distinction because real estate is not a nationwide market, nor is it even a citywide market.  Real estate is highly local and responsive on a neighborhood-level.

National surveys rarely capture that point.

(Image courtesy: The Wall Street Journal Online)

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In 2009′s first full week of trading, mortgage bond markets traded back-and-forth, eventually closing the week improved overall.Weekly mortgage rates fell for the first time since mid-December.

The most anticipated news of last week was Friday’s jobs report.  According to government’s press release, the economy shed another 524,000 jobs in December, raising 2008′s total job losses to 2.065 million.

This is the largest annual job loss since 1945, the press reminds us.  However, as one more reason to look beyond the headlines, today’s workforce is three times as large.

Other important notes included the release of the Fed’s minutes from its 2-day meeting in December.  In it, the Federal Reserve said that inflation should remain low through early-2010 — a good development for home buyers and homeowners because inflation is linked to rising mortgage rates.

This week, the market-moving data doesn’t start until Wednesday, but with a fair number of Fed members making public appearances, a case of “loose lips” can lead to mortgage rate volatility.  The most notable appearance is Fed Chairman Ben Bernanke’s speech in London today.  There are 10 speeches in all.

Despite the barrage of negative economic news, however, mortgage rates remain low.  If you have yet to join the Refinance Boom, make a call to us to see if your home loan is eligible.

(Image courtesy: USA Today)

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Even though its effective date is April 1, 2009, mortgage applicants should start seeing Fannie Mae’s new fee structure from lenders beginning this Monday, January 12.The reason why Fannie Mae’s mandatory loan fees are hitting lender pricing so far in advance is because lenders can take up to 30 days to package and sell a loan to Fannie Mae post-closing.  In effect, this moves the April 1 start date to March 1.

Then, figuring that March 1 is roughly 45 days from now and that 45 days is a normal window on which to close on a home or on a refinance, the start date again pushes back, this time to January 15.

Given lenders’ typical timeframe to close, fund, and sell a loan to Fannie Mae, in other words, it’s normal that pricing reflects the fee changes two-and-a-half months in advance.  Homebuyers and would-be refinancers would do well to take notice.

If you are floating a mortgage rate today — or shopping for one — consider locking it in before the close of business.  Effective Monday, any number of traits in your home loan could increase your closing costs:

• Your credit score
• Your downpayment / equity percentage
• Your home’s property type
• Your reason for wanting a mortgage
• Your loan type

For a complete look at Fannie Mae’s new, mandated loan fees, visit the Fannie Mae web site.  If you have trouble interpreting the worksheet, call or email me and we can talk about it together.

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When conforming mortgages started defaulting en masse in late-2007, mortgage guarantor Fannie Mae created a loss-offsetting, fee-generating scheme dubbed “loan-level pricing adjustments”.The concept was basic: For mortgage applicants with high-risk profiles, collect up-front payments to offset potential long-term losses.

Similar to the auto insurance model in which younger drivers pay higher premiums, the riskier the applicant, the higher the fee.

At the inception of the program, Fannie Mae defined ”risk” as a combination of borrower credit score and home equity percentage.  In general, lower FICOs and higher LTVs paid more costs.

Effective April 1, however, Fannie Mae’s definition of risk is expanded.  By a lot.  Fannie Mae’s new loan-level fees now impact any conforming mortgage that meets any of the following criteria, with the exception of fixed rate loans of 15 years or less.

• Up to 0.75% fee: Secured by a condo/co-op with less than 25% equity
• Up to 0.50% fee: Features a junior mortgage (i.e. HELOC, HELOAN)
• Up to 1.00% fee: Features interest only payment options
• Up to 1.00% fee: Secured to a 2-unit property
• Up to 3.00% fee: Is designated as “cash out”

Each 1 percent in fees equals 1 percent of the borrowed amount. Therefore, a condo buyer with a $200,000 first mortgage and a $25,000 line of credit is subject to a mandatory 1.25% charge of $2,500, due at closing.

However, it doesn’t stop there.  Fannie Mae has also adjusted its original FICO-LTV matrix so that nearly every applicant — irrespective of credit score — will face higher closing costs on their home loan.

Mortgage rates may be falling, but the cost of financing a home is rising.

Fannie Mae’s latest announcement is its fifth risk-based pricing update in the last 15 months.  It’s likely it won’t be the last, either.  Therefore, if you’re torn between to buy a home now or later, consider that the cost of waiting may outweigh the benefits of falling prices or falling rates.

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With respect to mortgage rates, you can’t always believe what you read in the papers.  Or what you see.A terrific example is the chart at right.

Published by Freddie Mac, it shows the 30-year fixed mortgage’s “going rate” as reported by the nation’s mortgage lenders. On December 30, 2008, that rate was 5.1 percent.

But 5.1 percent is only half of the relevant information.  There’s a mandated fee schedule that accompanies the Freddie Mac-reported rate survey.

Currently, the published fee required to get a 5.1 percent mortgage rates is 0.7% of the borrowed amount, or $700 per $100,000 borrowed.  This fee is more commonly known as “points” and versus last year, it’s nearly doubled from 0.4 points.

So, yes, conforming mortgage rates are low and they have fallen near all-time lows but there’s more to the story than just the interest rate — there are the fees that go with them, too.

Mortgage rates and loan fees often move in opposite directions so to get lower rates, consider paying additional points.  Conversely, to face fewer fees, accept a higher rate.  It’s a trade-off and we can help you best understand the choices and how each benefits you as a borrower.

(Image courtesy: The Wall Street Journal)

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The New Year is not yet one week old but that’s not stopping market “experts” from predicting what’s in store for 2009.The calls on housing and mortgage rates run the gamut:

• Home prices have farther to fall
• Home prices have touched bottom
• Mortgage rates will dip
• Mortgage rates will rise

Put it all together and it’s clear that the experts have no better idea about the future than you or I.  Their guesses are educated ones, but they’re guesses nonetheless.

A terrific example of how poorly experts can predict the future comes from a Wall Street Journal performance analysis of 1,700 mutual funds.

In 2008, only one earned a positive return.  That one fund represents zero-point-zero-six percent of all tracked mutual funds.  Surely, the fund managers of the other 99.94% didn’t expect to post negative returns on the year.

So, before you use predictions about the demise (or recovery) of the broader economy to make “personal economy” decisions, consider that the oft-quoted experts have a hugely better track record in analyzing the past than the future.

All we know for sure right now is that home prices are, in general, lower than at the time point last year, and mortgage rates are, too.  By 2010, both could be lower still.

Or they may not.

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Like the rest of the country, mortgage markets were on semi-vacation last week.  The low trading volume led to wild rate swings.After beginning the week vastly improved, and capped by a terrible late-Friday run, mortgage rates ended the week unchanged for the second week in a row.

This week, though, it’s anyone’s guess.  Wall Street comes back to work in force and, in the time since they’ve left, there’s been a lot going on:

• Holiday sales were even slower than expected
• Consumer confidence touched an all-time low
• Gas prices spiked nationally — by as much as 40 cents in some areas

Ironically, Wall Street will likely position the bad news as good for the stock market.  This is because negative economic data pressures Congress to pass larger, more sweeping stimulus in 2009.  However, what’s good for stocks is often bad for bonds and that’s the market from which mortgage rates are derived.

In fact, it was an exceptionally weak data point Friday that helped start the January 2 stock market rally that, consequently, caused mortgage rates to bulge.

This week, there’s only one high-profile data point to watch — Friday’s jobs report.  Economists are predicting the another 475,000 Americans lost their jobs in December and that the Unemployment Rate reached 7.0 percent.

If the actual numbers are in-line or worse than the predictions, mortgage rates could rise on the same “More Stimulus” line of thinking.

If the jobs data shows strength, however, don’t expect that rates will fall.   For now, markets are in a defensive stance about the economy and tends to work against rate shoppers and home buyers.

(Image courtesy: The Wall Street Journal Online)

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As part of the Economic Stimulus Act of 2008, Congress authorized a conforming loan limit increase in “high-cost” areas around the country. Versus the national conforming loan limit of $417,000, for example, a Manhattan home buyer could secure a 2008 mortgage for $725,000 and still be within “conforming” guidelines.

Effective January 1, however, those limits rolled back.  Conforming mortgages in the 59 designated high-cost regions are now capped at $625,500.

In non-high-cost areas, the 2009 conforming loan limits remain unchanged from 2008.

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

Loans in excess of these dollar amounts are often called “jumbo”, or “super jumbo” home loans, depending on their size.  Jumbo home loans tend to be more costly than their conforming-sized cousins.

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