Dan Hartman

February was a significant month for the mortgage and real estate markets, as a massive bailout package was signed into law, and further talk of foreclosure prevention efforts at the federal level reassured mortgage investors of the safety of their investments. An $8000 tax credit for first-time homebuyers sparked hope for increased home sales in 2009, both for starter homes and condominiums, as well as for so called "move-up" homes needed by those current homeowners able to sell into the current market and purchase significantly discounted replacement homes.

Entering March, the Mortgage - Treasury spread reached its lowest point since June, 2008, closing at 2.09%. The spread was last at that level June 5th, 2008 when it closed at 2.06%. The 10-week moving average spread closed February at 2.50%, reflecting the significantly higher spread in effect throughout December and January. The Mortgage-Treasury spread is a measure of the relative risk of investment in mortgage securities compared with investment

March will likely be dominated by further market absorbtion of recent events, especially the new Making Home Affordable plan recently introduced by the White House and several major mortgage agencies. This program should provide further support to the housing market and to the value of existing mortgage securities. As the rate of foreclosures is reduced, housing inventory should gradually decline, providing some stability to home prices. Should this trend continue, it is possible the mortgage - treasury spread could stabilize near current levels.

Other factors that will be of impact in March include the potential for further fed intervention in mortgage and treasury markets. The Fed's $500 billion program to stabilize the mortgage secondary market, announced in December, is intended to boost confidence in the mortgage backed security market that is at the core of current economic challenges. This investment has been successful, as the Mortgage - Treasury spread has declined by a full percentage point since that program's announcement in December. In January, the Fed announced it would be closely monitoring treasury rates and might intervene if conditions required. Thus far, they haven't.

Also, it is anticipated that home purchases spurred by the aforementioned first time homebuyer credit will begin to have an affect on the market, providing some degree of stability to real estate prices. Remember that a significant degree of mortgage risk comes from concern that homeowners might be unable to sell their homes if circumstances demanded. As the purchase market picks up in the spring, expect to see further support for the current reduced Mortgage-Treasury spread. Rhode Island and Massachusetts have recently seen a decrease in foreclosures; it is possible this may spread.

Dan Hartman is a Senior Mortgage Advisor with Province Mortgage Associates, and an Adjunct Professor with the University of New Haven and Roger Williams University. He can be reached at (401) 263-8655 or by leaving a comment on this article.

As I write this, the president is poised to sign the American Recovery and Reinvestment Act of 2009, better known as the $787 billion Economic Stimulus Plan. There has been much speculation about what this plan might do for housing, real estate, homebuyers, and mortgages, ranging from 2.99% to 4.5% mortgage rates, $15,000 tax credits, and more, but when the dust settles and the plan is signed into law, the final effect will be quite different.

The most important thing the finaliztion of this plan will accomplish is it will end that speculation. Over the past few weeks, I have spoken with dozens of homebuyers, realtors, financial planners, and fellow mortgage advisors about the economic situation and the stimulus ideas, and the overwhelming consensus was this: "I'm not doing anything until I see what comes out of the package."

This is exactly why finaliztion of the package is important: not because the package might contain some magic bullet that will stop foreclosures, recapitalize banks and restore Amercans' faith in the financial system; rather because finalizing it puts an end to further guesswork regarding its contents.

So what does the package contain for the average homebuyer?

$8000.

Section 1006 (page 54 of the conference report) describes changes to Section 36 of the Internal Revenue Code modifying the previous homebuyer credit that had been enacted in October of 2008. Specifically, the following important changes have been made:

• Credit has been increased: the original credit was limited to $7500 or 10% of the home's purchase price; this has been upped to $8000 or 10%.
  
• Credit no longer requires repayment: a significant criticism of the original 2008 credit was its repayment requirement, as those taking the credit would be required to repay it over 15 years. That has been addressed in the new law so that repayment is now required only if the home is sold within the first 3 years.
  
• Credit is now allowable for buyers using "revenue bond" funded mortgages: many state and local entities offer first-time homebuyer mortgage programs that sometimes offer terms more favorable than government or conventional mortgages. Previously those buyers had been prohibited from accepting the credit, however they may now claim it.
• Time to purchase extended: the original credit was due to expire June 30th; the revision extends that to November 30th

Meanwhile, many components follow the original wording instituted last fall, specifically:

• Credit is refundable: this means that a homebuyer who would otherwise owe no tax may still claim this credit and receive it as part of a tax refund
• Credit is for first-time homebuyers only: sorry, move-up buyers, but you won't receive this credit; do expect many more first-time homebuyers to be looking at your house, which should help you sell more quickly, if you're priced correctly
• Credit is income-limited: the legistlature didn't see fit to modify the terms of this program to allow all homebuyers to benefit, only those who haven't owned in the past 3 years

Finally, certain components are still somewhat unclear:

• Credit may be retroactively claimed: the prior credit offered the option to claim as if the purchase took place 12/31/2008 even if it closed in the early parts of 2009. The final bill's language appears to replace this paragraph (page 122, Stat 2981, section 36 subsection g) with something unrelated, which may mean buyers will need to wait until 2010 to claim the credit. UPDATE - As of 12 March, I have received confirmation that this credit may be claimed as if the home purchase took place in 2008, allowing buyers to get quicker access to the credit.
  

Overall, this program does a lot to change current programs by making them significantly more attractive to homebuyers. The removal of repayment requirement makes the credit much more attractive than the previous offer that had been made. The other changes are more semantic than meaningful, but the most significant thing accomplished by enactment of the bill is this:

Clarity

At least now, we can stop guessing, and start working towards improving the housing market.

Dan Hartman is a Senior Mortgage Advisor with Province Mortgage Associates, Inc, and has worked in the mortgage industry for over 9 years. A 2005 MBA graduate of Clark University, Dan also serves as an Adjunct Professor of Finance for the University of New Haven and Roger Williams University.

In a month which saw the lowest 30-year fixed rates on record, it isn't surprising that the massive groundswell of refinancing we experienced happened. Its consequences could also be seen as quite predictable: lenders, fresh from laying off thousands of employees in 2008, saw their operations grind to a halt as they received an onslaught of mortgage applications. The reprecussions to market interest rates were rather more cryptic, though. By the end of January, the Mortgage-Treasury Spread had closed to its tightest range since September, 2008, closing the month at 2.28%.

The 10-week moving average stayed relatively level at 2.78%, bouyed by much broader weekly spreads in December and early January.

The Mortgage-Treasury Spread is a measurment reflective of the relative perceived risk between mortgage securities and U.S. Treasury securities. A higher spread indicates investors fear mortgages are more likely to default, while a lower spread is suggestive of mortgage-market stability. Until July, 2007, the spread had experienced an unprecedented period of stability in the 1.4% to 1.6% range, but concerns stemming from the current crisis in confidence for mortgage assets has pushed that spread as high as 3.12% in December of 2008.

Moving into February, there are a number of factors that should put pressure on the Mortgage - Treasury spread, but only two of real significance. The US Treasury will be embarking on a massive borrowing campaign in order to fund the continuing bailout and economic stimulus efforts, and is expecting to sell over $400 billion in new securities. Ordinarily, such an increase in supply (when the Treasury borrows, it sells Treasury bonds, bills and notes, effectively increasing the quantity of such instruments in the marketplace), would have a significant effect on treasury iterest rates, as investors begin to require a higher return in order to justify their investment.

Offsetting that is the promise from the Federal Reserve to take an active role in controlling treasury rates by buying long-dated securities. The Fed alluded to this possibility in its January 28th announcement, saying that it would be closely watching markets for these securities, and would intervene by buying securities if rates became too high.

How does the Fed intend to do this?

Already, Fed Chair Benjamin Bernanke has injected nearly $2 Trillion into asset markets in recent months, to the point where the Fed's ability to invest further is limited by lack of available funds. Of course, the Federal Reserve controls the world largest source of funding, its own printing presses. Essentially, any further market action by the Fed is likely to be accompanied by a significant increase in the quantity of US currency in circulation as the angecy uses inflation to control interest rates. Will it work?

Only time will tell.

Dan Hartman is a Senior Mortgage Advisor with Province Mortgage Associates, and has over 9 years experience in mortgage lending. A 2005 MBA graduate of Clark University's Graduate School of Managment, Dan also serves as an Adjunct Professor of Finance at the University of New Haven and Roger Williams University.

The Mortgage-Treasury Spread remained near its highest ever level in December, as investors retreaed into the safest available investments to close 2008. Treasury instruments of all maturities saw one of the biggest demand spikes in their history, a sign that risk tolerance was negligible this month. Throughout the month of December, the spread remained largely unchanged from its December 4th level, closing the year at 2.86%. This is down slightly from the December 4th spread at 2.96% The historic low treasury yields reached in December are instrumental to the high spread, as mortgage rates dropped through the month to historically low levels.

The 10-week moving average spread soared to 2.79% from 2.58%.

The Mortgage-Treasury Spread measures the relative risk between mortgage securities and comparable treasury securities. Prior to July 2007, it had enjoyed an extended period of stability slightly above 1.5%, but troubles in the mortgage market have caused it to increase dramatically since then. Oddly, while negative news about mortgages and mortgage lenders began to slow in the latter part of 2008, increases to the spread did not.

Significant news this month includes Treasury Secretary Paulson's denial of a Treasury plan to pursue a 4.5% interest rate for fixed mortgages, a significant setback to many who thought mortgage rates could easily fall further. In its discussion of an unprecedented rate action December 16th, the Federal Reserve Open Market Committee annouced it would begin active participation in mortgage markets, including purchase of mortgage-backed securities beginning in January. Its announcement of this purchase led to tightening of the Mortgage-Treasury spread in mid December, and the result is likely to be further improvement in the spread later this winter as the Fed's demand for these securities replaces demand that is missing from other sectors.

Recent employment data was also encouraging, as fewer than expected applied for first time unemployment benefits. This reduction may be related to the timing of layoffs around the holidays, however if it forms a trend it could be beneficial.

Mortgage rates are at their lowest levels ever, yet mortgage availability is still significantly limited due to reductions in home market values and the increase in credit requirements. Many homeowners applying for refinances at historically low rates are being turned away due to limited equity or due to credit worries. The mortgage market will remain slow as long as Wall Street investors prefer security to higher returns as has been the case the past few weeks. One possible bright spot: as of this writing, the Dow Jones Industrial Average is approaching 9000 on the back of 3 straight days of increases, suggesting investors are aware better yields are available.

Dan Hartman is a Senior Mortgage Advisor with Province Mortgage Associates, and an Adjunct Professor with the University of New Haven and Roger Williams University. He can be reached at (401) 263-8655 or by leaving a comment on this article.

One night last week, I got home bright and early at 8:00 PM after a busy day of networking and loan applications. I opened my mail, and near about flipped. There on my credit card statement it said:

“11/xx Late Fee: $39.00”

People who know me well will tell you that I’m not a person who gets terribly angry, but after I read that, I have to admit that I didn’t really want to talk to anyone, and I certainly didn’t feel like addressing the problem.

So I did what a lot of people will do – I set it aside for a while.

Two days later, when I’d cooled down a little, I picked that statement back up, and I looked through my checkbook register for clues. Sure enough, 12 days before they hit me with that late fee, there was a check written out to the credit card company.

Knowing they weren’t out to get me, I picked up the phone and called, and 3 minutes later, my payment was up-to-date, and they had waived the late fee.

Seems pretty easy, huh? But millions of credit card owners each year don’t make this connection, and don’t make that call to their credit card company when something goes wrong. Success such as I had certainly isn’t a guarantee when calling your creditors, but it happens more often than you would think.

On-time payments are considered to be the most important factor in a good credit score, but almost just as important is communication. Communication is the key to keeping minor mishaps from becoming major problems. I said earlier that I set aside the credit card bill, but I picked it up 2 days later. Many who get into trouble with their bills forget that aspect, and find it harder and harder to catch up.

Remember – a 3-minute phone call can save you 3 years of interest payments!

Dan Hartman is a Senior Mortgage Advisor with Province Mortgage Associates, and an Adjunct Professor with the University of New Haven and Roger Williams University.