Government Ends Federal Support for Mortgage Rates

Expect low mortgage rates to end in March 2010. Washington Post ran this article this week:

For more than a year, the government pulled out the stops to revive homebuying by driving down mortgage rates.

Now, whether the housing market is ready or not, the government is pulling out.

The wind-down of federal support for mortgage rates, set to end in two months, is a momentous test of whether the Obama administration and the Federal Reserve have succeeded in jump-starting the housing market and ensuring it can hold its own. The stakes for the economy are massive: If the market again falls into a tailspin, homeowners could face another wave of trouble, and it would deal a body blow to President Obama’s efforts to get the economy on track.

Keeping the mortgage rates at historic lows, which required a commitment of more than $1 trillion, was viewed within the administration as a central plank of the economic strategy last year, senior officials said. Though the policy did not attract as much attention as rescue efforts to bail out banks, it helped revitalize homebuying in some parts of the country and put money in the pockets of millions of homeowners who were able to refinance into lower monthly payments, the officials added.

“We did what we thought was necessary to stabilize the market, but we don’t think the government should continue special efforts forever,” said Michael S. Barr, an assistant secretary at the Treasury Department. “As you bring stability, private participants come back in. We do expect this now that the market has stabilized. I’m not going to say there will be no effect on rates, but we do think you are seeing market signs and market signals that there should be an orderly transition.”

A few federal officials and many industry advocates disagree, saying the government is exiting too soon. They offer dire warnings of higher rates and a slowdown in home sales. Fed leaders say they will end a marquee program supporting the mortgage markets in March. Obama’s economic team, led by Treasury Secretary Timothy F. Geithner, has decided not to replace it and has been shutting down its own related initiatives.

Over the past year, these programs have enabled prospective homebuyers to get cheap loans, helping those buying and selling property as well as those eager to refinance existing mortgages. If the end of the initiative drives up interest rates, say from 5 percent to 5.5 percent, homeowners could be deterred from refinancing, industry officials say. A sharper increase in rates could make homes too expensive for many buyers, forcing them from the market and causing the recent pickup in home sales to stall.

“Mortgage rates are the lifeblood of the housing market, and we have cautioned the Fed about the sudden stoppage of this program,” said Lawrence Yun, chief economist of the National Association of Realtors.

But senior government officials said it could be hard to reverse course without damaging the credibility of the Fed and the administration. If the government loses the trust of the financial markets, preparing them for policy changes could be tougher, possibly resulting in economic disruptions. The officials said they also worry that the mortgage market is becoming overly dependent on federal support, inserting the government too deeply into private enterprise.

Only a new crisis would be able to persuade the administration and the Fed to change their minds, officials said.

“This is a worthy experiment to see if they can begin exiting after providing an unprecedented amount of money to one sector of the economy,” said Mark Zandi, chief economist at Moody’s Economy.com. “It’s a close call, though. I can see why they are debating it.”

The Fed’s policymaking body sets a key interest rate at periodic meetings, which in turn influences rates for all kinds of loans. But mortgage rates also are shaped by the health of the market financing these loans.

Banks typically create giant pools of home loans and turn them into securities that can be traded on the open market. When the system is working, many investors buy these mortgage-backed securities, providing a stream of money for lenders so they can make loans at relatively cheap rates. But the trading of these securities seized up when the financial crisis struck and panicked investors. Government officials feared that the mortgage market would collapse.

The Fed and the Treasury stepped into the breach, becoming the only major buyers of these mortgage-related securities, and they kept the mortgage market flush with cash. The Treasury spent about $220 billion, and the Fed pledged $1.25 trillion, the single largest foray the central bank has made into the markets since the onset of the crisis. In essence, the Fed has been printing money and funneling it to people looking to buy a house or refinance an existing mortgage.

At the same time, the federal government stood behind mortgage-finance companies Fannie Mae and Freddie Mac by taking them over and pledging to cover their losses. That helped the firms lower borrowing costs, since lenders know they can’t fail, and the companies passed on their savings to mortgage borrowers in the form of low rates.

Combined, these federal efforts helped push down the rates ordinary Americans pay for a mortgage. The 30-year fixed-rate mortgage declined from 6.04 percent in November 2008, according to Freddie Mac data, and hit an all-time low of 4.71 percent about a year later.

Refinancings surged, while homebuying perked up. Existing-home sales climbed nearly 10 percent in September, their highest level in more than two years.

The policy was the government’s most effective salve for the ailing housing market at a time when other initiatives, such as the administration’s attempts to modify the mortgages of struggling homeowners, produced far more disappointing results.

Now the government wants to end its support for low rates and has been striving to persuade others to buy mortgage securities.

The success of this approach hinges on the willingness of private investors, from China to big Wall Street funds, to buy large amounts of the mortgage securities and fill the void left by the government.

On Christmas Eve, Treasury officials announced a move that would cover losses suffered by investors who buy these securities from Fannie Mae and Freddie Mac, which together now back about half of the nation’s $12 trillion mortgage market. The goal was simple, officials said. They wanted private investors to be reassured that mortgage securities are safe to buy.

As the economy showed signs of recovery at the end of last year, the administration and the Fed decided to end their support.

The Treasury stopped buying mortgage securities in December. The Fed said it would taper off purchases gradually, ending them by March 31.

Obama’s economic team could have raised the limits on how much mortgage securities Fannie and Freddie can buy, allowing those firms to replace the Fed’s purchasing program. But Barr said the administration thinks the mortgage business will stand on its own without such special assistance, similar to the way the nation’s biggest banks weaned themselves off federal bailout funds by raising private capital.

“The basic goal is to implement a gradual process where the government’s role in the economy goes down,” Barr said. “It has to be consistent with the basic goal of stability, but it is appropriate.”

Administration and Fed officials expressed confidence that rates will rise only modestly – perhaps a quarter of a percentage point. They attribute their optimism to the lengthy notice they have given the market. The markets already should have anticipated the government’s exit by adjusting interest rates higher. Yet mortgage rates have been falling slightly the past few weeks.

The optimism at the White House and the Fed, however, is not shared across the government. A few senior policymakers at the central bank view the economic recovery as still too fragile, suggesting that purchases perhaps should expand further. These dissenters also warn that mortgage rates could shoot up, perhaps to 6 percent or higher, because private investors buying securities would demand a greater rate of return than the Fed. To reach it, lenders may have to raise rates for consumers.

“Presumably, there is pent-up demand from the private sector, but the question is: At what rate are they going to be interested?” said Eric S. Rosengren, the president of the Federal Reserve Bank of Boston, who has indicated that he supports expanding the Fed’s mortgage securities purchase program.

There also could be unintended consequences to the government’s pull-out. Last year, big investors such as Pimco sold their mortgage-backed securities to the government and used that money to buy bonds and stocks. That extra cash, which propped up stock prices, could drain away after federal support ends.

Real estate and mortgage finance officials said the timing of the government’s exit seems especially ill-conceived, since the Fed’s support would end just a month before a homebuyer tax credit program, which the real estate industry has credited with jump-starting home sales.

Given the importance of the housing market, some industry officials doubt whether the government will follow through with its pledge to exit the mortgage market in March. Fannie and Freddie officials say that the companies together can buy about $300 billion of mortgage securities by the end of the year before they hit their federally mandated limits. Though it appears reluctant to do so, the administration could use that buying power to cushion the blow after the Fed’s program ends, the industry officials said.

“I believe they do want to end it in March, but it’s like all New Year’s resolutions,” said Mark Vitner, a senior economist at Wells Fargo Securities. “The Fed’s New Year resolution is to go on a diet, go to the gym, give up drinking and clean the garage. They might be able to do one of those things, but to do all four is tricky. They have to drain all the liquidity they added to the financial market so we don’t see a resurgence in inflation, but do it in a way so that the economy does not slip into recession.”

Source: Washington Post

U.S. home prices hit six-month high

U.S. home prices rose for the sixth month in November, fueled by tax credits for home buyers.

The Standard & Poor’s/Case-Shiller 20-city home price index inched up 0.2 percent to a seasonally adjusted reading of 145.49. The index was off 5.3 percent from November 2008, nearly matching analysts’ estimates that it would fall by 5.1 percent.

The index is now up more than 3 percent from its bottom in May, but still 30 percent below its May 2006 peak.

Tampa’s housing prices dropped 0.4 percent for November when compared with the previous month. That came after a 1.6 percent September-October decline.

Like Southwest Florida, Tampa is a market where sales of distressed properties comprise about half of the total.

In Miami, prices were flat from October to November. Prices dropped 0.4 percent from September to October, and the community is down 12.1 percent for the year.

Prices in this region have been showing stability in recent months, according to data released Monday by the Florida Association of Realtors.

December prices in Sarasota-Bradenton were up 5 percent from a year ago and up 4.6 percent from November. The median — the midpoint between the highest and lowest price — was $167,400 during December. In Charlotte County-North Port, the median rose 9 percent to $111,800 from $102,400 a year ago. The price was up 11.8 percent from $100,000 in November.

Rising prices are important to the economic recovery because they make homeowners feel wealthier and lead them to spend more money. Price increases also help restore home equity for the one-in-three homeowners who currently owe more on their mortgages than their homes are worth.

In a research note, Deutsche Bank analyst Joseph LaVorgna wrote that the price improvements in some cities should lead to a $1 trillion increase in homeowner equity by the current quarter.

Phoenix and San Francisco posted the highest month-to-month gains, on a seasonally adjusted basis, while New York and Chicago had the largest declines.

The tax credit for first-time homebuyers had been scheduled to end Nov. 30, but Congress extended the deadline through April, and expanded the program to include a tax credit for current homeowners.

Prices increased for the seventh straight month in San Francisco, where sales in the $500,000 to $750,000 range were strong. Buyers took advantage of the tax credits and low interest rates.

In Las Vegas, prices edged up 0.1 percent, the first month-to-month increase since January 2007. Still, prices are down 56 percent in Las Vegas since peaking in April 2006.

The list of cities with price increases, on a seasonally adjusted basis, also included Los Angeles, San Diego, Denver, Boston and Charlotte, N.C.

While prices have risen steadily on a national basis, some economists predict they will dip again early this year because of high unemployment and foreclosures.

“Until we get job growth, we won’t get complete healing of the housing market,” said Jeff Humphreys, an economist with the University of Georgia.

Source: Associated Press and Herald Tribune

Jacksonville home sales up 21% in 2009

Jacksonville, like most of Florida, ended 2009 with existing single-family and condominium sales up and median prices down.

Home sales were up in the Jacksonville market 21 percent from 2008 to 12,019 in 2009 and the median price of a home dropped 16 percent to $152,200. The area’s condo sales were up 38 percent to 1,429 and the median price of a condo was down 24 percent to $112,100 in 2009, according to Florida Realtors, formerly known as the Florida Association of Realtors.

Sales figures from the Amelia Island-Nassau County Association of Realtors for September, November and December were not available, however.

Statewide existing home sales rose 31 percent to 163,148 in 2009 from 124,168 homes sold in 2008. Statewide existing condo sales increased 47 percent to 55,985.

“Continuing to stabilize and revitalize the real estate market is the linchpin to a strong economic recovery,” said Florida Realtors President Wendell Davis, a broker and regional vice president with Watson Realty Corp. in Jacksonville. “Robust housing and commercial property markets generate business, but they’re also key to helping families build a sense of financial security.”

Seventeen of Florida’s 20 metropolitan statistical areas reported increased existing home sales and 18 had higher condo sales through the period, a trend that has continued for about a year and a half now.

Jacksonville had the fourth most single-family home sales of any Florida market last year, behind Tampa/St. Petersburg/Clearwater with 28,617, the Orlando market with 23,994 and Fort Myers/Cape Coral with 16,260. Jacksonville ranked eighth out of 19 Florida markets in condo sales, dwarfed by South Florida markets such as Fort Lauderdale with 9,894 sales, West Palm Beach/Boca Raton with 7,887 and Tampa/St. Petersburg/Clearwater with 7,420.

Florida’s 2009 median sale price for existing homes was down 24 percent to $142,600. Jacksonville also ranked in the middle of the pack for median sale price, above Tampa/St. Petersburg/Clearwater at $137,500 and Orlando at $144,600, but far below the priciest markets in Florida: West Palm Beach/Boca Raton, $239,000; Fort Lauderdale, $205,700; and Miami, $195,300.

The statewide existing condo median sale price was down 34 percent to $108,000 in 2009. Jacksonville had the ninth lowest median price in 2009, above the $52,900 in Orlando and $105,300 in Tampa/St. Petersburg/Clearwater, but below Miami at $142,500. The highest-priced Florida condo markets in 2009 were Fort Walton Beach, with a median sale price of $254,000, and Pensacola, $240,300.

Nationally, home sales rose in 2009 for the first time since 2005, by 4.9 percent from 2008 to 5.2 million.

National home sales, which included single-family houses, townhomes, condominiums and co-ops, did see a lull in December, however, falling 16.7 percent to a seasonally adjusted annual rate of 5.45 million units from 6.54 million in November, but remained 15 percent above the 4.74 million-unit level in December 2008. Analysts at the National Association of Realtors said the drop was caused by first-time homebuyers’ rush to complete sales before the original November deadline for the $8,000 federal tax credit, which has since been extended to April.

Neither Florida nor Jacksonville experienced that lull, however. Florida’s existing home sales rose 4.3 percent from November to 14,630 in December and Jacksonville area sales rose 8.7 percent to 1,287 during the same period.

Source: Florida Association of Realtors and Jacksonville Business Journal

Experts debate impact of tighter FHA rules

U.S. Department of Housing and Urban Development (HUD) announced on 1/21/10 that new FHA tighter guidelines will go into effect on or after 4/5/10.  New changes will include:

1. The upfront mortgage insurance premium for FHA loan will go up from 1.75% to 2.25% beginning April 5, 2010.  The upfront mortgage insurance premium is financed into the loan amount and has a minimal effect on the buyer’s payment.  The change would raise the monthly payment $5.34 on a typical FHA purchase of $200,000.00.

2. Other changes that are Proposed but not final are:

2.1.  The minimum down payment for FHA buyers with a credit score lower than 580 will be raised to 10%.  In Florida, we have required a minimum credit score of 600 for some time now.  For buyers with a credit score of 600 and above, the down payment requirement of 3.50% will stay the same.

2.2.   Allowable seller contributions toward the Buyer’s closing costs and pre-paid items will be capped at 3% of the purchase price.  Previously, sellers could contribute up to 6% of the purchase price toward the buyers costs.  This change makes sense.  In most cases, the buyer’s closing costs and pre-paids can be covered by 3%.  The 6% allowable limit inflated property values and encouraged some lenders to charge exorbitant fees.

Tighter lending requirements for loans insured by the Federal Housing Administration may leave some borrowers unable to get mortgages, but economists are divided on the impact they could have on housing’s recovery.

USA Today published the following article on 1/22/10:

The changes, aimed at strengthening the FHA’s reserves in the face of rising foreclosures, shouldn’t hurt too many borrowers, officials say.

“We don’t expect this to have a significant impact on the housing market,” says FHA Commissioner David Stevens, adding that “the moves are designed to get the reserves back up.”

The FHA is playing a greater role in the mortgage market, insuring about 30 percent of new loans, up from 3 percent in 2007. Growing defaults have cut its reserves below the level mandated by Congress, leading to fears that it might need a taxpayer bailout.

FHA-insured mortgages are attractive to borrowers, however, because down payments are only 3.5 percent. That won’t change under the new policies the FHA announced Wednesday, which are to take effect in spring or early summer. Among them:

• New borrowers will have to have a minimum credit score of 580 to qualify for a 3.5 percent down payment. Those with lower scores will have to make at least a 10 percent down payment. The average credit score of FHA-insured borrowers is 693.

• Allowable seller concessions will be reduced from 6 percent to 3 percent of the sale price. The change is intended to discourage inflated appraisals.

• Buyers will have to pay an upfront mortgage insurance premium of 2.25 percent of the total loan amount, up from 1.75 percent now. A $150,000 mortgage would require a payment of $3,375, or $750 more.

“It will slow the growth in demand,” says Joel Naroff, of Naroff Economic Advisors. “Any time you put up roadblocks, fewer people will qualify. This is just the beginning of clearer and more specific requirements so we don’t get into the mess we got into again. In the short term, it will have an effect, but it won’t be a huge effect.”

Dean Baker, co-director of the Center for Economic and Policy Research, says he expects the new FHA requirements will have a significant impact on borrowers, especially first-time homebuyers. Those who are denied FHA-insured loans, he says, are usually unable to qualify elsewhere.

“It’s a big deal,” Baker says. “Some will be unable to get loans. This will have a big hit on the market.”

Baker says it’s not surprising that FHA needed to take such steps, because it’s risky for lenders to issue loans with 3.5 percent down during a time of declining home values and rising unemployment.

While the stiffer requirements may leave some borrowers out of the marketplace, some economists say the measures are necessary to protect the FHA from losses.

Lawrence Yun, chief economist at the National Association of Realtors, says very lax lending and FHA insolvency could hurt the housing market worse in the future.

He says he doesn’t believe the requirements will stall the housing market in light of current low interest rates and a federal tax credit for first-time and repeat home buyers.

Mark Zandi, of Moody’s Economy.com, agrees the changes won’t have significant impact.

“It does highlight more broadly that policy support for the market is starting to wane. The tax credit will end in April; now, the FHA rule changes,” he says. “Policymakers are slowly exiting from their unprecedented support of the housing market to see if it can function on its own.”

Source: HUD and USA TODAY

IRS Uploads Latest Form 5405 for $8000 Tax Credit

The Internal Revenue Service (IRS) finished updating the online tax credit claim forms, and they now reflect the extended deadline.

Form 5405 must be used for both the first-time homebuyer extension and the move-up homebuyer expansion of the homebuyer tax credit.

The revised IRS instructions and revised IRS form can be found below:

Updated 01-10-10: Instructions for using IRS Form 5405 (PDF)

Updated 01-10-10: First-time Homebuyer Tax Credit IRS Form 5405 (PDF)

Recap: On Nov. 6, 2009, President Barack Obama signed into law an extension and expansion of the $8,000 first-time homebuyer tax credit. Among other provisions, the extension adds money for certain move-up buyers; creates one deadline for signing a contract and a later deadline for closing; changes income requirements; and limits a purchased home’s cost to $800,000.

Updated: What you should know about the $8K tax credit (PDF)

Updated: Florida Homebuyer Opportunity Program flyer (PDF)

Updated: What you should know about the FHA downpayment plan (PDF)

8,000 reasons to buy your first home now (PDF)

Florida Realtors Announces Haitian Relief

In partnership with the National Association of Realtors® (NAR), Florida Realtors® will make a contribution and collect individual donations to help the Haitian people following this week’s devastating earthquake.

Florida Realtors’ Leadership Team, led by Florida Realtors® President Wendell Daviss, decided to contribute $10,000, earmarked for Haitian relief efforts, to NAR’s Realtors® Relief Foundation.

In addition, Florida Realtors will collect individual monetary donations during its Mid-Winter Business Meetings next week, Jan. 20 – 24, at the Renaissance Orlando Resort. Checks and cash will be accepted at the Florida Realtors registration desk. All contributions will be forwarded to NAR’s Realtors Relief Fund for disbursement.

Association members and the public can contribute to the Florida Realtors’ Haitian relief effort. Send checks, payable to “Realtors Relief Foundation,” to:

Dave Garrison, Vice President of Finance and Administration
Florida Realtors
P.O. Box 725025
Orlando, FL 32822-5017

At Watson Realty Corp. Southside office, we will coordinate the effort to help raise money and collect donations to forward to NAR’s Realtors® Relief Foundation. Our office address is listed below:

Watson Realty Corp.
4540 Southside Blvd Ste #1
Jacksonville, FL 32216
(904) 641-4343

Together, we can make a difference. Thank you for your contributions.

Income Tax on Foreclosure Homes

Imagine losing your home to a foreclosure and then getting socked with a big tax bill.

Distressed home owners who have their home foreclosed or sold as a short sale last year could get an unpleasant surprise from their mortgage companies in a form of 1099-C.

However, you are exempt from the tax if one of the following applies to you:

1) bankruptcy

2) insolvancy

3) debt is connected to your principal home and you used the money to buy, build or improve your home.

The exemption can be tricky if you use the home equity loan to pay for other things. In that case, you are not exempt from the tax.

http://www.clipsyndicate.com/video/playlist/8178/1243066