I ran across this article from Kiplinger Forecasts this morning.  It does a fair job of addressing the question on every troubled home owner’s mind:  Is there a bail out coming? 

So far, the answer appears to be no.   Despite high level legislative chatter, the recent Bush proposal for FHASecure—the details of which remain vague, and the inevitable debate about the “moral hazard” of keeping the dirty bath water to save the baby, no broad plan has emerged.  That may be understandable in light of the fact that 70% of the foreclosure problem exists in 7 states.  If your state didn’t contribute to the problem, do you want to pay for its solution?

And yet there is something bigger at stake.

The foreclosures in those 7 states will have a broad negative impact on consumer spending.  That hurts retail sales and profits, and ultimately jobs.  The negative wealth effect and spending pull-back on the part of foreclosure victims is actually the smaller part of the problem.  Think about the much larger group who won’t lose their homes.  They’re feeling the pinch too.  And they’ll spend less as a result.  It’s like the scare-movies they show you in driver’s training.  Even though that wasn’t your blood on asphalt, you’ll drive a little more carefully after seeing what happened to the other guy.

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As sub prime, Alt-A and 2nd mortgages continue their disappearing act, the GSE�s have been busy trying to help make housing more accessible and affordable. Both Fannie Mae and Freddie Mac have brought forth fantastic programs that can help consumers buy homes with no down payment or refinance homes with little remaining equity.

Fannie Mae�s initiative is called MyCommunity Mortgage and I wrote a previous article about that. Freddie Mac has something similar called Home Possible. Here are a few highlights:

• 100% purchase or rate and term refinance, with no minimum borrower contribution. (105% CLTV allowed on SFRs)
• 30 & 40 yr fixed, along with 5/1, 7/1, and 10/1 ARMs for 1�2 unit properties
• 3% seller contribution allowed
• Temporary buydowns allowed with .5% annual increases
• 140% of median income in high cost states like CA
• Reduced MI coverage
• No reserves required (SFR)

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I love to grow bamboo.  One of the things I love most is discovering a thick new shoot emerging from the dead leaves beneath one of my large plants.  The new shoots can be as big around as a woman’s forearm.

Today’s reported drop in new home starts for August—the biggest decline in a dozen years—struck me the same way, like spotting a sturdy green shoot poke out the dry real estate landscape.  This is perhaps the best news I’ve heard recently, better than the Fed’s half point cut, and it’s the first clear indication that the supply of homes may begin the retreat toward equilibrium with demand.

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Everyone is aware of yesterday�s Fed action: a 1/2 point cut in rates. That�s good news for mortgage rates, right? Well, yes and no.

Look how the market responded this morning. Stocks rallied, pulling money out of bonds and depressing bond prices. This sent bond yields�and mortgage rates�temporarily higher.

More importantly, the market sees the Fed action as inflationary in the long run. That will cause the Fed to eventually raise rates to control inflation. Mortgage rates are responding in advance to this concern.

So yes, there is a link between mortgage rates and the two rates�Fed Funds and Discount Rate�that the Fed tinkers with. But the link is indirect and based more on how the market perceives the move in the long run.

Just wanted to lend some clarity to that issue.

Acknowledging the growing concern over a recession which was cemented by the August jobs report, the Fed cut both the Fed Funds and the Discount Rate today by one half point. 

Here is the text of the statement:

The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 4-3/4 percent.

Economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally. Today’s action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time.

Readings on core inflation have improved modestly this year. However, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.

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While we wait for the Fed’s final decision on rates this morning (announcement at 11:15 Pacific time), we can chew on the Producer Price Index (PPI) report that preceded it.

This is a good example for anyone confused by these numbers.  The “headline” PPI figure showed a drop of 1.2% vs. the expected drop of 0.3%.  That seems like a good thing. right?.  Lower inflation means the Fed can relax about the whole inflation thing.  Not exactly.

The “core” PPI rate actually shows an increase of 0.2% which exceeded the 0.1% forecast increase, suggesting the opposite.  The inflation issue is still on the table and so bonds are down in price, rates rising this morning.

The Fed

This one has been hard to call.  The market has at times priced in an expectation of a half point cut, though there are still those who don’t think the Fed won’t (or shouldn’t) do anything.  A cut is largely considered to be a confidence booster and won’t cure the current ills.  Even a half point cut in the Fed Funds target rate won’t help those about to lose their homes, though it will offer a less painful interest rate “reset” for some borrowers.

The other wild card is just how this market will react to whatever the Fed does…   Stay tuned.

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With the tide shifting back toward old-school underwriting, source of down payment is once again becoming an issue. Conventional loans often require that the borrower have 5% of their own funds, and that money must be “seasoned”.

FHA is different and far more flexible.

Did you know that FHA loans do not require that the borrower have any of their own money? And there are no “reserves” required. Here are a few acceptable and interesting sources for an FHA down payment:

1. Gift funds, from a blood relative or charitable organization. The donor must sign a standard industry Gift Letter stating that no repayment is required, and you must prove the donor’s ability to gift funds. In other words, plan on getting a bank Read the rest of this entry »