The HAFA Mortgage Program

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Here’s a primer on who might be able to get the expanded credit, and what it might do for the housing market:

Who gets the credit, and how much can they claim? First-time home buyers are eligible for up to $8,000 on the tax credit, which is the same as the current credit. The Senate version of the bill creates a new credit of up to $6,500 for homeowners who have lived in their homes for five years. That provision would start on Dec. 1.

How long will it last? The tax credits would expire on April 30, 2010, but home buyers under contract by April 30 would be able to qualify as long as they complete the sale within 60 days. Keep in mind, this would be the third iteration of a home buyer tax credit that has been in place since mid-2008. Sen. Johnny Isakson, the Georgia Republican who has been a staunch advocate of the credit, promised that this would be the “last extension” of the credit, according to Dow Jones Newswires’ Corey Boles. “Tax credits like this only work by creating the sense of urgency to take advantage of it,” Sen. Isakson said.

Will the tax credit do anything for the high-end of the market? Probably not. The tax credit phases out for home buyers with incomes above $125,000 for single filers and $225,000 for married couples. Also, homes that cost more than $800,000 aren’t eligible for the credit. Overall, the tax credit is likely to generate only a modest further increase in home sales, says Tom Lawler, an independent economist in Leesburg, Va.  For many well-paid people, he says, it won’t make a big difference: “A household earning around $150,000 is likely to buy a home of $500,000 plus, so a $6,500 credit won’t be much of a factor in pushing such households off the fence.”

What other limits does the credit have? Toddlers are out of luck. Last week’s congressional hearings spotlighted concerns about misuse of the credit, including some 500 tax filers under age 18 who had claimed the credit.

So will the expanded tax credit help sales? That’s a point of debate among housing analysts and economists. Alec Phillips, economist at Goldman Sachs, notes that expanding the credit to people who already own homes doesn’t necessarily make a big dent in the supply of housing on the market. “If these ‘step-up’ buyers already own a home and sell it to finance the new one, that hasn’t reduced the amount of inventory for sale,” he says.

But Mark Zandi, chief economist at Moody’s Economy.com, thinks the extension is a big deal. Based on a preliminary analysis, he said it should mean at least 500,000 in additional sales, atop the 400,000 he estimates already have been generated by the tax credits (twice the Goldman estimate). “The tax credit is not a very efficient tax cut, but not extending it would do significant damage to the still fragile housing market,” Mr. Zandi said.

For the week of May 18, 2009 --- Vol. 7, Issue 20

Last Week in Review

"I WILL ACT NOW. I WILL ACT NOW. I WILL ACT NOW." Og Mandino. The markets took those words to heart last week, with plenty of timely action ranging from telling economic reports to interesting announcements from the government, related to homebuyers.

On the economic news front, the headlines were mixed. On the disappointing side was a worse than expected Retail Sales Report, which showed that consumers are continuing to tighten their purse strings. Not entirely surprising, but it did mark the eighth decline in the past ten months for Retail Sales. Initial Unemployment Claims were also reported worse than expected - which some said were due to massive Chrysler layoffs - but still was disappointing after there had been some recent signs of improvement in the labor markets.

However, there was positive economic news as well, including improved readings from the manufacturing sector, as the New York Empire State Manufacturing Index improved for the third month straight. Consumer Sentiment was also better than the previous reading and the best since September of last year. So although the consumer isn't out spending money with abandon just yet, this report shows that most folks are indeed starting to feel better about the economic outlook, likely due in part to the values of their investment accounts improving as Stock values move higher.

Looking at the always-important inflation headlines, wholesale inflation levels moved higher in April, driven by an increase in food prices. On the consumer inflation side, the Consumer Price Index (CPI) report was flat, although the Core CPI - which removes food and energy prices - was a little hotter than expected, largely due to a huge spike in tobacco prices by a smoking 9.3%! Core inflation has been moving slightly higher since February, as you can see in the chart below.

Chart: Core Consumer Price Index

Remember, inflation is the archenemy of Bonds and home loan rates, so I will be keeping a close eye on this in the coming months.

And as if that all weren't enough, the government got in on the action, with the Department of Housing and Urban Development's Federal Housing Administration making a very interesting announcement that ultimately appeared to be slightly premature. They announced a new plan to allow first-time homebuyers to use the Federal tax credit of up to $8,000 for a down payment at closing, rather than making buyers wait to receive the benefit after the fact at tax time. However, no details or logistics of how this will actually work were released, causing them to actually pull some of the industry announcements as they regroup to provide more details. This could be great news for first-time homebuyers, who are slated to account for 53% of home purchases in 2009. When the details of the program are fully released, I will certainly keep you posted as I learn more.

Bonds and home loan rates were able to make some improvements in the early part of the week as weak economic reports caused money to flow from Stocks into Bonds. And while Bonds lost some ground on Friday, home loan rates still ended the week slightly improved from where they began.

NOW IS THE PERFECT TIME TO TAKE SOME ACTION IN GETTING YOUR HOME READY FOR SUMMER. CHECK OUT THIS WEEK'S MORTGAGE MARKET VIEW FOR SOME GREAT TIPS AND IDEAS.

Forecast for the Week

The week ahead is sure to be just as action packed as the last, including a read on the housing market via Tuesday's Housing Starts and Building Permits report. And given last week's worse than expected Initial Unemployment Claims report, this Thursday's updated number will be one to keep an eye on.

Thursday also brings more news from the manufacturing sector with the Philadelphia Fed Report. This monthly survey of manufacturing purchasing managers conducting business around the tri-state area of Pennsylvania, New Jersey, and Delaware is one of the most-watched manufacturing reports overall. And given the good news from last week's New York Empire State Manufacturing Report, it will be interesting to see what the Philadelphia Fed Report reveals.

Remember: Weak economic news normally causes money to flow out of the Stock market and into the Bond market, helping Bonds and home loan rates improve...while positive and strong economic news normally has the opposite result. As you can see in the chart below, Bonds and home loan rates made some improvements last week, so I will be watching closely to see if this direction continues in the coming week. If you have questions as to how current historically low interest rates might benefit you, or someone you know, please feel free to send me an email or give me a call - my contact information is right at the top of this newsletter.

Chart: Fannie Mae 4.0% Mortgage Bond (Friday May 15, 2009)

The Mortgage Market View...

"Summerize" Your Home with These Spring Projects
It's hard to believe, but the official start of summer is just a few weeks away! Here are some spring cleaning projects you should definitely consider tackling before the hottest days of summer descend upon us.

Air Conditioning
It's important to have your air conditioner in perfect working order before summer starts. Taking care of any issues after the summer heat hits can potentially result in an increase in price, as well as an increase in the time it takes for a technician to visit your home. You should also replace any filters now. Simply remove the old one and take it to your local home improvement center. Sales representatives should have no problem finding its replacement.

Clean out your garage
Organizing a garage can be an excruciating experience during the hot summer months, so if that's something you need to do, don't put it off any longer. Once you clean out your garage, either donate any unwanted items or sell them.

Paint
Late spring is the perfect time to paint the interior of your home since the weather best lends itself to keeping your windows open, allowing the fresh air in and the paint fumes out. If you decide to paint the inside of your home, think about lightening the existing color as opposed to darkening it. Lighter colors are not only inviting, they create the illusion of a bigger, more open space.

Buy fans
Installing ceiling fans and using portable fans are great methods for cutting the heat inside your home. They are also far less expensive to use than an air conditioner. Using fans of any kind also enables you to keep windows open at night, allowing fresh air to circulate throughout the house.

Install dimmer switches
Dimmer switches not only add ambience, they also cut down on energy and the unwanted heat given off by brighter bulbs. Another tip is to use low-wattage light bulbs whenever possible.

Good luck and happy "summerizing!"

The Week's Economic Indicator Calendar

Remember, as a general rule, weaker than expected economic data is good for rates, while positive data causes rates to rise.

Economic Calendar for the Week of May 18 - May 22

Date ET Economic Report For Estimate Actual Prior Impact Tue. May 19 08:30 Building Permits Apr 530K   503K Moderate Tue. May 19 08:30 Housing Starts Apr 527K   510K Moderate Wed. May 20 10:30 Crude Inventories 5/15 NA   -4.63M Moderate Wed. May 20 02:00 FOMC Minutes 4/29       HIGH Thu. May 21 08:30 Jobless Claims (Initial) 5/16 NA   610K Moderate Thu. May 21 10:00 Index of Leading Econ Ind (LEI) Apr 0.6%   -0.3% Low Thu. May 21 10:00 Philadelphia Fed Index May -18.0   -24.4 HIGH

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U.S. President Barack Obama’s $75 billion plan to help families avoid foreclosure should be bolder.  While it is a meaningful rescue attempt that may help 9 million Americans, it could be doomed unless mortgage issuers have to write down principal to reflect current market values. The odious (to lenders) concept of a “mark-to-market” mortgage might be one way to put a floor on home-price declines. Why not give those in or facing foreclosure a haircut on principal? About 20 percent would be fair, reflecting the national decrease in house prices.  And, what about the diligent souls who have been paying their mortgages all along? Lower mortgage rates reflecting the Federal Reserve’s cost of funds -- about 1 percent, plus 2 percentage points of profit for the lenders -- would be beneficial. That may boost new-home sales, re-sales and refinancing. A strong new mortgage law could limit write-downs before a foreclosure hits the overcrowded court system. To avoid abuse, mark-to-market would be used as a last resort only; after all other options are exhausted. In its current form, though, the Obama mortgage bailout relies mostly on voluntary interest-rate modifications for relief through Fannie Mae and Freddie Mac, the government-seized mortgage companies. Designed to keep people in their homes; the plan calls for reducing rates so that monthly payments are eventually no more than 31 percent of household income. The plan has shortfalls; if Congress sanctions mortgage write-downs or “cram-downs” in bankruptcy court each judge may be allowed to forgive as much principal as deemed appropriate. Even if a homeowner avoids bankruptcy and heads straight to foreclosure, a bank that repossesses the home can lose 40 percent or more in fees, commissions and discounting when the lender finally resells it. Marking down 20 percent in principal would be a relative bargain. That is where a write down cap would come in. Index it to local real-estate prices. When there is a recession, you are more likely to get a break. If you have positive equity, it is unlikely you will write it down. Mandatory Counseling: combine the write down and bankruptcy provisions with mandatory counseling and screening. That might stem future defaults, which have been occurring in 57 percent of Fannie’s and Freddie’s loan modifications. Everyone has a stake in a sensible solution to the crisis. If your neighbor’s home goes into foreclosure, it will depress your property value and often lead to an increase in crime. The whirlpool of defaults also contributes to lower consumer spending, constricted bank lending and even lower home prices, which dipped almost 19 percent in December.  Hard times require bold systemic changes!

by John F. Wasik of Bloomberg

By Linda Shen