Archive for December, 2007

Market Update – Decmeber 28, 2007

David Kosmecki | December 28, 2007 in Uncategorized | Comments (0)

Risks favor: Floating

Current Price of FNMA 5.5% Bond: $99.50, +53bp

Bonds are once again trading higher as investors seek some safe haven during the political turmoil in Pakistan. The concern is a destabilization of the Pakistani government due to the assassination of Pakistan opposition leader Benazir Bhutto, and ultimately, the question of which political faction may end up controlling its nuclear arsenal. This is a great example of how unforeseen geopolitical events around the world can impact our rate sheets.

In economic news this morning, the Chicago Purchasing Managers Index (PMI) for December was reported at 56.6, which was higher than expectations of 52. This was good news for the economy, but it wasn’t enough to help Stocks improve, which have given up their earlier gains.

New Home Sales in November were reported at 647,000, which was lower than expectations of 715,000.

The number of new homes available for sale dropped to 505,000, the lowest level in two years – however, the pace of sales dropped even more, causing the inventory of unsold new homes to jump to a lofty 9.3 month level. Not unusual to have lower paced sales during the winter months approaching the holidays – but still an indicator that the housing market remains soft. The median home price from November 2006 to November 2007 fell just slightly to $239,100. On this weaker than expected housing news, Stocks moved lower and Mortgage Bonds traded even higher.

The Bond has now broken back above the 50-day Moving Average, which is a good sign. Additionally, the long-term uptrend remains intact. The next ceiling of resistance lies at the 25-day MA, which is where Bonds are trading at the moment. We will continue to float, but again be ready to lock as the recent volatility could send prices lower in a hurry.

The Difference Between Private Mortgage Insurance And Homeowners Insurance

David Kosmecki | in Uncategorized | Comments (0)

Private mortgage insurance (PMI) is insurance for the mortgage lender in the event of homeowner default.

PMI helps the lender recover its costs and losses after foreclosing and selling a repossessed home.

PMI rates vary by loan type, loan size, and loan characteristics. The higher the risk to the bank, the higher the cost of PMI.

The two types of PMI are:

  1. Borrowed-paid mortgage insurance
  2. Lender-paid mortgage insurance

Borrower-paid MI is the more common version of PMI. It may be payable up front, payable monthly, or both. However, once the mortgage balance is reduced to 80% of the home’s value, PMI may no longer be required by a lender.

This reduction can occur by principal being paid down, home appreciation, or a combination of the two.

With lender-paid PMI, there is no monthly payment because the mortgage note’s interest rate is increased and is, therefore, “self-insuring”. That is, the lender collects higher payments each month and usually buys an insurance policy with the extra proceeds.

Different from private mortgage insurance is another type of insurance called homeowners insurance, or hazard insurance.

HOI is property insurance that protects against losses in the event of a catastrophe.

Mortgage lenders require borrowers to carry homeowners insurance because it protects the bank if the home is destroyed. However, it’s a good idea to have additional coverage for personal property and for liability related to accidents that occur on-site.

For example, if a home is destroyed in a fire:

  • The homeowners insurance will repay the lender for the amount due on the mortgage
  • The personal property insurance will repay the homeowner for personal possessions destroyed
  • The liability insurance will protect the homeowner from third-party claims related to the fire

HOI is typically paid in annual installments to an insurance company and rates vary by type of home and type of coverage requested.

Private Mortgage Insurance

Home Insurance

Market Update – Decmeber 27, 2007

David Kosmecki | December 27, 2007 in Uncategorized | Comments (0)

Risks favor: Cautiously Floating

as Bond approaches 50-day Moving Average

Current Price of FNMA 5.5% Bond: $98.91, +28bp

Mortgage Bonds opened the day sharply higher on news that Pakistan’s opposition leader Benazir Bhutto, was killed. Hundreds of people had gathered at a political rally that was attended by Bhutto and at least a dozen other people were also killed in the attack.

Also adding a boost to Bonds were a couple of weaker than expected economic reports. Durable Goods Orders for November was reported at 0.1%, which was well below expectations of 2.2%. And after excluding volatile transportation orders, Durable Goods fell 0.7% for the month of November. Durable Goods is a volatile number month to month, but the longer-term negative trend in this report does suggest that business investment is slowing.

Initial Jobless Claims increased by 1,000 to 349,000, which was higher than expectations of 340,000 claims. This leaves the closely watched four-week moving average for Initial Claims at 342,500. As we mentioned last week, a four week moving average above 360,000 could signal an oncoming recession.

But then Consumer Confidence for December was reported at 88.6, slightly above expectations of 87.0. On the news, Mortgage Bonds gave up some of their earlier gains.

At 1pm ET, the Treasury Department will auction off $13 Billion in 5-Year Notes. The added supply may put a lid on the Bond's advance this afternoon.

Yesterday we saw bond prices move lower on sour auction results in the 2-Year Note.

Technically, the Bond Market is extremely volatile as the low-volume holiday environment has helped to create large intra-day price swings. This morning’s rally had helped Bonds climb back above the Rising Trend Line. We will cautiously float and see if prices can hold their gains.

How The Case-Shiller Home Price Index Over-Simplifies Real Estate Markets

David Kosmecki | in Uncategorized | Comments (0)

The headlines say that home prices are down 6.7 percent from a year earlier. It’s important to recognize that this is a national figure.

“National” has nothing to do with real estate. Real estate is local.

The chart above is from the latest S&P/Case-Shiller home-price index and — averaged out — shows that home prices are declining nationwide. Some areas are showing growth (or flatness):

  • Charlotte
  • Dallas
  • Portland
  • Seattle

And, in every town included in the survey, there are neighborhoods that are faring quite well, despite an overall sluggishness.

Real estate prices are local. Street by street even. National surveys like the S&P/Case-Shiller home-price index paints a broad picture of our nation’s real estate market, but that level of reporting doesn’t do much on a level that’s actually relevant to Americans.

Pace of Decline In Home Prices Sets a Record
James R. Hagerty And Kelly Evans
The Wall Street Journal Online, December 27, 2007

Market Update – December 26, 2007

David Kosmecki | December 26, 2007 in Uncategorized | Comments (0)

Risks favor: Cautiously Floating

Current Price of FNMA 5.5% Bond: $98.88, -3bp

With no economic reports scheduled for release, Bonds may take direction from Stocks, which are looking pretty good from a technical standpoint. Although Stocks are taking a bit of breather this morning, each of the major stock indices have just recently powered back above their 200-day Moving Average. Should Stocks continue to forge higher it may be at the expense of Bonds. And with lower trading volume because many Traders took this week off, any price moves may be exaggerated.

There is a four-week Treasury Bill auction at 11:00am ET and a $22 Billion Two-year Treasury note auction at 1:00pm ET. This added Bond supply could weigh on Bond prices.

The Case-Shiller Home Price Index for October showed a 6.1% year over year decline in home prices, which was more than the 5.7% decline expected. The Index, which measures home prices in 20 US metropolitan areas, showed a 4.9% decline in home prices in September. This report is starting to get more attention as the media enjoys reporting negative stories. Stocks didn’t like this report and Bonds modestly improved as a result.

Bond prices have fallen beneath their 50-day Moving Average. This is important as prices have not closed beneath this Moving Average for two consecutive days since July. At the moment, prices are attempting to hold onto support at the $98.81 level. Should the Bond fall beneath this floor, the next closest level of support lies at $98.64, which is another Rising Support Line. Hopefully, you have been following our locking advice and avoided the 120bp price loss seen in just the past four days, but on brand new transactions, we will cautiously float to see if support will hold.

Holiday Spending APPEARS To Be Lower, But It Isn’t Really Lower

David Kosmecki | in Uncategorized | Comments (0)

During the Holiday Season, economists watch consumer spending intently because it makes up two-thirds of the U.S. economy.

When spending is stronger-than-expected, it can lead to inflation which pushes mortgage rates higher.

So far this season, mortgage shoppers should be in good spirits. Sales have fallen four weeks in a row and the outlook for a late-December rally are bleak.

But there’s more to the story than the headline, though.

When store report “sales” data, they don’t report gift card sales.

Gift cards are only accounted for when they are redeemed for actual store merchandise.

So, with gift card sales projected to reach $26 billion this year, there is a $26 billion “shortfall” in the sales figures. That $26 billion will likely get booked in January when shoppers spend their “free money”.

For as much as mortgage rates may fall on weak sales data in December, therefore, rates could surge higher when January’s sales data is released.

Higher sales levels can lead to inflation and that is the enemy of mortgage bonds. WIth inflation comes higher mortgage rates.

Retail Rush Falls Short, Now Come More Sales
Kris Hudson, Ann Zimmerman And Vanessa O’Connell
The Wall Street Journal Online, December 26, 2007

The Week In Review (December 24, 2007) : What To Watch For

David Kosmecki | December 24, 2007 in Uncategorized | Comments (0)

Mortgage rates moved away from the best levels of the year last week with force, and this week could resemble last.

Markets have been grappling with conflicting signals about the U.S. economy.

On one hand, there is evidence of inflation in the form of higher cost of living. On the other hand, there is evidence of a recession in the form of hiring and housing slowdowns.

Because market players had expected recession for so long, just the threat of inflation is enough to reverse markets.

Inflation erodes the value of bonds and investors don’t want to be caught holding too many of them.

As mortgage bonds are sold, the extra supply drops their price. This causes mortgage rates to increase.

On most weeks, new evidence of inflation would cause a gradual rise in rates. But this is no ordinary time of year. With so many traders leaving for vacation last week, the rise was anything but gradual.

Fewer buyers and fewer sellers starved the market of liquidity and that helped contribute to the rapid movement in mortgage rates.

This week figures to be more of the same.

There are no major data points to watch this week so expect that stories about the U.S. consumer’s holiday spending will take center stage.

If store receipts are higher, it shows that consumers may spend their way out of a potential recession and mortgage rates should rise in response. By contrast, if receipts are low, expect mortgage rates to idle or fall.

Market Update – December 21, 2007

David Kosmecki | December 21, 2007 in Uncategorized | Comments (0)

Current Trend Direction: Higher

Risks favor: Locking Bias

Current Price of FNMA 5.5% Bond: $99.47, -22bp

Out of the Zone!!! This morning, the Personal Consumption Expenditure (PCE) Index was reported at 0.2% for the month of November, pushing the year-over-year core rate to 2.2%…and outside the Fed’s target zone for core inflation of 1 – 2%. Although some Fed members felt a larger cut to the Fed Funds Rate was needed – this report underscores the wisdom of sticking to a .25% cut…and may take a cut in January off the table altogether.

Bonds had opened lower in advance of this morning’s news, and now have slid even further to the downside. This makes yesterday’s alert to Lock very well timed. It also reinforces the need to stick to a systematic approach that weighs risk against reward. We know we may occasionally miss out on some small gains, but it is more important to protect against large losses.

The November Personal Income and Spending Report revealed a negative personal savings rate, showing that consumers spent more than they earned. Personal Income rose with a 0.4% gain, a little less than consensus estimates of 0.5%, but Personal Spending jumped to a 1.1% gain, significantly greater than the consensus of a 0.7% rise and its largest increase in over three years. Overall, the healthy spending number shows the consumer is still alive and well…but perhaps at the expense of savings. This is a great talking point to use with clients during and after the holiday season, as you encourage mortgage strategies that will help them manage their debt more wisely, and save for their future.

Bond Prices are presently testing support at the 25-day Moving Average. Hopefully you acted on yesterday’s Alert to Lock, and protected your pipeline. With the markets having an early close on Monday and full closure on Tuesday in observance of the Christmas Holiday, we’ll be back with our next Daily Update on Wednesday morning, December 26th. We have enclosed below, the next issue of By the Numbers

How Congress Is Providing Tax Relief To Foreclosed Homeowners

David Kosmecki | in Uncategorized | Comments (0)

After the December 2007 passage of the Mortgage Forgiveness Debt Relief Act of 2007, foreclosed homeowners have one less worry: taxes

After Thursday’s passage of the Mortgage Forgiveness Debt Relief Act of 2007, foreclosed homeowners have one less worry: taxes.

When a homeowner defaults on a home loan, a mortgage lender will sometimes “forgive” the debt owed.

One example is when a foreclosed home sells for less money than is owed on it. The mortgage lender will sometimes accept this lesser amount, while considering the mortgage to be “paid in full”.

This is often called a “short sale” because the lender is “short” of the full amount owed.

Prior to Thursday, the IRS treated the forgiven mortgage debt as taxable income. This added thousands of dollars to a foreclosed homeowner’s tax liability.

A $50,000 short sale, for example, could yield an additional $12,500 in taxes owed.

After the bill’s passage, that tax liability is gone. No taxes will be owed on primary residence mortgage debt that is forgiven or written off by a mortgage lender.

The bill has two sides, though.

In order to recover the estimated $650 million in tax revenue that will be lost, Congress has limited the amount of tax breaks available on the sale of second/vacation homes. That will be impactful on homeowners, too, of course.

If you think the Mortgage Forgiveness Debt Relief Act of 2007 will impact you personally, be sure to talk with your accountant.

For Some Homeowners, PMI Is Tax-Deductible Through 2010

David Kosmecki | December 20, 2007 in Uncategorized | Comments (0)

For eligible homeowners, lawmakers voted to extend the tax-deductibility of PMI through 2010.  The law was previously scheduled to expire at the end of 2007.

The resurgence of private mortgage insurance continues — if only because it’s aided by Congress.

For eligible homeowners, lawmakers voted to extend the tax-deductibility of PMI through 2010. The law was previously scheduled to expire at the end of 2007.

For all loans originated prior to December 31, 2010, and within those years, private mortgage insurance is 100% tax-deductible provided that two tests are met:

  • The homeowner’s household income is $100,000 or less in the calendar year
  • The home loan is for a primary or secondary residence

For households earning more than $100,000, the deduction is phased out to the tune of 10% per $1,000 of additional income until it reaches 0% at $110,000.

So, if a single person earns $90,000 in 2007 and buys a home using PMI, the PMI expenses are tax-deductible in 2007. If that person’s income exceeds the threshold prior to 2010, the deduction is phased out.

As always, talk with your tax professional about how tax deductions work and whether you qualify for a PMI deduction.