Consumer Confidence and Home Sales Fall - Mortgage Market Woes

This year has been a year of ups and downs for the housing market. In our continuing series, we chronicle news affecting the housing market and its major players.

More disappointing economic news released this week suggests last week's interest rate cut won't be the last.

Consumer confidence fell sharply and unexpectedly in September to its lowest in nearly two years. The index of consumer sentiment released by the Conference Board was 99.8 in September, a sharp drop from 105.6 in August.

"Weaker business conditions combined with a less favorable job market continue to cast a cloud over consumers and heighten their sense of uncertainty and concern," said Lynn Franco, director of the Conference Board's research center, in a statement. "Little economic improvement is expected," she added, "and with the holiday season around the corner, this is not welcome news."

The drop in consumer confidence is attributed to a summer full of worse and worse mortgage industry headlines, growing concerns about jobs, financial market turmoil, and the developing credit crunch.

The drop in consumer confidence came with the news of a slowing home sale market. Reports released Tuesday showed the pace of existing home sales slowed in August.

The National Association of Realtors said U.S. existing home sales, including condominiums, fell a sharp 4.3 percent in August to a 5.5 million-unit annual rate, the slowest since August 2002. Inventories of single-family homes and condos rose 0.4 percent to 4.58 million units, a 10-month supply and the highest since records began in 1999.

The stock market dropped slightly on these new housing and economic reports. They closed mixed on Tuesday.

Analysts are predicting an additional one-quarter point interest rate cut at the Federal Reserve's next policy meeting on October 30-31. An additional interest rate cut could work to alleviate the compounding worries about the economy, jobs and housing markets, worries exacerbated by this new data.

Alabama Alaska Arizona Arkansas California Colorado Connecticut Delaware Florida Georgia Hawaii Idaho Illinois Indiana Iowa Kansas Kentucky

Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi Missouri Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina North Dakota Ohio Oklahoma

Oregon Pennsylvania Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia Washington Washinton DC West Virginia Wisconsin Wyoming

U.S. Fixed-Rate Mortgage Rates Rise for Third Week

Fixed-rate mortgage rates rose slightly in the week ending September 27, 2007, according to finance company Freddie Mac. Their weekly Primary Mortgage Market Survey® was released Thursday.

"Consistent with the direction of 10-year Treasury securities, average rates on 30-year fixed-rate mortgages drifted up in the past week to levels close to those at the beginning of the month," said Frank Nothaft, Freddie Mac vice president and chief economist.
This week's survey indicates 30-year fixed mortgage rates averaged 6.42 percent, a gain from last week's average of 6.34 percent. Last year at this time, the 30-year fixed-rate mortgage averaged 6.31 percent.

Fixed mortgage rates for 15-year terms averaged 6.09 percent, an increase from last week's average of 5.98. A year ago, the 15-year fixed-rate mortgage averaged 5.98 percent.

Averages for Treasury-indexed adjustable-rate mortgages (ARMs) trended downward this week. Five-year ARMs averaged 6.15 percent, a dip from last week's average of 6.21 percent. At this time last year, the five-year ARM averaged 6.00 percent.

One-year ARMs averaged 5.60 percent this week, down from last week's average of 5.65 percent. Last year, the one-year ARM averaged 5.47 percent.

Freddie Mac said that to obtain these rates lenders charged varied point fees. For fixed-rate mortgages, lenders charged an average 0.5-point fee. For ARMs, lenders charged a 0.5-point fee for five-year terms and a 0.6-point fee for one-year terms.

"Also tracking short-term Treasury notes, average rates on 1-year adjustable-rate mortgages (ARMs) dropped by 5-hundredth of a percent," said Nothaft. "Though it is the fourth consecutive week rates on ARMs have declined, the share of mortgage applications for ARMs has been trending down, and last week reached its lowest level since March 2003, according to the Mortgage Bankers Association.Additionally, existing home sales continued to decline in August to the slowest pace in 5 years to a seasonally adjusted 5.5 million units. Sales of single-family homes slowed in every census region, with the highest impact felt in the Western region."

Freddie Mac is a mortgage finance company established by Congress in 1970. The company buys mortgages and mortgage-related securities and packages them to sell to investors or to hold in its own portfolio. They release their summary of average mortgage rates weekly.

Foreclosures: Selling Distressed Properties

Regardless of the stage at which you purchased foreclosure property, selling the property should be a far easier process. If you've done your research, you have laid the groundwork for acquiring a property in a location prime for selling so you can achieve the rate of return you're seeking. Doing your homework and arriving at the correct price to sell the property is of critical importance. There are ways to enhance both the property's appeal to a potential buyer along with improving your investment return if you take the steps necessary to apply them. Below are some tips which a savvy foreclosure investor can use to both sell a property faster as well as increase their return on the sale.



Develop an inspection checklist for the property to make sure all essential items are in working order. Any major repairs need to be noted and quickly determined whether you or a potential buyer will be the one to make them. However you must do the simple things that will help market the property and give it curb appeal. Give the house a new coat of paint, both exterior and interior, and make sure the carpet is clean and stain free. Landscaping should appear neat and well maintained. The house should pass a standard of professional cleaning, hire someone to do it if you are not willing or able to do it yourself. Needed attention should be applied to windows and window treatments as they can add or detract much from the lighting and appearance of the house. Kitchen and baths require special attention and all plumbing should work properly as well as all appliances, heating and cooling systems. You must be prepared to make a judgment call on any appliances that require replacing if they might be critical to promoting a faster sale. Also check all interior and exterior lights to be sure they are functioning properly, as well lit home will appear both cleaner and larger in size. Be sure all doors open and close properly as well and clean out anything remaining in the garage, basement or attic.

When arriving at a price, be sure to include any third party inspection work that's going to be required. No open ended fees and expenses should be left on the table, caps should be placed on everything. It is also important to carefully consider every offer you receive and not to jump at anything too quickly, you need to assure your profit is precisely what you are anticipating. Counter offers are the normal course of business and you want to put time limits on those as well as outlining what should occur in the event of any delays. You also need to plan how the transaction should proceed if the appraisal does not come in at full sales price. It would be very beneficial for you to have the same professional players involved in all of your transactions if possible, that is the same title company, escrow officer and inspection team if you can arrange it. This will help you save both time and money.

Additional ways to enhance your return beyond the initial purchase price include: selling the property yourself, as a real estate license would not likely be required if you are selling a home which you, yourself own. This will help save substantially on real estate commissions to the tune of 3-6%. You may also be able to sell the property subject to an existing mortgage, making it more attractive to a potential buyer if they do not have to apply for financing themselves but can simply assume a potentially lower than market rate mortgage already in place. You may also want to consider a seller carry back on the home which would involve extending credit to a potential buyer in the way of a second mortgage. This would also provide an additional return to you beyond what you sell the property for and could be an ongoing source of income if structured properly.

Buying and selling foreclosure properties is not for the novice real estate investor who only wants to dabble at something new without the expectation of making a significant time commitment. If you are serious about investing in foreclosure properties take the time to educate yourself about the process to insure that you do both the little as well as the big things right and hopefully you will find you are well rewarded for your efforts and can truly help a distressed homeowner in the process.

U.S. Mortgage Rates Post Small Increases

Mortgage rates rose slightly in the week ending September 20, 2007, according to finance company Freddie Mac. Their weekly Primary Mortgage Market Survey® was released Thursday.

"Mortgage rates were largely unchanged in the previous week, with long-term rates lingering at lower levels not seen since May," said Frank Nothaft, Freddie Mac vice president and chief economist. "The recent retreat in mortgage rates has brought in an increased volume of mortgage applications, according to the Mortgage Bankers Association, and pushed the share of applications for refinancing to the highest rate since April."

This week's survey indicates 30-year fixed mortgage rates averaged 6.34 percent, a gain from last week's average of 6.31 percent. Last year at this time, the 30-year fixed-rate mortgage averaged 6.40 percent.

Fixed mortgage rates for 15-year terms averaged 5.98 percent, a slight increase from last week's average of 5.97. A year ago, the 15-year fixed-rate mortgage averaged 6.06 percent.

Averages for Treasury-indexed adjustable-rate mortgages (ARMs) also posted small changes this week. Five-year ARMs averaged 6.21 percent, up from last week's average of 6.17 percent. At this time last year, the five-year ARM also averaged 6.08 percent.

One-year ARMs averaged 5.65 percent this week, down from last week's average of 5.66 percent. Last year, the one-year ARM averaged 5.54 percent.

Freddie Mac said that to obtain these rates lenders charged varied point fees. For fixed-rate mortgages, lenders charged an average 0.5-point fee. For ARMs, lenders charged a 0.5-point fee for five-year terms and a 0.6-point fee for one-year terms.

"On Tuesday, the Fed announced a half-percentage-point cut to the Fed funds rate," said Nothaft. "In addition to bringing down short-term interest rates, the cut should also dissipate some of the volatility in short-term interest rates we observed earlier."

Freddie Mac is a mortgage finance company established by Congress in 1970. The company buys mortgages and mortgage-related securities and packages them to sell to investors or to hold in its own portfolio. They release their summary of average mortgage rates weekly.

Fed Cuts Interest Rate

This year has been a year of ups and downs for the housing market. In our continuing series, we chronicle news affecting the housing market and its major players.

In a move that has been anticipated for weeks, the Federal Reserve cut U.S. interest rates by a larger-than-expected half-percentage point yesterday.

The move is one intended to protect the economy from the increasing effects of a housing slump and stock market turbulence. It was met with immediate rallies on Wall Street and the Dow Jones industrial average's best daily percentage gain since 2003.

The interest rate, formally known as the federal funds rate, which governs overnight loans between banks, has stayed firm at 5.25 percent since June 2003. The decision took the rate down to 4.75. The Fed also cut the discount rate it charges for direct loans to banks by a half-point to 5.25 percent.

In a statement, the Fed said its move was a preemptive strike to eliminate the potential impact of market turmoil on the economy.

"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," it said. "The committee will continue to assess the effects of these and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth," it said.

Many analysts and industry experts applauded the move, congratulating the Fed for taking note of the increasingly volatile economic situation. Others, however, worried the Fed's move would only encourage inflation.

Commercial banks followed the Fed, cutting the prime rate they charge their best customers for loans. Often a cut by the Fed initiates a series of rate cutting by economic organs. It remains to be seen if this will happen in this case.

There has been a landslide of evidence pointing to a hit in general economic activity, after a prolonged housing market slump and wild highs and lows in financial markets over the summer. In addition, employment figures show the first drop in employment in four years occurring in August, confirming that housing market strains are affecting businesses and households. Finally, reports on retail sales and industrial output in August also showed some softness.

The Fed has been busy this summer because of these signs, injecting cash into the banking system to keep roller coaster markets functioning normally, and issuing a surprise cut to the discount rate. This last move came with an acknowledgement that economic risks were increasing. The cut this week seemed to be a response to this growing risk.

Top Metro Areas Hit by Subprime Loans

This year has been a year of ups and downs for the housing market. In our continuing series, we chronicle news affecting the housing market and its major players.

Chicago leads the nation in subprime loans, followed closely by Los Angeles and Riverside County metro area, according to data released last week by the Federal Financial Institutions Examination Council.

The Chicago-Naperville-Joliet metro area ranked highest in the country in total high-cost loans in 2006 for the third year in a row. Two California metro areas ranked second and third: the Los Angeles-Long Beach-Glendale area and the Riverside-San Bernardino-Ontario metro. In order, the rest of the top 10 were Phoenix, Washington D.C., Atlanta, Houston, New York, Miami, and Tampa metro areas.

In this federal mortgage lending data sample, "high-cost" loans referred to first-lien loans with interest rates at least three percentage points above the U.S. Treasury standard. The data included conventional home purchases along with home improvement and refinance loans on owner-occupied, one-to-four family properties.

The Chicago Reporter, a bimonthly print and online newsmagazine, took the data released last week and further expanded on how the high-cost/subprime loan market is affecting the country in a feature series. The distribution of high-cost loans in Chicago may shed light, they announced, on how the country is being impacted, as well as which communities are being hit hardest by the loans.

The Reporter found in the Chicago area, three out of every five loans to African Americans in 2006 were high-cost loans, and two out of every five mortgages to Latinos were high-cost loans. In 2005 data showed there was at least one trend: lower-income, primarily minority communities were more likely to have a much higher percentage of high-cost loans than wealthier communities.

Further numbers are powerful:

> In 27 of Chicago's 77 community areas and in five Chicago suburbs, more than half of all loans made in 2005 were high-cost loans.

> Many community areas and suburbs were hit especially hard, including those on the south and west sides that are poorer and primarily African-American or Latino.

> In some suburban communities, those known as wealthier enclaves, the percentage of high-cost loans was comparatively small, including Glenview (14%), Northbrook (10%) and Wilmette (8%).

> In the south side community of West Englewood, 75% of loans were high-cost loans. On the north side, in the more affluent Lincoln Park community, only 7% of all home loans were high-cost.


Research conducted by The Reporter also shows the disproportionate impact of high-cost loans on African-American and Latino communities in the area:

> Black homeowners were nearly three times as likely to get high-cost loans as their white counterparts.

> Latino homeowners were twice as likely as white homeowners to get high-cost loans.

> Even when black applicants went through prime lenders, they got high-cost loans 37 percent of the time. From prime lenders, Latinos got high-cost loans 19 percent of the time compared with just 9 percent of the time for whites.

> Data also show that African-American homeowners earning more than $100,000 a year were more than twice as likely to get high-cost loans as white homeowners earning less than $35,000 a year.

In 2005, nearly 51 percent of all loans from subprime lenders went to African-American or Latino homeowners compared with nearly 23 percent of all loans from prime-rate lenders. This fact, as well as the other data analysis, meant a swift pledge from the Illinois Attorney General to investigate possible predatory lending and/or violations of civil rights laws.

Freddie Mac and Making Home Possible

We've all heard of Fannie Mae and Freddie Mac, in various tones and across different topics. But who are they? How do they operate in the world of mortgages, money, and home ownership?How are they different from other banks and lenders? In a series of articles, we examine the good, the bad, and the curious about government-sponsored enterprises, otherwise known as Fannie Mae and Freddie Mac.

Freddie Mac was organized by the government as the Federal Home Loan Mortgage Corporation (FHLMC, or Freddie Mac). The organization is a government-sponsored enterprise with a public mandate but private ownership. The company was given a mission in 1970 to expand the secondary market for mortgages in the United States, that market that the government first created with Fannie Mae in 1938. Working within the secondary mortgage market, they enable banks and other lenders to loan more, thereby offering more families the opportunities to become homeowners.

While organized by the government and given a public mission, the company is still private. Just like their major competitor and partner, Fannie Mae, their primary goal is making money. This means they've been susceptible to the kind of corporate greed that causes scandals (as described in another article). But despite this, they lead some truly interesting and innovative programs designed to support and expand homeownership in America.

Freddie Mac's goal is to "make home possible" for more Americans. Their mission and methods are grouped into four areas.

Market Stability. The company was formed to expand the secondary mortgage market, that source of funds that ensures liquidity and stability of mortgage funds. As noted in our overview of GSEs, liquidity of mortgage funds means mortgages can be offered quicker, with a more standard value despite economic conditions. This standardization attracts investors, adding further strength to the mortgage market and offering a stable supply of money from which lenders can offer loans.

Affordability. As part of their public mandate, Freddie Mac works to ensure that more and more families are able to purchase a home and keep that home. They work to grow the secondary mortgage market, enabling lenders to offer more and more reasonable loans to a greater number of borrowers, particularly low and moderate-income families, first time home buyers and minority home buyers. Their work allows lenders to offer a fuller range of mortgage products, requiring less cash for down payment and closing costs, helping people with past credit problems or no credit, and more.

Opportunity. Freddie Mac aims to educate borrowers and enable more loans to be made. They lead outreach programs and homebuyer education initiatives to reach potential minority homeowners. The initiatives include:

> Creditsmart, offering tips and information developed to help consumers make wise financial decisions, avoid credit scams and build and protect their credit.

> Creditsmart® Español provides tips and information in a bilingual format to help Hispanic Americans and Spanish-speaking immigrants or those with limited English proficiency understand the importance of good credit and the U.S. financial system.

> Buying and Owning a Home online tutorial gives consumers information on all steps of homeownership, from understanding how credit influences the ability to buy a home to choosing where to live.

> Como Comprar y Ser Propietario de Casa provides a step-by-step guide to becoming a homeowner for Spanish speaking consumers.

> Don't Borrow Trouble gives consumers information on anti-predatory lending and other consumer protection issues.

Prosperity: Freddie Mac aims to expand not just the mortgage market, but in effect the entire economy. Nearly 20 percent of the economy is made up of housing and related industries, and the company aims to create and sustain programs that support this sector. Part of encouraging economic expansion and prosperity is developing existing and future communities, and Freddie Mac does this through various neighborhood and non-profit programs.

Freddie Mac counts their efforts towards major industry improvement, including standardizing mortgage documents, introducing automated mortgage technology, foreclosure prevention aids, and leading the fight against unfair and predatory lending practices.

Other articles in this series about Fannie Mae and Freddie Mac
Government-Sponsored Enterprises: Fannie Mae and Freddie Mac Today
Government-Sponsored Enterprises: Fannie & Freddie Today, Part 2

U.S. Mortgage Rates Fall, Help Borrowers with Resetting ARMs

Mortgage rates fell steeply in the week ending September 13, 2007, according to finance company Freddie Mac. Their weekly Primary Mortgage Market Survey® was released Thursday.

"Interest rates on prime conforming loans fell across the board in the past week, with rates on 30-year fixed rate mortgages averaging 0.15 percentage points below the previous week's level", said Frank Nothaft, Freddie Mac vice president and chief economist. "The drop in mortgage rates may give some relief to borrowers who are looking to refinance or purchase a home. As a matter of fact, all the mortgage products in Freddie Mac's survey this week were lower than they were at the same time last year."

This week's survey indicates 30-year fixed mortgage rates averaged 6.31 percent, a big drop from last week's average of 6.46 percent. Last year at this time, the 30-year fixed-rate mortgage averaged 6.43 percent. (current rate quotes on 40 year fixed rate mortgage)

Fixed mortgage rates for 15-year terms averaged 5.97 percent, another deep decrease from last week's average of 6.15. A year ago, the 15-year fixed-rate mortgage averaged 6.11 percent.

Averages for Treasury-indexed adjustable-rate mortgages (ARMs) also posted steep declines this week. Five-year ARMs averaged 6.17 percent, down from last week's average of 6.32 percent. At this time last year, the five-year ARM also averaged 6.10 percent.

One-year ARMs averaged 5.66 percent this week, a drop from last week's average of 5.74 percent. Last year, the one-year ARM averaged 5.60 percent.

Freddie Mac said that to obtain these rates lenders charged varied point fees. For 30-year fixed-rate mortgages, an average 0.5-point fee was charged, while 15-year mortgages included an average 0.4-point fee. For ARMs, lenders charged a 0.6-point fee for five-year terms and a 0.8-point fee for one-year terms.

Freddie Mac is a mortgage finance company established by Congress in 1970. The company buys mortgages and mortgage-related securities and packages them to sell to investors or to hold in its own portfolio. They release their summary of average mortgage rates weekly.

Job Losses Point to Potential Recession

This year has been a year of ups and downs for the housing market. In our continuing series, we chronicle news affecting the housing market and its major players.

A report issued by the Labor Department last week shows that employers have cuts jobs for the first time in four years, raising new fears of the extent of the housing slump and credit crunch.

The report showed the nation's payrolls shrank by 4,000 in August, the first decline in jobs since August of 2003. Job losses in construction, manufacturing, transportation and government overwhelmed the gains in education and health care, leisure and hospitality and retail.

Employers are hiring less, this report shows, due to uncertainty about the country's economic health. The suffering housing market, along with credit problems that have sparked fear on Wall Street and throughout global markets, are driving this trend. Many analysts think this new data and the atmosphere of uncertainty could push the economy into a recession.

These new employment figures are the first to show the effects of the housing slump on the job market. Up to this point, the job market has held steady. But this summer's credit problems that have spread from subprime loans throughout the economy has finally pushed the stress to employers.

The 4,000 net jobs cut in August are a sum from both private and government employers. The government cut 28,000 jobs while all private employers added 24,000, the fewest since February 2004.

These figures don't count projected layoffs of key employers announced in the last months. It does not include the 12,000 jobs Countrywide Financial announced it would cut last week, nor does it include the 1,000 jobs IndyMac Bancorp will lay off in the next several months, or the layoffs announced by National City Corporation and Lehman Brothers. The latest cuts are on top of nearly 31,000 layoffs reported by financial services companies in August.

To stave off a potential recession, pressure is building on the Federal reserve to lower interest rates. Many believe these recent figures, which point to a deteriorating employment climate, will result in the Fed cutting the key interest rate by at least one-quarter percentage point on their September 18 meeting. The Fed has not lowered this rate in four years.

Homeownership & Taxes: How Good Records Can Save You a Bundle

http://www.erate.com/how-good-records-can-save-you-bundle.htm

Mortgage Market Woes: Foreclosures and Defaults Up in Q2 of 2007

This year has been a year of ups and downs for the housing market. In our continuing series, we chronicle news affecting the housing market and its major players.

In what's probably no surprise to anyone watching the housing industry and the general economy in the last months, foreclosures hit a record high in the second quarter of 2007.

According to the Mortgage Bankers Association of America, which represents the real estate finance industry, the rate of loans entering foreclosure process was 0.65 percent in the April-to-June quarter. This is compared to 0.43 percent in the same period a year ago.

"This quarter's foreclosure-starts rate is the highest in the history of the survey, with the previous high being last quarter's rate," the organization reported. The January-to-March quarter was 0.58 percent.

In addition, the delinquency rate is also rising. Those borrowers behind in their payments (but have not yet entered the foreclosure process) now account for 5.12 percent of all loans. From last year's rate, this represents an increase of nearly three-fourths of a percentage point.

Adjustable rate mortgages, for both prime and subprime borrowers, is directly contributing to this increasing foreclosure and delinquency rate, the MBA said. Approximately 2 million ARMs are due to reset to higher rates this year. This is resulting in monthly payments that are unaffordable for many.

There are several key states that account for this growing problem. About 1 percent of all of the mortgages in Michigan had foreclosure actions started during the last quarter. Indiana and Ohio, along with Michigan, have been hit with heavy job losses that have significantly impacted this foreclosure rate.

But the nation's largest states are feeling the biggest crunch, and driving this foreclosure-start rate. In fact, the MBA noted that were it not for rising foreclosures in California, Florida, Nevada and Arizona, the nationwide rate would actually have dropped.

These states have more than one-third of the nation's subprime ARMs. They also have one-third of the foreclosure starts on subprime ARMs. Also, the four states have a much higher share of investor loans than the rest of the nation. These loans are made to buyers who do not plan to live in the house. As of June 30, the non-owner occupied share of defaulted loans was 32 percent in Nevada, 25 percent in Florida, 26 percent in Arizona and 21 percent in California. That compares with 13 percent in the rest of the nation.

Important to remember with these recent figures is that much of the mortgage market turmoil this summer occurred after the second quarter. This means the situation is likely to worsen due to:

> Drop in home prices from the glut of new homes, making it difficult to refinance ARMs.

> Current FHA limits on mortgage insurance. Mortgage insurance from the Federal Housing Administration makes refinancing easier, especially if the alternative is no payment and foreclosure. But the FHA can only guarantee mortgages up to $362,790. That excludes a lot of homes in high-cost markets. Reform is currently under consideration.

> Nearly 2 million adjustable mortgages are going to reset over the rest of this year and next. This means many more troubles on the horizon as more homeowners face payments they can't afford.

Borrowing Against Your 401(k)

So you've set money aside for your retirement and now you'd like to tap into it for reasons other than funding your retirement. Simply cashing out of your 401(k) plan is not a smart idea because if you are under age 59 1/2 you will be hit with an early withdrawal penalty of 10% on top of having to pay federal and state taxes on the amount withdrawn. A better option may be to borrow against your 401(k) and to follow the plan's rules of repayment so you can accomplish both your objectives of having the short term use of your money and repaying it on time so you will then have the account available for your use by the time you retire, along with the additional interest you'd be chipping in when you repay the loan. Normally you are permitted to borrow against your 401(k)in an amount equal to the lesser of $50,000 or half of the amount vested in your account. However before setting the wheels in motion to borrow against your 401(k), make sure you really need the funds for a valid purpose and that you will repay the loan on time or you could end up costing yourself both in the short and in the long run. Carefully analyze whether your intended purpose for the funds is worth the risk of jeopardizing your retirement account. There are advantages and disadvantages to borrowing against your 401(k) loan, here are some for your consideration:

Advantages:

> Low interest rate, typically only 1-2% above prime commercial lending rates.

> Good repayment terms, typically 5-10 years and possibly longer if the funds are to be used for home down payment purposes.

>Inexpensive loan fees, typically only $50-$100.

> Fast source of money, you can usually access the funds within a week's time.

> No credit check, it is your money after all, so no check is required.

> Ease of repayment, the monthly payment is deducted from your paycheck automatically.


Disadvantages:

> You are using after-tax earnings to pay for the interest on the 401(k) loan resulting in your paying taxes more than once on the money, thus increasing your over all cost of borrowing the funds.

> The opportunity cost which results from not keeping the loan funds fully invested for retirement. The interest you are paying into the account to use the funds will help to offset this, but it remains a true opportunity cost to you if your invested funds would have earned a return in excess of what you are paying back into the account in the way of interest.

> Many borrowers may find it difficult to both repay their 401(k) loan and continue making their regular 401(k) contribution simultaneously. Thus your contributions into the plan could suffer.

> Your company's plan guidelines may prevent you from making additional contributions into your account until your loan is repaid further hampering your ability to continue to save. This could hurt even more if your employer offers any type of match of your personal contributions.

> There is added risk if you should lose your job before the loan is repaid, either by choice or layoff, you will then be forced to accelerate the repayment of the loan within 60 days or be required to pay taxes and penalties at perhaps the least opportune time, when your are jobless.

> Interest paid on the loan is not tax deductible (it's similar to a consumer loan) as it would typically be if other financing options were used.


Remember to always consult with your tax or financial advisor regarding your own individual circumstances. For additional information go to: http://www.irs.gov/faqs/faq5-4.html

U.S. Mortgage Rates Stay Steady

Long-term mortgage rates increased slightly in the week ending September 6, 2007, according to finance company Freddie Mac. Their weekly Primary Mortgage Market Survey® was released Thursday.

"Over the past week, long-term mortgage rates were largely unchanged as the most recent economic news showed smaller increases than had been expected," said Frank Nothaft, Freddie Mac vice president and chief economist. "For instance, core personal consumption expenditure price index rose at an annualized rate of only 1.3 percent in the second quarter and July's consumer spending data showed a 1.9 percent gain in the core price index for the twelve months ending in July."

This week's survey indicates 30-year fixed mortgage rates averaged 6.46 percent, a boost from last week's average of 6.45 percent. Last year at this time, the 30-year fixed-rate mortgage averaged 6.47 percent.

Fixed mortgage rates for 15-year terms averaged 6.15 percent, an increase from last week's average of 6.12. A year ago, the 15-year fixed-rate mortgage averaged 6.16 percent.

Averages for Treasury-indexed adjustable-rate mortgages (ARMs) bucked the trend and decreased this week. Five-year ARMs averaged 6.32 percent, down slightly from last week's average of 6.35 percent. At this time last year, the five-year ARM also averaged 6.14 percent.

One-year ARMs averaged 5.74 percent this week, a big drop from last week's average of 5.84 percent. Last year, the one-year ARM averaged 5.63 percent.
Freddie Mac said that to obtain these rates lenders charged an average 0.5-point fee for fixed-rate mortgages. Lenders charged a 0.6-point fee for ARMs.

"In other news, the most recent Conventional Mortgage Home Price Index (CMHPI) release issued by Freddie Mac reported that on average, national house prices grew by 0.1 percent in the second quarter, the slowest quarterly house price growth since the fourth quarter of 1994," said Nothaft. "For the past 12 months, house prices appreciated 3.3 percent, the slowest rate in 10 years."

Freddie Mac is a mortgage finance company established by Congress in 1970. The company buys mortgages and mortgage-related securities and packages them to sell to investors or to hold in its own portfolio. They release their summary of average mortgage rates weekly.


To get today's 15 Year Fixed Rates (conforming loan amounts)
click on your state below:

Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas

Bush Administration Steps In

This year has been a year of ups and downs for the housing market. In our continuing series, we chronicle news affecting the housing market and its major players.

Federal Housing Administration reform could soon be a reality, as President Bush endorsed key elements of a reform package last week.

Bush promised in a speech on Friday to help subprime borrowers refinance into new loans, alleviating the pain of loan defaults and foreclosures. His plan involves relaxing aspects of the FHA's loan insurance for high-risk homebuyers, lowering the required down payment for FHA loans, and raising the limit on mortgages that would be eligible.

These provisions were part of a reform plan that was making its way through Congress last year before getting blocked in the Senate. Throughout this year, the Housing and Urban Development federal department has been pushing FHA reform to legislators, and they are due to vote now that the summer break is complete.

Analysts predict that the combination of the U.S. mortgage market crisis, which deepens in urgency and depth each day, with Bush's endorsement means FHA reform will pass soon.

Under existing rules, loans that exceed $362,000 are not FHA eligible. This has effectively eliminated the program along the East and West Coasts where house prices are higher. The program also required borrowers to make a substantial down payment. Up until now, many borrowers who normally would have sought an FHA loan have been turning to subprime lenders, who offered more flexible terms, 100% financing and quicker turnaround. The FHA share of new mortgages slipped from 9.1 percent to just 1.8 percent between 1996 and the end of 2006, according to Inside Mortgage Finance.

The proposed reform would lower the down-payment requirements and raise the limit on the size of loans that FHA can insure, from $362,000 in states with high home prices to $417,000. The FHA program aims to help some subprime or high-risk borrowers faced with increasing intersest rates on adjustable-rate mortgages. By insuring loans, FHA makes its mortgages more affordable for borrowers and less risky for lenders.

Bush was careful to point out that the reform should not bail out speculators, lenders who made bad loans or those who purchased homes without the ability to pay for them. Assuming borrowers can meet the loan limit, there are then five criteria for FHASecure eligibility:

1.    A history of on-time mortgage payments before the borrower's ARM teaser        rates expired and loans reset;

2.    Interest rates must have or will reset between June 2005 and December        2009;

3.    Three percent cash or equity in the home;

4.    A sustained history of employment; and

5.    Sufficient income to make the mortgage payment.

The Federal Housing Administration was created during the 1930s Depression to help borrowers win favorable loan terms, guaranteeing mortgage payments to lenders. The FHA caters especially to first-time home buyers, minorities and low to moderate income families.

Mortgage Industry Changes Ahead

Consumers be prepared, dramatic changes in lending underwriting guidelines are coming. The markets are still experiencing the aftermath, and may not soon recover, from the tidal wave of risky loans which have closed over the past few years. The pendulum is about to swing in the other direction as investor money has all but dried up for sub-prime and so-called Alt-A loans and now many of these mortgage lenders have stopped making loans and have shut their doors. What comes next still remains to be seen but the days of providing 100% financing to borrowers with FICO scores below 620 are likely gone. As those borrowers who over-extended themselves, purchasing homes they simply could not afford with their lender's foolish blessing, experience their first rate adjustment and ensuing payment shock, the rate of mortgage defaults and foreclosures will rise. And as new tighter lending guidelines begin to take shape, many of these unfortunate borrowers will be prevented from refinancing. The supply and inventory of housing will continue to swell, effectively capping real estate values as the available pool of potential buyers shrinks along with their lending options and the balance between supply and demand tilts towards the supply side.

Stricter underwriting guidelines, or rather a return of sanity, will be the new standard of the day. Stretching guidelines to the point of qualifying anyone with the simple desire to own are over. First time buyers will find that lenders are no longer willing to push the boundaries of what is reasonable to get their loans approved. Adjustable rate loans will now be underwritten in line with standard industry guidelines of 2% over the initial start rate or qualified at the fully indexed rate (that is by adding the current index to the margin) and not at the initial start or teaser rate. New loan riders and disclosures may also be expected to add to the mountain of documents already signed by borrowers at closing. This will particularly be the case for those states having had in place looser consumer protection laws while the meltdown in sub-prime loans unfolded.

Your credit score has also played an important role in obtaining a loan, but now it will likely determine the rate you receive as well as the amount of the down payment you'll be required to make. The company that developed the FICO scoring system will now have an even greater pool of defaulting borrowers from which they can draw data and re-model their scoring system to filter out borrower risk. Note that the underlying purpose of the credit scoring system is to predict which borrowers are most likely to default on their payments.

Piggyback loans providing 100% financing were created to a large extent to eliminate a borrowers need to pay the dreaded PMI (or private mortgage insurance). Now it is likely that with a high percentage of these loans defaulting, the insurance protection was probably needed. Piggyback loans providing an 80% first and a 20% second mortgage may disappear. Down payments may increase for borrowers having credit scores below new higher limits and a lender approving a loan where a borrower has no equity stake in the property may be seen as nothing short of reckless. It is also to the benefit of a borrower to contribute something towards the down payment as it will likely expand the number of available loan options.

How you manage your non-mortgage debt will continue to be important because it will be reflected in your credit score. Therefore you want to continue paying your bills on time and keeping balances on revolving debt well below the maximum limits. Coming in and paying down debt at the 11th hour of qualifying for a loan is unlikely to help as it will have little impact on your credit score. Any surplus cash you are able to come up with would likely be better applied towards your down payment rather than paying down debts to in an attempt to reduce debt ratios.

Depending on the local conditions in your area, the impact on appraisals could be significant as property values trend lower. In some rapidly changing markets with many homes listed for sale, it is possible that the lender may request several appraisals. You need to exercise extreme caution when making an offer to purchase a property as valuations could become trickier. Back in the high flying real estate days of multiple offers, contingencies of almost any kind were taboo if you wanted any hope of having your offer accepted. However in today's market an appraisal contingency may offer you some well needed protection. If the home does not appraise at the agreed upon purchase price, the lender will base the loan on the lower of the two values. If you are unable to proceed with closing as a result of valuation problems, with an appraisal contingency in your contract at least the earnest money deposit you presented to the seller when you made your offer will be returned to you.

Based on the shockwaves in the financial markets created by risky lending, it is very likely the next move in rates could be downward. While the Fed does not directly control long term mortgage rates, they certainly exert an influence and they now need to ease fears of the mortgage lending calamity and resulting liquidity crisis from spreading into other areas of the economy. A changing interest rate environment could be on the horizon and while all the Feds previous moves have been upward, their next move may go quickly in the opposite direction.

Your Credit Score: It's More Important Than Ever

It's impossible to avoid news about the unraveling of the financial markets due to the impact of bad mortgage loans being made in the sub-prime area over the past few years. Lenders are now tightening their guidelines at a rapid rate as investors of these risky mortgage loans have all but disappeared and many of these lenders are shutting their doors. A liquidity crisis has developed as investors are no longer willing to take on perceived risk. The days of easy money are gone and now only those who can verify their income, assets and good credit are going to get a loan. If you have poor credit with a FICO score of less than 620, you are going to find it tough going out there. Now it is more important than ever to take stock of your credit situation and how you may improve your standing in the eyes of a lender. The worst time to actually go through this exercise is when you need credit quickly. The best strategy is to stay on top of it now so that when you want credit, it will be available to you at the best terms possible.

Anyone who tells you they know exactly how a FICO score is calculated is misleading you. The score is based on a propriety (or secret) model which is constantly changing due to research in consumer behavior and changes in consumer economics. The essential purpose of the FICO score is its ability to predict which borrowers are likely to default on their payments. After studying the credit files of masses of consumers, the FICO scoring model was born. There is general information available on calculating credit scores, and much of it should be obvious, such as paying your bills on time. Because of the ripple effect one late payment can have on the collective interest rates on all of your debts, it is vital that you make no mistakes, leave no room for error and always, always pay on time. The tragedy is to be late for reasons other than economic and simply due to forgetfulness or oversight as this will be a costly mistake that you may not easily overcome.

Although there are about 150 factors which can impact your risk profile, there are thought to be 5 predominant factors having the greatest impact on the scoring model. It is important to note that your recent credit history will likely always carry more weight than your past as the system is looking at current trends in predicting future behavior. These 5 predominant factors are as follows:


Payment History - do you pay on time and how often (if ever) are you late?

Outstanding Debt Balances - what is the total amount of debt you owe and what types of accounts are you carrying balances on? For example revolving (i.e. credit cards), installment (i.e. auto or student loans) or mortgage related.

Past Credit History - includes the complete payment history on an account since you initially opened it.

Recent Credit History - how many accounts have you applied for or opened recently as well as what type of credit you have been searching for or inquiring about.

Type of Credit Used - are you using more revolving or installment credit? How many mortgages do you have?


Consumers are able to request one free credit report per year from each of the three major credit reporting agencies. To obtain copies of your credit report from all three credit agencies, and to continue checking your credit report periodically, contact:

Equifax
P.O. Box 740241
Atlanta, GA 30374-0241
800-685-1111
www.equifax.com

Experian
P.O. Box 2104
Allen, TX 75013
888-397-3742
www.experian.com

Trans Union
P.O. Box 2000
Chester, PA 19022
800-916-8800
www.tuc.com

How Did We Get Here? Part II - Mortgage Market Woes

This year has been a year of ups and downs for the housing market. In our continuing series, we chronicle news affecting the housing market and its major players.

With Greenspan's interest rate slashing in 2001, money was cheap and easy to be had. Risk was a minor concern that had no place in the booming economy, and in the racing-ever-upwards housing market. When the housing bubble burst, sub-prime borrowers were the first hit.

So why are these seemingly limited events causing bankruptcy, stock market craziness, and plummeting confidence in the global economy?

Beyond the Housing Market

What could play a bigger and more crucial role in this economic decline is the very nature of Wall Street. Let's look first at how mortgage loans are used in the stock market. A derivative is a financial instrument whose value derives from some underlying asset. Mortgage loans are assets; groups of mortgage loans combined into a tradeable security are derivatives.

Securities are rated by rating agencies: a stellar AAA+ rating, like that given to U.S. Treasury bonds, means that the underlying assets have a very low risk of default. A security whose underlying assets include sub-prime loans would theoretically receive a lower rating. Many investors are told not to invest in the lower rated securities. But what if the rating systems are compromised?

Let's back up. Derivatives are part of a "imaginary" economy of sorts. The "real" economy is made up of people buying and selling goods and services, and going to work at jobs where they make or deliver these goods or services. The other economy is a place where speculators make bets on what will happen in the real economy. Think of it in terms of sports gambling. The real economy is the actual players, the football or basketball or baseball players involved in the actual game. The other side is the folks betting on the outcome, and not just the final score but the point spread, individual players' stats, and more.

Rigging the Game

A safe bet would be that securities based on sub-prime loans would be a risky endeavor, full of potential for default. Investors should stay away, would go the normal logic. But that's good enough for investors hungry for big gains.

Thus arrived the collateralized debt obligation (CDO), which takes a pool of securities based on risky (sub-prime) mortgage loans and divides them up. One part of the security gets a high rating (sold to the cautious or the folks who have investment restrictions), and another gets a low rating (sold to the buyers who don't mind risk). If the underlying assets (the sub-prime loans) are defaulted, the lower rated slice loses money, and the higher rated slice is protected.

These CDOs have been massively popular in recent years. Even the lower rated slices - high risk also means high reward. The demand for these CDOs based on subprime loans became insatiable.

So mortgage lenders were encouraged to continue extending these loans, no matter the risk.

Snowballing

Subprime loans defaulted after the housing market's unreal ascension slowed. They defaulted in so many numbers that the lower rated CDOs caused massive pain to investors. They defaulted in so many numbers that the higher rated CDOs began to lose money. Because these CDOs were so popular and widespread, this meant a big chunk of tradeable securities were now in danger.

But it doesn't stop there. "Regular" hedge funds, pension funds, municipalities and mutual funds might seem protected, but their lack of transparency means no one really knows if CDOs and other dangerous investments make up a significant portion of the portfolio. Companies could rely on the adage that has kept our economy afloat in the past few years - borrow more. It's easy to get and at good rates, right? But now that everyone is feeling the heat, the money is limited.

So subprime loans, though they seem a minor part of the economy, are actually intrically tied in with Wall Street, all other sectors of the national economy, and global economies. It was the first domino in an complex arrangement to fall. Now we just wait to see what happens next.