Bill McCord's Blog

The Federal Reserve (the Fed) took aggressive steps during 2009 and early 2010 to drive mortgage interest rates down in order to encourage more people to buy homes and revive the real estate industry.

To understand how they did this we need to know what actually controls mortgage interest rates for the home buyer.

 It is the price of Mortgage Backed Bonds (MMB’s)and NOTHING else. The bulk of these are created by Fannie Mae and Freddy Mac who buy your mortgage from the Bank or Mortgage Broker who originally made it. They then package hundreds of mortgages together as a Bond and sell it off to private investors (Pension and Insurance companies are typical buyers). The proceeds from the sale are used to buy new mortgages from the Banks and Brokers. This virtuous circle is the motor that drives the Real Estate market.

The Private Investors stopped buying when they realized that a lot of the individual mortgages inside the Bonds were badly designed (Sub-Prime) and payments from were less reliable than they had been told.

When investors stop buying MMB’s the Mortgage Lenders have no money to lend and the Real Estate Market freezes up.

One solution would have been to increase the interest rate on new mortgages in order to offer a higher rate to the investors to compensate for the higher risk. In normal times this is how the market works. In the current circumstances the Investors were not going to buy at any price.

In early 2009 the Fed came to the rescue to avoid a total shut down of the housing market. They began buying these MMB’s in huge numbers and aaccepted very low interest rates. This restored the supply of money available to make new mortgages at historically low rates, and stabilized the whole residential real estate industry.

These Fed purchases have been completed and the challenge now is to attract Private Investors back as buyers for MBB’s. They are there, but will not accept the low rates that the Fed did. Therefore the interest rates paid to get a mortgage will have to go up.

Potential Buyers need to be getting serious if they want to take advantage of these historically low rates.

 

Most Silicon Valley residents consider Cupertino schools are the reason why people will gladly spend more for their house than for a similar one in the surrounding Cities. I agree.

However, here’s a brief excert from a Mercury News Article discussing how different School Districts are handling the swinging budget cuts they are getting as the State works on cutting it’s huge deficit. http://www.mercurynews.com/cupertino/ci_15090121

“The exception to continued cuts is the Cupertino Union School District. A teacher union agreement to take furlough days, plus an unprecedented community campaign that raised more than $2 million, saved 107 teacher jobs and will preserve 20-to-1 class-size ratios in primary grades”.

Anyone aware of other school districts where all interested parties are co-operating to ensure the level of education is treated as the most important factor?

Speaking as a Realtor I should welcome the new California tax credit for certain homebuyers. Instead I condemn it as nothing more than a subsidy for lenders, the building industry and the brokers/agents (including me) handling their transactions.

California is a virtually bankrupt State with the 3^rd worst educational system in the Country.

To be allocating $200 million to such a program, while simultaneously imposing huge cuts on education, seems to me the height of irresponsibility.

In practice this program will chiefly benefit people who would be buying anyway, and steer them toward new construction. I don’t see this as anything Realtors should be cheering about.

Banks and Builders however are welcoming it with huge sighs of relief.

Just my opinion.

I am expecting that one of the major tax breaks in the nation will be hit by our elected representatives once they get back to running the Country (After the Fall elections).

Our dangerous levels of Public Debt are going to have to be dealt with and The Mortgage Interest Tax Deduction is an obvious and inevitable target.

Even as I type this I can hear the screams of “No Way” they’d never dare touch it.

Having lived through the British “phase out” of mortgage tax relief, and observed it’s results, I am convinced that this unfair tax break will soon join the Dodo, and our society will be the better for it’s going; Indeed, the process has already started, as limits on the total dollar amounts, and number of properties eligible have already been implemented over the past few years. Not all at one go, but little by little, so that in a few years it will, just like the smile on the face of the “Cheshire Cat,”  have totally faded away.

What we currently tell our taxpayers is that if they agree to take on one particular type of debt ( a mortgage) we will lower their taxes. If not we will have to increase their income taxes to make up for what we are losing to their more affluent fellow citizens i.e. Mortgage holders.

Is it good to have a high level of home ownership YES. Should it be done by this type of Social Engineering (Socialism) NO.

Could it be posible that one or more of our currently troubled States might be the 1st to take this path?? Perhaps the one that put in that other masterpiece of tax malpractice, Prop 13.

There are many suggestions being made as to how best to deal with homeowners in trouble with their mortgage payment. Some are constructive and worth pushing for. Others are not.

One of these is the proposal to allow a bankruptcy judge to force a bank to reduce the Pincipal amount of the mortgage. This is called a “cram down”.

Rather than giving this power of “Cram Down” to bankrupcy courts” (most “distressed” homeowners do not, and will not want to go the bankrupcy path), I’d rather see the Real Estate and Media industries praising and fighting for the Wells Fargo strategy for dealing with their Wachovia inheritance.

They are actively using Principal Reduction “Cram Down” along with Loan Modification strategies, usually  together, to provide long term solutions to many of their defaulting loans.

With a long history of prudent and pragmatic lending policies Wells Fargo are an excellent example of what the banks could and should be doing to make it possible for responsible homeowners to stay in their homes. By lowering the loan amount and interest rate they minimize the larger loss which they would take in a foreclosure or short sale.

 the short sighted strategies being used by the majority of other banks with similar problems are best described as  re-arranging the deckchairs on the Titanic.

Some retirement decisions are irreversible. But many retirees will be happy to learn that choosing when to start collecting Social Security benefits is not one of them.

When John Rothenhoefer, 70, found out that he could increase his Social Security benefits by about $1,000 a month by taking advantage of a do-over strategy, he thought he’d struck gold. As it turns out, he might as well have won a mega lottery. Out of the 32 million retirees who collect Social Security benefits, Rothenhoefer was one of just 71 people this fiscal year to take advantage of an obscure option that lets you halt your current benefits, pay back all you have collected interest-free, and restart your benefits at a new, higher rate based on your current age.

It’s perfectly legal, says Mark Lassiter, a spokesman for the Social Security Administration. But don’t expect the claims representatives at your local Social Security office or the employees who answer the agency’s toll-free number (800-772-1213) to be familiar with the details. “Our service representatives can go an entire career and never encounter this situation,” says Lassiter. He recommends that you download Form 521 (“Request for Withdrawal of Application”) from the agency’s Web site (www.ssa.gov) and visit your local office in person.

This strategy is just one of four little-publicized ways we uncovered to help you maximize your Social Security benefits. Each tactic applies to a specific situation; if one of them is yours, you could be in the money.

A “sweet deal”

For someone like Rothenhoefer, who had been collecting monthly checks for eight years, the price of repaying Social Security benefits can be steep — $100,000 or more in some cases. But he thinks it’s well worth it. Not only will his monthly check be about 75% larger than his previous benefit, but it will also increase with inflation each year for the rest of his life. And if John dies first, his wife, Charlotte, 67, will collect the same monthly amount as a survivor benefit for as long as she lives.

Here’s how it works: Let’s say you qualify for full benefits of $1,600 a month at your normal retirement age of 66, but you decide to begin collecting your benefits at 62. Your retirement benefits will be reduced by 25% for the rest of your life — to $1,200 a month, in this example — because you’ll be collecting a smaller benefit for a longer period of time.

On the other hand, if you delay collecting benefits, you will receive an 8% credit for every year beyond your normal retirement age until you reach 70, when your maximum benefit will be 132% of what you would have received at age 66. In this example, you would receive about $2,100 a month at 70 — a $900 difference.

Maybe you decided to collect benefits early out of fear that you wouldn’t live long enough to collect the larger delayed benefit. But now that you’ve made it to 70, you may regret your decision and wish you were receiving a larger check.

In order to get one, you must first file Form 521 at your local Social Security office to request a withdrawal of your application for benefits. Your retirement benefits will stop almost immediately — and if your husband or wife receives spousal benefits based on your work record, his or her benefits will stop, too. Then the Social Security Administration will send you a letter telling you how much you need to repay (including any spousal benefits). That process may take several weeks. Once you repay the benefits, you can reapply for new, higher payments based on your current age.

If, for example, you received $1,200 a month starting at age 62, plus annual cost-of-living adjustments through age 70, you would have to repay about $130,000. That’s a lot of money, but for some people it’s worth the price to get an additional $900 a month in retirement. By comparison, it would cost a 70-year-old man about $190,000 to buy an immediate annuity that would provide $900 a month initially, plus annual inflation adjustments and a 100% survivor benefit. That’s 46% more expensive than “buying” a lifetime annuity from Social Security.

Rothenhoefer thinks it’s a “sweet deal.” He concedes the strategy could backfire if both he and his wife were to die before they recoup their investment, which will take about ten and a half years. Still, he says, “it’s worth the gamble,” particularly because his wife stands a good chance of living into her nineties, as her mother and grandmother did.

There’s another financial downside: You may have to go without Social Security benefits for a few months while the agency sorts out how much you have to repay and you reapply for benefits. When your benefits stop, so do the automatic deductions that cover your Medicare premium. You’ll have to pay the Part B premium yourself — currently $96.40 a month for most retirees — until your Social Security benefits resume.

Crunch the numbers

Boston University economics professor Laurence Kotlikoff says repaying and reapplying for Social Security benefits is a “fantastic option” for some people. But it can involve a lot of number-crunching to determine whether it’s the right decision for you. Kotlikoff offers case studies on his Web site, www.esplanner.com. For $149, you can access his sophisticated financial-planning software, which lets you create your own comprehensive retirement plan, including an analysis of the pros and cons of a decision to pay back your Social Security.

John Greaney, who started the Retire Early Web site (www.retireearlyhomepage.com), says that members of his online community were aware of the repayment strategy but treated it as an urban legend. When Greaney took the time to research it last summer, he realized that it was an even better deal than he had first thought. That’s because when you repay your Social Security benefits, you can claim either an itemized deduction or a tax credit (whichever results in bigger savings to you) for the taxes you paid on your benefits in previous years. The calculations are complicated, but you can get all the details in IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits, at www.irs.gov.

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.

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 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.