Market Reports
A Mortgage Update from Jay Skwierawski for the week of February 22
Hello Everybody!
Interest rates dropped slightly this week, as the markets reacted to negative economic news and continued to try to decipher the economic stimulus plans coming out of Washington. The Dow Jones Industrial Average closed down almost 7%, at a six year low. Not accounting for dividends, the Dow is at a level equal to what it was 12 years ago. Often times stock markets rally when they test new lows. It remains to be seen if a rally is in the works. Stay tuned!
In addition to the economic reports that were released (which are detailed below,) the Economic Stimulus Plan for 2009 was finally approved by Congress and signed into law by President Obama. On Wednesday, President Obama unveiled the initial details of the Homeowner Affordability and Stability Plan, which is designed to stabilize the housing market and keep millions of borrowers in their homes. Many of the details of these plans are still being worked out, but here's an overview of what we know so far:
Stimulus Plan - Tax Credit for Homebuyers
The $787 Billion stimulus bill is made up of tax cuts and spending programs aimed at reviving the US economy. Although the package was scaled down from nearly $1 trillion, it still stands as the largest anti-recession effort since World War II. One of the major benefits of the plan is a tax credit for new homebuyers. According to the plan, first-time homebuyers who purchase homes from the start of the year until the end of November 2009 may be eligible for the lower of an $8,000 or 10% of the value of the home tax credit.
It's important to remember that the $8,000 tax credit is just that... a tax credit. The benefit of a tax credit is that its a dollar-for-dollar tax reduction, rather than a reduction in a tax liability that would only save you $1,000 to $1,500 when all was said and done. So, if you were to owe $8,000 in income taxes and would qualify for the $8,000 tax credit, you would owe nothing.
Better still, the tax credit is refundable, which means you can receive a check for the credit even if you have little income tax liability. For example, if you're liable for $4,000 in income tax, you can offset that $4,000 with half of the tax credit... and still receive a check for the remaining $4,000.
The tax credit starts phasing out for couples with incomes above $150,000 and single filers with incomes above $75,000.
The tax credit is applicable to any home that will be used as a principle residence. Based on that guideline, qualifying "homes" include single-family detached homes, as well as attached homes such as townhouses and condominiums. In addition, manufactured or homes and houseboats used for principle residence also qualify. Buyers will have to repay the credit if they sell their homes within three years.
While details are sketchy - we will expect to get some clarity soon as to an additional tier of conforming loan amounts which had been first established in 2008. This tier of home loans are those greater than $417,000, and with a maximum that depends on the area, but is not greater than $729,750. These loans would be eligible for rates that are slightly higher than conforming loan rates, but less expensive than the standard "jumbo" loan rates.
Homeowner Affordability and Stability Plan
President Obama unveiled his plan to help stabilize the housing market and keep millions of borrowers in their homes. The Homeowner Affordability and Stability Plan includes two initiatives to help struggling homeowners. One is a refinancing program for homeowners with less than 20% equity in their homes, or who owe more than their home is worth. The second program attempts to lower monthly payments for homeowners at risk of losing their home. Many of the plan's details are still being worked out and will not be announced until March 4. Here is an overview of the plan's main components.
Refinancing Initiative
Under current rules, those families who own less than 20% equity in their homes have a difficult time refinancing and taking advantage of the historically low interest rates. This initiative is open to homeowners who have conforming loans which are guaranteed by Fannie Mae and Freddie Mac, and who owe up to 5% more than their home is worth.
According to the plan, "credit-worthy" or "responsible" homeowners can refinance their mortgage into a 30- or 15-year, fixed-rate loan based on current market rates. The refinanced loan, however, cannot include prepayment penalties or balloon payments. For many families, this low-cost refinancing may help reduce their mortgage payments by up to thousands of dollars per year.
As with the rest of the plan, details about this initiative will be released at a future date--including what, if any, credit score requirements will be included.
Stability Initiative
This initiative aims at providing help to individual families as well as entire neighborhoods by helping reduce foreclosures and stabilize home prices. It is intended to help homeowners who are struggling to afford their mortgage payments, but cannot sell their homes because prices have fallen significantly.
The goal of this initiative is simple: "reduce the amount homeowners owe per month to sustainable levels." To accomplish this, lenders are encouraged to lower homeowners' payments to 31% of their income by lowering their interest rate to as low as 2% or by extending the terms of the loan. In addition, lenders can also lower the principal owed by the borrower, with Treasury sharing in the costs.
Homeowners who are current on their mortgages but are struggling can still apply for this program. As such, this is one of the few programs designed to help homeowners who may face delinquency soon, but are current at the moment.
This initiative also includes a number of additional elements and incentives, including an extra incentive for borrowers to keep paying on time. The initiative will provide a monthly balance reduction payment that goes straight towards reducing the principal balance of the mortgage loan. As long as a borrower stays current on his or her loan, he or she can get up to $1,000 each year for five years.
Since the focus of this initiative is on helping families and neighborhoods, investment properties do not qualify.
ECONOMIC REPORTS RELEASED LAST WEEK:
Empire State Index (economy in New York area) came in lower than expected. This has a MODERATE impact on rates.
Building Permits and New Housing Starts both came in lower than expected. (MODERATE) Although this was just more dismal news for housing, it may actually be a positive, as we have to work through the inventory of already completed homes before we can expect new homes to be started and sold.
Industrial Production and Factory Utilization came in worse than expected, as the economy continued to slow. (MODERATE)
The Producer Price Index (PPI) came in at +0.8%, which was higher than the +0.2% that was expected and much higher than the -1.8% reported the month before. In addition, the Core PPI, excluding food and energy came in at +0.4%, which was also higher than the +0.1% that was expected. Although one month's figures does not a trend make, these reports took the wind out of the sails of the people worrying about deflation. (MODERATE)
First Time Claims for Unemployment came in higher than expected. (MODERATE)
The Philadelphia Fed Index, showing economic activity in the Philadelphia region, came in much worse than expected. (HIGH)
The Index of Leading Economic Indicators (a prognosticator of future economic activity) showed an unexpected increase. (LOW)
The Consumer Price Index (CPI) came in as expected at +0.3%, while the Core CPI, excluding food and energy came in slightly higher. (HIGH)
ECONOMIC REPORTS DUE THIS WEEK:
Tuesday - Consumer Confidence is expected to show a decrease since it was last reported. (MODERATE)
Wednesday - Existing Home Sales are expected to show a slight increase from the previous month. (MODERATE)
Thursday - Durable Goods Orders are expected to show a decline. (MODERATE)
Thursday - First Time Unemployment claims will be released. (MODERATE)
Thursday - New Home Sales are expected to show a further decline. (MODERATE)
Friday - The first revision of the Gross Domestic Product (GDP) for Q4-2008 is expected to show a drop of 5.4%, larger than previously reported. (MODERATE)
Friday - The Chicago Purchasing Managers Index is expected to show a slight improvement. (HIGH)
Friday - The University of Michigan's Consumer Sentiment Index is expected to show a decline. (MODERATE)
I will keep you updated on any major developments or drastic movements in the markets that have an impact on mortgage rates.
In the meantime, have a great week!
Jay Skwierawski
President
First Sterling Mortgage Services, LLC
737 North Michigan Avenue, #1900
Chicago, IL 60611
312.268.7601
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