Jeff Baxter

February 17, 2008

In late 2006 Congress passed a law allowing a rather strange one-year deduction of premiums for private mortgage insurance (PMI). This was a scrap thrown to PMI insurers who had been complaining that their businesses were suffering from the number of homeowners opting for piggyback mortgages. These simultaneous second mortgages were used for a house down payment, eliminating the need for PMI and providing an additional mortgage interest deduction.

This deduction required that the policy be taken out and paid for in 2006 (tough luck for homeowners struggling with premiums from earlier years,) was for home acquisition not refinancing, and the deduction was available for 2006 only. Now this deduction has been extended for 2007 provided that the PMI contract was entered into in 2006 or 2007 and that payments for the more recent year were made before 2008. PMI premiums are treated as mortgage interest on Schedule A so taxpayers must itemize in order to claim the deduction and the taxpayer's gross income must be under $50,000 for an individual or $100,000 for a couple filing jointly.

A portion of this deduction may be available for higher earners; again, consult the regulations or your tax advisor. If you need a good local advisor/CPA contact David Nilsson at www.oceanviewcpa.com. David is on the Board of Directors of the Bethany- Fenwick Chamber of Commerce.

February 16

We all know the stock market has been volatile in the past few months, and now we are seeing an uptick in mortgage rates driven primarily by activity in the market for what are called Mortgage Backed Securities (MBS). These are also commonly called mortgage bonds. As with all bonds, when prices fall interest rates (yields) rise.

Mortgage bond prices fell last week pushing mortgage interest rates significantly higher. Stock strength the beginning of the week hurt mortgage bonds. Stronger than expected retail sales also shocked the market. The weakness was compounded as investor concerns about exposure to mortgage bond risk grew. Fed Chairman Bernanke expressed concerns about economic growth but his remarks did little to help mortgage bonds.

For the week, interest rates on government and conventional loans rose by about 1 and 3/4 of a discount point.

What does this really mean? I our case, we saw confirming ($417,000 and under) 30 year fixed rate mortgages increase from 5.625% with 0 points to 6.125%, and increase of 3/8%, in about 6 days. Now, 6.125% is still a great rate on a mortgage given past history (see chart below), but the quick run is troubling.

We are currently in the midst of a battle between investors viewing inflation and mortgage credit risk as the big issue (bad for rates) and those viewing a looming recession as the big issue (good for rates). We'll have to see how the battle plays out over the coming weeks. The Federal Reserve meets again next month and the market is betting on another 1/2 cut in the SHORT TERM Fed Funds rate. While not directly related to mortgage rates, another cut will signal help for a weakening economy and will support the case for lower mortgage rates in the future.

Call us if you want to discuss the current rate situation and its effects on your financing plans.

February 15, 2008

Well, the President signed the Economic Stimulus Bill HR 5140 on Wednesday. From our perspective, the increase in the conforming loan limits and FHA loan limits are the most important components of the bill. Unfortunately, the reality of the new bill presents a mixed bag. Congress did not pass a nationwide increase in the $417,000 conforming loan limit. Rather, they authorized an increase in the limit in "high cost" areas to 125% of the median price of a single family home in that area, with a maximum of $729,750. The Secretary of HUD is responsible for announcing the new limits per area and we expect this announcement within the next 30 days.

The bad news is that in our market at the beach (Sussex and Kent Counties in DE and Wicomico and Worcester in MD) there will probably not be an increase in the $417,000 limit. That's because the median price of homes is not high enough when looking at the whole of each county. It might be expensive at the beach, but not necessarily so in Seaford or Georgetown.

The good news is on the FHA side. We can expect to see fairly large increases in the maximum loan limit for FHA financing. See the chart below for our estimates of the new FHA maximums by county. Remember these are current estimates and it will take at least 30 days for the HUD Secretary to announce the official new limits.

County Current FHA Limit New FHA Limit

Sussex $247,000 $325,000

Kent $285,071 $375,093

Wicomico $332,499 $328,737

Worchester $362,790 $437,499

There is another wild card here. The law allows the HUD Secretary, at his discretion, to increase the FHA loan limit in any area by no more than $100,000.

These limits are only good for loan originated through December 31, 2008. Please giveme a call if you'd like to discuss these new limits or any other part of the stimulus bill.

I wish I knew!! The Fed cut short term rates another 1/2% today and the stock market rallied, then pulled back - the Dow down about 34 points. Mortgage Backed Securities (MBS) traded down slightly in the hours after the Fed cut - down about .125 discount points. What are investors trying to tell us? The large Fed cuts are an over-reaction and will lead to more inflation down the road, which is bad for mortgage rates or the Fed is behind the curve letting a slowing economy moving toward a recession, which is good for mortgage rates? Tough choice!

Here's the Fed Statement:

The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 3 percent.

Financial markets remain under considerable stress, and credit has tightened further for some businesses and households. Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labor markets.

The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.

Today s policy action, combined with those taken earlier, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks.

My take is that traders & investors are waiting to see what the rest of the week's economic reports bring. Employment Cost Index (Q4) and Personal Income & Outlays tomorrow, then Employment and Consumer Sentiment on Friday. If these reports show more weakness - remember Q4 GDP was only half of what was expected - then we should see some improvement in mortgage rates over the next couple of weeks.

A big caveat though. 30 year fixed rates are only about 1/4% to 1/2% above their 5 year lows. A 30 year fixed rate mortgage at 5.75% is still very attractive and rates below 6% might not last too much longer. We're seeing a huge increase in refinance activity right now as homeowners are taking advantage of this dip in rates. By the mid-to-late Spring, the opportunity might have passed.

My Realtors are telling me that activity is picking up at the beach, more phone calls, inquiries, showings, and yes, even OFFERS. I'm seeing it as well with a pick-up in pre-approvals and calls about something other than refinancing. There are some real bargins in the market at the beach and money is available and cheap. Call your Realtor and see what's happening.

Let's look at the local take on current news about mortgage financing. . .

News from the Mortgage Bankers Association:

"The White House surprised many on Monday by suddenly withdrawing its support for the inclusion of FHA reforms in President Bush's proposed economic stimulus package. Bush had previously made several personal pleas to Capitol Hill legislators on the importance of passing the bill, which would allow the FHA to insure more loans. Attaching the provisions to his economic stimulus plan had been viewed as a mostly innocuous move on the way to quick enactment. Among the provisions in jeopardy is one that would relax down-payment requirements and one that would temporarily raise the conforming-loan limit, thus give Fannie Mae and Freddie Mac a chunk of the jumbo loan market. A Treasury spokesperson said the department prefers that Congress address FHA reform as a separate issue from the economic stimulus package."

Increasing the conforming limit from $417,000 would help re-ignite the second home market at the beach. It costs a Jumbo borrower about 1% more in interest rate to borrower $500,000 compared to $400,000 to purchase a $650,000 property.

Increasing FHA limits are critical here is Sussex County. Our current limit is $247,000 and it hasn't changed since January 2005. Because FHA requires only a small down payment and has no minimum credit score, it's a much better alternative to the "sub-prime" loans that have been offered in the past to borrowers with little cash and less than perfect credit. We need higher limits in Sussex now.

"Economists are optimistic that language included in the stimulus package to raise the limit on jumbo loans will lead to a major refinancing boom this year. The $150 billion package of tax cuts and rebates includes a provision to increase the conforming loan limit from the current threshold of $417,000 to as high as $729,000 in costly housing areas such as New York and California, which would make jumbo loans cheaper for buyers and more marketable for investors. Richard Berner, chief economist at Morgan Stanley, says jumbo loans account for about one-fifth of all outstanding mortgages; and he expects consumers to save more than the record $31 billion windfall recorded during the 2003 refinancing wave. "It could do a lot to unfreeze the mortgage market," agrees John Rutledge, an economic consultant and former Reagan economic adviser."

If the conforming limits do get raised, borrower's will need to act quickly because the increase will only be for the remainder of 2008.

"The Commerce Department's recent new-home sales report reveals substantial weakness in the housing market; and more declines are on the horizon, according to some economists. The report shows a 26-percent plunge in sales volume last year compared to 2006 and just a 0.2-percent increase in the median price to $246,900 over the same period. New-home sales fell 4.7 percent to an annual pace of 604,000 in December, and the median price of $219,200 marked a decline of 10.9 percent from the same month of the prior year."

These numbers are for NEW home sales and indicate builders are still having trouble moving their inventory. The story locally is not as bleak. In all of Sussex County, single family home sales in 2007 totaled 2,153 units and the median price was $283,333. Although the number of units sold dropped from 2006 by 17%, the median price was flat, increasing 0.1% from $283,013 in 2006.