Thursday, June 18, 2009

Financial Overhaul: The Obama Administration’s Plan

On the heels of conflicting financial data about the recession’s future, President Obama revealed his plan this week to protect the U.S. financial system from another catastrophe.

The key component of the administration’s plan is beefing up the Federal Reserve’s power, imparting the authority to regulate bank holding companies and other large firms, whose failure could (and did) put the country’s economy in peril. At the same time, the administration is calling for the creation of a new agency to oversee credit and lending practices, with the goal to prevent the risky loans and victimized borrowers that characterize the current housing crisis.

The plan takes aim at the weaknesses now apparent in the current regulatory system, which wasn’t able to respond to today’s complex financial instruments and which allowed abuses and excesses resulting in the country’s slump. One of these weaknesses is a lack of big-picture thinking: while agencies and regulators may be responsible for overseeing individual companies, no one is in charge of looking at the financial system as a whole.

Elements of the plan include:

  • Boosting the authority of the Federal Reserve to enable increased supervision and regulation of financial companies. This will involve requiring increased capital commitments to offset loans and off-sheet commitments.

  • Creating the Consumer Financial Protection Agency to review credit and lending practices, in order to provide protection for potential homeowners, students and credit card holders.

  • Establishing the Financial Services Oversight Council to monitor the overall health of the U.S. financial system.

  • Requiring that lenders retain a 5 percent stake in all asset-backed securities. This key component was created in order to discourage risky loans and the practice of passing at-risk assets off to other investors, ensuring banks have “skin in the game.”

  • Mandating that all lenders be held to the same standards as banks, and that mortgage brokers provide clear and concise disclosures.

  • Setting up a clearer method for regulators to dismantle troubled companies.

  • Getting rid of the Office of Thrift Supervision. This office oversaw institutions such as Washington Mutual and AIG, which of course turned into some of the biggest failures of the economic crisis.

  • Ordering shareholders to vote on compensation packages for executives in the financial industry.

The administration is now presenting the plan to legislators, and beginning the daunting process of deflecting critiques by the banking industry and Congress itself.

For Further Reading:
Geithner Defends Plan to Give Fed Stepped-Up Powers (Update2)
Forcing Banks To Put More 'Skin In The Game'
Obama Introduces Sweeping Financial
Obama Defends Financial Overhaul

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                Friday, March 27, 2009

                Time to Declare Economic Marshall Law!

                Since Washington has created the mother of all moral hazards by not holding anyone accountable for this unprecedented economic disaster, the repercussions of which we will be facing for decades to come, rather they have elected to reinforce the offending behavior, thereby guaranteeing its reoccurrence, by paying the offenders enormous bonuses and labeling the Americans (AKA Joe or Jane Taxpayer) who are outraged byy this egregious inequity as “distracted”. Some how it hasn’t quite registered that if Washington is unable to comprehend something as patently obvious as not rewarding the culprits who got us into this mess in the first place by paying them enormous bonuses, then what exactly could Washington possibly be getting right in attempting to correct the disaster? If Washington is serious about wanting to prevent the same mess from occurring yet again in the future it may be time to declare “Economic Marshall Law” and make those responsible face the music. If no one has “technically” done anything illegal (how about gross negligence for starters?) and therefore cannot be criminally prosecuted, this may be the way to go.

                If a corrupt compensation system, rampant with incentives in all the wrong places, helped get us into this mess, then start by eliminating it and replacing it with a system featuring the appropriate incentives which are aligned with the best interests of the U.S. taxpayers. If the American taxpayers now have a majority interest in these bailed out firms then don’t its employees have a fiduciary responsibility to protect us from further losses or at the very least to minimize our losses?

                Why not begin by disincentivising the employees of the now taxpayer bailed out firms from leaving their jobs by penalizing those who do opt to go, that is those who choose to bail out on us rather than stand by to help clean up their own mess, by establishing a tax penalty or surcharge on the future earnings of any departing employees (or they could be labeled as economic enemy combatants and threatened with detention at Guantanamo:). Then incentivise these employees to stay on and help restore their firms to health by promising to pay their bonuses after the U.S. taxpayer is repaid and offer added incentive bonuses based on a time table of how quickly their firm is able to repay Uncle Sam with interest. What better way could there possibly be to retain these employees than to guarantee payment of the bonuses they claim are due to them for 2008, on top of incentive bonuses promised for rapid repayment of taxpayer dollars, than to pay out this compensation after their firm is restored to financial health and the U.S. taxpayers have been repaid? After all had these companies been allowed to go bankrupt, without taxpayer intervention, the whole bonus issue would have likely been a moot point as insolvent businesses do not typically pay out bonuses!

                If Washington found a way to hold onto some 13,000 military personnel who had actually performed and bravely satisfied their employment contracts by creating the “stop loss” program, declaring a time of “extraordinary circumstances”, then declare Economic Marshall Law now, our ravaged economy has proven to be every bit of a national security threat and force these employees to stay on the job until the U.S. taxpayers are repaid. This should be their legal and moral responsibility to all current and future generations of tax paying Americans. Seems pretty simple to me, what am I missing?

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                Monday, March 9, 2009

                New Data on Delinquencies and Foreclosures, and New Details on the Obama Mortgage Plan

                Loan delinquencies rose to record-breaking levels in 2008, but new data show foreclosure rates may be staying put. With new details about Obama’s mortgage modification plan emerging, economic experts and homeowners alike are hoping the plan will point the way towards reduced foreclosures and loan relief.

                The percentage of delinquent loans in the fourth quarter of 2008 broke the longstanding record, according to the Mortgage Bankers Association's quarterly delinquency survey released on Thursday. Loans at least 30 days past due rose to 7.88% on a seasonally adjusted basis. Jumping from 6.99% in the third quarter, the increase was the biggest jump since the MBA survey began in 1972.

                Loans that are either in the foreclosure process or at least one payment past due totaled a seasonally adjusted 11.18%, the highest ever recorded in the survey.

                The survey cited several reasons for the increasing figures, including the rise in unemployment due to layoffs, and the deepening recession. The hardest-hit states continue to be California, Florida and Nevada. Some key states have seen sharp increases in delinquencies, including Louisiana, New York, Texas and Georgia.

                Some good news does exist, however. The rate of new foreclosures has remained essentially stagnant. The rate of mortgages entering the foreclosure process, which hit 1.08%, has stayed basically flat for the last three quarters of 2008. According to the MBA’s chief economist, servicers are delaying foreclosure starts in favor of modifying loans or other arrangements, or due to local moratoriums placed on foreclosures.

                To further slow foreclosure figures and prevent new foreclosures, the Obama administration announced additional details this week about the proposed mortgage program, designed to help up to nine million families restructure or refinance their mortgages.

                The “Making Home Affordable” program takes aim at foreclosures not just to help struggling families, but also to prevent the devaluation of neighborhoods, and stop the steady decline of home values.

                Eligibility requirements have been clarified. Those eligible for refinancing under the program are homeowners who are current on their mortgage payments but haven't been able to refinance due to the decrease in the value of their home. Other requirements include:

                The loans must be owned or guaranteed by Fannie Mae or Freddie Mac
                The property must be owner occupied
                The borrower has to have income to support the new mortgage debt
                Borrowers need to owe between 80% and 105% of the value of their home
                The borrower must have an unpaid principal balance equal to or less than $729,750
                The mortgage must have originated before Jan. 1, 2009
                Mortgage payments -- including taxes, insurance and homeowners association dues -- have to be higher than 31% of the borrower's gross monthly income

                A list of all participating servicers will soon be available online (at

                Mortgages refinanced under the plan will have terms of 30 or 15 years and have a fixed interest rate. The new rate will be fixed for a minimum of five years.

                For Further Reading:
                More Than 11 Percent of Mortgages Delinquent or in Foreclosure
                Mortgage delinquency rate hits record: MBA
                Making your home affordable

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                Monday, March 2, 2009

                The Mortgage Fiasco: How the Housing Bubble Developed and Why the Crisis Will Likely Get Worse…

                By Keith Schemm.

                In my previous article I discussed some of the reasons why the housing crisis appeared, why borrowers were undeterred by the warning signs of a bubble and how the traditional mortgage broker wasn’t to blame for mistakes made by real estate investors aggressively chasing after profits. Shortly after June of 2003, when mortgage rates hit historic lows, I think that borrower psychology shifted, which resulted in real estate no longer being viewed as a place of residence but as a risk-free investment vehicle for generating equity gains.

                Fixed rates for mortgages had clearly bottomed in the early summer of 2003 and as the rates on 10 year Treasuries jumped in July and August of that year we saw a pullback in the number of prime borrowers who were refinancing adjustable rate mortgages into fixed rate loans. The financially savvy baby boomers at that time were for the most part placing their permanent loans on primary residences, second homes, and investment properties that they intended to keep for the long haul. After all, they had lived through the property cycles of the eighties and early nineties and they knew how the ownership game worked. The cost basis of these properties was still modest and the price spiral had not yet begun.

                Under normal circumstances, the rising interest rate cycle would have caused housing affordability to suffer, resulting in a slow down in the buying cycle and putting the brakes on the rapid ascent of home values. In previous cycles, when home values became stagnant, a shift to conservatism would have prevailed that would have automatically served to slow down and stabilize the entire system.

                However, because there was an inter-generational transition going on (the youngest boomers were turning 40 and the oldest were pushing 60) and a wave of sophisticated new arrivals and Generation Xer’s were now getting their first shot at home ownership, making things different this time. It is at this point that the normal cycle was pre-empted by these events as a generation of fresh buyers were enabled by the advent of new mortgage financing products which lead them to develop an appetite for housing acquisition as pure investment that then became the game-changer.

                A number of factors such as higher education levels, rapid financial achievement, and familial pressures for owning versus renting came together to create the real estate super-speculator which helped create the bubble we are now facing. The fast-forward desire for real estate ownership by the individual that would have normally been aspired to in the course of a decade was compressed into just a few years. This short circuited process had both an upside and downside to it. The early adopters of this strategy benefited handsomely via huge (albeit temporary) ramping up of home prices. But the unrealistic expectations for future appreciation that were raised in each successive wave of buyers that came after ward, destroyed the stability of the system of property ownership as a means of building wealth. Many of the new buyers were not ready for the financial consequences of their actions.

                We saw parents helping children accomplish what they themselves took years of hard work and saving to achieve, seemingly happened over-night. For example, there is nothing like the experience of renting and saving for a down payment to focus the attention of a borrower on the responsibilities of home ownership. People seemed to know the price of everything, but the value of nothing. The income and credit qualification process was transformed from a litmus test of financial capacity and true readiness into a game of jump through the hoops and find the cheese at the end of the maze.

                Throughout 2004 and 2005 prices continued to climb upward and appreciation of 20% and beyond in a year became common, leading to a destructive attitude towards financial prudence which tended to breakdown people’s reluctance to over-encumber themselves. Deferred gratification was an anachronism. Why bother saving 20% (or even 10%) for a down payment on a home when you could take on a little risk and make that return in a year if you purchased immediately, with nothing down, and accept a minimal mortgage payment on an Option ARM. The financial system was in the process of converting all available income, both present and future, into borrowing power and capitalizing that into the present value of real estate.

                Each successive wave of borrowers using creative financing enabled the next by forcing them off the fence and into ownership before they were financially ready. As underwriting ratios were pushed to the maximum; new products were introduced to allow the next wave to come into the market and buy. When the standard 80-20 (LTV-Down Payment) fixed rate or adjustable purchase loan was eclipsed as the standard there was no going back. Soon avoiding Private Mortgage Insurance (PMI) became an accepted practice as borrowers resorted to 80-10-10 financing and then the no-down payment loans followed. Over time what was created was a layering of speculators and borrowers with increasingly riskier loan products which had inherently worse capacities to service loans. All were counting on home prices rising ad infinitum in order to bail them out of a situation that in the long run was unsustainable.

                Where we go from Here…

                In a late 2006 presentation to investors, Credit Suisse showed how this layering of mortgage risk categories could play out as an ARM Reset Schedule in the coming years. In the graphic below we see that this scenario has in fact played out over the last 24 months is a failure of the sub-prime loans en mass. But what’s coming next?

                We are living through an historic time and this period will be looked back upon as a defining moment. What will transpire in the next four years with the un-winding of the mortgage credit bubble as it spreads to Alt-A and Option ARMS will seem unbelievable. Over the next few years as society deals with the aftermath of the mortgage credit contraction, along with the unwinding of derivatives worldwide, including: liquidations, bankruptcies, foreclosures and subsequent homelessness and unemployment that will result, future generations will look back and ask the reasons for the dramatic shift that transpired in the way we lived at the end of the 20th century and the first decade of the new millennium.

                These factors are now converging in a self-reinforcing and vicious cycle which will eventually cause the US economy and government finances to implode at virtually every level within the next several years, possibly within month and the rest of the world will follow suit as well. The delicate global infrastructure that is so highly dependent on the smooth functioning of both physical and financial transactions is being thrown into global and domestic chaos.

                Moreover, in the past a wrench in the gears of finance could be dealt with over time by additional growth in another area of the economy. But in today’s highly integrated global economy, any loss of income committed to mortgage and other debt service could spell disaster. Our economies have evolved during these relatively quiet decades into a fatally sophisticated system of interdependencies that rely upon stability in critical engines of finance and commerce. That stability is now gone. As the Credit Suisse graphic of mortgage resets implies we are now in the eye of the storm between the effects of the Sub-prime Crisis and those coming in 2009 from the Alt-A and the Option ARM loans. Another cautionary note, the potential fiascos in securitized commercial real estate, student, auto, and credit card debt are also currently looming on the horizon.

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                Home Prices Fall as Delinquencies Rise

                New reports released this week revealed decreased home prices, increased delinquencies, and a population of borrowers eager to shed their adjustable rate mortgages.

                Home prices in 20 major cities in the U.S. dropped 2.5% in December 2008, according to the Case-Shiller home price index released Tuesday by Standard & Poor’s. In addition, home prices in these cities were down a record 18.5% from December 2007. In the original 10-city index compiled by Case-Shiller, prices were down 2.3% in December, and a record 19.2% from the previous year.

                On average, home prices are at levels similar to late 2003, wiping out years of appreciation in the process. The biggest declines were seen in Phoenix, Las Vegas, and San Francisco, where prices were down over 30% from the previous year.

                As home prices continue to decrease, equity is reduced, and interest rates reset for many borrowers, delinquencies are accelerating. In the fourth quarter of 2008, bank loan delinquencies were growing faster than at any other time since the Fed started collecting data in 1985, the Federal Reserve reported Tuesday.

                In residential real estate, the delinquency rate rose to a record 6.3%, increasing from 5.2% in the third quarter and 3% in 2007. The seasonally adjusted delinquency rate, combining loan delinquencies for residential and commercial real estate, as well as consumer credit cards, rose to 4.6%, up from 3.7% in the third quarter. It’s the highest delinquency rate since 1992.

                In an environment like this, with depressed real estate and uncertain loans, new data show American homeowners are bypassing adjustable rate mortgages and aiming for the traditional and the secure.

                Of those prime borrowers who refinanced adjustable rate mortgages in fourth quarter of 2008, 97% opted for a fixed-rate mortgage, according to a quarterly report from Freddie Mac. Of those homeowners who already had fixed-rate mortgages and refinanced, 99.7% chose to remain with fixed-rate mortgages.

                “The very low interest rates for fixed-rate loans compared with ARM rates in the fourth quarter, combined with worries that rates may rise in the future when the economic recession ends, enticed refinancing borrowers to seek the security of long-term fixed-rate mortgages,” said Freddie Mac chief economist Frank Nothaft in a statement. “When borrowers can lock in a rate of 5 percent or less for 15 years or longer, it’s hard to find a reason not to take it.”

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                Thursday, February 5, 2009

                The Mortgage Fiasco: Why Mortgage Brokers are Getting a Bad Rap

                By Keith Schemm.

                As the year 2008 has come to a close and the turmoil and upheaval occurring in the mortgage and real estate markets is fully evident, I think it is worth reflecting on the last few years of the housing bubble to ask how did we get here, what have we learned and what’s coming next?

                Thinking back to 2002, when I was a loan officer with during the go-go years in real estate lending that progressed in quick succession until 2006 when I returned to corporate finance, I couldn’t help but think something had gone seriously haywire in the borrowing and lending culture. Borrowers had long resented the traditional banker sitting behind the big desk with the take-it-or-leave-it attitude and mortgage brokers offered the borrower a chance to get a competitive rate on their loan at a reasonable price with some personal service and expert advice to boot.

                I cannot tell you the thousands of thankful clients I talked with over the years who appreciated the clarity and transparency that Erate’s website brought to their mortgage search experience. They really appreciated how Erate’s customer service demystified the loan process for them, we explained the 4-Cs of lending and educated them about how to integrate their loan decisions into their overall personal financial plan.

                As the real estate bubble progressed, it was interesting to hear stories from borrowers as to what their financial planners were advising them about other investments and I gave them my own opinions. I once had a 55 year old woman call me about obtaining an option arm on her un-mortgaged personal residence. After talking with her about her ideas I expressed that I didn’t think that was a wise loan decision for her (see my BusinessWeek interview from 2005) and that she should really be locking in low fixed rates at that time. She then went on to say that her financial planner told her that the stock market was the place to be and she could get a better return on her equity if she paid a teaser rate and put the money into the stock market. Well her planner was obviously talking his book (commissions) and my advice didn’t go over to well and she quickly said goodbye.

                I had another borrower with very sketchy credit and a lot of credit card debt who had been a longtime renter but had purchased recently and was sitting on a windfall in appreciation. He wanted to refinance and cash out to pay down the credit card balances. I said that I thought that maybe he should think outside the box and sell for a profit now and pay off his debts, build back up his credit score and rent again for a while (seeing that his lifestyle was more suited to being a renter). He said he had never thought of that as an option and thanked me. I certainly hope he got out in time.

                Another mistake I saw many borrowers make was letting tax laws dictate the timing of buying and selling property. There were many who took the risk of carrying two properties to satisfy the holding period for preferential long term capital gains tax treatment on personal residences. At the end of the bubble one has to wonder how that worked out for them. Are they still holding? Did trying to save on taxes due to Uncle Sam end up bankrupting them?

                By 2004 most, if not all, of the thoughtful borrowers had obtained fixed rates for long term properties. The bubbling prices were now putting the hurt on would be buyers but there was such a frenzy in the air for appreciation that no amount of down-to-earth talk about prices would get through to prospective buyers at this point. I had one young woman who was a recent Harvard Law grad who had gotten a really great job with terrific income growth potential who I just couldn’t get through too. She hadn’t yet saved a serious amount for a down payment but wanted to buy in an “up and coming market” in a shady part of the bay area selling for around $780,000. It was clearly too much money for the property. I did some back of the envelope calculations for her and said that prices had to go up a minimum of 6-7% annually for it to be in her best interest to do the deal and I advised her against it. I think she got the loan somewhere else.

                During the bubble you just couldn’t get through to some people about the total lack of reality in their situation. There was always somebody else that they could find to do the loan, add a co-borrower, or bend the rules (or worse) to complete the deal. I am proud to say that we at kept our integrity and didn’t descend into that quagmire. In fact, 98% of our loans were “A” paper the rest were special situation Alt “A” and some stated income. I don’t think we did a single sub-prime loan in the 4 years I worked there. Needless to say there were some pretty quiet stretches where interest rates trended up and we didn’t do many loans.

                Finally, having 20 years of experience in accounting and finance, I think it is now clear that it was a confluence of trends and events (not due to the traditional mortgage broker) that were in place for 50 years or more in the areas of: public tax policy, societal attitudes and norms, technological capability and credit securitization and attitudes towards risk that had changed which corrupted a longstanding system of private property acquisition and financing in America that resulted in this credit crisis.

                In the wake of the bursting of the bubble, this evolved into what I term the “Property & Savings Crisis” as much as anything that gripped America and eventually the world in the first decade of the new millennium. It was the mass recognition by the average U.S. consumer that they were incapable of earning enough to adequately save for retirement and that inflation in some other asset, namely real estate, was their only hope in building wealth.

                Government’s War on Savers

                With the signing of the Federal Reserve Act on Christmas Eve in 1913 (see The Creature from Jekyll Island) the U.S. government began its “War on Savings’ and solidified the banking establishment’s control over the machinery of wealth creation in this country. Since Nixon’s closing of the gold window in 1971, the U.S. saver has endured a policy of government engineered inflation via issuing of Fiat currency. It is a well documented fact that a c.1910 dollar bill is now worth less than six cents today. This intentional government policy of destroying people’s savings over time by growth in the money supply and thus increasing nominal economic activity through inflation has become is so ingrained in the psyche of the population at large that no one even thinks about it anymore.

                Property ownership and the favorable tax treatment of the same through the tax code (i.e. mortgage interest deduction, tax credits, and capital gains exclusions) has over time served to make real estate the primary vehicle of personal wealth creation in this country for the common man. However, it always came with the risks embedded in the economic cycle and the periodic real estate downturns along with the inherent dangers in the use of leverage by the individual compounded by the over-leveraging by U.S. corporations and the government.

                The difference I see between this cycle and the ones that had preceded it in the 70’s and 80’s is the failure to recognize the moral hazards that developed within the financial industry in allowing Wall Street to effectively become the de facto regulator of itself, compounded by the scale of the securitization of mortgages and the supposed disintermediation of risk through derivatives and the changes made to the compensation scheme for the firms that rated the securities that were later sold in the secondary markets. More on this later…

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                Sunday, December 7, 2008

                Is it Foolish to Continue Paying Your Mortgage on Time?

                The government recently announced yet another new bailout program however this 1 has the unusual twist of assisting individual homeowners rather than banks, corporations or Wall Street. The program is aimed directly at distressed borrowers who have little to zero equity remaining in their homes with a pre-condition that they must be a minimum of 90 days delinquent on their mortgage payment to qualify for the program and they must have an outstanding mortgage balance equal to 90%+ of the value of their property. The program, called the Streamlined Modification Program, is being supported by FHFA, the Federal Housing Finance Agency which is the newest overseer of GSEs Fannie Mae and Freddie Mac. Eligible delinquent borrowers are being promised a quick and streamlined process in reducing their mortgage payments to revised affordable levels in an effort to keep them out of foreclosure. The pre-requisite of mortgage delinquency to participate in the program, has some concerned that this is tantamount to encouraging homeowners to deliberately stop making their mortgage payment in order to become eligible under the terms of the program. The government has set up some parameters which may help prevent this outcome, namely that participating borrowers must legally certify that they have experienced an authentic (vs. fraudulent) financial hardship and that they did not in fact intentionally default on their mortgage payment in order to become eligible for the loan modification they are currently seeking. The program would cap an eligible borrower's mortgage payment, along with their total monthly expenses, at 38% of gross monthly household income. However if a homeowner is not able to qualify under the 38% loan modification parameters, they may still be able to negotiate on an individual basis for their own unique loan modification terms. The loan servicers involved in the process would also receive $800 from the government for every troubled borrower they are able to initiate into the program.

                Whether or not this program will stop the hemorrhaging or compound the problem by piling on still more bad debt and encouraging homeowners to deliberately decrease their earnings, remains to be seen. But one fact seems indisputable at this point and that is that the real victims of this complex financial calamity are the millions of homeowners who are honest, hard working, played by the rules, knew their own financial limitations and kept to them by not over-extending themselves. The real tragedy of this mess is that the honest borrowers are the ones being hurt most of all, who is stepping up to bail them out?

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                Wednesday, November 5, 2008

                Forensic Review: A Tactic to Fight Off Foreclosure

                Homeowners having trouble with mortgage payments or facing foreclosure can feel ignored by lenders and desperate for solutions. But there is a way to get lender attention and improve the current financial situation.

                A forensic loan review can determine if lenders made any mistakes when the mortgage was issued, mistakes that can be actionable offenses and the key to persuading lenders to help.

                A forensic review involves a legal expert examining your loan documents for errors and misstatements. Commonly, the truth in lending statement given by the lender after mortgage application and the APR calculation won't match up with the HUD-1 closing cost sheet you received at closing. Even with small mistakes and tiny percentage errors, you can have cause for legal action. Other major violations to uncover could include illegal predatory lending practices or even outright fraud.

                While forensic review is usually a tool of mortgage firms, the current economic climate has resulted in several companies offering review to individuals. The drawbacks could be severe - costs for legal review at San Diego firm You Walk Away can be as high as $3000. But the benefits can be significant. Review companies contend that errors are frequent, and can provide you with the leverage you need to make lenders listen and develop a solution.

                Experts assert that the goal of forensic review is not to actually sue, but to gain bargaining power. David Petrovich, executive director of the nonprofit Society for the Preservation of Continued Home Ownership in Oakhurst, N.J., and the author of "Fight Foreclosure: How to Cope With a Mortgage You Can't Pay, Negotiate With Your Bank and Save Your Home," is one of these advocates. Lew Sichelman, a real estate writer for over 30 years, has covered the topic extensively in his syndicated column.

                Errors in mortgage documents stem from the housing rush of the last few years, when mortgage companies couldn't push borrowers through fast enough, and often (intentionally or not) overlooked key borrower issues. In the mad dash for more money and more loans, borrowers were confused or actually hoodwinked.

                Today, lenders are feeling the repercussions through the housing bust, and are under increased pressure by federal and local regulators to shape up their practices. Mortgage lenders are inundated with requests to improve current loans, and many borrowers can get lost in the shuffle. This tactic of legal review can help borrowers move their case up in the ranks, and get the help they need.

                Related Articles:

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                Monday, September 22, 2008

                The Fed Stands Pat Keeping Rates Unchanged for Now

                At its September 16th meeting, the FOMC decided to keep the benchmark federal funds rate unchanged at 2% for a third consecutive time. This decision was unanimous amongst FOMC members, marking their first uncontested decision on rates in a year. Futures traders were projecting an 80% possibility of a .25 point cut by the Fed yet ironically just several months earlier they were forecasting a 100% chance of a rate increase. After a roller coaster weekend of horrific financial news snowballing from the Lehman bankruptcy filing followed by the B of A acquisition of Merrill Lynch and then the stunning collapse and government takeover of insurance titan AIG, investors and traders alike saw the odds of a cut in the key rate rapidly rising. Fed policy makers had begun their series of seven rate cuts starting in September 2007, commencing just one month after the sub-prime debacle first unfolded, and they continued with this series of rate reductions through April of 2008 when commodities prices and inflation became an overriding concern. Until that time, the Fed's aggressive rate cutting measures had pushed the federal funds rate down from 5.25% to where it stands now at 2.00%. Futures traders had recently been persuaded to believe the Fed would now ease again at its September meeting in an effort to help beleageaugered financial companies weather the storm and support the stock market which had recently suffered its worst daily slide in six years. Rate cut expectations were further supported by the gradually improving news on the inflation front, as oil prices had been gradually declining as the global economy slows. The downside risk to growth and the upside risk of inflation both remain key concerns at the Fed, however the credit crisis appears to be in large part a crisis of confidence and therefore less likely to respond to further a reduction in rates. The Fed has already been working overtime to make funds readily available, providing liquidity directly to the distressed institutions that need it most. Yet another rate cut by the Fed might have been perceived as a panic response to a crisis that is worsening when Fed officials may prefer to let the dust settle a little longer on the most recent stream of financial disasters before taking further action.

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                Thursday, August 28, 2008

                Global Outlook: Recession Fears Expand Beyond the U.S.

                The subprime mortgage debacle has had far reaching effects in the U.S. economy. But the effects go beyond our own borders. The economic turmoil has ricocheted throughout the global economy, causing inflation, recession fears and general anxiety.

                Consider Europe, which is experiencing the fastest inflation in 16 years and the prospect of a widespread recession. Inflation is currently double the European Central Bank's 2 percent ceiling, and household spending power is quickly being eroded across the continent.

                The ECB has authorized nine interest-rate increases since December 2005, in attempts to curb inflation and slow down money-supply growth. The ECB reported this week that this M3 money supply, a figured used as a gauge of future inflation, rose 9.3 percent from a year earlier. This is the weakest growth since November 2006, but still nearly twice the ideal amount to rein in inflation. Policy makers kept the benchmark rate at 4.25 percent this month, a seven-year high, on concerns that inflation may push up wages and prices.

                At the same time, European retail sales have declined for a third month in August. Although the measure of sales activity in the region using euros increased slightly this month, it's still the third month the reading held below 50, the boundary between growth and contraction. An executive survey also revealed retailers cut jobs for a fifth month.

                Overall, confidence is low across Europe. German business confidence has fallen to a three-year low and consumer sentiment dropped to the weakest since 2003. In France, the housing inventory has reached a record this summer.

                In the UK, the outlook is particularly bad. House prices declined this week at the fastest annual rate since 1990, with the average value of a home falling 10.5 percent. At the same time, retail sales have plummeted to the lowest rate since the survey began in 1983. British lending organizations have limited their loans since the subprime collapse, with a 65 percent drop in mortgages granted since last year. The reports suggest a recession is imminent, and forecasts predict the Bank of England will be forced to cut interest rates this year despite fears of inflation.

                The economic troubles reach beyond Europe into Latin America, Africa and Asia. In Japan, inflation is a rising concern. Bank of Japan leaders are suggesting a key interest rate increase as the economy shrank at an annual 2.4 percent rate in the second quarter, putting it on the brink of recession.

                Globalization has meant significant benefits to the world's economies and citizens, but it also means that the economic problems of one country extend to every country. The ability to recover from our current economic woes will also be affected by the interrelated nature of our global financial systems.

                Web Articles:

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                Thursday, August 21, 2008

                Prices Rise and Credit Contracts: Is the Recession Here?

                Inflation rose in July to the sharpest price increases in 17 years.

                Consumer prices rose 0.8 percent on a seasonally adjusted basis from June to July, according to a government report (Consumer Price Index) released today. This is the third consecutive month of inflation, and during the last 12 months prices have risen 5.6 percent.

                Driving the price increases are continuing surges in energy and food costs. Energy prices increased 4 percent over the month, while food prices rose 1.2 percent.

                The reported figures coincide with consumers cutting back and employment getting squeezed. Core inflation, removing food and energy costs, rose 2.5 percent in the last 12 months, and reaching the levels federal policymakers consider unacceptable. The inflation is causing worker spending power to drop dramatically to rates last seen in 1990. Although average hourly pay rose during the last month, inflation and a cut in average hours means a reduction in real weekly earnings by 0.8 percent. During the last 12 months, real earnings dropped 3.1 percent.

                Accompanying the consumer price report was another indication of continuing housing market woes. Existing U.S. home sales fell 16 percent in the second quarter, a 10-year low, according to reports released this week. At the same time, median prices for a single-family house dropped 7.6 percent, from $223,500 to $206,500 over a year period.

                A third of all sales in the quarter were foreclosures, with bank seizures of properties in default rising 184 percent in July. Put another way, more than 272,000 properties, one in 464 U.S. households, were in some stage of foreclosure. The increasing foreclosures are depressing home prices further.

                For those looking to buy, banks are making it harder to borrow money, with tighter lending standards and terms, according to a survey by Bloomberg. The tight funds extend also to small businesses and credit card loans.

                With consumer prices rising, fixed mortgage rates at a six-year high, and a tightening credit crunch, the recession seems to be imminent, or already here.

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                Thursday, August 7, 2008

                Unemployment Spikes, Fed Keeps Interest Rate Level

                Initial claims for state unemployment benefits rose to 455,000 last week, according to reports released by the Labor Department. The new figures represent a jump of 7,000 from previous reports, and the highest rate in six years. Overall, the unemployment rate hit 5.7 percent in July, with some analysts predicting the rate to peak next year at well over 6 percent.

                Payrolls declined by 51,000 workers in July, the seventh straight monthly drop. Additional figures for unemployment claims, the moving four-week average, posted a jump over the 400,000 mark, the highest since July 2003 and bypassing the threshold for recession.

                The Labor Department did cite increased access of benefits, the result of a new federal program, as a partial cause of the increase. But the rising unemployment is also a result of the slowing economy; companies are cutting costs and reducing staff as demand slows and raw material costs spike.

                Rising unemployment also increases worry that consumer spending will decline in the coming months. For the last few months spending has been secure on the basis of economic stimulus checks. Now that these are spent, spending will probably decrease as costs rise, jobs are cut, and the economy continues to falter.

                With the economy is dragging and labor markets softening, the Fed decided to halt its pattern of interest rate cuts and stay firm at its recent meeting. The Federal Reserve kept the benchmark interest rate at 2 percent, suggesting that weak employment and general financial instability will keep naturally keep borrowing costs low.

                After an aggressive series of rate cuts, the most in two decades, the Fed halted the cuts at their last meeting in June, and has continued to do so. Experts contend the Fed will leave the rate unchanged in coming months in efforts to slow inflation and balance economic turmoil.

                A rise in the pending home sales index, based in contracts signed in June, was a surprising but welcome piece of news in the midst of the unemployment and economic crises. The 5.3 rise brought the index to 89.0, the highest since October. Some analysts note this could mean a stabilization of sales and a flattening in the market. Others note it could be a rise from increased sales of foreclosed homes.

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                Wednesday, July 23, 2008

                Housing and Economic News: A Roundup

                A flurry of reports, statistics, and announcements this week provide a portrait of the struggling economy as it stands today.

                Prices and Inflation

                A report from the Labor Department revealed this week that consumer prices jumped 1.1 percent in June, the second-biggest monthly increase since 1982. Over the past year, prices have risen 5 percent. The sharp increases mean worries about the economy are rising as well, and are causing some analysts to predict a boost in interest rates soon.

                Major components of the increasing consumer prices are surging food and energy costs. Food prices have jumped 8 percent on an annualized basis during the past three months; energy costs have increased at a 30 percent annualized rate since the start of the year. Other sectors are also feeling the price squeeze, indicating food and energy costs are affecting the entire economy. Transportation costs rose 3.8 percent last month, and rents and education costs also increased.

                Overall, core inflation increased 0.3 percent in June.

                Housing Market Ups and Downs

                Single-family construction starts fell to the lowest levels since 1991 in June, the Commerce Department said Wednesday. The single-family starts in the U.S. fell to an annual pace of 647,000, a decrease of 5.3 percent.

                Multifamily home construction starts, on the other hand, jumped 43 percent in June to an annual rate of 419,000. A change in New York City building codes, as well as a general upswing in the Northeast, led the increase with a 242 percent surge in that area.

                Taken together, total housing starts rose by 9.1 percent to a 1.066 million per year pace.

                The turmoil in the mortgage market, and the sluggish number of starts in portions of the construction market, has caused builder's confidence to drop and job losses to increase. After stabilizing over the last nine months, the National Association of Home Builders/Wells Fargo sentiment index, reflecting builder's confidence, dropped to 16 in July. This is the lowest level since records began in 1985.

                In addition, job losses in construction and manufacturing have increased. Payrolls at builders declined by 43,000 in June after a drop of 37,000 the prior month. The total loss of construction jobs since September 2006 has grown to 528,000.

                Plans for Fannie Mae and Freddie Mac

                Treasury Secretary Henry Paulson expressed confidence this week about the passage of a three-part plan to rescue Fannie Mae and Freddie Mac. His plan will allow the Treasury to increase credit lines for the two companies, buy shares in the firms, and give the Federal Reserve a bigger role in overseeing their capital requirements.

                Together, the two organizations own or guarantee more than half of the $12 trillion in outstanding U.S. home loans. The companies have lost more than 80 percent of their stock market values this year as investors grow increasingly concerned about their ability to weather the housing slump.

                Paulson emphasized the plan will be temporary, granting the Treasury powers in the interim to support the two companies. Lawmakers intend to tack the rescue plan onto the pending housing bill that will assist subprime borrowers in mortgage refinancing into fixed-rate mortgages backed by the government, and institute tougher regulation for Fannie Mae and Freddie Mac.

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                Friday, June 20, 2008

                Burgeoning Inflation, Bigger Fed Powers, Better Lender Response: A Market Report

                The economy continued to struggle this week. The most recent statistics shows prices jumped in May as energy costs soared. Prices Americans pay for goods and services is up 4.2 percent for the past year, driven mostly by food and energy costs. When these two items were excluded, prices only rose 0.2 percent.

                The higher prices were expected. But they show the pressure being placed on consumers and companies, with higher rates and less credit available to them, and the Federal Reserve, trying to prevent major inflation.

                The role of that central bank might expand to better respond to financial emergencies under new recommendations from Treasury Secretary Henry M. Paulson Jr. Paulson is expected to deliver a speech today proposing the Federal Reserve should assume new powers to protect the financial system and intervene in the workings of Wall Street firms.

                Responding to the major loss of Bear Stearns, and the emergency steps the Fed took to keep the dissolution from causing a major international catastrophe, Paulson plans to promote the permanent powers of the Fed to respond to any future emergencies. In March, the central bank threw out decades of precedent and provided financial backing for J.P. Morgan Chase's acquisition of Bear Sterns, and made emergency loans available to all major investment firms.

                The new recommendations push beyond the financial regulation plan Paulson offered earlier this year, which proposed a bigger role for the Fed without details on what that role would entail. The planned comments for today will offer these details, suggesting the Fed should have the power to step in when a firm poses risk to the system, as well as the power to mandate information sharing from financial institutions to anticipate future problems. This last recommendation will prevent banks and other firms from assuming they can continue risky behavior and still be bailed out.

                Paulson's speech comes at the same time as a potential shift in the residential environment. Major mortgage lenders have agreed to assume greater responsibility for and simplify and speed up assistance for assisting homeowners in distress. This move is in response to complaints that lenders have done little to offer help, even as foreclosures climb and late payments skyrocket.

                The new guidelines state that lenders will acknowledge borrowers' help requests within five business days, approve or deny requests within 45 days, and update borrowers with status after 30 days. The guidelines also encourage lenders to beef up staff to better respond to homeowners in need, and to consider pausing foreclosure when homeowners contact them.

                Related from the Washington Post
                Paulson To Urge New Fed Powers
                Mortgage Lenders Pledge More Help For Homeowners
                Fuel Costs Pushed Up Inflation In May

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                Saturday, June 7, 2008

                May Employment Report Spooks the Market

                The Labor Department reported on Friday that payrolls in the month of May fell by 49,000 as job losses continued for the fifth consecutive month, now totaling 324,000 for the year. The unemployment rate rose a surprising half a percent from 5.0% in April to 5.5% in May, reflecting the biggest month over month increase since 1986. The number of unemployed grew to 8.5 million in contrast with this time a year ago when the unemployment totals stood at 6.9 million. The impact of the housing and credit crisis is continuing to take its toll on the economy yet skyrocketing energy prices are a significant culprit as well. Most Americans are being hit from both sides as the value of their home is declining just as other expenses are rising resulting in a drop off in consumer spending leading to a further loss of jobs.

                The percentage increase in the unemployment rate was sharper than analysts had anticipated, as most had expected a job loss of closer to 60,000 rather than the 49,000 reported. Many teenage students reported entering the workforce and this may have resulted in a seasonal deviation in the report as teen unemployment experienced its biggest spike since 1948. May's employment report was therefore greatly impacted by both new entrants as well as re-entrants coming into the labor pool. Job growth continues to remain fairly robust in the areas of healthcare, education and government hiring. However the jobless rate overall now stands at the highest level since October of 2004. The Dow fell 395 points or 3.13%, the NASDAQ dropped 75 points or 2.96%, while the S&P 500 fell 43 points or 3.09%, sustaining the sharpest sell-off in three months.

                Mortgage Rates improved as investors shifted out of stocks. This could be an opportunity to lock in a low fixed rate.

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                Friday, May 23, 2008

                Freddie Mac Reports Massive Losses

                Freddie Mac, the stalwart government-sponsored entity responsible for mortgage funding and market reporting, has been hit hard by the struggling economy, a recently released report shows.

                In the three-month period ending March 31, Freddie Mac lost $151 million, or 66 cents per share. In the first quarter of 2007, Freddie Mac lost $133 million, or 35 cents per share.

                While it may seem that the increased loss is significant but not deadly, the bottom line numbers do not reflect the building cost of actual and anticipated losses from defaults, foreclosures, and other credit-related expenses. Freddie Mac reported $1.45 billion of these expenses in the three-month period ending March 31. This represents an increase of more than 50 percent from the previous quarter and more than fivefold from the first quarter of 2007.

                Put another way: the estimated asset value of Freddie Mac was $12.6 billion on December 31 of 2007. On March 31 of this year, the estimated asset value plummeted to a negative $5.2 billion. If not for changes in valuation methods, the estimate would have sunk by an additional $4.6 billion.

                Freddie Mac is an organization formed by the government to keep credit liquid and mortgage money flowing. The company packages mortgages into securities for sale on the secondary mortgage market, and covers the loan payments if borrowers default. With the booming housing market, Freddie Mac and the other government-sponsored entity, Fannie Mae, were also booming. Accounting scandals at both firms, however, pointed the way for problems with the rest of the housing market and enhanced the damages from the subprime fallout.

                Freddie Mac is required to maintain minimum levels of capital as protection against losses, but the government is currently decreasing this amount, counting on the company to help support the struggling market. To raise additional capital, Freddie Mac plans to sell more common and preferred stock, diluting current investor shares and increasing costs to the company, but adding power to Freddie Mac’s ability to meet the housing market’s needs.

                Freddie Mac's financial woes are indicative of the housing market and financial services companies’ troubles, with rising loan delinquencies and falling home prices causing massive fallout.

                Related Article at Washington Post

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                Thursday, May 1, 2008

                Fed Makes Last Interest Rate Cut in Series to Stimulate Economy

                After seven months of interest rate cuts in a campaign to boost the sagging U.S. economy, the Federal Reserve cut a key interest rate yesterday and signaled this would be the last.

                The Fed lowered the federal funds rate, the interest rate banks use when lending to each other, to 2 percent. The goal with this cut is to create lower borrowing costs for adjustable-rate mortgages, credit cards, or business loans, and to offer one more means to prevent the current economic downturn from extending.

                In a statement issued with the cut, the Fed indicated this was potentially the last cut in the foreseeable future, but left open the possibility of further cuts if the economy continues to deteriorate. The cut comes at the same time that a new report indicated the economy grew at a small, but better than expected rate in the first quarter. The 0.6 percent annual rate growth, along with fiscal stimulus checks mailing this month, is influencing the Fed's restraint for the time being.

                The risks from continued and prolonged interest rate cuts are significant, and important to weigh against the burgeoning economic problems. High inflation, caused by higher prices for food and energy, could raise expectations for future inflation, creating a self-fulfilling prophecy. Continuing to cut the interest rate could weaken the dollar further, and worsen inflation. Plus, continued lowering of rates could undermine the Fed's credibility as an authoritative source for fighting inflation and economic troubles.

                Details about the higher prices for food and energy surfaced Thursday. The Commerce Department reported that consumer spending is up 0.4 percent, higher than forecasts. But inflation is responsible for much of this increased spending: without inflation, spending increased by 0.1 percent. The figure for consumer spending is important, as two-thirds of economic activity comes from consumers. Too big of a slowdown could push the country into a recession.

                The interest rate cut is another bulwark against deepening economic worries, including the 1.1 percent drop in construction spending in March, a decrease lasting 23 straight months. Unemployment claims rose by 35,000 to 380,000 last week, almost double what economists expected. Unemployment and job losses are also expected to rise in April figures.

                Washington Post Articles:

                Fed Cuts and Signals Halt

                Soaring prices for food, gas push consumer spending higher

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                Tuesday, April 29, 2008

                Fed Releases Regional Economic Stats

                (from April 22, 2008)

                The so called Beige Book report of regional economic statistics was released by the Fed to reflect the overall economic health of the 12 Districts of the Federal Reserve, seemingly taking the "economic temperature" of the nation since the month of February. The news appears to support a weakening economy in 75% of the districts as housing starts have fallen to a 17-year low and foreclosure filings climbed 57%. The news on property values is also bleak as prices have fallen in many areas of the country and could be down by as much as 10% in some locations as the supply of homes for sale continues to outpace demand. Tightened lending guidelines, coupled with the declining credit quality of many loan applicants, means the pool of qualified buyers will continue to shrink dramatically. Overall consumer spending, the linchpin of economic activity in the U.S., has declined in response to the housing crisis as retailers nationwide have begun reporting slow to declining sales, in areas beyond that of the automotive industry, in over 80% of the districts.

                The unemployment rate is 5.1% while the consumer price index (CPI) rose 4.00% with the core rate, which excludes food and energy, rising 2.4%. However anemic growth had been reported by the end of 2007, as overall growth had slowed from the brisk pace in the 3rd quarter of 4.9% down to 0.6% by the 4th quarter as both consumption as well as business spending had slowed decidedly. In response, the Fed has exercised a policy of monetary easing as they have brought the Fed Funds rate down to 2.25% from 4.25% and will be expected to cut another .25% from the rate at the next FOMC meeting on April 29th-30th.

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                Tuesday, April 22, 2008

                Existing Home Sales Decline Again

                Existing home sales dropped in March, yet another sign of a housing market spiraling downward and dragging the greater economy with it.

                The 2 percent drop was the seventh decrease in eight months, according to the National Association of Realtors. The median price of a home also decreased to $200,700, a 7.7 percent drop from last year and the seventh consecutive year-over-year price drop.

                In addition, the National Association of Realtors revealed a survey showing 18 percent of homes up for sale in March had negative equity. These homes, where the mortgage was larger than the value of the home, are either in foreclosure or in "short sale." In comparison, from 2002-2006 this amount of negative equity stayed around 3 percent.

                Sales are falling as a result of increasing loan restrictions on the one hand, and the prospect of further price declines on the other. Defaults on subprime mortgage loans have led banks to tighten credit and borrowing rules, resulting in less people able to get mortgage loans. For those borrowers who can obtain loans, home values continue to decrease and savvy buyers are waiting until prices hit bottom.

                The inventory of homes on the market keeps rising, causing prices to continue to drop. Unsold homes increased 1 percent in March to 4.06 million homes, representing a 9.9-month supply at the current sales pace. Rising foreclosures are pushing more homes on the market.

                Existing-home sales make up around 85 percent of the U.S. housing market, and new-home sales make up the rest. Figures from the Commerce Department are expected later this week on sales of new homes, and a 13-year low is predicted. Decreasing overall sales are encouraging builders to stop construction and/or reduce prices. The amount of new homes initiated in March, 947,000, was the lowest in 17 years.

                Different areas of the country are experiencing the drop in home sales differently. For March, sales were down 6.5 percent in the Midwest and 3.5 percent in the South, but they increased by 2.2 percent in both the Northeast and the West.

                Washington Post Article: Existing home sales fall in March

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                Thursday, April 17, 2008

                Economic Reports Profile Sputtering Economy

                Reports released today confirm much of the bad news we've been hearing about the economy.

                According to the "beige book," a combination of anecdotal reports prepared by the Federal Reserve that chronicle business conditions from around the U.S., the economy is slowing, the homebuilding sector is tanking, and prices are rising to painful levels.

                The residential real estate and construction industry are "anemic," according to the book. The Commerce Department provided more specifics this week on this sector of the economy, nothing that builders started 11.9 percent fewer units of housing in March than in February, a huge decline. Permits for single-family homes are down 63 percent from the 2006 peak. Both numbers together indicate a picture of significantly reduced building activity. But this could actually be a good thing. The backlog of houses available for sale, an astounding surplus nationwide, combined with less construction, could actually help reset the balance of supply and demand, and prod the economy back in shape.

                Consumer spending is softening, said the beige book. Plus, prices are rising. Consumer prices were up 0.3 percent in March, according to the Labor Department. Rising prices are due to increases across the board, but are driven particularly by natural gas and heating oil. Food prices are also increasing. In March, food prices rose 1.2 percent from big price jumps in vegetables and beef and the biggest increase in rice prices in more than five years.

                Producer prices are also spiking, but so far businesses have kept the majority of price increases away from the consumers. The producer price index rose 1.1 percent last month, the largest increase since November (which experienced the highest one-month increase in 33 years) Over the last year, producer prices for finished goods are up 6.9 percent, the biggest year-over-year increase in nearly two years.

                With the cost of living going up consider finding your lowest mortgage rates at ERATE

                Since increased producer prices are not affecting the majority of consumer products yet, core inflation (price increases of goods other than food and energy) is still at manageable levels for the Federal Reserve. But the forecast for the immediate future is uncertain.

                Washington Post Article:

                Fed: Economy Worse Off Than Believed

                Producer Prices Rise 1.1% in March; Food Up More Than Expected

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                Wednesday, April 16, 2008

                World's Central Bankers Address Credit Crisis at G-7 Meeting

                Heads of Finance from Canada, France, Germany, Italy, Japan, the United Kingdom and the Unites States all met this week in Washington. The meeting came a day after Europe's Central Bank President issued a warning that the crisis in the financial markets may develop into a broader economic dilemma. But the so called G-7 finance ministers found little common ground upon which they could agree in dealing with the crisis as each country maintains differing viewpoints on the level of responsiveness required to combat the problem. Discussions involving strengthening the regulatory environment in which the financial industry operates failed to address the pressing need to mitigate the current market crisis. While implementing more stringent regulations would certainly help prevent the recurrence of a similar crisis again in the future, agreement must be reached now to minimize the damage from the existing crisis before re-focusing on the future.

                Unfortunately a joint, coordinated level of cooperation appears unlikely as each of the G-7 nations is facing different economic problems and a one size fits all approach will not work. In the United States, the economy is slowing rapidly and the threat of recession is looming, while in Europe inflation seems to be the overriding concern as they are facing the worst rate of inflation in over 15 years. Given this backdrop, it is unlikely that coordinated monetary and fiscal policies could be effectively applied. However looking toward the future, agreement could be reached on issues of improving the level of multi-national cooperation in both monitoring and regulating the financial markets. Agreement may also be reached in implementing new levels of financial transparency along with the disclosure of losses and raising the over all capital requirements. Steps which could be taken jointly now by the central banks, include lending to foreign banks as well as following the path of the U.S. Fed in lending shorter term government securities and acquiring mortgage-backed assets. ERATE is an excellent source to find the lowest mortgage rates in your state for nearly all loan programs.

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                Expansion of FHASecure Program Proposed

                With over 8.5 million homeowners having virtually little to no equity in their homes, fears of mounting foreclosures continue to grow. In response to the problem, the White House has proposed expanding a program which has been in place since August of 2007 to help stem the tide. This existing Federal Housing Administration (FHA) program makes it possible for many low to moderate income borrowers to refinance into government-insured mortgages, resulting in more manageable monthly payments and helping almost 100,000 homeowners by expanding the role of FHA in dealing with the nationwide credit and housing crisis. FHA loans are insured by the federal government in cases of default though the mortgages themselves are made by private mortgage lenders such commercial banks and mortgage bankers, then after the loans have funded, they are bundled, packaged and sold as mortgage-backed securities known as Ginnie Mae's.

                The program, called FHASecure, was established last year to help homeowners in distress who had some equity remaining in their home and had been able to make their mortgage payment but would face a substantial rate increase in the process of refinancing into a government insured fixed rate mortgage. Therefore the program was geared to help borrowers who were stuck in adjustable rate loans (ARMs) and were able to meet their payment obligation up until the point that their interest rate reset higher. About 150,000 homeowners have been able to refinance under FHASecure and the program is projected to reach an additional 400,000 by year's end. Under the new expanded rules proposed, a borrower would be eligible for a refinanced FHA loan even if they were delinquent in making several mortgage payments. With home prices on the decline now in many areas of the country, concessions would be required by both lenders and investors of mortgage-backed securities, because without a reduction in the principal balance owed on the mortgage, a borrower would be left in the position of having to come up with 3% equity in order to refinance. Naturally for an already financially stressed and cash strapped borrower this is not feasible and refinancing is not possible with out agreement by all parties on a reduction of the principal balance. It appears to be the judgment of the Bush Administration that it is the lender and the investor who should bear the responsibility for doing this rather than asking the U.S. taxpayer to assume the burden. Excellent source to find your lowest mortgage rates.

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                Thursday, April 10, 2008

                Senate Passes Contentious Housing Package; Bush Offers Own Plan

                A bipartisan package offering assistance to businesses and homeowners hurt by the housing crisis passed the Senate today with an impressive 84-12 vote.

                The plan includes large tax breaks for homebuilders, a $7,000 tax credit for buyers of foreclosed properties, and $4 billion in grants to buy and improve abandoned homes. The bill also includes $150 billion in pre-foreclosure counseling and stronger loan disclosure requirements. Finally, it includes $10 billion in tax-free mortgage revenue bonds to help homeowners refinance subprime loans.

                Despite the show of support, the bill has many detractors including the House and the Bush Administration. Opponents claim the package is biased in favor of businesses instead of homeowners and bails out lenders with taxpayer money. They contend the tax credit for the purchase of foreclosed homes will unfairly reward purchases happening anyway, give banks an incentive for foreclosure, and depress home values. The House will likely reject key points in the package.

                Another key sticking point seems to be the $25 billion tax break offered to homebuilders and other businesses experiencing heavy losses. The tax break was dropped from an earlier bill after criticism, but was added to this package after increasing worries among the public and policymakers about the housing crisis.
                The Bush administration offered its own proposal on Wednesday. This narrower plan aims to rescue 100,000 homeowners at risk of foreclosure with relaxed government-backed loans standards and increased loan forgiveness.

                Subprime borrowers who have missed two or three mortgage payments will be eligible for assistance from the Federal Housing Administration. More specifically, borrowers who have missed two payments and have at least 3 percent equity, and those who have missed three payments with 10 percent equity, would be eligible. Lenders will be encouraged to forgive portions of some loans and enable refinancing.

                The plan drew immediate criticism from consumer groups, who said the small measures would do little to help homeowners with no equity and the millions of homeowners facing resetting loans and foreclosure.

                Washington Post Article:
                Scant Support for Senate Housing Bill

                White House Presents Plan To Aid Subprime Borrowers

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                Tuesday, April 8, 2008

                Bernanke Talks Recession; Groups Oppose Treasury Plan

                Confirming what many in the industry and throughout the country already believe, Federal Reserve Chairman Ben Bernanke suggested this week that the U.S. might be in a recession.

                In comments to the congressional Joint Economic Committee, Bernanke projected the economy could shrink and contract during the first half of this year. He couched his first use of the term "recession" with optimism, saying he expects growth in the second half of the year, and thinks 2009 will be solid on the basis of the recent interest rate cuts and the fiscal stimulus package.

                Bernanke outlined the issues that contribute to his assessment of recession, including a stagnant unemployment rate, decelerating consumer spending, tighter credit, and reduction in business prospects and spending.

                Analysts believed the Fed Chair's comments explained some of the unprecedented actions in recent weeks, including continuing interest rate cuts and an intervention to save Bear Stearns from bankruptcy. Bernanke claimed the move to help the Wall Street company is a direct motion to preserve credit and financial solvency for the country.

                Bernanke's comments came as opposition grows to the Treasury plan to overhaul the nation's financial regulatory structure in attempts to streamline government response to such crises in the future.

                The plan, released this week by Treasury Secretary Henry M. Paulson Jr., offers up a wholly revamped system of regulation in the coming decade, correcting the oversight mistakes that led to today's current crisis. The Treasury hopes to create three more powerful agencies to monitor and oversee banking, market stability, and consumer and investor protection in mortgage lending and other activities. Another goal is to ease the approval process from the Securities and Exchange Commission for mortgage-backed bonds, so oversight is more complete. Eventually the SEC would merge with the Commodity Futures Trading Commission. Finally, the plan also grows the role of the Treasury into chief regulator of financial markets.

                The mounting opposition (from lobbyists and members of the Bush administration) contends the plan is too widespread, shutting down longtime financial institutions. Banks could have less choice among regulators and credit unions could be placed under new, business-killing regulations. The SEC and CFTC are crying foul about their major overhauls. Finally, many opponents are questioning the wisdom of centralizing regulation into the Treasury, and the benefits of it for the greater economy.

                Washington Post Article:
                It Might Be a Recession, Fed Chief Tells Congress?
                Opposition To Treasury's Blueprint Gains Steam

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                Tuesday, April 1, 2008

                Insurance Losses Due to Sub-prime Top Those of Natural Disasters

                Insurers are now faced with the prospect of having to hold onto mortgage-backed securities in a market where buyers for such investments have all but disappeared. Without buyers it is difficult if not impossible to establish value and on that basis a ripple effect throughout the entire organization occurs without hope of a turnaround. There is much doubt as to whether significant portions of mortgage-backed debt will ever reach maturity unscathed. The continually unfolding developments resulting from the mortgage meltdown are forecast by many within the industry to ultimately produce a bigger hit to insurers than any of the previous natural disasters. Losses resulting from mortgage-backed securities continue to be revised upward from all initial estimates with no end in sight. And for the first time since the late 1990's the book value of 24 companies within the KBW Insurance Index actually declined.

                Total industry losses currently exceed $38 billion and that is not where things will likely end. As auditors continue to process the financial standings of the insurers, many are found to have underestimated their losses and incorrectly valued their holdings. Many portfolio managers are now being advised to carefully weigh the credit quality of all that is purchased to insure each acquisition can safely be held to maturity. Markdowns on many of the now defunct mortgage-backed assets will continue to occur as the assets supporting them, namely home values, continue to decline. It is difficult to project when a bottom will be reached and the course reversed as many insurers may continue with write downs resulting in losses spanning the next five years.

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                Tuesday, March 25, 2008

                Consumer Confidence Lowest Since 2003

                A slumping housing market and skyrocketing gas prices have pushed consumer confidence to a five-year low.

                The Conference Board, a business-backed research group, reported Tuesday a Consumer Confidence Index score of 64.5 for March, a drop from the score of 76.4 in February. The March score is far below the 73.0 expected by analysts, and is the worst since March 2003, prior to the U.S. invasion of Iraq. The score then was 61.4.

                The Consumer Confidence Index has shown a pattern of decline since July of 2007. The Conference Board and industry analysts predict sagging consumer confidence will continue, deriving from a depressed job market, uncertain business conditions, and the credit crunch.

                Weakened consumer confidence is an important factor in determining the overall strength of the economy, and the outlook for the future. Lower confidence usually translates to reduced consumer spending. Less money pumping in from consumers will further damage the sputtering economy.

                The Conference Board also reported steep declines in companion indexes. The present situation index dropped to 89.2 in March, a slump from 104.0 in February. The expectations index dropped to 47.9, the lowest score in 35 years. Contributing to this index score is a growing number of consumers who are pessimistic about business conditions, expecting them to worsen in the next six months. Consumers also expect fewer jobs to be created during this time.

                These reports also came with new data on the freefall in home prices. Standard & Poor's/Case-Shiller home price index reported the biggest drop in U.S. home prices in over 20 years. Prices fell 11.4 percent in January, the largest decline since 1987, when the index was first collected.

                Taken with the prices from the last 19 months, the recent drop shows a pattern of over a year and a half of declining or slowly growing home prices.

                Figures like these are encouraging some analysts to announce the existence of a recession. Many policymakers, government members and economists have been reluctant to suggest a recession is here, but others contend it's already arrived.

                Washington Post Article

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                Tuesday, March 18, 2008

                Is the Fed Rate Cut What the Housing Doctor Ordered?

                Source: Informa Research Services

                Today, the U.S. Federal Reserve slashed the discount rate by 75 basis points down to 2.25%. But how does the Fed rate cut affect you and your search for a new home? Is the Fed rate cut the miracle elixir to cure the housing market pain?

                When the Fed makes a rate cut, it actually doesn't affect consumers directly since the Fed funds rate is the rate that financial institutions are charged for overnight loans to fulfill reserve funding requirements. However, this does affect consumers indirectly by allowing financial institutions to offer more financing options, possibly at lower rates.

                The Fed cut should not directly affect fixed rate mortgages, but it can have a more immediate impact on short term loans, such as adjustable rate mortgages (ARMs). Check online rate comparison tables to stay up to date with rates in this volatile market.

                This should be good news for responsible borrowers looking to purchase a home. If home prices either continue to drop or stay put, and more financing options become available, the market may look like a buyers market soon enough.

                But if you already own a home, don't fret! The Fed rate cut could mean an opportunity to refinance an existing mortgage at a lower rate or use your equity to fund home improvement projects. However, be aware that some lenders will have set floor rates. These floor rates may be set slightly higher than how the rate is typically calculated, which is prime rate plus a margin. To be sure you are getting a good rate, check convenient home loan equity rate tables.

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                Monday, March 17, 2008

                Fed Working Overtime This Weekend

                In order to head off the global market repercussions that a collapse at Bear Stearns would surely have, the Fed worked through the weekend to help facilitate an acquisition deal between Bear Stearns and JPMorgan Chase. Just last Friday the Fed, in conjunction with JPMorgan Chase, worked quickly to save Bear Stearns from the brink of insolvency and over the weekend the Fed made further strides by offering special financing to JPMorgan Chase so it can proceed with an acquisition of Bear Stearns. Many details have yet to be disclosed but it appears that the Fed will fund up to $30 billion of Bear Stearns illiquid mortgage-backed assets and that JPMorgan Chase will acquire the battered 85 year old institution for approximately $236 million. Then as added insurance, the Fed moved to cut the discount rate, that is the interest rate which banks are charged on loans received through their regional Federal Reserve Bank's discount window, from 3.50% to 3.25%. It is hoped this move will help prevent the deepening crisis from spreading even further as financial markets re-open on Monday. The Fed is also expected to cut the fed funds rate, that is the interest rate which banks charge each other for overnight loans, when it holds its scheduled FOMC meeting this coming Tuesday and Wednesday.
                To find some of the Lowest Mortgage Rates click the map on our homepage.

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                Saturday, March 15, 2008

                Fed Pulls Out Depression Era Stops in an Effort to Save Bear Stearns

                The hits just keep coming for the Fed as things continue to go from bad to worse as they are forced to utilize provisions not employed since the Great Depression in order to rescue beleaguered Bear Stearns from insolvency. The nation's fifth largest investment bank has been struggling on life support as a result of problems related to wide-spread losses incurred by mortgage-backed securities. Bear Stearns was amongst the first to disclose mortgage related problems in the summer of 2007 when several of its hedge funds collapsed; it has amassed up to $2.75 billion in write-downs to date. The situation snowballed as rumors of insolvency circulated and what amounted to a bank run on the investment banker occurred as nearly $6 billion (half the institution's value) was abruptly wiped out as customers, lenders and investors began to pull their accounts. Bear Stearns has nearly 14,000 employees globally. The Fed was then forced to act quickly, applying a depression era provision, by essentially using JPMorgan Chase as a conduit to lend funds to Bear Stearns for a 28 day period. The size of the loan was predicated on the amount of collateral that the besieged institution could put up but it is the Fed who will assume the default risk rather than JPMorgan Chase. However JPMorgan Chase is considered to have one of the healthier balance sheets on Wall Street today and as a result was seen as a good candidate to help in this situation. The loan's 28 day time frame is expected to allow sufficient time for a potential buyer of Bear Stearns to evaluate the extent of their mortgage related losses and come up with an acquisition proposal. Naturally JPMorgan Chase is tops on the list of potential suitors. Speculation grows about what may lie ahead in the coming weeks and what other financial land mines have yet to be unearthed.

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                Thursday, March 13, 2008

                Plans in Place to Help Distressed Homeowners and Their Lenders

                It appears that the full extent of the damage has yet to be revealed when it comes to the fall out from the mortgage crisis which began unraveling back in August of 2007. Since the disaster first unfolded a number of programs have been introduced to stem the growing tide of mortgage delinquencies and foreclosures. Lenders, servicers and investors are running scared as foreclosure numbers are expected to hit the million mark, almost four times the level which occurred in 2007, with the number of serious mortgage loan delinquencies now exceeding a million. It is estimated that 30% of home buyers of the past several years may currently be upside down on their loans, meaning the value of the home is less than what they owe on the mortgage. Another apparent problem with the so-called workout plans being promoted is that a high percentage of borrowers who take advantage of them may end up going into foreclosure anyway, that number is estimated to be as high as 40%. Many industry experts believe this is due to declining real estate values which encourage many borrowers to simply walk away from the home rather than renegotiate the mortgage terms. It has been proposed that a re-negotiated, reduced principal loan balance, based on current market values, would be a more realistic approach to the problem and would certainly make sense when one considers that IRS guidelines technically do not permit homeowners to even deduct the interest on a mortgage that exceeds the value of the property further compounding the problems of already distressed homeowners. Here is an overview of the some plans available to assist eligible homeowners:

                Hope Now Alliance - this plan was initiated by the Treasury Department and the Department of Housing and Urban Development (HUD). The objective of the alliance is to help those adjustable rate borrowers who have been able to make their mortgage payments at the start or initial teaser rate but would be unable to do so once the rate is re-set at the first loan adjustment. The suggested goal is to freeze an ARMs initial start rate for a period of 5 years and would apply only to those borrowers having less than 3% equity in their homes and having provided full income documentation on an owner-occupied residence (investment properties do not qualify). This plan is proposed for loans originated from Jan. 1, 2005 to July 30, 2007 which are due to re-set between Jan. 1, 2008 and July 31, 2010. The plan is voluntary for both lenders and borrowers as mortgage lenders and servicers are not required to comply.

                Project Lifeline - this plan was initiated by the six major lenders comprising 50% of the mortgage market in hopes of stemming the swelling numbers of REOs hitting their books. The goal of this plan is to extend help to all borrowers in distress, not just those in the sub-prime and adjustable loan categories, whether they are delinquent on their payment or not. It would give borrowers a 30 day window to work out an alternative to foreclosure, essentially offering a 30 day "pause" in the foreclosure process. This plan is available to owner-occupants only and does have some restrictions on eligibility and excludes: those who are bankrupt, borrowers who are more than 3 months behind on their mortgage payments and have a foreclosure date scheduled within 30 days. Those who are eligible for the plan are to receive an unsolicited letter advising them so, sent directly from their lender instructing them how to take advantage of this option. Find some of the lowest mortgage rates in your state.

                Operation Protect Your Home - this state sponsored plan was initiated in New York by both the New York Senate Democratic Conference and the New York State Banking Dept. The goal of this plan is to address the sub-prime crisis, particularly in the area surrounding the loan modification effort, in a more coordinated way to benefit all effected parties. With the primary goal of assisting those having difficulty making their payments or having already fallen into default. Letters are sent to at risk borrowers by their respective Democratic State Senator inviting them to participate in a local lending forum. Those borrowers whose mortgages are on tap to re-set or those who are already delinquent in their payments will receive priority, however the meetings are free and are open to the public. Check your state government website to see what resources are available in the state you live in.

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                Wednesday, March 5, 2008

                Fannie Mae and Freddie Mac Tighten Appraisal Standards

                In yet another regulatory rule sparked by the housing market decline, Fannie Mae and Freddie Mac have announced an agreement to stricter appraisal standards for home mortgages.

                The agreement is with New York Attorney General Andrew Cuomo, who has been probing fraud in the mortgage industry for the past year. The agreement is intended to discourage inflated appraisals, one of several major problems behind the subprime collapse and general housing slump.

                Fannie Mae and Freddie Mac are the government-sponsored entities that provide mortgage market liquidity and funding for mortgage loans. The two companies buy about 60% of all home loans originated in the country. With this agreement, Fannie Mae and Freddie Mac will buy only those loans from banks that meet strict standards of independent, reliable appraisals. The code of conduct will take effect in January of 2009, and will set a standard for the industry.

                The agreement includes several key components:

                > Lenders and their representatives will be barred from interfering with appraisals. Pressure from these sources cause appraisers to supply inflated estimates of property values. Appraisers are encouraged to succumb to such pressure: without appraisal values that allow loans to be extended, the appraisers risk losing business. aklamentilibin

                > Bank employees will not be allowed to choose appraisers.

                > Lenders will be prevented from using employee or affiliate appraisals as a basis for making loans.
                Lenders will not be allowed to use appraisals ordered by mortgage brokers.

                An independent monitoring organization will be created to ensure compliance with the new regulations.

                Appraisals are usually required by lenders before home loans are extended. The purpose of an appraisal is to provide a reliable estimate of the property's value. Inflated appraisals can encourage bigger loans than necessary. This can hurt the borrower in their monthly payments and when home prices fall; it can also expose the lenders to losses. Some experts contend that appraisals nationwide are inflated at least 10 percent.

                Related WSJ Article

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                Thursday, January 24, 2008

                Legislators Scramble to Save Battered Economy

                The housing market woes seeped into the greater economy over the last year. But in the last week, fears of a full-blown recession have caused panic and drastic action by regulators and lawmakers.

                On the heels of the surprise interest rate cut earlier this week, a dramatic 0.75 percent cut to the overnight bank lending loan that affects credit card, home equity, auto and other interest rates, the White House and congressional leaders proposed an economic stimulus package. The plan is intended to act quickly and prevent further panic on Wall Street and around the globe.

                Thus far it has bipartisan involvement and support, but the communal spirit is quickly deteriorating. Both parties are attempting to remain unified with President Bush, but business as usual in a gridlocked Congress is wearing down the goodwill. Lawmakers are attempting to hurry the package along, both to influence the economy as soon as possible but also to prevent the plan from falling apart.

                Treasury Secretary Paulson and House Speaker Nancy Pelosi are guiding the economic package development, totaling $145 billion. The stimulus package includes:

                • Tax rebates for individuals to spur consumer spending

                • Business tax breaks to prompt new investment

                • Extension of social welfare benefits such as unemployment aid and food stamps. This option may be exchanged for a progressive rebate plan that sends checks to all workers who make less than $75,000 a year or married couples who make less than $150,000.

                Other potential components directly focusing on the housing market include:

                • Expansion of the Federal Housing Administration's ability to insure higher-priced mortgages.

                • Temporarily increasing the size of jumbo mortgages available from Fannie Mae and Freddie Mac, from $417,000 to as high as $729,750.

                • Enhanced powers for the FHA to help homeowners threatened by foreclosure to renegotiate their loans, without sharp increases in their payments.

                Even if an agreement is reached and passed by next month, taxpayers might not see their rebate checks until June. Meanwhile, Democrats and Republicans are now arguing over additional components to the package.

                Washington Post Article about this subject

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                Monday, January 14, 2008

                Down Payment Options: What's My Best Bet?

                Source: Informa Research Services

                Everyone knows that the standard is to put 20% down on home purchases. But is this my best bet? In making this choice, do the math and ask yourself the following 3 questions:

                1. How long do I plan on living in the home?
                Depending on how long you intend on living in the house, you may or may not choose to make a substantial down payment. If you plan on staying in the home for a longer period of time, you may want to look into making a larger down payment if possible. However, because you don't get your down payment back, you may want to think about putting less money down if your plans are still up in the air.

                Also, figuring out whether you plan on staying in your home for 3 years or 30 years will help you decide what kind of loan you should get. For instance, if you plan on staying in your home for a shorter period of time, you may consider looking for an adjustable rate or interest only mortgage loan.

                2. How much can I afford to spend on my monthly mortgage payments?
                Because your down payment affects the amount you are borrowing, it affects the size of your monthly payments as well. Typically, when a larger down payment is made (and as a result, a smaller amount is borrowed), monthly payments are smaller. However, if this is not one of your options, then be sure that your monthly payments fit into your budget. Think about what kind of loans are available because your monthly payment will be determined by the type of loan you have. For instance, if you choose a 30-year fixed mortgage over an adjustable rate mortgage (ARM), your payments will stay the same for the life of the loan where as the payments on an ARM may change after the initial term of the loan.

                Remember, if you do not put 20% down, you may need to pay private mortgage insurance (PMI), which will be added to your monthly payment. Unlike the interest paid on most mortgages, PMI is not tax-deductible. The alternative to paying PMI is to get a "piggy back" loan, or taking out a second loan to help finance the 20% down payment.

                3. What options does my credit score provide me?
                It is important to see what options are available to you depending on your credit score. Good credit can save you money by qualifying you for better interest rates on your mortgage loan. For instance, let's take a person with a credit score under 620 versus a person with a credit score of 720 or higher (assuming a standard 30-year fixed, $300,000 mortgage loan). The person with the lower credit score would qualify for an annual percentage rate (APR) of 9.715% while the person with a higher credit score would qualify for an APR of 6.080%. In this example, having a better credit score could save you approximately $756 a month, or $9,072 a year (Source:

                Credit Score APR Monthly Payment
                Less than 620 9.715% $2,570
                700 and higher 6.080% $1,814
                Total Savings 3.635% $756/month
                (or $9,072/year)

                This applies not only to first mortgages, but second ones as well. For those with impressive credit, getting a "piggy back" loan can be less costly than paying private mortgage insurance. The rates available depend on your credit score, so be sure to use available resources to research rates.

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                Sunday, January 13, 2008

                Cleveland Sues Countrywide, Wells Fargo.... Over Subprime Mess

                Some of the cities hit hardest by the subprime mess may have a new option available if they follow the example of Cleveland.

                The city, the home to over 7,000 foreclosures in 2007, announced on Thursday it is suing 21 major banks and mortgage companies for their part in the subprime mortgage crisis. The suit says these companies created a "public nuisance" in violation of state law by pushing subprime mortgages in the city.

                Cleveland hopes to recover lost property tax revenue that numbers in the hundreds of millions. Homes left abandoned have been demolished, and neighborhoods hit hard by thousands of foreclosures have seen drastic increases in crime and have needed extra policing efforts. Overall, the city's tax base has been depleted, and entire neighborhoods are in ruin.

                The lawsuit alleges that the subprime model used in the city was completely inappropriate for the residents, and the lenders didn't care. Companies sued include Deutsche Bank Trust, Ameriquest Mortgage, Bank of America, Bear Stearns, Citigroup, Countrywide Financial, Credit Suisse (USA), Fremont General, GMAC-RFC, Goldman Sachs, Greenwich Capital Markets, HSBC Holdings, Indymac Bancorp, J.P. Morgan Chase, Lehman Brothers, Merrill Lynch, Morgan Stanley, Novastar Financial, Option One Mortgage, Washington Mutual and Wells Fargo Bank.

                Cleveland Mayor Frank Jackson said the activities by these investment banks and lenders amounted to a legal form of organized crime. He likens the end result of organized crime and drugs on neighborhoods and individuals as siphoning the equity and quality away. The same could be said for the subprime activities conducted by the lenders named in the suit.

                Cleveland is the first city to launch a lawsuit on this scale. Earlier this week, the city of Baltimore sued Wells Fargo, alleging they intentionally sold high-interest mortgages to African-American borrowers more than white borrowers, in violation of federal law.

                The suit launched by Cleveland is unique in its scope, and its targets: the investment side of the industry that feeds off the secondary mortgage market and encourages continued subprime lending. The suit states that although Cleveland had flat housing prices, along with widespread poverty and struggling manufacturing, investment bankers continued their activities at the expense of borrowers.

                More on this subject at Washington Post

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                Saturday, December 22, 2007

                Credit Freeze: A New Weapon for Putting the "Freeze" on ID Theft

                On November 1, 2007 your tool box for fighting identity theft got a little bigger, freezing your credit may be the best possible defense in protecting yourself against ID theft. A credit freeze involves blocking (or locking out) potential credit and ID thieves from gaining access to your credit information, including both your personal credit history and credit scores. By initiating a credit freeze you are requesting that the credit bureaus stop sharing information on your report without your express permission. This will effectively make it impossible for anyone to hijack your credit by applying for a loan in your name. Freezing your credit does require some effort on your part however it may be far less of a hassle than correcting the damage done by an ID thief or having to continually employ a credit monitoring service. In order to put the freeze on your credit into effect you are required to request it in writing by certified letter and to send it to all three bureaus, in addition proof of your ID will be needed.

                There are 39 states which have laws allowing for the freezing of credit and of the 11 remaining states which do not, you may still freeze your credit but the bureaus may require a fee from you to do so. The fee requested by each of the bureaus is generally about $10 to initiate the freezing and $10 to temporarily unfreeze it or to remove the freeze permanently so $30 total ($10 x 3 bureaus). If you have had the misfortune of being a victim of ID theft already, then the freezing service should be available to you at no charge. It is important to note that by freezing your credit profile from ID thieves you may also be freezing out yourself or at least creating some obstacles in getting access to your own credit when you need it. A freeze effectively locks out everyone (including you) and in order to remove the freeze you will need to contact each of the bureaus to have them take your credit out of deep freeze while you are going through a credit application process or applying for a loan, this will take time and will likely cost you $30. However you will only be required to go through the unfreezing process if you are working with a new creditor as those creditors you already work with or have an authorized relationship with will continue to have access to your credit information.

                For those consumers who do not anticipate the need to work with new creditors in the foreseeable future or believe they will not need to call upon their credit at all, this could be an extremely beneficial precaution to take. Even after considering the cost of freezing and unfreezing a credit profile with all three bureaus, this may end up being more cost effective in the long run than using a credit monitoring service. However if you don't want to spend the time or bear the expense involved that freezing your credit would require, you can still implement some credit protection for yourself by placing a 90 day fraud alert on your credit report with each of the three bureaus. An alert is not as much of a safeguard as freezing your credit but it does provide an added layer of protection in that the bureaus are required to take additional measures in verifying the accuracy of anyone applying for credit in your name. Key to using the credit alert vs. a credit freeze is that with the alert you must re-apply for it every 90 days in order to maintain it or risk it expiring on you.

                Please contact the 3 credit bureaus for more information on freezing your credit:

                Experian Security Freeze
                P.O. Box 9554
                Allen, TX 75013

                Equifax Security Freeze
                P.O. Box 105788
                Atlanta, GA 30348

                TransUnion Security Freeze
                P.O. Box 6790
                Fullerton, CA 92834

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                Thursday, December 20, 2007

                'Twas the Time for Great Rates

                Source: Informa Research Services

                'Twas the night before Christmas and all through the house,
                People like you were finding the best rates online with a mouse.
                The stockings were hung by the chimney with care
                And smart investors were online because best rates are found there.
                We exchanged presents wrapped in green and red
                While visions of great returns danced in our heads.
                From home equity and mortgages to checking and CDs
                I, too, looked online to find the best rates for me.

                As a gift to my parents, I helped them refinance their mortgage loan
                I found them a low 30-year fixed, so their payments won't grow.
                They're able to make the monthly payments with ease
                And they say it makes owning a home feel like a breeze.

                For those who already own their home at this time,
                Perhaps the gift of choice should be a home equity line.
                With the Fed cutting the rate again and again,
                Rates are the lowest they've ever been. (Well almost)
                If you want to tap into your equity, now may be the time,
                To pay off your credit card debt so it doesn't continue to climb.

                By using rate tables, I filled my wallet with cheer
                And ensured that gift-giving will be a little easier next year.
                Finding ideal rates online has become such a cinch
                Never again will I need to be a Scrooge or Grinch.
                Bring out the holly, garland, and yule log,
                Offer everyone some sugar cookies and eggnog.
                Use tables to check rates and make your finances soar,
                Happy rate shopping to all, from my home to yours!

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                Wednesday, December 19, 2007

                Fed Proposes Crackdown on Lenders and Lending Practices

                The Federal Reserve continued its flurry of activity this month by announcing on Tuesday a proposal for restrictive rules for mortgage lenders. The restrictions are aimed at limiting unfair and deceptive home-lending practices that contributed to this year's subprime meltdown.

                Generally, the rules take aim at unscrupulous lenders that target subprime borrowers and others, those borrowers being persuaded that they can afford loans that should be out of reach.

                "Our goal is to promote responsible mortgage lending, for the benefit of individual consumers and the economy," the Fed's chairman, Bend Bernanke, said in a statement. "We want consumers to make decisions about home mortgage options confidently, with assurances that unscrupulous home mortgage practices will not be tolerated."

                The Fed's proposals, which would mean changes to Regulation Z (Truth in Lending) under the Home Ownership and Equity Protection Act, would affect subprime lenders and borrowers:

                > Prohibit giving borrowers unaffordable loans. Some lenders use introductory interest rates on subprime adjustable-rate mortgages to determine a borrower's ability to repay the loan. However, this does not take into account the inevitable resetting to a higher interest rate, the bane of many subprime borrowers' current or future reality and the reason for spiking foreclosure rates. The Fed proposed that lenders base the determination of affordability on a borrower's ability to repay the loan at the reset rate.

                > Restrict use of loans without income verification. Some lenders make loans without verifying the income of potential borrowers. Homebuyers then end up with homes they can't and could never afford. These are called "liar loans" or "stated income loans," and the Fed wants to eliminate them by requiring verification of income and assets.

                > Prohibit or limit prepayment penalties. Many times prepayment penalties, like those incurred when homeowners want to refinance into more affordable loans, are overly punitive, adding up to six months of mortgage payments. The Fed wants to require lenders to waive prepayment penalties for 60 days prior to loan rate resetting.

                > Encourage (or require) escrow for taxes and insurance. Some lenders do not disclose the entire cost of the home, including insurance and property taxes. The Fed wants lenders to collect taxes and insurance along with the mortgage payment and hold them in escrow for the borrower until they come due.

                In addition to subprime loans and lenders, the Fed also made several proposals to improve all mortgage lending:

                > Make broker incentives restricted and/or transparent. Some lenders will pay brokers to lock-in borrowers to higher rate loans than they would normally qualify for. This is called the "yield spread premium." The Fed wants to outlaw these payments unless they are clearly disclosed to borrowers.

                > Prohibit appraiser coercion. Appraisers have often been pressured to overvalue homes by lenders. The Fed would end this practice.

                > Prohibit unfair loan-servicing practices. The Fed wants to eliminate late fees that are charged more than once ("pyramided.") They would require that servicers credit consumer accounts on the day of receipt and provide records of payments.

                > Require better disclosure overall. The proposed rules here include requiring complete and clear disclosure by lenders in ads and in person. This means all applicable rates advertised along with the "teaser" rates.

                The Fed is inviting comment on these restrictions for 90 days.

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                Thursday, December 13, 2007

                Fed Acts to Boost Economy and Prevent Additional Subprime Fallout

                The Federal Reserve made major moves this week to thwart a recession and improve economic growth.

                On Tuesday, the Fed cut the interest rate again, the third cut in the last few months. The group cut the federal funds rate, an overnight bank lending rate that affects interest on credit cards, auto loans and home equity loans. The rate now stands at 4.25 percent.

                The Fed also cut the discount rate, governing the interest banks pay to borrow directly from the central bank, to 4.75 percent.

                On Wednesday, the Fed acted again, announcing a plan to pump billions into the financial system to ease the burgeoning credit crunch.

                The plan involves auctioning off the rights to borrow money directly from the Fed. This means banks would be able to access funds without the usual interest, based on the discount rate. From December 17 until January 28, four auctions will be held, with the first two auctions offering rights at up to $20 billion each.

                Around the world, other central banks will offer similar auctions. Additionally, the Fed has established foreign exchange swaps, enabling the European Central Bank and Swiss National Bank to make loans in dollars. The goal of this step is to hopefully alleviate interest rates abroad.

                Analysts and economist say the auction plan could potentially help banks hurt deeply by the subprime mortgage meltdown. According to estimates, banks across the industry have already reported about $100 billion in losses associated with subprime mortgages.

                The Fed has made its interest rate cuts in efforts to stem the bleeding from the housing market turmoil, and prevent major economic fallout. With their announcement this week they acknowledged that "economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending." The Fed added that "some inflation risks remain" and the Fed "will continue to monitor inflation developments carefully."

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                Wednesday, December 12, 2007

                The Bush-Paulson Plan to Freeze Rates: It's Only a Start

                As usual the government is behind the curve on this one. It would have been far better to dissuade Wall Street from exploiting the misguided lending practices that got us into this mess is the first place however at least the now proposed plan is an attempt to bail out the poor homeowner and not the corporations. Wall Street made billions off of sub-prime debt and rather than questioning the sanity of what was happening they were generating so much money in the way of service fees that they were able to rationalize all the obvious risk away. The banking and financial industry felt compelled to sign off on the Bush-Paulson plan for fear of what congress would come up with if they did not. Up until now Treasury Secretary Paulson had maintained that the sub-prime crisis should be dealt with on a case-by-case basis, a position which would have tended to support a bill currently in the U.S. Senate granting bankruptcy judges the right to change the terms of a mortgage loan if a judge deemed it necessary in the course of a Chapter 13 proceeding. The authority extended to the bankruptcy judges under the proposed bill is to be permitted without any input from either the lenders or investors involved. The banks have already received some corporate relief as Paulson has put together a toxic debt superfund of some $100 billion to purchase the garbage short-term debt of the so-called structured investment vehicles (SIVs) which the banks themselves had set up to keep their poor quality mortgage-backed securities in off balance sheet entities (Enron deja vu).

                Who is the plan going to help?

                The government's goal is to help those borrowers who have been able to make their mortgage payments up until now but will struggle once their interest rate is re-set. The plan would effectively freeze these borrower's rates for a five year period. Targeted borrowers are those who obtained owner-occupied adjustable rate mortgages from January 1, 2005 to July 30, 2007 which are due to re-set between the period of January 1, 2008 and July 31, 2010. Borrowers with credit scores below 660 will receive much initial attention under the plan as these homeowners are the most likely to have been given adjustable loans with low teaser rates which are due to spike up to 7% to 9% in the coming months. These rate increases could translate into a hike in the monthly payment of those affected by as much as 30% in some cases.

                Are there any additional requirements of the borrowers targeted under the plan in order to qualify for the relief?

                All mortgage payments under the initial teaser or start rate must be current and paid up to the previous two months and borrowers must have provided income documentation to qualify for the loan. Additionally only those borrowers having less than 3% equity in their home will be eligible under the program. And as stated above, only those who are owner occupants of the affected properties will be eligible.

                Why are only the borrowers within that specific 2.5 year time frame being targeted for relief under the plan?

                Because it is those borrowers who purchased their homes at the tail end of the real estate boom who are likely to lose or have already lost equity in their homes and in some cases may now be upside down on their loans (essentially their home is worth less than the mortgage balance on it). These borrowers will have the most difficult time refinancing even if rates were to come down because they lack both equity and decent credit in this new lending climate. Foreclosure may be most likely for these homeowners because they stand nothing to lose by simply walking away from their home as they have little or no equity stake in it.

                Why does the government feel it necessary to get involved at this point?

                Because over two million sub-prime borrowers have loans on tap to re-set to substantially higher rates over the next two years. Housing prices are already declining in many areas and if foreclosures were to accelerate it is believed that every 70,000 foreclosures could translate into a 1% drop in home values. The hope is that the plan will forestall severe and on-going damage to the housing market nationwide which could potentially throw the country into an unprecedented recession as housing has become the linchpin of the economy and the underlying engine of both consumer confidence and spending.

                What are some of the obstacles to the plan?

                First and foremost the plan is a voluntary one, it does not require mortgage lenders to comply. The plan will stop the bleeding for the targeted borrowers but at whose cost and are those who are going to incur the loss going to take in lying down? The finger pointing has already begun and the potential lawsuits should have attorneys working overtime. As part of the plan a so-called "safe harbor" preventing lawsuits has been proposed but we will see if it is viable as it will likely be tested. Also of significance is what impact the governments interference in a private contract matter (from the standpoint of the investor) will have on the securitization of debt in the future as well as the over all confidence of investors, both domestic and foreign, in the integrity of the U.S. financial markets as it appears that supposedly binding legal contracts can be altered. Seems like a classic catch-22 situation for all involved.

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                The Fed's Impact on the Economy

                The Fed meets regularly every six weeks of the year to assess the state of the economy and after their two day Federal Open Market Committee (FOMC) meeting adjourns, the markets eagerly wait for any indication of their outlook on the economy or hints on the direction of interest rates. The irony is that the Fed, which is seemingly omnipotent in the eyes of the average American, really has no direct control over long term interest rates which determine what homeowners pay for a mortgage nor do they directly impact long term economic growth. What the Fed actually does is regulate monetary policy by setting short-term interest rates and controlling the supply of money in the short run. They do so through the use and control of the following tools:

                • The Discount Rate - this is the interest rate which the Fed charges to loan short-term funds from a Federal Reserve Bank directly to a member bank.

                • The Fed Funds Rate - this is the rate which banks charge one another for overnight loans. This is the key short term rate which directly influences changes in the prime lending rate which is charged to consumers and businesses.

                • Open Market Operations - this involves the buying and selling of government securities by the Fed whereby they can both inject (by buying) and drain (by selling) funds from the money supply.

                Through the use and control of the above outlined tools, the Fed can wield a lot of influence in the areas of both consumer and business spending thereby guiding economic growth. However what the Fed cannot do is control the cyclical nature of the economy and prevent its pattern of highs and lows. When the Fed decides to cut short term interest rates the news is normally well received by the financial markets and the bond market will rally unless it is perceived as overly aggressive and may possibly lead to a higher rate of inflation. If a Fed move is seen as too conservative, or not aggressive enough, bond investors will likewise reveal their disapproval by summarily selling bonds and the yield will go up as yield and price move in opposite directions.

                So if the Fed controls only short term interest rates, what influences rates in the long run? The answer is bond investors and they do so through the act of both buying and selling treasury bonds and notes. It is the bond investor's reading on the economy, influenced in part by the actions of the Fed and their resulting perception of Fed actions by bond investors which determines whether they will become either buyers or sellers of bonds. However other factors determine the behavior of the bond investor as well such as their future expectation of economic growth and the overall rate of inflation. Longer term economic growth is influenced by the government's control of fiscal policy which influences government spending as well as tax policies creating incentives for both consumers and businesses to save and invest.

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                Monday, December 10, 2007

                Sub-prime Mortgage Mayhem: Could it Effect You

                Your credit rating is so far from sub-prime it's practically super-prime, so you've never come even close to having personal experience with the notorious sub-prime lending universe, in fact it's another planet altogether. Listening to the updates on the news regarding the latest sub-prime casualty or reading about it is seemingly the only exposure you've had to the disaster or is it? It might take some investigating on your part but chances are you have been impacted by the problem more than you think. The financial aftermath of the subprime meltdown has touched the far corners of the financial world as stocks have been hard hit and rare would be the bond fund that did not own any mortgage-backed securities. It would be difficult to avoid having some exposure to the problem if you are invested any mutual funds which contain the terms "high-income" or "high-yield" in their fund name. And if you own a financial services sector mutual fund, you can count on having taken a hit, in fact it is important to note that the financial services area now accounts for an almost 20% weighting within the S&P 500. Services related to the real estate industry have become such a substantial part of the U.S. economy and it's over all performance that it would be next to impossible to escape being touched by the problem in some way. Real estate values and consumer confidence have now become flip sides of the same coin. As real estate has surged in recent years it has become the linchpin of economic activity, so it may now be a far greater component of your investment portfolio than you even realize.

                What can you do to protect yourself from the risk of the sub-prime industry's woes?

                • The first step would be to check your asset allocation to determine if your investment's exposure to real estate and its related industries has ballooned into too large a percentage of your over all portfolio. If this is the case then it may be time to make some investment changes, shifting your positions into other investment categories.

                • Consider taking a cash position in the market. Don't hesitate to increase your cash holdings and ride out the market gyrations and volatility from the sidelines. You can resume executing your investment plan, as well as adjusting your asset allocation, once things have settled down and the market has its bearings again.

                • As the economy wavers on recession, now may be the time to move into investment sectors which perform well during times of a sluggish economy. You may want to adopt a defensive strategy when picking stocks moving forward.

                • Take the opportunity to purchase blue chip companies that may be dipping in relative sympathy to their market sector. During times of uncertainty the baby is occasionally thrown out with the bathwater so to speak, be on the lookout for just such opportunities and bargains.

                Always consult with your tax or financial advisor regarding your own individual circumstances before taking any action which could have a significant impact on your personal taxes or finances.

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                Friday, December 7, 2007

                Bush Announces Limited Subprime Interest Rate Freeze

                After negotiations between federal regulators and U.S. lenders, the Bush Administration announced today a five-year interest rate freeze on subprime mortgages for certain borrowers at risk for foreclosure.

                The move, announced by President Bush and Treasury Secretary Henry Paulson, is designed to stem the rising numbers of foreclosures, and protect the borrowers whose adjustable-rate mortgages (ARMs) will reset to painful levels over the next year. The White House said the plan could help 1.2 million homeowners.

                With this plan, borrowers of adjustable-rate mortgages whose interest rates will reset in 2008, and who are current with their monthly payments, will have a five-year interest rate freeze.

                The freeze is limited, however. Anyone who is judged capable of making mortgage payments as they reset is exempt. Also, anyone more than 30 days late, or borrowers who have been more than 60 days late in the previous 12 months, will be excluded.

                According to the New York Times, the investment bank Barclays Capital estimates only 240,000 borrowers will be covered by the freeze, out of the 2 million subprime ARMs expected to reset in 2008 or 2009.

                In addition to the rate freeze, the plan will work to speed up other forms of help. The goal is to streamline the refinancing/mortgage modification process, allowing borrowers to move into a new mortgage or a Federal Housing Administration (FHA)-backed loan. Lenders will work quicker to examine loan criteria, credit scores, and payment history to make a determination on next steps.

                The plan comes about as the housing situation grows grimmer. According to Credit Suisse Group, more than 30 percent of borrowers with subprime adjustable-rate mortgages are behind on their payments, and face their loans resetting higher. An estimated 775,000 homes with $143 billion of mortgage debt will go into foreclosure over the next two years.

                This housing slump is affecting the greater economy, and this new plan and other recent legislation to reform mortgage management are attempts to end the drain on economic growth.

                The president, during his announcement about the subprime plan, also urged Congress to act quickly on pending mortgage relief legislation, which has been stuck in the Senate for some time. The legislation includes the FHA Modernization bill and other bills enhancing the mortgage refinancing process.

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                Sunday, December 2, 2007

                Is the Time Right for Bonds? Bond Market Investing

                This ERATE Blog Post has been featured by

                Now that the stock market has hit shaky ground, investors are looking for a safer haven to park their money. In July of 2007, the market briefly closed above 14,000 only to slide back down 1,000 point within a month. In the flight to quality that normally follows a downturn in the market, investors have begun turning to more secure holdings such as bonds. With the Federal Reserve having initiated the process of moving short-term rates lower in response to a slowing economy that was pushed in that direction by the fallout resulting from the sub-prime loan debacle, bonds are once again in the spotlight. Even if a recession is some how averted, the economy is likely to continue trending lower in both 2008 and 2009. As the housing market unravels, letting more air out of the tires, consumers will feel less confident in their spending ability. The disposable and discretionary spending of consumers is on course to experience a considerable pull back, thus dragging the overall economy down with it.

                The bond market is where debt issued by federal, state and local governments, as well as large corporations, is traded. The prevailing climate for interest rates is typically the key indicator for the bond market. When interest rates move higher, the value and therefore the price of bonds already issued at lower interest rates drops and conversely as interest rates move lower, those bonds previously issued on the market increase in value and therefore in price. Interest rates influence the demand for bonds and on the supply side the number of new bond issues coming onto the market has the defining impact as the market attempts to digest these new issues and supply and demand work to establish price.

                An advantage of bonds is that they tend to move in a direction opposite that of stocks and are therefore a good way to balance and manage the risk of maintaining equity holdings. Bonds also pay out a stream of income over time and are a relatively safe and reliable investment which produces a steady return. Currently the five and ten year issues may offer the best over all return, however a good way to invest in bonds is through bonds mutual funds. Consider a highly rated muni-bond fund which is typically a five to ten year general obligation bond issued by a municipality to finance a targeted project. Muni-bonds are insured as a requirement to support the bond and to back its safety and most are rated by the general rating agencies such as Moody's or S&P in an effort to reflect the solvency of the municipality having issued them. The critical selling point of muni-bonds is that their gain is generally tax-free which adds significantly to their yield.

                An exciting new development in the world of muni-bonds, they are now tracked by exchange traded funds (ETFs) making them an even more attractive investment as bare-bones expense ratios are the hallmark of ETFs. The national average for an expense ratio on a tax free bond fund is about 1.02%. Compare that to the 0.25% expense ratio of some the muni-bond ETFs and you will reap the benefits of investing in the lower expense ratio fund, increasing your overall return. The tax free element of muni-bonds works to increase the tax equivalent yield by 1%-2% if you are in the 28% tax bracket as an example. This combination of lower expense ratios, along with their tax-free status, make muni-bonds an investment worth taking a serious look at.

                Note that a key case regarding municipal bonds is currently being decided by the U.S. Supreme Court. The case originated in the state of Kentucky and will likely determine whether municipal bonds purchased by an investor who resides in a state other than the state where the municipal bonds were issued are indeed tax free. However the municipal bonds issued by and purchased within your state of legal residence are not at issue.

                Always consult with your tax or financial and legal advisor regarding your own individual circumstances before taking any action which could have a significant impact on your personal taxes or finances.

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                Tuesday, November 27, 2007

                Overloaded With Debt? Symptoms and Solutions

                Most of us intuitively believe we would know if we were overburdened by debt, that kind of stress should be clear and obvious. However for those who suffer a disconnect with common sense, and there are far too many among us, or for those whose rose-colored glasses are so thick they impervious to reality, here are some clear and concrete signs that your debt is getting the better of you:

                > You spend in excess of 20% of your net income servicing debt other than your mortgage.

                > You are not contributing to your 401(k) or other retirement plans because you need the take home pay to service your debt.

                > You use credit cards out of necessity and not out of convenience.

                > You are frequently hit with late payment fees.

                > You continually reach the maximum limit on your credit cards.

                > You play the game of credit card roulette using one card to pay off another.

                > You cannot meet the minimum payment requirement on your credit cards.

                If these statements hit too close to home or are precisely on the mark then it may be time for a dose of reality and financial maturity to take hold of you. What should you do to stop avoiding the problem and finally face up to it. Here are some steps you can take to begin addressing the problem head on:

                > Start by contacting your creditors and asking them to reduce the interest rates and fees on your accounts. Your account history with them will factor in big in their willingness to negotiate with you. Use the offers you have received in the mail (a rare occasion where junk mail may actually benefit you) as an incentive for your creditors to compete for your business. If the first person you speak with declines your request, ask to speak with someone else higher up the chain. Of course your goal is to remain with the creditor you already have your account with because closing seasoned established accounts and transferring balances to another creditor, could adversely impact your credit score in striking opposition to your goals and intentions.

                > You may want to consider transferring an account balance with one creditor to another if a new creditor is offering zero percent interest or another low introductory offer to entice new applicants to transfer their account balances. But if you play the transfer game you must be organized about it or risk defeating your purpose should rates spike up on you unexpectedly at the end of the brief introductory period. If you cannot be trusted to track this closely enough then you may want to consider opting for a low fixed rate offer that will remain unchanged for the duration of your debt. The key to implementing any balance transfer strategy is to eliminate the possibility of negatively impacting your credit score in the process by keeping the account which you are transferring out of open after you have moved onto a better deal. Closing any seasoned long term accounts can result in your credit score taking a hit.

                > If you find you are unable to negotiate with your creditors on your own, or if you need help establishing a budget as well as some oversight to help get you out of debt and remain that way, consider using the resources of a credit counseling agency. Choose your agency carefully and keep a watchful eye on any possible conflicts of interest between your goal of paying off your debt as quickly and cheaply as possible and the agency's compensation structure. It is best to use a non-profit counseling service which is sponsored by the credit card companies collectively as penance for their credit-card peddling practices. A non-profit service should charge you only a nominal monthly fee or a fee based on a small percentage of your over all monthly debt service. Note that the only occasion where consulting with a credit counseling agency could adversely impact your credit score would be if the counseling agency works to reduce or re-negotiate your debt (i.e. changing either the payment or interest rate) with a creditor on your behalf and that creditor reports to the credit bureaus that the debt was "not paid as originally agreed". However if you use the service strictly for debt management and budget development purposes, this should not result in anything being reported to the credit bureaus.

                > Filing for bankruptcy should naturally be your last resort and this process has been made far more difficult with the changes to the bankruptcy laws that went into effect in 2005. You will likely end up having to go to a court approved credit counseling agency before you can proceed in this direction and it may be wise to hire an attorney to advise you and help walk you through the process. If you do decide to go the bankruptcy route, and feel it is your only option, know that the decision will stay with you for some time to come making it more difficult to get credit at a prime rate. While most derogatory credit remarks will remain in your credit profile and on your credit report for a period of seven years, a bankruptcy filing will stain your credit history for ten years.

                Always consult with your tax or financial and legal advisors regarding your own individual circumstances before taking any action which could have a significant impact on your personal taxes or finances.

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                Monday, November 26, 2007

                Loophole Must be Closed on Misleading Credit Abuse

                An inadvertent loophole in the federal Equal Credit Opportunity Act (or (ECOA) has provided an open invitation for those seeking to abuse and profit from it. The Act permits the use of what's referred to as an "authorized user" account to establish a credit history rather than actually having to open credit in ones own name, this essentially allows someone to hijack the credit history of another person. Becoming an authorized user on an account opened by someone else (even someone not related to you) allows the authorized user to transpose the account holder's credit history and make it their own seemingly through osmosis. Absurdly the authorized user may not even have physical access to the account but is only noted as being an authorized user by the legitimate account holder. ECOA does not have any limitations on the number of authorized users permitted on an account and does not prohibit the outright rental of authorized user accounts by persons having legitimately opened an account.

                This is a shamefully misleading practice which credit repair companies have exploited to its fullest potential. These companies claim they can raise a less than stellar consumer's credit score by as much as 200 points in one to three months time. This feat is accomplished by despicably offering to pay a person possessing great credit a hefty rental fee, up to $2,000 in some cases, in exchange for being added as an authorized user on one of their accounts. Because the credit scoring system makes no distinction between the authorized user and the actual account holder, the credit history on the account is now seen as one and the same for both parties. This seemingly fraudulent practice is commonly referred to within the industry as "piggybacking".

                Both Fair Isaacs (developer of the FICO Score) and all three major credit bureaus have products in the works which will discount this practice when reporting an individual's credit rating but no changes have been rolled out currently nor are any being widely used within the lending and credit industries. Appallingly lenders and creditors alerted both legislators and bank regulators to this problem some time ago but no action has been taken to make the practice illegal. Hopefully Fair Isaacs and the credit bureaus will be able to introduce their new systems and eliminate the faulty and misleading credit enhancing impact of this practice sooner rather then later. In the meantime the opportunity to abuse the system exists for those who wish to take advantage of and profit from it.

                Those wishing to improve their credit scores will still be able to do so the old fashioned way. Note that even borrowers having filed for bankruptcy have been able to dramatically improve their scores and become "prime" borrowers in some cases within a period of only three years. By using credit wisely ones credit score can rebound with surprising resiliency. Using credit wisely means keeping the number of new accounts to a minimum, not closing any older accounts which reflect a good credit history and wrapping them into new accounts, also keeping the outstanding balances on all credit cards limited to a ceiling of 65% of the maximum limit allowed on the account. By following some simple guidelines you can turn a negative credit history into a positive one without having to pay someone you may not even know personally for the unethical privilege of hijacking their credit profile.

                For those persons who lack a credit history altogether and would therefore have difficulty obtaining a credit score, Fair Isaacs (developer of the FICO Score) has created a new FICO expansion score to gage the creditworthiness of those persons having minimal to no information reflected with any of the three major credit bureaus. Rather than using traditional credit card and loan payment histories to calculate a FICO score, the new expansion score is obtained by using alternate credit sources such as utility bills along with checking account management histories. This new scoring system will make life considerably easier for young people just starting out as well as those persons who are new to the country. Many credit card companies, as well as auto financing sources, have begun to accept the expansion score however it has yet to be widely used and accepted by mortgage lenders at this time but the hope is that this acceptance is coming in the near future.

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                Tuesday, November 20, 2007

                Legislation Watch: House Passes Bill Restricting Mortgage Lenders

                Desperate to show responsiveness and action on behalf of the growing number of families hit by the subprime crisis, the House passed a bill on Thursday restricting the activities of mortgage lenders.
                The bill forces mortgage lenders to obtain licenses to operate, makes them responsible for determining a family's true ability to pay mortgage payments, and fines them for pushing borrowers toward subprime loans.
                The bill sponsors say the restrictions are designed to prevent additional families from falling prey to the mortgage crisis. They recognize that the bill won't help families currently in trouble, but will go towards a better future.
                "What we have today is a bill that cannot undo what happened, but makes it much less likely it will happen in the future," said Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, to the Federal News Radio.
                More than 2 million adjustable rate mortgages are scheduled to reset by the end of 2008, and many American homeowners are expected to fall into debt. Supporters of this bill say that this situation could have been averted with stronger rules, and that past practices in the sub-prime market amounted to predatory lending, with confusing terms, high fees, and too much pressure by lenders.
                Opponents to the bill, including Republicans and the White House administration, warn that measures such as these and other congressional intervention can make things worse. They worried that action by Congress can make it harder for current mortgage holders to refinance, and are concerned that lenders would be expected to forecast borrower's ability to pay.
                Banking associations also oppose the bill. The Mortgage Bankers Association says the bill will limit credit availability and options for homeowners.

                The bill:

                > Prohibits lenders from making loans that borrowers can't repay

                > Bans lenders from pushing homeowners into refinancing that provide minimal benefit and exorbitant fees

                > Outlaws excessive fees for late payments

                > Makes Wall Street banks that package mortgage securities into investments accountable for lending law violation

                > Creates the Nationwide Mortgage Licensing System and Registry, a system for mortgage bankers and bank loan officers

                The bill passed 291-127 and now goes to the Senate, where another bill attempting to regulate the mortgage industry has been stalled for weeks.

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                Tuesday, November 13, 2007

                Sub-prime Mortgage Debt Relief and the IRS

                By Cameron Street

                The downturn the housing market is currently experiencing was both predictable and inevitable. Speculative buying spread throughout many areas of the country fueled by the unprecedented availability of loans to borrowers in the sub-prime credit category as well as other types of high risk adjustable rate loan products. Wall Street and its investors in these loan products, called mortgage-backed securities and the now notorious collateral debts obligation (or CDOs) sparked this combustible cycle with their insatiable appetite for yield and their willingness to take on imprudent levels of uncharted risk. Sadly many of the borrowers who acquired their homes through either sub-prime or the high risk ever-rising-property-value dependent adjustable rate loan products are now faced with the fact that the party has ended and they are going to be left with a huge debt hangover. Foreclosure is on the horizon for a high percentage of these borrowers but tragically their problems will not end there. As if losing ones home and the resulting devastating blow to ones credit weren't enough, many homeowners may not be aware that debt cancellation (also called forgiveness) by your lender will result in a 1099 being generated with your name on it in the amount of the unpaid debt. Essentially, the IRS is going to tax you on the amount of debt cancelled or forgiven by a lender as if it were ordinary income you received within that year.

                The debt you believed to be wiped out or "forgiven" by your lender is actually treated as income to you. For example if you were to borrow $250,000 from a lender to purchase your home and then you were to pay back only $50,000 and proceed to go into default on your payments after that, the lender will write off $200,000 in remaining outstanding debt which was owed by you and you would then receive a Form 1099-C (Cancellation of Debt) upon which ordinary income tax would be due. If interest on the mortgage is also forgiven, that could appear on the 1099-C as well depending upon whether or not the interest was tax deductible. Whenever personal debt is cancelled by any type of lender or creditor, the amount that is cancelled or forgiven is treated as ordinary income by the IRS unless the borrower in question is declared bankrupt or insolvent. A borrower would be deemed to be insolvent if after reducing the amount cancelled or forgiven debt from their original liabilities, the total outstanding debt still exceeds the borrower's total assets. You would claim relief of this kind on IRS Form 982 (Reduction of Tax Attributes Due to Discharge of Indebtedness) if applicable in your particular case.

                However fortunately help may be on the way, The Mortgage Cancellation Tax Relief Act of 2007 (HR 1876) would attempt to expand protection from the IRS by shielding those borrowers who are not bankrupt or insolvent. The bill would in essence amend the tax code to exclude debt forgiveness on mortgages secured by a primary residence from being treated as ordinary income. It is interesting to note that this change or amendment would simply be a return to IRS policy prior to the last infamous lending debacle, also know as the Savings and Loan Crisis. This legislation could also assist the expanding number of homeowners who are on the brink of foreclosure and are considering either a "short sale" or a "deed-in-lieu of foreclosure". A short sale involves selling your home for less than the amount of the mortgage(s) secured against it and a deed-in-lieu of foreclosure is simply an agreement between you and your lender that will permit you to turn over your deed or ownership of the property to your lender rather than proceeding with the foreclosure process, both aforementioned events would currently trigger a 1099-C from your lender. The bill is currently in committee where it will be reviewed prior to proceeding onto a vote by Congress. If passed this could result in easing the nation's sub-prime mortgage debt hangover to the tune of $2 billion in debt relief, a welcome tonic indeed.

                Always consult with your tax or financial advisor regarding your own individual circumstances before proceeding with any plan which may have a dramatic impact on your personal finances.

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                Monday, November 12, 2007

                Bankruptcy Judges May be Given New Sub-Prime Related Authority

                It is estimated that over 2 million homeowners who have acquired their homes by means of a sub-prime mortgage either have or will lose their home in foreclosure. It is also estimated that 25% of all sub-primes loans which were funded in the past 3 to 4 years will end in default wiping out approximately $145 billion in equity wealth as housing prices are on tap to continue declining over the next few years. Consumer action groups are taking the position that as home prices have already begun to decline on a nationwide basis, consumers, lenders and their investors will continue to lose much more over time if the pace of foreclosures is not stopped now. Compounding the problem for the consumer is the fact that current bankruptcy laws will make things more difficult for them in recovering from the devastating financial impact of losing ones home and trying to move forward with tarnished credit. As an unfortunate and untimely result of the 2005 changes to the bankruptcy code, an individual in financial trouble cannot pursue a bankruptcy filing option until they have first sought out credit counseling from a court approved credit counseling agency. This is a time consuming requirement which an individual facing foreclosure cannot afford as time is in very short supply.

                Frustratingly only 1% of risky sub-prime mortgages have been modified during the period of January through September of 2007 and for the month of October only a nominal number of so called loan work-outs or modifications occurred. The loan modification or workout process can be extremely complicated and time consuming because of the number of players involved in a mortgage loan transaction, each may be required to sign off on or approve any changes to the original loan terms. Those players are as follows: the consumer, the mortgage broker (if applicable), the funding lender, the loan servicer and the investor in the loan's mortgage backed security or now infamous collateralized debt obligation (CDO). Because all the players may have a legal stake in the process the water gets murky and everybody is either afraid of being sued or may be considering suing another player. This makes for an extremely hostile and difficult process under which to modify original mortgage terms. The process is far easier for the consumer who obtained their loan through one source that processed, underwrote, funded and serviced the loan all under one roof.

                So now it appears that what’s in the best interest of the consumer may be in the best interest of all parties involved and it may be left in the hands of a bankruptcy judge to decide. A bill sponsored by a congressional representative from North Carolina, Brad Miller (D), will allow bankruptcy judges to re-set mortgage payment terms at their discretion. This will bring mortgage debt in line with all other consumer debt from the perspective of how bankruptcy law handles insolvent homeowners. A judge would be allowed to change the interest rate on the loan, extend the loan term or even reduce the loan amount altogether, just as they would be permitted to do so with auto loans or with credit card debts. Bankruptcy courts have long been permitted to change the terms of mortgages on second or vacation homes as well as on family farms and now the primary residence would be given the same consideration.

                While consumer groups are squarely behind the bill, the lending industry is naturally in strong opposition to it. Lending industry representatives claim that this legislation will end up harming the consumer in the long run because it will raise the cost of obtaining a mortgage by increasing the uncertainty and risk involved to all parties who extend credit to the consumer. They claim that rates and lending costs have been low historically because a home is secured by a real asset and if someone is allowed to come in and arbitrarily change the value of that asset, the cost of borrowing will rise for everyone. If the terms of an original loan contract, initially agreed upon by all parties, can be altered down the line, this will bring added risk and uncertainty, thus increased costs, into the entire mortgage equation. In the end it would appear that how the law is applied, and under what conditions and circumstances, will be the ultimate test of whether the lending industry’s claims bear out. However given the prevailing complicated circumstances, it would appear that no one but a judge may be able to ultimately determine the right thing to do in each individual case given the specific circumstances involved.

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                Thursday, November 8, 2007

                ARMs Ready to Adjust, Lenders Respond to Troubled Borrowers

                Almost $50 billion in adjustable rate loans are scheduled to reset this month alone, many of them in the notorious sub-prime loan category, and $100 billion are on tap to reset by the end of 2008. It is estimated that over half the effected borrowers do not understand how their loans will reset or what their new payments will be. Sadly it may come as a shock to many borrowers whose payments could rise as much as 50%. It is also believed that many of the loans which were underwritten right up until the sub-prime implosion came to a boiling point last August, may pose an even greater risk to both the borrowers and lenders of the more recently closed loans as guidelines were not revised and tightened until that time. Since the housing market peaked at the beginning of 2006, home prices nationwide have fallen by as much as 6.5% and are expected to continue descending into next year. This decline in home prices could prevent the more recent crop of borrowers from selling as the inventory of housing climbs and values fall to levels which may be lower than the original mortgage, particularly for those borrowers having contributed little to nothing towards their down payment. Surprisingly 50% of the foreclosures which have occurred have happened without borrowers having ever consulted with their lender, therefore many lenders are now proactively attempting to get in front of the foreclosure problem by heading it off at the pass.

                Countrywide Funding, the nation's top mortgage lender, and the company seemingly at the center of the sub-prime mortgage calamity, announced recently a plan to either refinance or complete loan modifications on up to 80,000 loans. Countrywide has on its books approximately $16 billion in mortgages due to reset by the end of 2008. The advantage that Countrywide may have over other mortgage lenders is that they are likely both the funder and servicer of many of these loans, making the process of managing the problem loans much more streamlined for them versus other lenders who have more channels of authorization to go through in resolving their problem loans. Many investors will lose money in the loan modification process so they are not going to readily cooperate but could be forced to weigh this loss against that of losses occurring in the foreclosure process. Loans servicers are faced with a lack of qualified staff to help them in the loan modification process as loan counselors will need to be hired and trained in accordance with the lender's and investor's loan modification guidelines. It is believed that if loan servicers cannot beef up their staff quickly enough to meet the demand that they may be left with no alternative but to simply permit the high risk adjustable rate borrowers to have an additional 3 to 5 years of the initially low teaser rate payments before taking any further action. Lenders may also require that any unpaid interest under the original loan terms simply be deferred as negative amortization and wrapped into the borrower's principal loan balance. This would hopefully permit sufficient time to pass so that housing prices could recover as well as all the parties to the transaction.

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                Saturday, November 3, 2007

                Alternative Minimum Tax Deadline Looming for Legislators

                Lawmakers in Washington are scheduled to adjourn on November 16th and if they don't act by then an ever increasing number of taxpayers, about 25 million to be precise, are going to be hit with the so-called "wealth tax" also know as the alternative minimum tax or AMT. The vast majority of taxpayers that will be impacted in 2007 are going to be introduced to the AMT for the very first time and it will not be a pleasant introduction as the effected taxpayers will pay on average an additional $2,000 in income tax resulting from the AMT. To make matters worse, if congress fails to act fast enough, 25-50 million taxpayers could face a delay in the processing of their federal tax returns and consequently a delay in receiving their refunds.

                The Internal Revenue Service (or IRS) needs at least 12 weeks to process any changes made to the alternative minimum tax (or AMT) from the time that new legislation is passed into law. The re-programming that is involved within the IRS computer system requires millions of lines of coding which cannot be implemented over night and will require time for testing as well. Unfortunately the AMT is an integral part of the IRS processing system and much time will be needed to alter it. Therefore should congress delay until December in making any AMT changes, the IRS would not be able to process some 25 to 50 million returns until the mid-March time frame at the earliest. Of course the deadline to file a return is not until April 15th however those taxpayers anticipating a refund tend to file their returns far ahead of that deadline and for the 2006 tax year, the average refund amounted to approximately $2,260. The IRS is scheduled to send its 1040 instruction forms to be printed on November 7th and the agency should be ready to begin processing 2007 tax returns by mid-January.

                Unfortunately policy watchdogs and Washington insiders predict that major AMT reform legislation will not occur prior to 2009 and therefore would not go into effect until 2010 at the earliest. The best alternative for taxpayers would be if lawmakers were to pass a "patch" for 2007 which would prevent taxpayers with income levels at $45,000 (for joint filers) and $33,750 (for single filers) from being affected by the AMT this year. A patch was successfully implemented in 2006 which effectively raised the AMT exemption levels to $62,550 (for joint filers) and $42,250 (for single filers). The uncertainty surrounding the current AMT status has professional tax payers ready to pull their hair out as they have no way of currently determining which of their clients will be impacted.

                The alternative minimum tax (AMT) was originally conceived 40 years ago to prevent a small number of high wealth individuals from eluding taxes altogether, a flaw in the tax system at the time actually allowed this to occur. The problem with the AMT system today is that it has not been indexed to the median income levels within the various geographic regions throughout the United States. Therefore the AMT tends to hit the residents of expensive coastal and urban areas disproportionately to the rest of the country. There is of course strong taxpayer support for correcting the inequities within the AMT system however the political support to do so is now limited to solutions which are revenue-neutral and will replace the $500 billion to $1 trillion in revenue that is expected to be generated from the AMT over the next decade. This is where the catch-22 arises as there is no agreement amongst legislators on how to replace the AMT generated revenues and there are now other looming political crisis's taking the spotlight away from AMT reform, such as the recent sub-prime mortgage debacle.

                Beware of the potential impact of the AMT on you and your family if:

                > You have a combined household income is in excess of $100,000.

                > You take multiple itemized deductions, exemptions or credits which may not be permitted under the AMT system.

                > You don't itemize your deductions. AMT does not allow the standard deduction.

                > You have dependents or children. Personal and dependent exemptions are not permitted under the AMT system.

                > You are a resident of a high income tax state. Even state, local and property taxes are not deductible under the stringent AMT system.

                > You receive income from municipal bonds which is not subject to standard income tax but is subject to the AMT.

                > Exercising stock options (or ISOs) is a large and notorious trigger for the AMT to come into play.

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                Thursday, November 1, 2007

                Micro-Loans Small Loans, Big Impact

                While we continue the debate on what led to the collapse of the sub-prime market, there is good news circulating in the financial world and it's what is commonly referred to as micro-loans. If ever there was a feel good story in the loan universe, this is it. Micro-loans are part of a wonderful and exciting new category of banking called micro-credit. The economist from Bangladesh who pioneered this type of financing, Muhammad Yunus, deservingly won the Nobel Peace Prize for his efforts. These loans are made available to some of the most impoverished nations and people as sadly there are over a billion people in the world who survive off less than $1 a day. Micro-credit has been implemented in over 40 countries world-wide and is even available in the United States within the inner cities of urban areas. Micro-loans are far easier to obtain than traditional bank loans and are granted in average loan amounts ranging from $200 (within third world countries) to $13,000 (within more developed countries). The loans are used for small self-employment endeavors which generate income for the recipients to help sustain their families as well as moving them towards the path of financial self reliance. These loans have proven to be amazingly beneficial in fighting the war on poverty and they happen to have default rates which are less than half that of the sub-prime loans made by U.S. lenders.

                Micro-credit lenders obtain their capital from both individual and institutional investors. In 2003, it is estimated that over 60 micro-credit lenders extended credit in an amount exceeding three billion, this is double the rate of micro-lending just three years earlier. You may be familiar with the concept of compound interest and the way these loans work you could think of them as compound lending. As one loan (plus interest) is repaid these funds are then lent out again to others and in essence recycled as the benefits resulting from them grow exponentially. Repayment of the loans is driven by social pressure, it is a system that encourages social responsibility and has a repayment rate exceeding 98%. Loan recipients can only apply for future loans once the others within their particular pool of micro-loan borrowers have repaid their outstanding debts. Micro-credit programs are a powerful tool in fighting poverty as it is the very poor themselves who are motivated to improve their circumstances through their own efforts and with this type of lending an investment is made in their future and they are given the power and control to change their own lives rather than simply given a hand out. It is women who also play a significant role in the system of micro-credit as women are generally considered good credit risks in that they choose to invest any funds received to benefit their families. Because women are often responsible for the raising and upbringing of the world's children, by helping women the lives of children are simultaneously improved as well.

                The most successful micro-credit programs re-fund new loans with repaid interest on existing loans and are most beneficial when marketing and technical assistance are also provided to the loan recipients. Business planning and training may also be required of a potential loan candidate before an application is approved. The maximum term for a micro-loan is normally about six years with each micro-lender developing their own credit and lending guidelines. The loans are typically made to start-up type businesses and may require some kind of collateral or the personal guarantee of the loan recipient. Interest rates charged on these loans are high and could be as much as 20% on an annual basis, however the cost of underwriting and administering such small loans is very high, and with the currencies within a loan recipient's country normally somewhat weak, a higher rate is charged to insure there is sufficient funds to convert back to an investor's dollars and euros. The interest that each borrower pays on their loan is used to finance the cost of lending to another deserving recipient. Because these loans are powerful life changers that enable those living in poverty to help themselves, they deserve our collective international applause and support as well as substantially more than the paltry 2% of the world's development budget estimated at $60 billion. For more information on micro-loans and how you can get involved go to:

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                Sunday, October 28, 2007

                ARM Ready to Re-set? What to Do

                It is estimated that about 1.3 million sub-prime adjustable rate loans are due to re-set by the end of 2008. If you were a recent homebuyer who took advantage of low interest rates and are now stuck with either an option ARM or an interest only loan and your first rate adjustment is looming on the horizon, what should you do? Relief from your lender may be on the way as many of the lenders who are saturated with these loans fear that adjustments for a high percentage of these borrowers may result in REOs (foreclosures) on their books. Fortunately many lenders are now being proactive in working with borrowers who may be at risk to halt these adjustments before they occur. But as an adjustable rate mortgage borrower you must take steps to avoid potential problems yourself by being ready for the rate change that is coming. Many adjustable rate borrowers will be caught off guard by the increase in their mortgage payment, which could be as high as a 50% jump in some cases, don't be one of them. Here's what you can do now:

                > Find out what index your adjustable rate loan is tied to. This is the variable or adjustable component of the loan. Refer to your copy of the loan documents, hopefully you have maintained copies, or you may contact your mortgage loan servicer to determine this information. Most adjustables are tied to some variation of the treasury index or the LIBOR (London Interbank Offered Rate) index. Then find out where that index currently stands.

                > Next determine what the margin on your loan is. The margin is the fixed component of a variable or adjustable rate loan. Again refer to your copy of the loan documents or contact your mortgage loan servicer to find out this information.

                > Adjustables do have either an annual interest rate cap (the best case scenario) or a payment cap (the worst case scenario). Interest caps usually run at either 2% annually or 1% semi-annually. If you have a payment cap, this is where negative amortization can come into play. If your payment cap does not permit you to amortize (or pay off) the loan, then the difference is tacked onto your loan balance and rather than declining gradually over time as one would expect, your loan size could actually increase from the original loan amount borrowed.

                > Once you have both the index and the margin, you can add the two numbers together to determine your new interest rate. Then use the applicable loan caps referenced in your loan documents to determine the maximum amount your rate could change. You can use your current mortgage balance to calculate your payment using your own calculator or one of the many readily available mortgage calculators on financial or real estate related websites.

                > Next comes the decision to accept the rate and payment change looming if you can afford it or you may want to consider refinancing if you intend to stay in the property for at least 4-5 more years. If you cannot handle the payment shock that is coming and selling your home is not an option, then your best course of action is to contact your lender immediately to let them know your status and allow them time to work out a new payment solution that will suit your income and will prevent your lender from having to take the property back as an REO and sell it at a trustee or foreclosure sale.

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                Friday, October 26, 2007

                Mortgage Market: Subprime Mortgage Reports Show Increasing Troubles

                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 flurry of news this week suggests that the eventual toll of the subprime market collapse could reach much farther than anticipated, or dreaded.

                Bank of America announced a drastic personnel cut of 3,000, along with a replacement in the C-suite. In addition to the layoffs, the bank also reported its net income declined $1.18 billion dollars, or 82 cents per share.

                Merrill Lynch, the storied brokerage firm, reported its first quarterly loss in almost six years. The company lost $2.24 billion, or $2.82 a share. Revenue fell a staggering 94 percent, down to $577 million from $9.83 billion last year.

                Existing home sales took a tumble in September, marking the worst housing industry slump in 16 years. The National Association of Realtors said sales fell 8 percent, while industry watchers had expected a 4.5 percent decline.

                Analysts point to the turmoil that hit markets in August as the leading factor, resulting in a drying up of jumbo mortgages ($417,000 or more) crucial to high-cost areas such as California.

                The seasonally adjusted sales rate translated to 5.04 million existing homes, the slowest pace on record. In addition, median prices dropped 4.2 percent from last year. The sales drop was the 13th sales decrease in the past 14 months.

                Simultaneously, the National Association of Realtors announced an unexpected gain the sale of new homes. In September, these sales rose 4.8 percent. Analysts expected sales of new homes to fall 2.5 percent to be on pace with the August rate.

                While the increase appeased some, many still pointed to the bad news: new home sales figures for September were still 23.3 percent below last year's rate.

                With all these reports and announcements in mind, economists now say the mortgage market troubles could cost financial firms and investors up to $400 billion. The savings and loan crisis of the early 1990s, in comparison, cost financial firms and investors $240 billion (adjusted for inflation).

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                Make Sure Your New Home Purchase is a Perfect Fit

                Source: Informa Research Services

                Your home can say as much about you as your outfit. And just like shopping for a tasteful, classy wardrobe, shopping for a new home has its challenges. However, like choosing new clothes, there are a few helpful hints that will save you loads of time and trouble.

                Choosing the Right Style
                When choosing a mortgage, research the different types available and realistically consider which will fit your budget and lifestyle. Furthermore, gaining a complete understanding of precisely how the various mortgages work should help you make a better decision. For instance, even though the thought of lower monthly payments is tempting, unless you are anticipating a steady increase in your income over the term of your mortgage, an adjustable rate mortgage may not be the best option for you.

                Furthermore, know your credit score and credit history. Months before you go look at any properties, check your credit history and make sure it is accurate. By federal law, you are entitled to a free credit report every 12 months from three designated consumer credit reporting agencies. These free credit reports can be requested by mail, phone, or the Internet through the Annual Credit Report Request Service (Source: If your credit history is less-than-perfect, you may consider consulting a credit counselor to help you manage and budget your finances to improve your credit score. You will find it troublesome to have to clear up inaccuracies on your credit report while trying to get approved for a mortgage for your dream home.

                Finding the Right Size
                Look for a home that suits both your family and your budget. Figure out how much you can afford and try to buy a property that is within your budget. The rule of thumb is that you should aim to spend about a third of your gross annual income on housing. Another way to figure out an approximate housing budget is to deduct your regular necessary expenses (such as food, utilities, car payments, etc…) from your gross income. This should help give you a good idea of how much you can afford to spend on monthly mortgage payments. You need to also remember that the cost of a home includes other costs such as maintenance and utilities which tend to correlate with the size of the home. Moreover, it might be wise to try to leave room in your budget to include saving for emergencies or other unexpected expenses.

                The "Little Black Dress" of Properties

                Lastly, despite the popular mantra of "living-in-the-moment," try to keep a property's future resale and equity in mind when looking for your new home. While a vogue home or location may be all the rage at this moment, choosing a classic, timeless home will pay off in the long run, especially if you intend on tapping into your home equity at a future date through a home equity loan or line of credit.

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                Tuesday, October 23, 2007

                Buying and Selling Real Estate in this Market

                Simply stated, if you are a buyer, you are now in the driver's seat in most markets across the country. And if you are a buyer who can put 10-20% down, along with having already obtained a mortgage credit pre-approval, then you are rock solid in the eyes of a seller. While it is certainly more difficult to obtain a loan approval today, if you have a credit score over 660, along with a job with good earnings ability, in addition to having money in the bank to cover both the down payment and reserves, then you are a seller's and listing agent's dream. The inventory of unsold homes is at record levels, which means a terrific selection of homes to choose from. For serious buyers this translates into lower prices due to little to no competition when making an offer as the days of multiple offers are long gone now. The primary caution for buyers is to be aware that home prices are unstable and might not have hit bottom in many areas yet so buying for the short term (of less than five years) is not advisable. As prices may be expected to continue to decline, it is best to find a seller who is willing to negotiate. If you are working with a buyer's agent then it should not be difficult to determine the concessions which have become commonplace in the market or area you are looking to purchase in. Of course individual sellers are not the only ones willing to negotiate today, perhaps no one has had a tougher time coping with excess inventory than builders. As all tides seem to have risen and now fallen together nationally, builders with nationwide exposure are feeling the pinch on many different fronts. Lastly, if you were a recent buyer who acquired your home before the explosive 2006 market year, then you may not be in for the dip in value that many of the 2006-07 buyers may be facing. So hopefully you were a buyer for the long run and not one of the notorious, now ill-fated, flippers who hoped to cash in and then cash out quickly. If you purchased your home as your primary residence with the intention of occupying it for the foreseeable future, you should likely come out of this market just fine as long as you can safely make your mortgage payment(s).

                As for those hoping (or worse having) to sell their homes, they are in for a tougher road today. Accepting this fact is the first step in making progress towards a sale, that is having truly realistic expectations of where prices are and how you should begin to list the price of your home. In many markets across the country it is expected that if you need to sell your home in three months or less, then you'll need to deeply discount the list price at least 10% to 20% below comparably listed homes in your area. So in essence if you need to move quickly it's going to cost you and you must be prepared to accept this. Because the best chance of selling your home is during the initial listing period, it is essential that you get this part right. There are far too many other listings available now for buyers to consider and if you don't price your home correctly from the start, buyers might not be willing to come back and take a second look at your home sometime down the line when you've come to your senses and realistically re-priced it. As loans have become more difficult to obtain in the post sub-prime environment, when you have an interested buyer who has money for both the earnest money deposit, along with the required down payment, you would be foolish not to seriously consider the offer of each and every qualified buyer. In today's real estate market even the previously immune high-end luxury homes have been greatly impacted because of the drying up of investors in the jumbo or non-conforming market. This is an unfortunate by-product of the sub-prime implosion which has scared many investors of mortgage-backed securities out of the market for the time being leaving only the so-called "A" paper conforming borrowers (those with credit scores 660 and over) with ample loan options available to them.

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                Wednesday, October 17, 2007

                Mortgage Broker's Role in the Sub-Prime Loan Debacle

                By: Cameron Street

                Many in the mortgage industry admit to being caught off guard by the ferocity of what's occurred as a result of the meltdown in sub-prime lending, few predicted the global firestorm that has erupted and the fallout continues almost daily. Having been a mortgage broker in California for many years I'll be the first to admit that the reputation of the mortgage broker is parallel to that of the notoriously disrespected used car salesman. Luckily I've had the good fortune of working with extremely competent mortgage professionals who were in the business as a career and in it for the long run and not just to make a fast buck and then exit the industry when it cycled into a slowdown. With real estate being the type of referral business it is, the mortgage brokers I've known personally wanted to do a good job for their clients because they wanted the return business and more importantly they wanted clients to refer their family, friends and co-workers. Leading up to the implosion which occurred, most mortgage brokers I know believed that a day of reckoning would ultimately come and everyone seemed to recognize the outrageous risks that were knowingly being taken on, however the mortgage broker, just like the used car salesmen, is a middleman and while blaming the middleman may seem like directing frustration onto an unpopular and a deserving target, this could be impractical and might be counter productive to a real solution.

                There are several fallacies in placing the blame primarily with the mortgage brokers. First you cannot paint all mortgage brokers with the same brush. All 50 states have different laws regarding the regulation and licensing of those in the mortgage industry, in fact some states have no licensing requirements for mortgage originators at all. Therefore it is difficult to blame them as a group because the profession varies so dramatically from one state to another. It is also important to point out that the two states in the country that currently have the highest rates of foreclosures have consumer protection laws which are polar opposite of one another. The largest state on the west coast, with the highest rate of foreclosures, is thought to have very strong consumer protections in place and the mid-western state, falling into second place, is considered to have about the weakest. So it appears that finding consumer safeguards the area that was lacking may be misguided as well. Most helpful might be to start by examining the basic economic fundamentals of supply and demand as well as reviewing the common denominators that existed within the sub-prime marketplace.

                First where did the supply of the sub-prime loans come from and why would any lender want to finance such risky loans? The primary reason why is because the lenders had investors who were willing to take on the risk in exchange for a higher yield or return. If investors were knowingly willing to take on the risk of buying these bundled sub-prime mortgages as mortgage backed securities (referred to as Collateralized Debt Obligations or CDO's) because they were willing to accept the trade off of greater risk for higher yield, then lenders were willing to make these loans as long as they had a market where they could sell them. It is also thought that the agencies assigned the task of rating mortgage-backed securities may have played a significant role in this mess by not accurately evaluating the risk levels associated with these mortgage-backed investment vehicles. These agencies are now being compared to the public-accounting industry and the problems a few years back which contributed to corporate disasters such as Enron. As time passes we’ll see what comes to light and what direction this argument takes.

                Next let's examine the underwriting guidelines of the lenders who both underwrote and funded sub-prime loans. Lending guidelines amongst large national lenders are somewhat standardized in various markets throughout the country. Inherent in the word "guideline" is that lending principles were developed and implemented by both a lender along with knowing and willing investors who agreed to buy these loans on the other end to free up more capital for the lender or mortgage banker. It is important to note that a mortgage broker does not normally fund loans and requires a wholesale lender or mortgage banker to perform the lending functions of underwriting, funding, selling and arranging for the servicing of the loans they originate. A mortgage broker is as a loan originator, which means they perform the so called upfront lending functions of advertising and marketing to potential buyers and homeowners interested in refinancing and then process loan applications for delivery to a mortgage banking or wholesale underwriter. From there the underwriter is the person whose job it is to evaluate borrower risk and adhere to the lender's and investor's stated guidelines. Technically a mortgage broker cannot decline a borrower's loan application, only an underwriter is permitted to do so. The system of credit scoring is another essential element of a loan which is supposed to serve as a standardized reflection of individual borrower risk and the decision to underwrite and fund the loans of low fico scoring sub-prime borrowers was strictly that of the funding lenders and their investors.

                Next is the demand side of the sub-prime equation coming from the borrowers themselves. Admittedly I have seldom seen a borrower who wanted to purchase a home and was told no by one lender who simply did not move onto another lender until they got the "yes" they were looking for. Also, I have never met someone I would classify as a "stupid borrower", regardless of education level. Of course some borrowers are savvier than others but most who’ve entered the real estate market are smart enough to grasp the difference between a fixed rate and an adjustable loan. Wanting to participate in the American dream of home ownership, along with the expectation that real estate prices would always continue to climb, played a key role in motivating borrowers to get into homes they couldn't truly afford or worse, those greedy borrowers who attempted to purchase more than one home at a time, in hopes of "flipping" them and making a huge profit. As long as values and prices kept rising consumers were not complaining about lending guidelines being too lacking in restrictions. How many of the borrowers who purchased multiple homes claimed all were to be "primary residences" so they could secure the most favorable financing and tax treatment? And how many of the now defaulting borrowers put misleading or blatantly false information on their loan application in order to obtain a loan?

                The critical flaw from a borrower's perspective regarding sub-prime loans is that unlike that of the prime lending arena, it is far more difficult for the sub-prime mortgage consumer to shop for a loan and to compare rates and programs. In many cases the rate is not definitively calculated until the loan is underwritten and all of the risk factors associated with the loan have been reviewed. This is where the consumer is left in the dark and the unscrupulous (or sleazy) mortgage broker could take advantage. If a borrower is unable to easily compare and confirm that the rate they are being offered is fair, this puts them in a dangerous blind spot where a mortgage broker can abuse an unsuspecting borrower by making thousands, in some cases ten of thousands, of dollars from a single loan. Mortgage brokers making five figure commissions on conforming loan amounts should be seriously called into question and forced to justify such seemingly usurious practices. Note that mortgage brokers are required to disclose their commissions on the mortgage lending disclosure agreement which regulations require to be presented to a borrower within three days of receiving a loan application. However the problem inherent in sub-prime vs. prime lending is that sub-prime borrowers are not usually permitted to lock in their rate until the loan is approved and ready for loan documents to be drawn. This is due to the individual risk factor involved with each loan and the fact that a sub-prime underwriter may have to review a complete borrower file before determining the rate. This leaves a sub-prime borrower "rate vulnerable" in that the broker is left unchecked and may change the rate at the time the loan is ready to be locked and loans documents are ready to be drawn. In many cases dishonest brokers may have "pulled a fast one" on sub-prime borrowers at the time of loan closing by putting them into a higher interest rate loan (resulting in greater commissions to them) and then falsely blaming the rate change on the funding lender's underwriter. The only way a sub-prime borrower may be able to confirm they are receiving a competitive rate would be by applying for financing with more than one broker or lender.

                Clearly this is a complex problem with plenty of blame to go around. However hastily pointing the finger at the mortgage brokers who originated these loans could be a gross oversimplification of a complex problem. The answer may be to make the sub-prime loan process more transparent so borrowers can confirm that the rate they are being offered is fair. In prime lending the interest rate is reduced to nothing more than a commodity because a borrower can easily shop rates and terms from one lender to the next and will also ultimately choose to close their loan with the broker offering the best rate and terms. Sub-prime borrowers need a level playing field of comparison to make rate and loan program decisions on their own, something they have had no way of doing. However having the ability to shop and compare prices would not have likely prevented the loan debacle from erupting. The flaw is with the loan programs themselves and this is something the mortgage brokers had little to do with but profited from generously, and in many cases shamefully.

                The solution to eliminating the multiple problems in sub-prime lending, and with it the potential for abuse, may be to have the government mandate how the sub-prime lending arena functions under a system very similar to that of the way FHA and VA loans operate currently. This will standardize the process and potentially protect all parties to the transaction against elements of abuse. It is unfortunate that the competitive market forces allegedly at play in the private sector were unable to make this happen without the government's interference. Back to the used car salesman analogy, recall that in the automotive world they have "Lemon Laws" which protect new car buyers who get stuck with mechanically unfit vehicles. Perhaps the sub-prime borrower requires similar protection. This may be a safeguard refinance borrowers already have on their primary residence, which is the right of rescission, or so-called "cooling off" period, which occurs after the loan documents have been signed by the borrower, but before the loan can fund, so that consumers have a three day time frame to re-think the loan before the lender is permitted to request the loan funds. It may also be time for sub-prime borrowers to benefit from this added safeguard as well.

                The information contained on this article is provided as a supplemental educational resource. Readers having legal or tax questions are urged to obtain advice from their professional legal or tax advisers. While the aforementioned
                information has been collected from a variety of sources deemed reliable, it is not guaranteed and should be
                independently verified. Copyright ©1999-2007 ERATE

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                Tuesday, October 16, 2007

                Choosing the Right Mortgage Can Be a Thrill

                Source: Informa Research Services

                While the thought of paying off an entire mortgage may have your stomach flipping, either from excitement or nerves, choosing a mortgage loan can be a lot like choosing a roller coaster at a large theme park: exciting, a little daunting, and important to your future well-being and happiness. Like coasters and other amusement rides, mortgages come in a variety of shapes, sizes, and speeds to accommodate your personal taste and situation.

                Choose the size of your adventure: teacups or colossus?
                Even at the largest theme park, rides are offered in a variety of sizes from "kiddie" rides for the little tikes to the extreme coasters that push the limits of speed, gravity, and the adrenaline rush. Likewise, most financial institutions offer a variety of mortgages made to fit homeowner needs. These usually come in the form of conforming mortgages and jumbo mortgages. The main difference between these choices is that conforming mortgages are under the threshold (currently, $417,000 for a single-family residence) set by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation (more commonly referred to as Fannie Mae and Freddie Mac, respectively), whereas jumbo mortgages are over the $417,000 threshold.

                Mortgage term: How long is your favorite ride?

                Another factor that coaster buffs consider in deciding which coasters to ride is the length of the ride. Would you rather have a slow and steady five minute ride or an adrenaline-packed 30 seconds? Similarly, the term of a mortgage loan, or the amount of time over which you have to pay the mortgage loan back, should influence your decision. While longer mortgage loan terms allow you to have lower monthly payments, some people might prefer the financial and psychological comfort of paying off their mortgages more quickly despite the larger monthly commitments (i.e. a 30 year fixed vs. a 15 year fixed)

                Speaking of monthly payments, consider your spending habits and abilities over the term of the mortgage. For instance, a balloon mortgage typically requires very low payments in the beginning, but the balance of the mortgage is due in full all at once. While the low starting payments may be tempting, be realistic about whether you will be able to pay off the loan in its entirety when it is due.

                Are you ready for that 300-foot rise?
                The most obvious and attractive features of coasters are the loops and the drop. Likewise, many people only notice the interest rates attached to mortgage loans, and with good reason. Interest only adds to your monthly payments and the overall cost of your home; thus, you should use resources, such as the Internet, to shop for the best mortgage loan interest rates.

                Mortgage loans come attached to a fixed or variable rate (also called adjustable or floating rate). If the rate is variable, look at what interest rate caps are in place (both annual and lifetime). Interest rate caps can apply not only to the frequency and amount of interest rate changes, but also the total adjustment in the interest rate over the entire span of the loan.

                Lastly, in making any financial decision, be sure that you understand the terms and conditions of the mortgage loan you decide to take. You can save yourself hundreds and thousands of dollars by simply understanding what is expected of you and what you should expect from the lender. Having this thorough understanding will ensure that you can enjoy the thrilling ride to homeownership.

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                Sunday, October 14, 2007

                Mortgage Market Woes: Latest Market Victims

                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 year that's seen some of the financial industry stalwarts stumble and fall, two more high-profile lenders are now added to the list.

                UBS, Europe's biggest bank, announced it will report a loss in the third quarter due to lost value of securities backed by mortgages, to the tune of over $3.4 billion. Their chief financial officer and the head of the UBS investment bank are stepping down. Worst of all, the company announced plans to cut 1,500 jobs.

                The loss is UBS's first quarterly loss since 1998. It shows proof that larger, international lenders are increasingly not safe from the subprime mortgage crisis affecting U.S. markets.

                Analysts expressed surprise at the news, as the consensus expectation was for the bank to remain profitable. Rival Credit Suisse Group reported a profit for third quarter even after damage from the credit market roller coaster.

                Final third-quarter figures for UBS will be issued on October 30.

                Citigroup, the largest U.S. bank by market value, also issued distressing news on Monday. The lender is estimating a 60 percent drop in third-quarter earnings due to losses from subprime-mortgage-backed securities. They're predicting losses of about $1.3 billion in this area, and will also record a loss of $600 million in fixed-income credit trading because of market volatility.

                Final third-quarter figures for Citigroup will be issued on October 15.

                The losses are raising questions about whether other banks that have yet to report third-quarter results will suffer, or whether these stumbles could be one-time occurrences.

                Others are questioning whether third-quarter figures are flawed.

                For example, Lehman Brothers and Goldman Sachs have reported better-than-expected quarterly earnings last month. But their reporting period includes June, the last month of relative peace before the major market downturn. Some analysts have warned that earnings of banks whose third quarter includes June may be inflated, and alternatively, those that exclude the third quarter may be hit hard.

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                Thursday, October 11, 2007

                Mortgages: Protect Yourself Before You Wreck Yourself

                Source: Informa Research Services

                At the end of August, the Bush administration called for a more detailed disclosure of mortgage loan terms and settlement costs. However, if one were to read the Federal Deposits Insurance Commission (FDIC) laws and regulations (because they are such a fun read and we all have that much free time on our hands), one might be surprised to find that many tools are already in place to ensure full disclosure of said details. So, how can you avoid being yet another cautionary tale of mortgage mishap? Here are a few helpful tips:

                Educate yourself. According to the White House Press Release, President Bush and his administration plan on enforcing a number of programs to promote consumer mortgage loan education. The home buying and financing process is not a simple process, and since a home purchase is frequently the largest purchase most people will ever make, it is something buyers should definitely take the time to understand.

                A common complaint among borrowers, particularly those who took out subprime mortgage loans, was that they did not understand the terms of their loan. Thus, this is why some see education as an effective tool in preventing an inflated level of default mortgages.

                Another common complaint among mortgage holders was that the terms of their loan had changed by closing. Thus, these homebuyers ended up with mortgages and interest scenarios that were not ideal for them or their financial situation. Had these borrowers been more aware of the different loan options that were available, they may have been able to avoid their current high cost loan. There are a number of tools, including the Internet, that you can use to research rates and find available loan options.

                Don't be afraid to scrutinize. While most of us probably sign documents that are placed in front of us in the blink of an eye, it is important to know what terms and conditions to which you are agreeing. In addition to general knowledge concerning mortgages, being familiar with the mortgage loan vocabulary can help you better recognize bogus terms or interest rates. The purpose of written documentation is to ensure that both sides understand the terms to which they are agreeing. If either side neglects to read the fine print, once they sign it, they have agreed to whatever is stated in the document, regardless of whether they meant to or not.

                While the government will continue to create more safeguards to protect consumers, doing your part as a responsible borrower can ensure that you don't run into any surprises down the road.

                Mortgage Rates for Interest Only Mortgages for Florida Homes
                Mortgage Rates for Interest Only Mortgages for Maryland Homes

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                Monday, October 8, 2007

                Bankruptcy Code Changes Could Help Avoid Foreclosures

                Could over 600,000 foreclosures be prevented over the next two years with a simple change to the bankruptcy code?

                That's the stand of the Center for Responsible Lending (CRL), who has proposed changes to regulations for Chapter 13 bankruptcies in a recently introduced House bill. The CRL calls it a tweak, and says the effect could be significant for homeowners and mortgage-backed securities markets.

                "Under current law, subprime homeowners have two choices," said Eric Stein, senior vice president for CRL, in written testimony before a House Judiciary subcommittee last week. "They can get a loan modification, or they can lose their home through foreclosure. Bankruptcy – the traditional option of last resort– is virtually useless, because current law prevents bankruptcy courts from assisting with the very debt that is causing the problem today – the mortgage on the family home."

                The CRL proposal aims to retool the current regulations, which establish a repayment plan instead of wiping out debt. Judges can't reduce mortgage debt owned on a person’s primary residence.

                The House bill proposes that the bankruptcy judge for Chapter 13 bankruptcies would have the option of reducing what the homeowner owes lenders, perhaps reducing the principal to match the home's current market value and reduce the loan's interest rate. The rest of the original principal would become lower priority for repayment as an unsecured debt.

                "If bankruptcy law is like a life preserver, we're reserving it for the strongest swimmers while hundreds of thousands of families drown," said Stein. "Changing the bankruptcy code to allow the courts to modify loans on primary residences could help 600,000 families facing subprime exploding ARMs stay in their homes. This change will also save American families not facing foreclosure $72.5 billion in wealth by avoiding these foreclosures."

                CRL says that this change to the bankruptcy code would not necessarily increase bankruptcy filings, and in fact deter them. If lenders and investors know the new protections, they might be more willing to modify borrowers’ terms. Additionally, lenders will get paid more than they would for a foreclosure, making it a more attractive option.

                Preventing foreclosure can also preserve home values in the neighborhood, a big perk for lenders and communities.

                Homeowners who take advantage of this new provision will experience damaged credit, and a bankruptcy judge will closely monitor their finances. But this reality could be a better option than the threat of foreclosure.

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                Saturday, October 6, 2007

                Home Equity Hazards

                While using your home equity can be a wise, tax-advantaged strategy when prudently applied, it can also be down right dangerous when misapplied. Home owners have been taking out home equity lines in record numbers to fund all types of consumer purchases. Almost 25% of all homeowners in the U.S. have a home equity line of credit (or HELOC) secured against their primary residence. In the past ten years it is estimated that U.S. household debt overall has increased by over 145% and at the same time credit card debt has risen almost 70%. The conclusion is that home owners are using their home equity, or borrowing against their homes, to either pay down or pay off their credit card balances.

                Lax underwriting restrictions may have permitted many homeowners to take out lines of credit up to 75%-90% of the value of their home. These loans are frequently available at attractive interest rates and at little or no cost. On the east and west coasts, home equity lines of up to $500,000 are not uncommon. The concern with this practice is that by using the equity in your home as collateral for the loan, you are putting your very place of residence in jeopardy. If you rack up too much credit card debt and find yourself in over your head, the worse thing that can happen is that you ruin your credit and perhaps reach a point where you consider filing bankruptcy but you don’t have to lose your home in the process.

                If you exercise prudent money management skills, your home equity could be an excellent resource at your disposal for making long term investments requiring a sensible tax advantaged strategy to achieve (as you may typically deduct the interest on a HELOC, depending upon when the home was purchased, up to your acquisition indebtedness on the home plus $100,000). However a home equity line shouldn’t be used as a "cash register" for making short-term consumer goods types of purchases and should not be seen as a way to further enhance your spending ability. Sensible reasons to tap into ones home equity include: home improvements, investing in a real asset, financing higher education, converting existing unsecured higher interest rate debt to secured lower interest rate debt, to purchase a new vehicle (of course you should always try to drive a car for 8 to 10 years before buying a new one) or for emergency funds in case of short term job loss or for covering unplanned medical bills.

                Think carefully before writing a check against your home equity line and consider whether the risk of potentially losing your home justifies the reward obtained by using it. Ever rising home values are no longer a given as the median home price continues to fall from its peak. Using your home as a cash register for consumer purchases never made sense and it makes even less sense now than ever before.

                Always consult with your tax or financial advisor regarding your own individual circumstances before proceeding with any plan which may have a dramatic impact on your personal finances.


                Fifteen Year Fixed Rates Mortgages by State

                New Hampshire
                New Jersey
                New Mexico
                New York
                North Carolina
                North Dakota
                Rhode Island
                South Carolina
                South Dakota
                Washinton DC
                West Virginia

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                Thursday, October 4, 2007

                How Much Does a No-Cost Mortgage Cost?

                Source: Informa Research Services

                Free press. Fat-free. Free gift with purchase. It seems like anything that's "free" is harmless and generally, a good thing. People will jump at the opportunity for something that is sans cost. But should you be jumping for a no-cost mortgage loan?

                So, what exactly is a "no-cost mortgage"?
                A no-cost mortgage loan is a mortgage in which the upfront fees are paid by the lender at closing. These fees include many of the settlement costs, but keep in mind that there are some costs, such as prepaid taxes, or title charges, that cannot always be paid by the lender. Typically, the only fees that are waived are those that fall into the category of "lender fees."

                How much does a no-cost mortgage cost?
                A no-cost mortgage costs nothing out of pocket at closing. However, a no-cost mortgage may result in having a slightly higher interest rate. Nonetheless, the difference between the interest charged on a no-cost and regular mortgage loan tends to be very small. You should use the resources available to you, such as the Internet, to shop and find the best rates and fees.

                Who would benefit from a no-cost mortgage?
                Depending on your situation and personal finances, a no-cost mortgage may or may not be the right option for you. Some homebuyers may opt to use the cash they save to furnish their home or perhaps upgrade the conditions of their home. It may be advantageous to use the cash you save by not paying the upfront fees to get the mortgage loan to finance these purchases because it will be affected by a lower interest rate than many other loans, such as credit cards.

                No cost mortgages are not for everyone. It is really a matter of preference. You need to weigh the importance of paying closing costs upfront against paying a slightly higher rate over the term of the mortgage loan.

                Although there are protective measures in place, such as the Truth in Lending Act, regardless of which loan you choose, you should be sure to read the details contained in the fine print to ensure that you are truly getting (and paying) what you think you are. Additionally, one can use the Internet to research their available loan options, both traditional and no-cost.
                More about no cost mortgage refinance
                Another good article from the Washington Post - Mortgage Fees to Avoid

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                Sunday, September 30, 2007

                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.





























                New Hampshire

                New Jersey

                New Mexico

                New York

                North Carolina

                North Dakota





                Rhode Island

                South Carolina

                South Dakota







                Washinton DC

                West Virginia



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                Thursday, September 27, 2007

                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.

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                Wednesday, September 26, 2007

                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.

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                Thursday, September 20, 2007

                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.

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                Wednesday, September 19, 2007

                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.

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                Tuesday, September 18, 2007

                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.

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                Monday, September 17, 2007

                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

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                Thursday, September 13, 2007

                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.

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                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.

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                Wednesday, September 12, 2007

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


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                Tuesday, September 11, 2007

                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.

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                Monday, September 10, 2007

                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:


                > 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.


                > 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:

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                Thursday, September 6, 2007

                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:



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                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;

                   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.

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                Wednesday, September 5, 2007

                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.

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                Tuesday, September 4, 2007

                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:

                P.O. Box 740241
                Atlanta, GA 30374-0241

                P.O. Box 2104
                Allen, TX 75013

                Trans Union
                P.O. Box 2000
                Chester, PA 19022

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                Monday, September 3, 2007

                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.


                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.

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                Thursday, August 30, 2007

                U.S. Mortgage Rates Up and Down

                Long-term mortgage rates dropped in the week ending August 30, 2007, according to finance company Freddie Mac. Their weekly Primary Mortgage Market Survey® was released Thursday.

                "Interest rates on conforming long-term fixed-rate mortgages declined slightly, while rates on one-year adjustable rate mortgages increased by about a quarter of a percent," said Frank Nothaft, Freddie Mac vice president and chief economist. "The increase in ARM rates is consistent with movement of the yields on short-term Treasury securities, which have exhibited higher volatility recently due to market uncertainties."

                This week's survey indicates 30-year fixed mortgage rates averaged 6.45 percent, a drop from last week's average of 6.52 percent. Last year at this time, the 30-year fixed-rate mortgage averaged 6.44 percent.

                Fixed mortgage rates for 15-year terms averaged 6.12 percent, a decrease from last week's average of 6.18. A year ago, the 15-year fixed-rate mortgage averaged 6.14 percent.

                Averages for Treasury-indexed adjustable-rate mortgages (ARMs) bucked the trend and increased this week. Five-year ARMs averaged 6.35 percent, up slightly from last week's average of 6.34 percent. At this time last year, the five-year ARM also averaged 6.11 percent.

                One-year ARMs averaged 5.84 percent this week, a big jump from last week's average of 5.60 percent. Last year, the one-year ARM averaged 5.59 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 five-year ARMs, and a 0.8-point fee for one-year ARMs.

                "In other news, new home sales defied consensus expectations and rose in July to 870 thousand units, led by a 22 percent increase in the Western region," said Nothaft. "Existing home sales fell, however, though by less than the market had forecasted, to 5.75 million units, with the decline limited to the Midwest 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.

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                Mortgage Market Woes: How Did We Get Here?

                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.

                Subprime collapse. Credit crunch. Stock market craziness. Even the most astute industry analysts and insiders are confused and shocked with how quickly and thoroughly the economy has felt the tremors this summer.

                For all of us looking at headlines and feeling only a vague sense of anxiety and befuddlement, we take a look back. How did we get here?

                Greenspan and the Housing Bubble

                In 2001, the economy was stifled and stilted after the dot-com bust. To stimulate the economy, the Federal Reserve Bank Chair Alan Greenspan lowered interest rates to unheard-of lows. Money became cheap and immediately available. Lenders were ready and eager to lend money to homeowners and business owners alike, and offered the funds at extremely low rates.

                What about risk? Every time someone borrows money, whether it's for a family home or a multibillion dollar firm, there's always risk involved. That's the entire basis of lending, whether from banks, credit agencies, or other groups. But with the slashed interest rate, cheap money was everywhere. This led to a growing complacency about risk. Running into trouble paying back a loan? Just get another one. Getting deeper into debt? There's plenty of money to be had, so have no fear.

                Housing Bubble

                Today, people are blaming Greenspan's interest rate policies for bringing on the biggest housing bubble in national history. What defines a bubble?

                For years the housing market only moved up. With money easy to obtain (even for folks with less than ideal credit) new homes and buildings exploded into being. Home prices continued to rise, because the demand was there and the belief that prices would continue to rise was there.

                This rapid rise of real estate values soon outgrew reality. They reached unsustainable levels relative to incomes and other economic elements. That's the definition of a housing bubble. These bubbles historically are followed by severe price decreases (a "crash"). Many homeowners are left holding negative equity, meaning a mortgage debt higher than the actual, current value of the property.

                Subprime borrowers, those that received money despite their lower credit ratings, were the first hit. The strange and often unfair loans they received became too much to bear as housing values decreased. They couldn't make payments, and entered loan default in droves.

                Beyond the Housing Market

                So how did these events result in giant companies declaring bankruptcy? Or the crazy rollercoaster ride the stock market has taken this summer? Why are banks across the world desperately trying to restore confidence in increasingly shaky global economies?

                It's much more complicated than blaming Greenspan, as some pundits and angry analysts have done. Interest rate movement is only part of the story. What could play a bigger and more crucial role in this economic decline is the very nature of Wall Street. Built into the global web of economic movement are a shockingly unstable and confusing set of financial instruments, known as "structured finance." They've become the basis of markets worldwide. And they're in trouble.

                For the rest of the story, read Part Two of this article - Tomorrow

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                Saturday, August 25, 2007

                Mortgage Woes: Action from the Fed

                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.

                First the Federal Reserve injected cash into the economy in a international concerted effort to increase market confidence and lending ability. Now the Fed has taken another dramatic step to prevent and respond to a growing credit crunch and market instability.

                On Friday the Fed announced a half-percentage point cut in its discount rate on loans to banks. The announcement came with a carefully crafted statement as the Fed noted their actions were taken to prevent risk to U.S. business growth.

                Federal Reserve Chairman Ben Bernanke said that incoming data suggests the economy is continuing to expand at a moderate pace, but "the Federal Open Market Committee judges that the downside risks to growth have increased appreciably"

                "Financial market conditions have deteriorated and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward," said Bernanke. The announcement also included the Fed's intention to continue monitoring the situation. They are "prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets."

                What does this change mean? The interest rate the Fed charges to make direct loans to banks is now 5.75 percent, down from 6.25 percent. Unchanged, however, is the more important federal funds rate, which has stayed firm at 5.25 percent for more than a year.

                The federal funds rate covers all loans that banks make to each other on a short-term basis. It affects credit cards, home equity lines of credit, car loans and other consumer loan rates. It's much more critical from a national economy standpoint: this rate helps determine interest rates such as bank's prime lending rates. Many industry folks believe if the financial market crisis worsens, the Fed will finally cut this rate.

                The move by the Fed last week was alternately lauded and criticized. Many industry analysts say that the massive infusion of cash into the world's central banks earlier this month did not sufficiently calm investors. Instead, the markets are still in turmoil as investors are worried about what companies will next announce money problems, and what hedge funds will go under. This has led to an increasing tightness with credit by lenders and others (the "credit crunch").

                This interest rate cut, though largely symbolic compared to a potential cut in the federal funds rate, will give another vote of confidence to markets and the economy, both desperately in need of the jolt. Criticism of the effort revolves around the desire for a federal funds rate cut. Industry professionals may get this wish after the central bank's next scheduled meeting of Sept. 18. The growing consensus is that the Fed will cut the federal funds rate by at least a quarter of a percentage point.

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                Thursday, August 23, 2007

                U.S. Mortgage Rates Drop After Lower Treasury Yields, Fed Rate Cut

                Mortgage rates dropped across the board in the week ending August 23, 2007, according to finance company Freddie Mac. Their weekly Primary Mortgage Market Survey® was released Thursday.

                "Interest rates on conforming long-term fixed-rate mortgages and one-year adjustable rate mortgages trended down by about one-tenth of a percent in the past week," said Frank Nothaft, Freddie Mac vice president and chief economist. "This is as a result of yields on Treasury securities coming down, and the Fed's decision to cut the discount rate by half a percent to 5.75 percent last Friday."

                This week's survey indicates 30-year fixed mortgage rates averaged 6.52 percent, a drop from last week's average of 6.62 percent. Last year at this time, the 30-year fixed-rate mortgage averaged 6.48 percent.

                Fixed mortgage rates for 15-year terms averaged 6.18 percent, a plunge from last week's average of 6.30. A year ago, the 15-year fixed-rate mortgage averaged 6.18 percent.

                Averages for Treasury-indexed adjustable-rate mortgages (ARMs) also dropped this week. Five-year ARMs averaged 6.34 percent this week, 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 5.60 percent this week, an decrease from last week's average of 5.67 percent. Last year, the one-year ARM averaged 5.60 percent.
                Freddie Mac said that to obtain these rates lenders charged an average 0.4-point fee for 30-year fixed-rate mortgages. Lenders charged a 0.5-point fee for 15-year fixed-rate mortgages. ARMs included a 0.6-point fee.

                "Economic indicators released in the past week reflect slowing housing activity in July," said Nothaft. "Last month's housing starts dropped to the lowest level since January 1997 at an annualized pace of 1.38 million units, while one-unit housing starts experienced the fourth consecutive month of decline. Building permits also fell to the lowest level in nearly 11 years, and the number of one-unit permits issued was at the lowest since June 1995."

                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.

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                Wednesday, August 22, 2007

                Mortgage Market Woes: Countrywide Stumbles

                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.

                The roster of companies succumbing to serious financial problems keeps growing.

                Countrywide Financial Corp., the nation's largest mortgage lender and the originator of 17 percent of the mortgages in the U.S., is having trouble raising the capital needed to continue operations. Last week, the company tapped into an $11.5 billion line of credit issued by a group of banks in order to shore up liquidity.

                The past few months have seen a whirlwind series of troubling events in the mortgage realm, and Countrywide is no exception. The company's predicament came about quickly and has shocked many industry analysts.

                Founded in 1969, Countrywide has gained a reputation for efficient and smart lending. They expanded over the years into banking and insurance. This diversification made many industry experts feel secure in the company's future during the market's downfall. But last month, the pinch began.

                Countrywide makes money offering prime mortgages. But looking closer reveals that Countrywide relies heavily on short-term financing to fund new mortgages and conduct company operations (including paying salaries). With the mortgage market in trouble, and an increasing credit crunch developing, the company is having problems borrowing the money they need for this short-term financing.

                The impact of Countrywide's announcement this week immediately hit the stock market. The company's stock price began the year at $42 a share. On Thursday, it finished at $20. Investors and analysts are growing increasingly worried and skeptical about the company's future.

                If the company ultimately goes under, some analysts predict, the effects could be catastrophic. The existing anxiety across the country and the world's markets could be ramped up with the demise of the biggest mortgage lender in the U.S.

                For these reasons, and more, many industry experts and watchers are watching Countrywide anxiously as a sign of what's to come in the wider mortgage industry, and the greater economy.

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                Saturday, August 18, 2007

                For ARM Loans Set to Go Up, Preparation is Your Best Defense

                If you have taken out an adjustable rate mortgage in the past several years, the news looming on the horizon about forthcoming rate increases could not have escaped your attention. It is predicted that some $1.5 trillion in adjustable rate loans are due to reset in the very near future. The current rate of mortgage defaults is hovering around 4%-5% and is expected to double by mid 2008. We are all aware that the Fed had been moving short term rates in only one direction, higher and while long term rates are not controlled directly by the Fed, they certainly have a strong influence on their direction. Given the current liquidity crisis rippling through Wall Street, as well as the global markets, it is assumed that the Feds next move may be to take a neutral or a declining position on rates to stave off any further economic impact of these market gyrations. However based on current market conditions, one may reasonably presume their adjustable rate loan will increase in the neighborhood of 1.5% at the first adjustment. On a $300,000 mortgage this will result in an increase in payment of approximately $279 per month, this is what is referred to in the mortgage industry as payment shock. It may seem like a relatively small amount, yet it is significant enough that you need to plan and prepare for it. So exactly what should you do?

                The first thought you have may be to refinance, but how long you anticipate remaining in your home will determine whether or not it is worth while option to consider. If you anticipate wanting or needing to move within a period of 5 years or less then refinancing may only make sense if you could obtain a "no closing cost mortgage" at a rate close to or lower than the rate at your ARMs scheduled adjustment. While it is likely at the first adjustment on your ARM, your rate will go up, it is not clear that it will continue to go up after that. Therefore you may be better off, if you have a short term expectation of ownership, to simply absorb the rate increase until the next sequence of rate decreases by the Fed, at which time you could logically refinance into more attractive fixed rate terms. The costs of refinancing are significant and typically in the range of 2-3% of the loan amount, so until fixed rates are at a level where they are low enough for these expenses to be a reasonable trade off, you'll want to consider only a "no point no fee refinance" option and then only if the rate is close to or less than the rate of your ARM after the scheduled adjustment.

                If you are not in a position to refinance, then how should you manage the burden of payment shock? First, simply knowing that it is coming is a big step in preparing for it. One option would be to scale back on your expenses in an amount equivalent to the payment increase. Good places to start looking for expenses to shave would be entertainment (including eliminating cable or satellite services), eating out, vacations, club memberships. Next examine utilities, such as converting to more conservation in your energy usage, checking your phone bill for both long distance and local coverage savings you may not be taking advantage of, eliminating any land line expenses which you may not truly need. Also you may want to examine any insurance premiums which could be reduced by increasing your deductibles. This could pertain to your homeowners, auto as well as your medical coverage (assuming you are not covered by your employer).

                Other more drastic efforts could be taken such as having a non-working spouse or family member could get a part-time job or the primary wage earner could get a second job if possible. Lastly if you feel that the rate and payment increase is simply more than you will be able to handle, you want to contact your mortgage lender right away and let them know you are in trouble. Start the lines of communication early because the sooner you get your lender involved, the more options they will be able to offer to help you prepare. Whatever you do, do not wait until the 11th hour when you are already delinquent and have damaged your credit. Believe it or not your lender may well be your best ally in this situation because the last thing they want is to have to take your home, have it on their books and to have to sell it off themselves. Lastly you could consider contacting a successful real estate agent with a proven track record in your neighborhood and have them sell your home for you. Hopefully you will not sell at a loss as this could produce a problem for you and your lender if you put little or nothing down and have no equity in the home. If you are upside down on the loan (that is you have negative equity) you should plan on receiving a 1099 from your lender for this difference and it will likely be treated as income to you for tax purposes. So the objective is to start planning now so you can carefully consider all of your options and not have to make a rushed, hurried decision when that fateful adjustment date actually arrives.

                The information contained on this website is provided as a supplemental educational resource. Readers having legal or tax questions are urged to obtain advice from their professional legal or tax advisors. While the aforementioned information has been collected from a variety of sources deemed reliable, it is not guaranteed and should be independently verified.

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                Thursday, August 16, 2007

                Mortgage Market Woes: The Fed's Response

                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.

                On August 10 and August 13, central banks in key countries injected funds into their respective banking systems. The Federal Reserve injected a combined $92 billion into the federal banking system. Simultaneously, the Europeans added around 203 billion euros and the Japanese 600 billion yen. Smaller amounts have come from the central banks of Australia, Hong Kong, and Canda. This is the first time that American, European and Japanese central banks have taken action together since the aftermath of 9/11.

                The goal was a coordinated effort to increase liquidity and stabilize the foreign exchange rate. Underneath this monetary need was a need to reassure global markets about the availabity of credit in the wake of fears stemming from the subprime collapse that has led to the beginnings of a severe credit crunch.

                What does injecting cash into world banks accomplish?

                • Reinstating lending: Injecting funds in the country’s cash supply means large banks and broker-dealers can confidently begin lending between one another again. This process was disrupted due a major change: "re-pricing of risk." Many economists say that risk has been inappropriately priced during our recent housing booms and lending craze. This was a major factor in the subprime mortgage explosion, where less-than-ideal borrowers were accepted by lenders without enough regard to the risk represented.

                • Limiting effects of subprime implosion: The impact of the re-pricing of risk was first felt in a narrow segment of the economy – the subprime market. Risky borrowers delivered on a potential for defaulted loans, and the dominoes fell. It spread quickly from there to firms and funds dealing with debt. Now it's spread to a more general cross-section of the economy. Experts say the effects are still somewhat limited, and the Fed's efforts, combined with other world banks, will help keep the effects limited.

                • Restoring market confidence: The purview of the Fed is beyond day-to-day stock market action. But their funds were an active effort to stave off a global financial crisis. This leads to more confidence, leading to positive market responses. More market volatility can be expected, but experts say that the probability of larger economic pain is lessened due to the central bank’s actions.

                • Helping global economic stability: European and Japanese involvement in this funding of central banks is another thing that will stabilize markets and head off further damage, according to analysts. A remarkable development in risk and money investment over the past decades is the commingling of money worldwide. Global markets are strong, but are tied with the flow of money and risk in the U.S. So this global effort to reinstate market confidence will be crucial.

                In the short-term future, the Federal Reserve and other central banks remain on alert to, watching the markets and gauging whether more funds should be infused into the economy. Their goal now and in the future is to ensure fallout from the subprime collapse stays limited.

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                U.S. Mortgage Rates Rise Despite Non-Prime Market Woes

                Fixed-rate mortgage rates dropped in the week ending August 16, 2007, according to finance company Freddie Mac. Their weekly Primary Mortgage Market Survey® was released Thursday.

                "Interest rates on prime conforming fixed-rate mortgages ticked up a little in the past week, in line with 10-year Treasury rates movements and retracing part of last week's decline," said Frank Nothaft, Freddie Mac vice president and chief economist. "Problems in the non-prime mortgage market where funds are expensive and hard-to-get have not affected the prime conforming market."

                This week's survey indicates 30 year fixed mortgage rates averaged 6.62 percent, a rise from last week's average of 6.59 percent. Last year at this time, the 30-year fixed-rate mortgage averaged 6.52 percent.

                Fixed mortgage rates for 15-year terms averaged 6.30 percent, a jump from last week's average of 6.25. A year ago, the 15-year fixed-rate mortgage averaged 6.20 percent.

                Averages for adjustable-rate mortgages (ARMs) also rose this week. Five-year ARMs averaged 6.35 percent this week, up from last week's average of 6.33 percent. At this time last year, the five-year ARM also averaged 6.18 percent.
                One-year ARMs averaged 5.67 percent this week, an increase from last week's average of 5.65 percent. Last year, the one-year ARM averaged 5.65 percent.
                Freddie Mac said that to obtain these rates lenders charged an average 0.4-point fee for 30-year fixed-rate mortgages. Lenders charged a 0.5-point fee for 15-year fixed-rate mortgages and for five-year ARMs. One-year ARMs included a 0.6-point fee.

                "This week's data releases included the Producer Price Index and Consumer Price Index for July," said Nothaft. "Core inflation at the wholesale level increased 0.1 percent in July, or 2.3 percent year-over-year, below market expectations, while core inflation at the retail level grew by 0.2 percent, or 2.2 percent year-over-year, in line with what had been expected."

                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.

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                Sunday, August 12, 2007

                Mortgage Market Woes: American Home Mortgage Implodes

                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.

                An increasing roster of companies succumbing to serious financial problems has dominated much of the news this year. Recently added to this group, in a surprisingly spectacular fashion: American Home Mortgage.

                On July 27th, the first signs of trouble emerged when the company postponed paying a scheduled dividend. Then, the company's lenders cut off access to credit. Last Friday, August 3, the company announced a decision to cut its workforce. From a robust 7,400 employees, the company slashed the payrolls to a shocking 750 employees.

                Finally, on Monday, August 6, the company filed Chapter 11 bankruptcy. The company intends to use bankruptcy to maximize any remaining value of its assets, and wind down operations. They hope to sell their portfolio of loans and mortgage-related securities at auction. Analysts predict lenders and other investors might pick up the loans for pennies on the dollar. After the news, the New York Stock Exchange began delisting all American Home's common and preferred shares. The stock ended its trading at 44 cents, a huge drop from December values of $36.

                What's most striking about American Home Mortgage's failure is their status as the first major lender serving high-credit and near-prime borrowers to see this severity of problems.

                Most of the cause of mortgage industry problems thus far, and the focus of the media, has been the subprime mortgage market. These loans are made to people with less attractive credit scores, and are the biggest risk to default. That's exactly what's been happening, in big enough numbers to bring down many companies predicating their success on the strength of debt obtained from the subprime market. In fact, over 50 lenders focused in the subprime market have been forced into bankruptcy this year.

                But the case of American Home Mortgage is different. Their focus was on lending to people considered better credit risks. Their products were "Alt-A" mortgages, loans that weren't quite prime but not yet subprime. The problem with these loans was sometimes unfavorably changing interest rates that become hard for borrowers to handle. These loans have defaulted in growing numbers, putting companies like American Home at risk. These loans represent 20 percent of the mortgage market (the subprime market represented 20 percent as well).

                Mortgage-backed securities are directly affected by the subprime, and now the Alt-A market, fall. These packages of loans that are securitized and sold to investors are increasingly become devalued, making investors and sellers leery. In addition, we could be in the middle of a credit crunch that increases with each major company downfall. Lenders are afraid to make loans, don't have the funds for loans, or charge much higher interest rates on loans to break even.

                For these reasons, and more, many industry experts and watchers see American Home's fate as a sign of what's to come in the wider mortgage industry. In the meantime, borrowers can expect to find slowly increasing mortgage rates and slightly less favorable lending environments.

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                Friday, August 10, 2007

                U.S. Mortgage Rates Drop after Jobs, Unemployment Reports

                Fixed-rate mortgage rates dropped in the week ending August 9, 2007, according to finance company Freddie Mac. Their weekly Primary Mortgage Market Survey® was released Thursday.

                "Interest rates on prime conforming fixed-rate mortgages eased further in the past week, according to the Primary Mortgage Market Survey, even though other sources such as HSH Associates reported that jumbo fixed rates increased by a quarter percent or more last week," said Frank Nothaft, Freddie Mac vice president and chief economist. "Job creation fell short of market expectations, with 92,000 jobs added in July, the smallest gain since February, and June's number was revised down by 6,000. In addition, the unemployment rate ticked up for the first time in four months to 4.6 percent.

                This week's survey indicates 30-year fixed mortgage rates averaged 6.59 percent, a plunge from last week's average of 6.68 percent. Last year at this time, the 30-year fixed-rate mortgage averaged 6.55 percent.

                Fixed mortgage rates for 15-year terms averaged 6.25 percent, a drop from last week's average of 6.32. A year ago, the 15-year fixed-rate mortgage averaged 6.20 percent.

                Averages for adjustable-rate mortgages (ARMs) bucked the trend and rose this week. Five-year ARMs averaged 6.33 percent this week, up from last week's average of 6.29 percent. At this time last year, the five-year ARM also averaged 6.21 percent.

                One-year ARMs averaged 5.65 percent this week, an increase from last week's average of 5.59 percent. Last year, the one-year ARM averaged 5.69 percent.

                Freddie Mac said that to obtain these rates lenders charged an average 0.4-point fee for fixed-rate mortgages. Lenders charged a 0.5-point fee for adjustable-rate mortgages.

                "Freddie Mac reported that the amount of home equity cashed out through refinancing totaled $76.7 billion in the second quarter," said Nothaft. "Although slightly higher than the previous quarter's level, it still reflected a drop of $24.5 billion compared to the same quarter last year. Both the tightening of underwriting standards and slackening house price appreciation are possible contributing factors to the decline."

                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.

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                Thursday, August 9, 2007

                Mortgage Market Woes: Credit Crunch

                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 all the insider talk about this year's mortgage woes, we've heard a lot of new terms. Subprime market. Government-sponsored enterprises. And then there are the copious economic reports with titles of varying complexity.

                Add a new term to the list. Recently, there have been rumblings of a "credit crunch" as the effects of the subprime market implosion continue to be felt.

                What's a credit crunch? Technically, it's an economic condition where investment capital is difficult to obtain. Banks and investors get leery of lending money to corporations, meaning higher prices for loans for borrowers. What this means in the greater context is an extension of or a harbinger of a recession.

                Many industry analysts and corporation owners are saying a credit crunch is in progress or near. After years when companies and private equity firms had no limits and were able to obtain trillions of dollars of debt at low interest rates, the money may be drying up. This affects many parts of the economy. If cheap debt is restricted, it means an end to activity funded by cheap debt. This means businesses are scaling back products and expansion, meaning layoffs and lowered share prices.

                It all started with the subprime market, where lenders offer mortgages to borrowers with credit that's less than ideal. For years the subprime market skipped along robustly. Mortgage lenders in the subprime market often sold the debt to a big Wall Street bank or other entity, where millions of these mortgage debts were pulled together into collaterized debt obligations (CDOs). These were sold to investors, such as hedge funds. A subprime loan became collateral for some other debt elsewhere in the world.

                Since a subprime loan is lumped in with other types of debt, if an individual borrower defaults on the loan, the default shouldn't affect the overall CDO. However, the highly fluctuating and often unfair loans have meant an increased number of defaults in the last year. When a large number of borrowers default, trouble begins, and did begin this year. Over time and increased defaults, along with slipping house prices, investors have lost faith in CDOs. Demand has dropped drastically, and the value of the CDOs has collapsed.

                How does this relate to a credit crunch? When the subprime market first started its sickening drop early this year, many lenders and regulatory agencies increased their scrutiny of the lending procedures in the market. As more and more companies have lost funds due to chain reaction of subprime defaults and CDOs, scrutiny increased. Now, many say, lending companies and banks are increasingly wary of extending loans to individuals and corporations. And when loans are given, they include higher interest rates than in the past few years.

                All of this came to a head last week with the plunging stock market. Comments from a Bear Stearns executive indicated what many in the industry already believe - we're in the midst of a widening credit crunch. The Bear Sterns CFO described the situation in the credit market the worst he'd seen in 22 years.

                It usually takes hindsight to definitively point out the beginnings of a recession or a credit crunch. Investors know that the next few weeks will feature volatility in the stock market due to credit worries and upcoming economic figures. Industry analysts keep their eyes on indicators like increasing company bankruptcies and stricter regulations. For the rest of us, we must sit and ride the tide of what could be a slowing economy.

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                Our New Mortgage Rates Search Feature for Handy Analysis

                As mortgage rates continue to fluctuate with the economic ups and downturns in the USA, we thought this was a really good time to unveil the new mortgage rates search tool for our site visitors. It's handy, very easy to use, and quite informative - whether you live in Alaska or Florida or anyplace in between.

                When you use this tool, you can select the target state for which you desire mortgage rates data (all fifty states are included), as well as the type of loan, amount of the loan, and whether you desire to purchase or refinance a home with the loan. The tool will then produce a list of companies offering the loan you seek - featuring the loan rate, APR, financial fees, and other pertinent information. It's a totally free service that even generates the links to the companies' websites.

                We think our mortgage rates search tool is just one more reason why ERATE is the best site on the Internet for valuable mortgage information and resources. And we freely admit that we're a little biased in our opinions. Enjoy!

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                Thursday, August 2, 2007

                U.S. Mortgage Rates Drift Lower as Treasury Securities Snapped Up

                Mortgage rates dropped in the week ending August 2, 2007, according to finance company Freddie Mac. Their weekly Primary Mortgage Market Survey® was released Thursday.

                "Market investors seeking safety from the subprime fallout bought Treasury securities, pushing bond yields down and allowing mortgage rates to drift a bit lower," said Frank Nothaft, Freddie Mac vice president and chief economist.

                This week's survey indicates 30-year fixed mortgage rates averaged 6.68 percent, a slight decrease from last week's average of 6.69 percent. Last year at this time, the 30-year fixed-rate mortgage averaged 6.63 percent.

                Fixed mortgage rates for 15-year terms averaged 6.32 percent, a drop from last week's average of 6.37. A year ago, the 15-year fixed-rate mortgage averaged 6.27 percent.

                Averages for adjustable-rate mortgages (ARMs) also posted downward changes this week. Five-year ARMs averaged 6.29 percent this week, down slightly from last week's average of 6.30 percent. At this time last year, the five-year ARM also averaged 6.27 percent.

                One-year ARMs averaged 5.59 percent this week, a plunge from last week's average of 5.69 percent. Last year, the one-year ARM averaged 5.69 percent.
                Freddie Mac said that to obtain these rates lenders charged an average 0.3-point fee for fixed-rate mortgages. Lenders charged a 0.5-point fee for adjustable-rate mortgages.

                "Sales of new and existing homes fell in June, and prices continue to weaken, especially in the markets that had recorded the strongest gains over the past few years," said Nothaft. "There are early signs, however, that the market is stabilizing. As construction spending levels off, the drag on GDP growth will continue to diminish. Meanwhile, the 5 percent rise in pending home sales in June suggests that sales in July and August may reverse last month's decline."

                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.

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                Sunday, July 29, 2007

                How Much Debt Can You Afford?

                This is a timely question considering the escalating mortgage delinquency rates reported almost daily. With the recent calamities in sub-prime lending at the forefront of the news, what should be obvious to most of us now bears repeating, don't borrow based upon what a lender alone informs you that you may qualify to borrow. Remember most lenders compensation is commission based and calculated as a percentage of the amount that is borrowed, thus the higher the loan amount, the higher the loan officer’s or loan agent's commission. This is an obvious conflict of interest but unfortunately it exists and not just on the loan side but it can exist on the real estate side at times as well. Real estate in general operates as a referral business so both a loan and a real estate agent likely want to do a good job for you so they will receive the highest compliment you can give them as a satisfied client, your personal referrals. However make no mistake about it these professionals are not always working as your fiduciary, that is to say they are not always duty bound to work in your best interest.

                It seems that the process of underwriting loans with increased speed and technology, as well as advances in credit scoring, have not only brought faster loan decisions but riskier ones as well. No one should tell you how to run your personal finances but you. The seemingly old fashioned rules of lending used to reflect a housing ratio of only 28%, which meant that if more than 28% of a prospective borrower’s gross monthly income was being applied to their mortgage payment they would not qualify for the loan. However because today Uncle Sam has an even bigger hand in our collective pockets (this is why it takes two incomes to support a family where one used to do the job), this old formula of underwriting might need updating and should make today's lending ratios even more conservative as we all have less take home pay (or net income) than we had in the past. This concept is in sharp contrast to the now liberal lending practices that have been in place over recent years.

                Moreover with the recent changes to the bankruptcy laws which occurred in 2005, a borrower cannot easily get off the credit hook. Once you find yourself in over your head and are left with damaged credit, bankruptcy is not the viable option it once was. Therefore it is more important than ever to make informed decisions in taking on both mortgage and consumer debt and not to assign this responsibility to a professional who may be benefiting financially based on the amount of debt they can persuade you to take on. Don't feel as though you've won the lottery when your lender tells you that you may qualify to borrow more money than you thought possible, they are not doing you any favors if you cannot comfortably repay the debt. Remember, borrow only the amount of money you yourself feel comfortable repaying as the lender who approves your loan is not the one obligated to repay it, you are.

                In the end you yourself are the best judge of what you can repay and certainly not a commissioned professional or loan underwriter. Always do your personal finance homework on your own before seeking out any type of loan for no one knows or should know your finances better than you and no one can better predict what your earnings will be in six months to a year better than you can. The risk of borrowing excessively is disproportionately yours, not your lenders, so make this decision responsibly and make one that suits your lifestyle as well as the projected stability of your income.

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                Thursday, July 26, 2007

                U.S. Mortgage Rates Drop from Weakened Housing Market

                Mortgage rates dropped in the week ending July 26, 2007, according to finance company Freddie Mac. Their weekly Primary Mortgage Market Survey® was released Thursday.

                "Mortgage rates eased this week on market concerns that a further weakening of housing demand this spring will delay any recovery in the sector," said Frank Nothaft, Freddie Mac vice president and chief economist. "For example, building permits fell last month to the slowest pace in a decade, and more recent data on June sales of existing homes showed a fourth consecutive monthly decline."

                This week's survey indicates 30-year fixed mortgage rates averaged 6.69 percent, a drop from last week's average of 6.73 percent. Last year at this time, the 30-year fixed-rate mortgage averaged 6.72 percent.

                Fixed mortgage rates for 15-year terms averaged 6.37 percent, a slight decrease from last week's average of 6.38. A year ago, the 15 year fixed rate mortgage averaged 6.34 percent.

                Averages for some adjustable-rate mortgages (ARMs) also posted minimal changes this week. Five-year ARMs averaged 6.30 percent this week, a drop from last week's average of 6.35 percent. At this time last year, the five-year ARM also averaged 6.35 percent.

                One-year ARMs averaged 5.69 percent this week, down slightly from last week's average of 5.72 percent. Last year, the one-year ARM averaged 5.78 percent.
                Freddie Mac said that to obtain these rates lenders charged an average 0.4-point fee for all mortgages except the one-year ARM, with a 0.5-point fee.

                "Several factors contributed to the softening in housing markets this spring," said Nothaft. "In addition to the tightening of lending standards earlier this year, especially on subprime loans, the 40 basis point jump in rates on 30-year fixed-rate mortgages in June may have deterred potential buyers. For the year-to-date, sales of single-family homes were down about 9 percent from the first half of 2007."

                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.

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                Monday, July 23, 2007

                U.S. Mortgage Rates Make Small Movements

                Rates stayed steady for mortgages in the week ending July 19, 2007, according to finance company Freddie Mac. Their weekly Primary Mortgage Market Survey® was released Thursday.

                "In a week marked by stock indexes reaching new highs on Wall Street, mortgage rates lingered near the previous week's level as the latest economic indicators did not affect inflation expectations significantly," said Frank Nothaft, Freddie Mac vice president and chief economist. "June's core producer price index inched up higher than market expectations, pushing the year-over-year growth rate to 1.8 percent, while the core consumer price index held steady at a 2.2 percent annual growth rate.
                This week’s survey indicates 30-year fixed mortgage rates averaged 6.73 percent, unchanged from last week’s average of 6.73 percent. Last year at this time, the 30-year fixed-rate mortgage averaged 6.80 percent.

                Fixed mortgage rates for 15-year terms averaged 6.38 percent, a slight drop from last week's average of 6.39. A year ago, the 15-year fixed-rate mortgage averaged 6.41 percent.

                Averages for some adjustable-rate mortgages (ARMs) also posted minimal changes this week. Five-year ARMs averaged 6.35 percent this week, unchanged from last week's average of 6.35 percent. At this time last year, the five-year ARM averaged 6.36 percent.

                One-year ARMs averaged 5.72 percent this week, up slightly from last week's average of 5.71 percent. Last year, the one-year ARM averaged 5.80 percent.

                Freddie Mac said that to obtain these rates lenders charged an average 0.4-point fee for fixed-rate mortgages, and a 0.5-point fee for ARMs.

                “The most recent statistics suggest that the housing market has yet to reach a trough,” said Nothaft. “Although June's housing starts unexpectedly rose to 1.47 million units, construction of one-unit houses still saw a decline of 0.2 percent: At 1.15 million units, it was the slowest pace since January. Building permits fell by 7.5 percent last month to the lowest level since June 1997."

                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.

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                Tuesday, July 17, 2007

                Government-Sponsored Enterprises: An Introduction to Fannie Mae and Freddie Mac

                We've all heard of Fannie Mae and Freddie Mac, in various tones and across different topics. But 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.

                Fannie Mae and Freddie Mac are the two government-sponsored enterprises (GSE) in a specific area of mortgage lending. The goal of these private companies is to help expand home ownership across the country.

                In a roundabout way, they've helped millions of people obtain homes and mortgages over their years of private existence. They also offer direct loans of various types, lead a number of public initiatives designed to expand home ownership, and offer mortgage education for consumers.

                Seems simple enough. But confusion reigns when it comes to these two companies. Why? Two reasons – their work within the "secondary mortgage market," and their complex relationship with the government.

                Secondary Mortgage Market
                The primary market is where most of us live, and what most of us consider when it comes to lending and mortgages. These are transactions directly between homebuyers and mortgage lenders, like banks, credit unions, state and local housing finance agencies, and other institutions. When places like banks lend money to borrowers in the primary mortgage market, they are either using funds from their own deposits, or funds from what’s known as the secondary mortgage market.

                Banks and other institutions will often sell the loans they make. GSEs purchase mortgage loans from banks, bundling them together into tradable securities. These are then sold to large investors, like fund managers, foreign central banks, commercial banks, pension funds, insurance companies, other financial institutions. The idea is that lenders get more funds from selling their mortgages to the secondary mortgage market, allowing them to originate more mortgage loans and enable more home purchases.

                The secondary mortgage market offers liquidity of mortgage funds, meaning mortgages can be offered quicker, with a more standard value despite economic conditions. This standardization attracts investors, adding further strength tot he mortgage market. Finally, the secondary market aims to make funds available to lenders nationwide, correcting some imbalances that might occur by region.

                Because of their role in the secondary mortgage market, Fannie Mae and Freddie Mac are the largest source of housing finance in the country, according to their oversight organization, the U.S. Department of Housing and Urban Development (HUD).

                Government Charter
                Fannie Mae was founded in 1938 as part of President Roosevelt's New Deal policies, the first organization to establish the secondary mortgage market and an important step in easing Depression woes. The Federal National Mortgage Association (FNMA, or Fannie Mae) operated for years as a government entity. In 1968, the company became a fully private organization working in the secondary mortgage market. Freddie Mac, on the other hand, was chartered by the government as a private company from the start, with a mandate to work within the secondary mortgage market.

                Now – why are they "government-sponsored enterprises" if they are fully private corporations?

                Each company has a congressional charter requiring them to achieve public purposes, those described above in the secondary mortgage market section. In exchange for carrying out these purposes, the companies get some special privileges. They are exempt from state and local taxes, and get conditional access to a line of credit from the U.S. Treasury worth several billions.

                Most investors in the secondary mortgage market assume, because of the government charter and special privileges given to the GSEs, that the securities offered by Fannie Mae and Freddie Mac are guaranteed by the government. In fact this is the not the case, and is the biggest misconception about the companies.

                Understanding the secondary mortage market and government charters is a major step towards comprehending the importance of Fannie Mae and Freddie Mac. In our continuing series, we'll examine other aspects of these GSEs, including their initiatives to increase home ownership, their surprising scandals, and more details on their role in the housing market today.

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                Thursday, July 12, 2007

                Mortgage Rates Week Ending July 12, 2007

                U.S. Mortgage Rates Boosted by Employment and Credit Growth

                Rates increased for most mortgages in the week ending July 12, 2007, according to finance company Freddie Mac. Their weekly Primary Mortgage Market Survey® was released Thursday.

                "A favorable employment report for June and robust consumer credit growth for May pushed long-term mortgage rates higher in the past week, nearly eliminating the declines made in rates over the previous three weeks," said Frank Nothaft, Freddie Mac vice president and chief economist. "In addition, consumer credit jumped by $12.9 billion in May, almost double market expectations."

                This week's survey indicates 30-year fixed mortgage rates averaged 6.73 percent, a jump from last week’s average of 6.63 percent. Last year at this time, the 30-year fixed-rate mortgage averaged 6.74 percent.

                Fixed mortgage rates for 15-year terms averaged 6.39 percent, an increase from last week's average of 6.30. A year ago, the 15-year fixed-rate mortgage averaged 6.37 percent.

                Averages for some adjustable-rate mortgages (ARMs) also jumped up this week. Five-year ARMs averaged 6.35 percent this week, up from last week’s average of 6.29 percent. At this time last year, the five-year ARM averaged 6.33 percent.

                One-year ARMs averaged 5.71 percent this week, unchanged from last week's average of 5.71 percent. Last year, the one-year ARM averaged 5.75 percent.

                Freddie Mac said that to obtain these rates lenders charged an average 0.4-point fee for fixed-rate mortgages, and a 0.5-point fee for ARMs.

                "Our July economic outlook forecasts 30-year fixed-rates to stay around their current level through the end of year," said Nothaft. "The refinance share of loan applications is expected to continue decreasing throughout the same time frame, averaging about 35 percent in 2007, the lowest level since 2000. Freddie Mac expects weakness in the housing market to persist in the second half of the year, with 2007 total home sales and housing starts hitting 5-year lows."

                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.

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                Tuesday, June 5, 2007

                Investing in Real Estate: Is It Right For You?

                Though real estate has historically produced superior returns than bonds, real estate it appears has not out performed stocks. The long term returns for stocks (13.4%) out pace that of real estate (8.6%). A recent report by a well known national financial magazine reveals that when it comes to such areas as performance, cost, diversification and overall effort required, stocks come out ahead of real estate. However in the areas of leveraging (or debt), taxes and volatility, real estate takes the edge over stocks. It is important to note that the use of debt (or leveraging) can enhance the returns in real estate by using mortgage financing as a tool to acquire property. Typically the smaller the down payment one provides, the larger their return on investment at the time of sale.

                The drawbacks of purchasing real estate include the fact that there are high transaction costs involved both in buying and selling property. Secondly real estate transactions tend to involve significant amounts of money and are generally complex agreements to complete. Buyers often lack for accurate and complete information about both the property and the market they are buying in. The property may also be subject to regulation either through the developments covenants, conditions and restrictions (CC&Rs) or by local government entities. Also chief among the risks of acquiring real estate are the physical risk of loss due to disasters such as fire, flood and quake, the liquidity risk of having your money tied up in property where it is not easily accessible as well as the risk of changing regulations which could impact zoning and the use of your property. Lastly there is the market and valuation risk involved in the initial appraisal and purchase price of the property. In the event that faulty or inaccurate data is used in the appraisal, there is the risk of paying an over-inflated purchase price.

                Before setting out to acquire real estate, ask yourself the following questions: Do you have sufficient funds saved to make at least a 20% down payment? Can you invest the time required to do the basic market and valuation research about the area you are looking at as well as researching the type of property you want to acquire? Will you invest the time and do you have the long-term objective of caring for and maintaining the property after you’ve acquired it? Of course you may hire a property manager to maintain it for you if you do not intend to reside in the property and are purchasing it for its income producing potential, but in any case you will still need to personally inspect the property periodically. If you have answered yes to each of the preceding questions, then you may be prepared to move ahead with your goal of acquiring real estate.

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                Wednesday, May 16, 2007

                Bank of America Cuts Mortgage Closing Costs

                One of the largest banks in the country has tackled the area that hurts many mortgage borrowers most.

                Bank of America Corp. rolled out a nationwide no-fee mortgage this month, eliminating the typical mortgage closing costs that can total thousands. The bank will not charge borrowers for loan applications, title insurance, appraisals, flood certifications, or private mortgage insurance.

                This new program eliminating closing costs is part of a far-reaching effort by the bank to get more of existing customer's business. Bank officials note that the typical mortgage customer has multiple other accounts with the bank. An attractive mortgage program such as this encourages these existing customers to stick with the bank.

                Additionally, insiders say that the program is a major effort to tap into the mortgage industry. Even with U.S. home sales running 14 percent below last year's level, the company wants to encourage more investment in private property. Currently, the company controls about five percent of the mortgage industry's direct-to-consumer market share. Bank officials say they would like to more than double that in the next three years.

                According to preliminary figures, Bank of America's plan may be working. In markets where the bank tested the program, lending was boosted by half, bank officials said. When the loan debuted nationally at the beginning of May, it produced the most applications for home purchases in the bank's history.

                The no-fee mortgage attacks the most worrisome and complex part of the mortgage process, according to bank officials, and does away with the final sticker shock of unexpected costs at closing. On a $200,000 loan, for example, an average $3,350 is assessed in closing costs. Bank officials say that this program allows borrowers to plan accurately and simplifies the entire mortgage process.

                Borrowers qualify for the program if they have at least one account with Bank of America and obtain their loan through the bank's retail channels. Customers must pay a down payment of at least five percent. The loan is not available to subprime consumers, those whose credit histories or low incomes translate to higher interest rates.

                Bank of America is the first major bank to waive traditional closing cost fees. In particular, the new guideline that eliminates private mortgage insurance is a boon. Typically, banks require PMI to protect themselves against default when mortgages exceed 80 percent of a home's value. The bank does stipulate that other fees, such as property insurance, property taxes, recording taxes, and home inspections, are those voluntarily chosen by the customer and not included in the program.

                Bank of America introduced this program as a test in Washington in September. They rolled out the no-fee mortgage to eight additional states in February. As of this month, the “No Fee Mortgage Plus” is available nationwide.


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                Monday, April 30, 2007

                Home Buyers Guide

                Our new complimentary guide offers home buyers helpful insider tips about everything from understanding the loan pre-approval process to how to work with real estate agents.

                Our "Home Buying Guide" is available at no cost at:

                Home buyers can learn a great deal from the guide, including:

                • Understanding the difference between "pre-qualification" and "pre-approval

                • Determining whether you are ready and able to purchase a home

                • Insights into underwriting

                • How to select and work with a real estate agent

                • How real estate agents work

                • Potential conflicts of interests to watch out for

                • How negotiating a purchase involves more than just price

                • How to choose a lender

                • Distinguishing between banks, mortgage bankers and mortgage lenders

                • Potential benefits of applying with more than one lender

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                Mortgage Calculators and Online Financial Tools

                Home owners and other consumers in search of financing can take advantage of our expanding and comprehensive array of nearly 20 mortgage calculators and useful tools for financial analysis.

                Consumers now have access to a greater collection of specialized mortgage calculators and online financial tools than ever before through

                Our vast yet easy-to-use collection of tools covers everything from calculating mortgage payments, emphasizing different loan variables, to debt consolidation.

                An overview of nearly 20 calculators and tools is available here:

                Examples include:

                Monthly Mortgage Payment Calculator
                Allows you to explore the results of changes to your loan balance, mortgage term, and interest rate and the impact these changes will have on your monthly mortgage principal and interest payments.
                Interest Only Calculator
                Although interest only calculations are quite simple, calculators available on the web for this purpose are all too rare. This calculator gives you a quick look at what your interest payment will be each month.
                Refinance Mortgage Calculator
                Should I refinance? Explore the pros, cons and options of refinancing your current mortgage.
                How Much Do I Qualify For?
                This calculator shows you how much income you need to purchase a home (based on standard loan underwriting guidelines). Compare and contrast income, mortgage payments and other factors.
                JAVA Mortgage Payment Calculator
                This mortgage calculator displays your mortgage payment for the term of your loan and beyond.
                Debt Consolidation Calculator
                The Debt Consolidation Calculator will show you how to reduce your monthly payments and hopefully save you money in the process.
                Mortgage & Bond Market Update
                Get current Mortgage and Bond Market commentary, an Economic Calendar, U.S. Treasury and Bonds Yields, Analysis of Market Direction, Interest Rate Trends, Current Index Yields and Market Report Archives.
                Market Commentary
                Commentary on the markets which impact mortgage rates.

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                Tuesday, April 10, 2007

                Guaranteed Lowest Rate (GLR)

                While this offer sounds like a can't miss proposition, upon closer examination it's not all it's cracked up to be. Many lenders are offering prospective mortgage applicants the promise or guarantee of the lowest market rate on the day in which they lock in their rate. But if you review the terms and conditions required by the lender you will see that they are indeed not offering you any great favors as their terms and conditions are next to impossible for a borrower to meet. First and foremost the rate which lenders are comparing is the illusive, difficult to compute and comprehend, APR or Annual Percentage Rate. The problem with using APR as the barometer for the rate comparison is that each lender does not calculate APR the same way. One glaring example of this is the use of pro-rated (or per diem) interest in the calculation. Lenders are allowed to use anywhere from 1 to 30 days of pro-rated interest when calculating APR and depending upon the size of the loan involved, as well as the interest rate, the pro-rated interest can amount to a sizeable chunk of the closing costs. For example on a loan amount of $350,000 with a rate of 6.00% 15 days of pro-rated interest would total $863 while 30 days would total $1,726. This difference could alter an APR calculation decidedly, by $863 to be precise.

                Next, the hurdles a borrower is required to clear in order to provide the Guaranteed Lowest Rate (GLR) lender with proof or evidence of a lower rate is substantial. A borrower must typically submit a Good Faith Estimate (GFE) generated by the competing lender, complete with APR and itemized fees, dated exactly the same day as the GLR lender's, while many of the lenders have daily deadlines for delivering this documentation, for instance noon the same day. Try extracting all the required paperwork from a lender you received a rate quote from before noon the same day. The GLR lender is then permitted the time necessary to review and authenticate the competing lender's GFE under their own terms until arbitrarily satisfied that the competing lender did in fact offer a rate and terms which beat their own. During this time a borrower might lose the opportunity to proceed with the loan that actually does secure for them the lowest rate and terms. This time constraint may prove to be a horrible trade-off for a borrower as time is typically in short supply where rate locks and loan closings are concerned. Many GLR lenders also require that your loan be approved or pre-approved prior to the rate comparison in order to ensure that your loan is indeed one that they can legitimately close under your desired rate and terms. Therefore your loan may need to be far enough along in the process, having completed underwriting and possibly having satisfied all the loan conditions required to be cleared prior to ordering loan documents, before your loan could be evaluated under the GLR guidelines.

                It is important to note that the Annual Percentage Rate (APR) calculation on an Adjustable Rate Mortgage or (ARM) becomes even more difficult to compare on an apple-to-apples basis. This is because many factors in an adjustable rate mortgage (primarily the future of the index to which the ARM is tied) contain unknown variables and these unknown variables must then be forecasted, projected or assumed by your lender in order to calculate the APR. This can truly cloud the basis of any legitimate comparison. Therefore many GLR lenders do not include ARM's under their guaranteed lowest rate programs.

                Lastly, many of the remedies offered to a borrower once a lower rate has indeed been identified, do not truly cure or fully resolve their situation. Many lenders offer only to improve their own fees by a nominal amount (say $50 to $100) or pay the applicant a flat amount out right, something equivalent to an appraisal fee for their trouble. Given the time and opportunity cost involved, it may not be worth it.

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