Bill McCord's Blog

Is it a good idea to pay off a mortgage as soon as possible. My answer 90% of the time will be NO. It may make you feel good but it is economically foolish for the vast majority of people.

A mortgage is the cheapest form of debt for the average homeowner. This is partly because it has a low interest rate, but also brings with it enormous tax benefits. For most people this lowers the actual interest rate by more than a third. The real after tax rate on a 5.5% mortgage is actually 3.625%.

The vast majority of consumer debt is much higher than this. It seems clear to me that no one should be trying to pay off the mortgage with money which would be far better used to pay off a credit card.

Another major consideration should be whether tying up more money in your house is good for your on-going financial security. Once you make that payment you can never get it back without either selling or refinancing the house. Unless you have enough other assetts to handle job loss or other family emergencies you would probably be better served by investing that money where you can quickly get at it in such circumstances.

For a more detailed conversation on this topic check the following link to the New York Times.

http://www.nytimes.com/2010/03/20/your-money/mortgages/20money.html?ref=realestate

Mortgage interest rate have remainded at historically low levels for longer than we can remember. This has not been an accident. The largest factor has been the Federal Reserve program under which they have bought about $1.25 TRILLION of Mortgage Backed Securities (MBS’s) on the open market.

 MBSs are simply BONDS. Their prices go up and down based on our old friends Supply and Demand. As with all Bonds,  when   pricies go up the Interest Rate on them goes down, and vise-versa.

So in order to see where Mortgage Interest Rates are going we simply track the prices of the Bonds known as MBS’s.

You can safely ignore the uninformed pundits of the media repeating the ridiculous mantra that Mortgage interes rates are driven by the 10 year Treasury. The MBS’s deal only with Mortgages. The 10 year Treasury is an indicator of the entire U.S. financial system and will often point in the opposite direction to the MBS market.

Now let’s come back to the $1.25 Trillion worth of MBS’s bought by the Federal Reserve as part of the Governments Financial Stimulus program. Having this much money looking to buy MBS’s (DEMAND) has artificially kept the price of them up, and as a result kept Mortgage Interest Rates down. As of the last day of March this program is finished. Now there is a reduced demand for MBS’s and an inevitable inrease in Mortgage Interest Rates.

This will begin to happen right away and continue until the market stabilizes at the level dictated by regular market forces. This will be at a higher rate than we are at now.

For an excellent summary of this process check out the following link 

http://www.mortgagesuccesssource.com/ezine.php?ez=1003

The lesson here is that if you want to become a homeowner it’s time to get serious before these rate increases get too far away from what you can afford.

 FICO scores measure the risk that an individual will default by evaluating their history of credit management. The exact formulas used are top secret but FICO has given the following components and the approximate importance of each:

35%- Payment History. Late payments of bills such as Mortgage, Credit Cards, Car loans etc will lower a person’s FICO score . Paying bills as agreed over time will improve the score.

30% – Credit Utilization. The ratio of current revolving debt (Credit Card and Charge Account balances) to the total available credit (Credit Limits). Consumers can improve their FICO scores by paying off debt and reducing balances to less than 50% of the available credit. Closing existing revolving charge accounts can have a negative effect on this ratio, and lower your score. Before closing accounts be sure to do some more research, or get qualified advice.

15% – Length of Credit History. Time improves FICO scores without any action other than paying all bills on time.

10% – Types of Credit Used. FICO scores are improved by having a good history of managing multiple types of credit (Installment, Revolving, Consumer finance etc).

10% – Recent Credit Applications. Multiple requests to obtain new credit over a short period of time can hurt an individual’s FICO score. However, individuals shopping for the best rate for a Mortgage or Auto Loan over a short period will not see any negative impact on a FICO score.

For more detail on this and other Credit Related questions the following link is a Gold Mine of factual information.
 http://www.myfico.com/CreditEducation/

I won’t try to explain the pro’s and con’s of any of these options, but will strongly suggest that whichever of them you choose, you consider working with a REALTOR. My reason for this specific advice is as follows:

 

1. There are more than Half a Million Licensed Real Estate Agents in California. This is the minimum required qualification for the job.

2. Only 165,000 of them are REALTORS who have voluntarily agreed to subscribe to a strict Code of Ethics, and are paying members of their Local, State, and National Associations of Realtors.

Amongst many other services Realtors provide to the public is the web site Realtor.com. the most popular of all on-line Real Estate sites. Check out http://www.realtor.com/.

Here we are at the start of the annual self flagellation period otherwise know as Tax Preperation Time.
Given the amount of bad/wrong advice freely floating around on this topic you might find it helpfull to see what the rules really are as the I.R.S. sees it.
Check out this link: http://www.irs.gov/pub/irs-pdf/p936.pdf

Drugs, Drink, Gambling. From the clutches of these escape is possible with  sufficient help and hard work. 

From Golf,  NEVER!

Like all other forms of compulsive behaviour, for golfahlics even nine holes is too much, yet 18 holes are not enough to satisfy their insatiable craving for humiliation and self abuse.

Have you ever know a man who gave up golf?

You probably didn’t see the reports that Goldman Sachs is talking to Fannie Mae about buying, at a discount, $1 billion worth of low-income housing tax credits from the government-controlled Agency.
Fannie Mae can’t use the credits because you have to actually earn money to use such an off-set against profits.
Goldman Sachs on the other hand is making profits hand-over-fist thanks in part to the Taxpayer Funded TARP program.
For the nation’s tax collectors the issue might boil down to this:
if we let Goldman buy the tax credits, that means a Wall Street firm that received Bail Out money, will be able to lower their taxes at a time when Uncle could really use the money.
It’s worth remembering that TARP funds were intended to help the Banks re-start making loans to individuals and small business’s.

The IRS will be releasing a new version of Form 5405, the First-Time Homebuyer Credit Form, for homebuyers claiming the extended housing tax credit. Homebuyers eligible for the tax credit must use this new version if they:

1. Purchased their homes on or after November 7, 2009,

OR

2. Will claim the housing tax credit on their 2009 tax returns, regardless of when the property was purchased.

The new form was due to be published last December. The old form (currently the only one available on the IRS website) will not be accepted for claiming the tax credit under the extended rules.

NOTE: At this time the IRS requires that owners claiming this tax credit 0n their 2009 tax returns must file on paper. Be sure to check this beforehand if planning to file electronically. It may have changed by then.

The Administrations well meant efforts to make it possible for many homeowners to avoid foreclosure has stirred up a hornet’s nest among some media commentators.

The Plan described at http://www.makinghomeaffordable.gov/ uses up to $75 billion to provide incentives to holders of FANIE MAE and FREDDY MAC loans to work with Borrowers to refinance, or modify existing problem loans, rather than simply go ahead and foreclose.

This is a classic version of the glass ½ full, or ½ empty. Typically, in our current exclusively partisan media, the answer is dictated solely by political affiliation regardless of the facts.

This is unfortunate because there are legitimate reasons for supporting, opposing, or, better still, improving the current process.

One the one hand it is a legitimate effort to try to help Joe Public get through a situation brought about by failures in our economic systems. Given the Trillions of dollars being ploughed back to the very people who caused this situation, the $75 Billion allocated to this program is peanuts.

On the other hand there is a valid argument to be made that subsidizing refinances, or modifying problem loans, is simply putting off an inevitable final default. This can often hurt the very people it purports to help by having them use up scarce funds in a doomed attempt to save an impossible situation, rather than simply give the property back to the Lender and getting  on with life.

The December report on the status of this program provides ample ammunition for both schools of thought, and the regulators have shifted emphasis to try to deal with the problems showing up.

The summary shows that 728,000 loan modifications are already in the required trial phase. Unfortunately only 31,382 have completed that phase and have become permanent, saving homeowners an average of $550 per month. The low rate at which Trials become Permanent  is a serious problem raising concerns that a significant number of these modifications are simply allowing the Banks to delay acknowledging the number of bad loans on their books and to avoid taking the losses on to their Balance Sheets.

If that is true then the inevitable result will be a longer period of foreclosed properties coming to market as these failed modifications fall apart.

As with most things there is not a simple answer, but on balance I come down on the side of giving the program a fair shot. This is based mostly on my view that given the countless billions we have poured into supporting the financial institutions that caused the problems,  a little effort to give similar assistance to the victims is not unreasonable.

The Fed and the Crisis

For anyone wishing to understand what the Federal Reserve actually did, and will continue to do in dealing with our current financial problems, here is a link to a San Francisco Fed web site where you will find a goldmine of facts and commentary. http://www.frbsf.org/econanswers/

It’s a great resource dealing with the process of digging out of the hole and getting back on track.

Maybe one day they will do an equally good job on their failure to prevent all this from happening. As far as I can see they did not have the courage to take away the cookie jar when this Bubble was so obviously getting seriously inflated.

Turns out that Mr. Greenspan really let us down by failing to spell out what was happening, and take the risk of being unpopular with his Political Masters. Like many before him he seemed to buy into the “New Paradigm” myth. Remember that phrase during the run up to the Dot Com bust.