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Some good news from the State of Colorado Department of Treasury!

Cary Kennedy, State Treasurer
Eric S. Rothaus, Deputy Treasurer

………………………………..

Treasury Notes, October 2008

We all have been watching closely as our nation’s credit markets have experienced extreme stress in recent months. The collapse of some of our nation’s largest and longest-standing financial institutions has caused a crisis of confidence – and liquidity - in the global financial system. It is not yet clear how long these challenges will last or how broadly the impacts will be felt.

The good news is that Colorado’s economy is outperforming the rest of the nation. However, poor real estate and credit conditions continue to slow our state’s economy.

Colorado Ranking vs. The Rest of the Country

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The First Time Buyer….

• They have an opportunity to buy homes today that don’t have inflated values…
• They don’t have to wait for their home to sell…
• They have sellers willing to pay their closing costs and buy-down already low interest rates….
• They are in the first “Buyers” Market in nearly 8 years….
• They have the largest selection of homes in 15 years…..
• The current down turn in pricing will allow them to buy homes in neighborhoods that were out of their reach 2 years ago…
• They can get that extra bedroom or bath or garage…
• They can still buy a home with 3% down, a job, and reasonable (not perfect) credit through FHA..
• If rates go dramatically lower …FHA has a streamlined refinance program that doesn’t require re-qualification of the buyer…..
• If they buy before July 9, 2009 they are eligible for a $7500 tax credit
• If they buy before Dec 31 2008 they will get that back with their 2008 return

This is a life changing opportunity……

The Federal Reserve held the line on Tuesday–leaving the Fed Funds Rate at 2.00% for the third straight meeting. The decision, however, was anything but cut-and-dry.

Earlier in the week, the Personal Consumption Expenditure data indicated that inflation climbed 0.8% overall in June, which is the highest inflation jump in 27 years. In addition, the report indicated that inflation now sits at 2.3%–above the Fed’s desired range of 1-2%.

Although the Fed ultimately left interest rates unchanged, inflation obviously remains a concern and the recent rise may lead to an interest rate hike by the Fed in the near future.

What Does This Mean to You? 
Many experts believe the housing market is nearing the bottom and may even be set to bounce back up. For now, home prices remain low, personal incomes are high, and interest rates are still very attractive.

If you have been weighing your options and waiting to see how things shake out, this is the ideal time to act–especially when we consider the new Housing and Economic Recovery Act benefits for home buyers:

Tax credits. First-time home buyers who purchase their primary residence between April 9, 2008 and July 1, 2009 are eligible for up to $7,500 in tax credit, as long as they haven’t owned a home in the last three years.

Down Payment Assistance…going, going, not gone yet. Another provision of the legislation eliminates some down payment assistance programs Oct 1, 2008…but they are still available right now. 

Bottom line…now is the ideal time to put together a home purchase strategy based on your unique situation.  Contact me if I can be of assistance.

The housing bill that was signed this week included two major changes for FHA lending guidelines.  The changes are scheduled to kick in on October 1, 2008.

The first change is the minimum down payment requirement.  Currently FHA loans require 3% down.  On a $200,000 purchase this would be $6,000.  The housing bill will increase this minimum down to 3.5%.  On that same $200,000 home, the down payment will now be be $7,000.

The second major change is the elimination of seller funded downpayment assistance.  Currently the seller can contribute up to 6% to the buyer to cover their down payment and closing costs on an FHA loan.  These funds are deducted from the sellers equity and credited to the buyer at closing with a non-profit intermediary.  This has allowed buyers to take advantage of 100% financing.

One of the main reasons this is being eliminated is that FHA found the foreclosure rate to be about 80% higher on loans with down payment seller assistance verses FHA loans without.  There was also concern about inflated property values as a result of the seller funded DPA programs.

Moving forward the max the seller can contribute to the buyers closings costs and pre-paid items is 3% of the purchase price which has always been allowed.  The buyer will now be required to contribute the 3.5% for their the down payment.  Down payment assistance from a non-profit, employer, church or family member is still allowable and always has been.

Despite these changes, FHA loans will continue to be a good option for first time home buyers.

This week President Bush signed the $300 billion housing bill aimed at helping homeowners avoid foreclosure and it’s estimated that roughly 400,000 families will benefit. The changes are scheduled to begin October 1, 2008. It’s a very detailed bill but some of the highlights include:

FHA Changes

Mortgage limits for high cost areas will be increased to the greater of $417,000 or 115% of the local area median home price, capped at $625,000. The FHA floor will go from 48% to 65% of the current conforming loan limit or $271,050.

The FHA down payment requirement will now be 3.5% of the purchase price up from 3.0%.

Seller funded down payment assistance program (DPA) will be terminated on September 30. Other assistance programs provided by non profits or funded by churches, employers or family members remain intact.

Fannie and Freddie

The conforming loan limit will be increased to the greater of $417,000 or 115% of local area median home price up to $625,000.

The bill includes language to authorize the Treasury to make loans to and buy back stock from Fannie Mae and Freddie Mac, establish capital standards, management standards, review and approve new product offering to ensure future sound operations.

FHA Rescue Program

A special FHA refinance program will allow the refinance into fixed rate FHA products of up to $300 billion in distressed mortgages. A few of the details include:

· Homeowners currently living in their home with loans that were issued between January 2005 and June 2007.

· They must be spending at least 31% of their gross monthly income on their mortgage payment.

· They can be current or behind in their monthly payment but must prove they can not continue making the payment.

· Other debt such as home equity loan must be retired first and they can not obtain another home equity for 5 years unless they can prove it’s needed to pay for required maintenance to their home. In addition the new debt can not total more than 95% of the homes value and approval from FHA must also be granted.

· Homeowners will share in future profits by paying a 3% exit fee based on the principal balance to FHA when they sell or refinance.

· If the home is sold or refinanced within a year they will have to pay 100% of the profits to FHA. After a year that numbers drops to 90% and the profit percentage drops in 10% increments to the 5 year and stays at 50%.

Local Foreclosed Properties

The bill provides for $4 billion in neighborhood revitalization funds for local governments to purchase foreclosed properties.

Tax Incentives

A tax credit of $7,500 will be available for First Time Buyers who have or will purchase between April 8, 2008 and June 30, 2009. The Low Income Housing Tax Credit will also be expanded.

For questions on the new law, and how it may effect your purchase or sale, contact the Get Home Denver Team for all your real estate answers!

photo credit: respres

According to The Millionaire Real Estate Investor by self-made millionaire and real estate investor Gary Keller, most successful real estate investors have had to overcome certain beliefs that later proved to be unfounded. Some of these beliefs center around the way they view themselves as investors, and the others are focused on beliefs about investing. By addressing these doubts and fears, and recognizing that they’re unfounded, you’ll eliminate the major barriers to becoming a real estate investor. ·

Personal Myth #1: “I don’t need to be an investor. My job will take care of my personal wealth.” Truth: History indicates that few jobs pay enough to create true financial independence. Financial wealth building depends on another vehicle. ·

Personal Myth #2: “I don’t need or want to be financially wealthy. I’m happy with what I have.” Truth: Financial wealth offers greater opportunity to care for yourself and others, and that is something most everyone wants and needs.·

Personal Myth #3: “I can’t do it.” · Truth: You don’t know what you can or cannot do until you actually try. ·

Investing Myth #1: “Investing is complicated.” · Truth: Investing is as complicated as you make it. ·

Investing Myth #2: “All the best investments require knowledge most people don’t have.”· Truth: Your best investments will always be in areas that you can or already do understand. ·

Investing Myth #3: “Investing is risky. I’ll lose my money.”· Truth: Investing and gambling are not the same thing. Investing, by definition, is not risky. ·

Investing Myth #4: “Successful investors can time the market.” · Truth: Timing isn’t about being in the right place in the right time. It’s about being in the right place all of the time. ·

Investing Myth #5: “All the good investments are taken.” · Truth: Plain and simple, every market, in every time, has its share of good investments.

If you’re interested in investing, but you have doubts about whether or not investing fits in with your current financial program, it’s best to consult with a qualified Real Estate Broker and reputable Mortgage Planner who can assess your financial situation and put you on a plan that targets your goals. As with any financial program, gaining clarity on the facts is always the best place to start.

This past month two of our clients received “Gift Funds” from Mom and Dad to help them with the down payment on their new home. There are lending guidelines for “Gift Funds” and it’s important to understand how they work in the event you are the giftor or the giftee.

Here’s what you need to know:

On a conventional loan up to $417,000 (Fannie, Freddie product), if the Gift Funds from mom and dad are less than 20% of the purchase price the borrower (son or daughter) must have 5% of their own funds. As an example: $250,000 Purchase price of the home$ 25,000 10% - gift from mom and dad$ 12,500 5% - required borrower contribution from their own funds

In this example, if the Gift Funds were $50,000 (20% of purchase price) then the borrower would not be required to contribute any of their own funds.

FHA loans do not have a minimum contribution requirement amount from the borrower regardless of the gift amount.

The reason I bring this to your attention is often times mom and dad will liquidate investments thinking their generous gift of 10-15% of the sales price will be plenty of money to help their son or daughter buy a home. Then they find out about the 5% funds rule which their children don’t have, then they get upset because they liquidated funds, possibly paid capital gains and the home purchase doesn’t happen.

There’s also some paperwork to be completed. Mom and/or Dad will be required to sign a one page Gift Letter which states your relationship, the amount of the gift and from what account the funds will come from. We will also ask them for the most recent statement for the the account in which the gift funds will come from. All standard procedure, and necessary to comply with underwriting guidelines.

Yearly reviews are a great way to keep on track with your financial goals. You’re probably already meeting with your financial advisor and other asset manager for quarterly or annual reviews, and you should do the same with your Mortgage Planner as well. An annual mortgage check-up is an ideal way to make sure your mortgage is still having the maximum positive impact on your overall financial plan.

A lot can happen in one year. The market can take turns that can open up new opportunities, such as reduced interest rates, new loan products or changes in home values. Furthermore, your personal and financial situation could be mildly to radically different than it was just 12 months prior. Perhaps one or more of the income earners got a raise or lost a job. Maybe you received an inheritance. Even a (more…)

What?  The Fed lowered the Fed Funds rate today .75% and mortgage rates went up?  Yep, that’s right.  That doesn’t make sense.  I thought if the Fed lowered rates, mortgage rates would follow?  Nope that’s not how it works.    

 ”Mortgage rates frustrates buyers” was a timely article in the Denver Post this past weekend and it’s a must read for every current and prospective homeowner.   The point of the article, the Fed does not determine the direction of mortgage interest rates.   Plain and simple.  http://www.denverpost.com/business/ci_8580045

So, when the Fed lowers or increases rates, what exactly are they doing?  They are increasing or lowering the Fed Funds Rate - not mortgage rates.  They lower the Fed Funds rate to stimulate the economy and raise the Fed Funds to slow things down.  The Fed’s #1 job is to prevent inflation, but in general they are responsible for keeping the economy humming somewhere between recession and inflation - not an easy task.  Why? the Fed “cuts” or “increases” typically take 6-9 months to trickle through the economy and it’s not an exact science.  

What you need to know is that mortgage interest rates are determined by the price of Mortgage Backed Securites.  These financial instruments are traded daily and as their prices increase, interest rates come down and vice versa.  These mortgage backed securites are very sensitive to economic data, especially the actions of the Fed.  The MBS trade throughout the day, like stocks, which is the reason mortgage interest rates can change without notice.  A 30 yr fixed loan can be 6% in the morning and 6.5% by time you get back from lunch.  I’m not kidding.  It happened several time this past month.  The markets get wind of an inflationary report or rumor and BOOM, the selling begins and rates jump up!  It’s not a lot of fun explaining that to a client when they didn’t take your advice to lock in the morning.  There’s a lot of volatility in the MBS market.

Mortgage rates have actually increased the last six times, including today, that the Fed has cut the Fed Funds rate.  Why?  Inflation is the number one enemy of mortgage backed securites as it erodes the value of these instruments.  Traders are always fearful that the Fed will over stimulate the economy by lowering rates too much, thus causing inflation 6-9 months down the road.  In order to protect their investment they like to “sell” their MBS after a Fed rate cut, flooding the bond market with mortgage backed securities, prices drop like a rock and interest rates spike up.  It can happen in minutes.  In fact, as I write this, MBS have lost 90 basis points.  Yesterday they were up 150 basis points.  Yesterday was the day to lock.  I had a few clients that listened to me. 

What can you do?  First, read the attached article several times so you really get it!  Second, stop listening to your parents, friends, co-workers, neighbors and all the other experts in your life giving free financial advice about the direction of interest rates.  Don’t worry, you are not alone, I have plenty of those experts in my life too.   Third, stop gambling with your money and thinking that mortgage rates might drop if the Fed lowers the Fed Funds rates.  You have better odds going to Vegas.   

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