False Illusions and What You Need to Know

Homebuyer Alert…
For prospective homebuyers who are on the fence about making a home purchase, the next few months represent a countdown of sorts for two reasons.

The first of these, the coming expiration of huge tax incentives, may be a bit more obvious to most borrowers. April 30, 2010 is the last day to enter into a home purchase contract and still potentially qualify for a federal income tax credit of up to $8,000 for first-time homebuyers and up to $6,500 for repeat homebuyers. The credit can be claimed only on contracts that close by June 30, 2010.
Secondly, beyond the waning benefit of the Federal income tax incentive, another form of stimulus will soon disappear, as the Federal Reserve winds down a program that has been keeping home loan rates artificially low.

Rate Alert…
The lowest rates of 2009 were driven down to their attractive levels because of the Fed’s Mortgage Backed Securities (MBS) purchase program. Home loan rates have an inverse relationship with the value of MBS. When these securities trade higher on the market, rates move lower and vice-versa. So when the Fed originally agreed to be a big buyer, it helped provide a market for MBS, which helped keep prices high and, as a result, helped push home loan rates low.
And while the Fed continues that program through the end of March 2010, the reality is that the Fed‘s “extension” was really more of a rationing intended to prevent home loan rates from spiking as the program is phased out. It’s sort of like weaning the market off of its life-saving treatment instead of forcing it to go cold turkey.
Already, some in the media have mistakenly reported the extension of the program through March as good news, telling consumers that rates will continue to decline, and remain low into the spring. This gives a false sense of security that homebuyers and refinancers simply cannot afford.
The problem is…
Those reports do not accurately report what’s going on or where rates are really headed. That can have a very costly impact on consumers who may miss out on historically low rates if they listen to these media outlets.

Here’s what’s really going on…In May 2009, the Federal Reserve's purchases of MBS peaked at an average of $25 Billion per week. As of November, the average weekly purchases dropped down to $14 Billion. At the end of November, the Fed had already used over 80% of the allocated funds for MBS, meaning less than 20% remained to be used over four months.
Making the problem worse is that the Fed now has less money available to purchase MBS while at the same time, the supply of these securities has increased as a result of refinance and purchase activity that was triggered by lower rates.

Why is that important?

As the Fed now has fewer funds to last through the remaining months of the program, its ability to keep rates low will wane.As the Fed's program winds down and ends, we’ll likely see two things happen.
First, we will probably see higher levels of volatility—with rates sometimes shifting dramatically in the middle of the day. That means it is more important than ever for buyers to work with a knowledgeable mortgage professional who has a finger on the pulse of the market at all times and can provide trusted, proven advice.
Second, since MBS will have less support from the Fed, rates are likely to rise over time.
In short, while rates are still very good, they may not be for long.

What should you do to protect yourself?

First and foremost, work with a knowledgeable mortgage originator who studies and monitors the market.
Second, don’t be fooled by media stories that only report the headlines and don’t understand the underlying implications of the Fed’s actions. If you ever hear something in the news but aren’t sure what it means to your situation, Please contact your Financial Advisor to see how the Feds' actions effect you and your financial situation.

Finally, if you haven't yet explored how the current rate environment might benefit you or someone you know, let’s arrange a time to sit down and discuss your unique situation as well as your short- and long-term goals. Remember, rates are still very good, but they may not be for long.

THE 5 THINGS YOU MUST KNOW ABOUT BUYING REAL ESTATE AND GETTING A MORTGAGE IN 2010

THE 5 THINGS YOU MUST KNOW ABOUT BUYING REAL ESTATE AND GETTING A MORTGAGE IN 2010

1. NEW Good Faith Estimates take effect- on January 1st, 2010, RESPA(Real Estate Settlement and Procedures Act) which is one set of governing bodies over the real estate, mortgage and title industry is implementing a new 3 page estimate of settlement costs and new settlement statement that all industry providers must use. The goal of RESPA with these changes is to make settlement costs more transparent to homebuyers and home refinancers and at the same time guarantee certain costs to consumers. We do see it as helpful to the industry and consumers however it will take several months for all industry players to get all the working parts of it working smoothly. How could this affect you? Consumer will be more informed however RESPA has implemented very tedious rules for lenders that may cause the need for homebuyers and sellers to be more flexible with a settlement date. Bottom Line: A target date for settlement may become more normal versus a specific day and time for settlement.

2. INTEREST RATES- On March 31st, 2010 the Federal Reserve will end a program in which they have purchased $1.25 Trillion in Mortgage-Backed-Securities(MBS). The reason mortgage rates have been so low in the past 12 months is because of MBS purchases. The Federal Reserve did this to purposely drive down mortgage interest rates to potentially spur more home sales to in turn help the economy return to some sort of normal sooner rather than later. To keep it simple, mortgage interest rates drop when there are a lot of buyers of MBS and inversely mortgage rates go up when there are a lot of sellers in the MBS market. So, if rates went down to around 4.5% APR for the last year because the Federal Reserve was systematically buying $1.25 Trillion of MBS, what needs to happen as they end this program and start to sell their MBS portfolio? If you said rates must go up you are absolutely correct! As the largest investor(Federal Reserve) in the MBS market sells their holdings rates will rise. The biggest question still looming is how fast will the Federal Reserve sell their MBS portfolio after March 31st? The answer to this will be determined by how well the economy does in 2010. Many Federal Reserve members have stated that they understand that they need to be cautious in how fast they sell MBS because if they sell too fast rates could rise dramatically and quickly which would not be in the best interest of overall economic stability. We expect mortgage interest rates to stay relatively low in the 1st quarter of 2010 but will rise significantly by mid year with average rates expected between 6% to 6.5% on 30 year fixed mortgages for the second half of 2010. Bottom Line: It is possible that the next 3 months will be the last time in our lifetimes that we can get a 4.5% APR 30 year mortgage! I would recommend that if you can, buy a home or refinance your current home before the end of April 2010.

3. TAX CREDITS - On April 30, 2010 the tax credit for first time homebuyers of $8000 and the $6500 tax credit for those who have owned a primary residence 5 of the last 8 years will end. Tax credit recipients will have until June 30th 2010 to actually settle on the home purchased. Bottom Line: You must find a home to buy by April 30, 2010 and settle by June 30, 2010 to take advantage of this opportunity.

4. INDUSTRY CHANGES- 2009 saw more than 60% of mortgage companies go out of business and many good mortgage consultants have been forced from the industry as well. More than 60% of mortgage products that existed 3 years ago are gone. The Department of Housing and Urban Development and the Federal Reserve along with State regulatory bodies have forced new and imposing regulations on the mortgage industry on a regular basis throughout 2009 with more coming. A lot of the regulations will eventually be helpful however to have multiple changes and new rules implemented multiple times monthly every month makes for a lot more red tape for consumers to get a mortgage. There is currently a 1271 page document floating through congress that will add even more regulation change to the industry and until lenders know what the rules will ultimately be which appears to be coming in mid 2010, requirements to obtain a mortgage will continue to be tough and get tougher. Bottom Line: Start working on your mortgage options well in advance of choosing a home to purchase.

5. YOU- What can you do with this information to take advantage of the situation for you and your family? Understanding that mortgage rates will be rising at some point in 2010 and that tax credits are due to end by the end of April it is highly recommended that you start looking into your mortgage options as soon as possible. Also, be sure to get educated on all current market conditions. Ask how new mortgage regulations will affect you, ask about tax credit pre-approval, ask for free mortgage pre-approval, ask about buying short sale and foreclosure properties, ask about seller assistance, ask about low and no money down mortgages, ask what you should budget for a housing payment to be safe. Bottom Line: Get educated, search your options now and if you can buy a home before April 30, 2010.