Many skeptics are calling for the government to extend both the first time buyers tax credit as well as the MBS purchase program.  The sentiment is the economy has not strengthened enough to this point where a housing market without government assistance will fall back into a tailspin with decreasing property values as well as soaring interest rates.  Since the government has provided a historical amount of support to the housing industry, why stop now when the economy is only showing extremely moderate signs of growth?

Others believe now is the time for the government to step out of the way and allow the markets to take control themselves.  Believing the worst is behind us and a financial collapse has been averted, it is now time for the economy to take some of the needed medicine in order to stabilize the future of the market.

Nobody can tell exactly how the market will react when, and if, the government decides to discontinue the tax credit and no longer continue to purchase MBS.  However, there are three key elements we need to keep a watchful eye on in order to best predetermine any movements in the market, no matter how great or small.

1. For the most part the refinance boom is over.  Any borrower who was in a position to refinance in 2009 most likely did.  Since the demand for refinances will be much less in 2010 there will not be a need for as great a supply of MBS in 2010.
2. Mortgage loan production is expected to drop 40% in 2010.  As noted above, the refinance boom is most likely over, this means there will be a far less demand for mortgage loans in 2010 compared to 2009.  With far less demand expected, there will not be a need for overwhelming MBS supply.  This will mean there is less demand on Investors to pick up the slack in MBS purchases to support overall loan volume.  Less demand on Investors in MBS means it will be easier to stabilize liquidity in the market.
3. The Federal Reserve has no immediate plans of selling the 1.25 trillion in MBS purchased since the beginning of 2009.  In addition to this strategy, the Federal Reserve picked up most of the slack for stabilizing interest rates over the last 15 months.  Because of this the banks have a lot of liquidity and will be in a strong position to purchase MBS as the Fed exits left at the end of March.

The economy is showing moderate signs of growth, and without a continuation of Fed support the mortgage market will be in the hands of banks and investors.  With the ball back in the corner of the free market the question now becomes; how much will interest rates rise?  Since there will be lower demand and pressure on the free market to support interest rates, we can expect a gradual increase over the next 10 months.  Interest rates ranging from 5.5% to 6% are likely, however a dramatic increase by the end of the year pushing rates above 6.5% to 7% is difficult to support.  Buyers will still need to buy houses and prices are still at desirable levels.  2010 will be an interesting year in the housing industry, but the gloom and doom of soaring interest rates is hard to justify.

• Increase UMIP (Upfront Mortgage Insurance Premium) from 1.75% to 2.25%.  The UMIP can still be rolled into the loan and does not need to be paid at closing.  FHA felt they needed to increase this premium as their reserves were undercapitalized due to the recent boom in FHA lending.
• Increase Down Payment for Low FICO Score Borrowers.  Currently there is not a minimum required FICO score in order to be approved for an FHA loan, however many Investors/Banks require a minimum FICO of 620 in order to be approved to purchase a home.  Moving forward any borrower with a FICO score below 580 will be required to make a 10% down payment instead of the current down payment requirement of 3.5%.
• Reduce Seller Concessions from 6% to 3%.  That’s right; a little known fact of FHA is they have always allowed the seller to contribute 6% to closing costs for the buyer.  Moving forward the maximum seller contribution to closing costs will be 3%.  This should not have a significant impact as 3% seller concessions seem to be the norm in today’s market.
• Heavily Enforce Tougher Guidelines on Individual Lenders & Banks.  Moving forward FHA will audit individual banks on a quarterly basis and will enforce suspensions or penalties if their default rate on FHA loans is three times higher than any other lender within their specific region.  As of today 67 banks have lost their FHA lending privileges due to these new tougher lender requirements.

FHA has been warning of these changes for quite some time now.  Based on the rumors of what FHA was planning to change this seems pretty fair when stepping back and looking at the big picture.  Rumors of the down payment increasing to 5% across the board, UMIP increasing to 3%, and risk based pricing due to FICO scores were all avoided.

With this in mind, here is what FHA still does!

• Minimum 3.5% down payment for borrowers with a FICO score greater than 580
• Extremely competitive interest rates (5.125% at time of this posting) for any borrower who qualifies for an FHA loan, regardless of their FICO score.
• Commons Sense underwriting guidelines that allow flexibility for borrowers who have extenuating circumstances within the last few years.
• Loans guaranteed by the U.S. Government in order to help aid the financial system as the economy and the housing market are still recovering from the recent crisis.

2009 was a year where the mortgage industry was challenged with many changes.  2010 will be no different; we will continue to see Investors/Banks follow the governments lead through tougher lending guidelines and increased regulation on the financial system.  Stay tuned for updates regarding these changes as staying educated and aware of the changes in our industry will be at the forefront of success this year.  If you have any questions regarding FHA lending or mortgage lending in general please contact me directly.

• First and foremost is the children; at this time there is no plan in place regarding where the current students of Zerger will be receiving their education next year.  Stability in a child’s life is a core value and as of now these children would not have any structure in place for the upcoming school year.
• Closing Zerger will lead to transportation issues within the school district.  Due to the location of Zerger there is no easy or direct route to any neighboring schools.  Again, this has a chance to add additional burden to the daily life of a student in this area.
• It is projected that Zerger will increase in overall attendance by 100 students within the next few years.  Closing the school at this time could lead to potential issues for the next generation of students in this area, which will only compound the issues currently being navigated.
• For the past two years Zerger has shown great improvement and growth in their academic achievement.  This shows the teachers of Zerger have worked hard to put together a system where the students have an opportunity to grow and excel throughout their primary education.
• From a real estate perspective the obvious concern would be the value of homes in the community surrounding Zerger.  What would be the short term and long term effects to this neighborhood if Zerger were to close?  In a community already struggling with moderate consequences to home values, losing a core focal point within the community can only lead to further deterioration of home values.  Speaking of long term effects; the neighborhood could have a hard time turning over and continuing to transition without the immediate incentive for families with young children to relocate within this area.
• Another aspect to this equation would be the options for converting this land/building into a different facility.  As of now there have not been any plans released regarding the future function of the closed schools.  The biggest concern here is possible crime or vandalism of an abandoned building, as well as the depreciation of the building throughout a transition period.

 These are the main concerns and difficulties with making the decision to close down a public school.  Understandably, the school district is in a tough spot with the current economic conditions forcing them to make difficult decisions such as this.  However, as a resident of Westminster I ask you to voice your concern over the closing of Zerger Elementary so the community, neighborhood, and most importantly the children are not placed in a truly difficult situation.

If you would like your voice to be heard regarding this matter, please use the following methods at your discretion.  It is important this be done before January 14^th so please be proactive with your support for this community!  Take a couple minutes and put together a few words in support of Zerger Elementary; you would be surprised how positive support within the community can greatly impact these tough decisions.

 Send an E-mail
Helen Neal; Manager, Board of Education
hneal@jeffco.k12.co.us

 Make a Phone Call / Send a Fax
303-982-6800 Phone
303-982-6806 Fax

 Write a Letter:
Board of Education
1829 Denver West Drive, Bldg. 27
Golden, CO 80408

Right now the market is still looking for some form of direction.  Keep in mind there are a number of factors needing consideration when taking a look at where the market will look for any form of consistency.  President Obama continues to march forward with his plan to revamp the health-care industry.  The market is concerned about this as this plan will possibly cost the taxpayers a great deal of money and Washington cannot seem to agree on much of anything in the current proposal.  The Federal Reserve is still reacting to daily questions about the possibility of inflation in the near or long term future.  With all the money they have printed in the last 9 months most market analysts are having a hard time swallowing the pill the Fed is selling as they still claim both inflation and hyperinflation can be curtailed.  Today was a big day in the commodities market where oil was the big loser.  Due to the banter in the congressional hearings regarding the oversight of financial speculation in the commodities market, this has left numerous Investors uncomfortable participating in this sector due to the unknown regulations the future could hold.   The bond market is experiencing volatility as the treasury auctions have not promoted confidence in the dollar.  The argument regarding foreign investment in the dollar surrounds the idea that other countries have a need to diversify their global deposits and if not in the dollar, where will they go?  No other foreign market offers the long term stability and leverage the United States has had a strangle hold on throughout modern history.  On top of all this our economy is still fragile and seeking guidance on whether or not we are truly in recovery mode.  In the past few minutes I have pointed out five different components that can affect the direction of the market on a daily basis, and there are numerous more that have the ability to increase uncertainty and volatility throughout the economy.  If any one of these aspects of the economy has any breaking news you can expect a direct reaction from the market, as you can see we are dealing with a lot of stuff right now.  Probably will see more of the same tomorrow…

Since there has been significant news reported this week reassuring analysts the housing market is making a comeback, we have to pose the following question… Is the “Buyer’s Market” coming to an end?  In my opinion this is a double edged sword and will be quite difficult to predict and pick apart.  The most important part of this equation as I see it is interest rates and where they are headed.  Rates are not going to go significantly down, if you missed your chance to lock in at 5% or lower that ship has left the dock.  However, as rates meander around the mid 5% range you must remember this is a tremendously low rate as we step back and look at the big picture.  Additionally, the first time buyer tax credit expires on December 1, 2009.  With housing showing signs of recovery there is little hope this tax credit will be extended into 2010.  Once the first time tax credit goes away I believe we will see a considerable increase in interest rates.  Without this incentive the buyer’s market could take a step back and force the hand of the government to intervene with further action, however I would not hold my breath.  Now, as I have said before and will continue to preach moving forward; we still have some major obstacles to overcome on the road to housing recovery and the analysts are ignoring this information as their hopes for a bull market far exceed any kind of rational thinking.  Foreclosures are still, and will continue, to be a problem in any real estate market.  There are many “option arms” set to adjust on all the sub-prime loans issued for investment properties in the coming years.  Once these loans adjust it will be interesting to see how many Investors are affected by higher monthly costs and the inability to cash flow their stock of homes.  More foreclosures means more inventory coming back on the market.  The other major factor directly linked to the housing market is the unemployment rate across the nation.  Unemployment will continue to rise well into 2010 and this will make it difficult for homeowners to stay current on their loans and for a flock of new buyers to enter the market.  My suggestion; homebuyers should act now while interest rates are still low and the price of a home is still negotiable.  If the market does turn we will see rates increase and many caveats of today’s purchase contracts like 3% seller concessions will be harder to achieve!

This morning the new home sales report also surfaced and showed new home sales were up 11% since May of 2009.  This was both good and bad news; even though new home sales showed an overall increase, the sales price of these homes decreased off their May 2009 mark and in addition were well off their one year ago mark in comparison to June of 2008.  Keep in mind we are looking for two separate housing bottoms, the first is new home sales and the second is new home sales prices.  Market indications show we might have hit a bottom, or stabilization, in the market for new home sales.  However, we have not hit a bottom in housing prices as these figures continue to slide.  What does this mean?  If you are looking to purchase a new home right now you need to remember this is a buyer’s market!  Make sure you are purchasing a home at the correct price while there are still good deals to be found in the Denver Metro area, even as the Denver real estate market is stronger than most areas throughout the country!

Since today was a slow day I would like to take a second and talk about all the “green chutes” we have been hearing about in reference to an economic upturn towards the end of the year!  The most dissatisfying part of this economic crisis is the fact most talking heads we see on the television are still acting exacerbated that we have not seen a recovery in the economy to this point!  This is why they dig, scratch, and claw in every nook of the economy in an effort to find positive news to report.  Adversely, the market is having a stronger reaction to headline news now more than ever!  This cause and effect has left me sitting in front of my computer scratching my head as I try to piece together this congested puzzle on display.  Let’s take a step back and look at some very real truths; unemployment continues to rise, consumer spending is stagnant, the overall money supply has almost quadrupled, and we still have not seen the worst of the commercial real estate and credit card default rates.  We are still in a mess and need to be very aware this will most likely be a double dip recession.  Meaning the majority of the stimulus spent by the government will cause a brief growth in the economy, possibly by the end of this year.  However this growth will be hard to sustain since it has been fueled by increased debt issued by the government, not real growth based on economic fundamentals.  There is a significant chance we will see another major dip in the economy once the real markets accepts this crisis for what it is and realizes these underlying patterns.  The question is; how will we save the economy when the government is the one who is bankrupt and there is nobody to bail them out? 

Something to think about over the weekend, see you on Monday and enjoy these lazy Colorado summer sunsets!

The other major topic of discussion today surrounded the need for greater financial oversight in the banking industry.  This morning FDIC Chairwoman Sheila Bair testified in front of the Senate Banking Committee and detailed her plan on ending the “too big to fail” framework we currently have established for our banking industry.  The need for financial oversight is greater than ever due to the recent actions of the government where they stepped in and saved the banking system from colossal failure!  If a strict financial oversight program is not enforced banks will continue to behave in a pattern where greater risks can be entertained with the mindset if the strategy fails the government will step in and bail out the specific institution.  As a banker it might sound odd that I am championing stricter oversight, however none of us want to repeat the actions needed over the past year to save the banking system ever again.

We shall see what tomorrow brings, and I will continue to ride the roller coaster and keep you informed!

Today’s major events included Federal Chairman Ben Bernanke testifying on the hill this morning as he continues to try and defend his position there is minimal risk of inflation in the coming years for our economy.  If there is fear of inflation we will see intererst rates increase due to lack of confidence in the dollar.  If Bernanke can keep the threat of inflation on the sidelines we will continue to see low interest rates, specifically for long term rates like a 30 year fixed mortgage.  Another topic frequently being discussed recently has been about the commercial real estate market.  The trends of the commercial real estate market typically lag between 12 and 18 months behind the residential real estate market.  Meaning we are in for a rough road in the coming months regarding commercial real estate.  With the overall increase in the unemployment rate we are seeing higher and higher vacancy rates in commercial offices.  How does this impact the real estate community and possible lending programs?  The main thing we need to consider when it comes to commercial real estate is the majority of these loans are funded by smaller local or regional banks.  The bigger banks tend to shy away from most small commercial and construction lending because the local banks have been historically the most competitive players in this aspect of the industry.  As more and more of these loans begin to default we can begin to prepare for our smaller local banks to begin a significant contraction in their lending portfolio.  This can affect our real estate investors as well as our small businesses as these banks are typically at the forefront of helping these borrowers with customized or “creative” lending needs.  Keep this in mind if you are working with real estate investors looking to purchase a few properties before the end of the year; their local lending sources could quickly be feeling a crunch of their own.  There is also a possibilty our credit unions and smaller banks will place a freeze on their specific residential lending programs.  Historically smaller banks have never played a significant role in residential lending with high dollar amounts.  Reason being, most of them are portfolio lenders and need to have the asset base required in order maintain a strong leverage ratio in comparison to the debt on their books.  This is why smaller banks typically have stronger loan programs when it comes to lines of credit, credit cards, auto loans, and second mortgages (when they still existed). 

Lastly I wanted to share a quick video with you where Congressman Ron Paul of Texas takes a few minutes to recap all the government intervention in monetary policy since the beginning of the financial crisis in late 2008.  When you take a step back and think of all the different programs and policies we have implemented you can only hope the right people are in place to make these decisions!

Here is my pledge to you; I am going to begin writing a short post on a daily basis with a quick summary of what happened in the market and the important information our clients need to know!  Monday through Friday I will post this information between 4 pm and 6 pm so you have the opportunity to review this information as your day is winding down or the following morning in order to start your day off with a fresh perspective!  If you want specific information or have specific questions this will be the forum for you to use in order to be part of a discussion group, all you need to do is participate in the comments section!

Along with simple updates about interest rates and the economy I will continue to update you on any major changes in the mortgage lending industry.  I’ll keep you posted about changes in lending guidelines, new loan program opportunities, and other pertinent information we should be aware of in the real estate industry.

The last piece to this puzzle is one I am truly excited about.  I have begun a weekly discussion group for real estate agents to participate in regarding different marketing ideas and strategies, specifically focusing on social media.  If you feel you need a jolt in your marketing efforts I strongly suggest you stop by and see what we are doing!  In addition to the weekly discussion groups I will be writing posts about different marketing ideas you can use to help increase the productivity of your business.  I will simply be explaining what the product/application is and how it can be added to your arsenal of efforts.  The great thing about this, basically each marketing tool I will be covering can be used and accessed for no charge whatsoever.  It’s time to increase our productivity and efficiency in this challenging industry!

If you would like to receive any of this information directly via E-mail, all you need to do is subscribe here to this Blog!  For those of you who have been tracking the information I send out up to this point I thank you for your viewership.  For those of you who have not been following my information I look forward to the opportunity to earn a few minutes of your day in hopes to help you increase your business productivity.