A New York Mortgae Planners View:

I thought it is a great cartoon it can be found on http://www.msnbc.com/ 

What I learned from that is That while the battle between the sharks goes on, there is another company doing something very right! Google always was the leader for adding value to the consumer. allot of free things. I can even remember talks in the investors circles if it pays to invest in google, What value do they have what is their product? but in the mean time google kept on adding value opened up business services add-words free search engines to websites and desktops. this is the way they grew they focused on the value they bring to consumers not by swallowing the competitor, Not by violating (or being accused of)anti trust laws.

The same we should all behave in our respective businesses, don't focus on what you will be getting out of it, just add value and keep on doing it. If you take care of enough people there will plenty who will take care of you! (Misquoted quote from Zig ziglar)

Just a thought!

Sincerely,

Joel Silberstein

The PCE reading, which stands for Personal Consumption Expenditure is a report released every month by the feds, the looks back and it measures inflation. (How much buying power the dollar lost if any)

As I wrote before, inflation is the worst enemy for long term bond or mortgage rates. With a great reading on inflation today fear of fast inflation was tamed and that means better mortgage rates.

  If you care about detail read below, The PCE Report is a monthly report reporting on the previous month.

There 2 parts to this report, the PCE that includes all goods and services that a person on the personal level buys or pays for. Then there is the Core PCE, which looks at the core alone and excludes volatile Industries like food and Energy. The fed’s target rate of inflation (Yes There has to be some inflation) is 1-2% year over year.

This months’ reading was exactly 2.0 which is in the feds target Zone. Which means that the fed’s actions to keep the economy flowing paid off for now! Regards Joel Silberstein The silberstein Group

Another Announcement calmed fears in the financial markets. The Office of Federal Housing Enterprise Oversight, (Makes me wonder how do they come up with these names?) Just announced that they just  lifted a capital restriction they kept Fannie Mae and Freddie Mac that kept them from buying to much mortgage bonds, or some other restriction I do not know exactly-what it was, that is now lifted thereby making available yet another 200 Billion dollars for the mortgage market.

In My yesterdays post I mentioned the feds are not responsible for making the mortgage market better but for the general economy in all market as a whole. The Announcement by the OFHEO is a measure that exclusively impacts the mortgage market, Just like the TSLF mentioned in my previous post.

Make it a great day!

Sincerely

Joel Silberstein

The feds Primary Job is to monitor and control to some extend the economy as a whole. there job is not just to provide low interest rates to the housing market.

One of the ways the fed can stimulate the economy is by cutting their rates. By cutting their rates money is cheaper so banks can borrowand lend out. Not necessarily for home-loans but for business loans, etc.  If there is more money available housing will enjoy something as well.

The side-effects of a rate cut is

• the potential loss of value to the dollar.
• Inflation
• and higher mortgage rates.

Benefits of the rate cut is primarily for

• Commercial banks that are in business of checking and savings type of banking.
• Home equity loans that are typically have a 10 year life.
• Auto Loans
• credit cards.
• Business loans

As I wrote above the benefits are intended for the economy in general and not necessarily to the housing market. The housing market can initially suffer by getting higher interest rates due to bonds being enemy #1 of inflation.

An example-of a recent fed move to benefit the Housing market exclusively was the Treasury Securities Lending Facility introduced for the first time last week.

It is Amazing what is happening in the financial markets.

History repeat itself. Well it surely does, but not always exactly the same way, and not always to the same people.

There is a well known proverb that a smart person learns from everyone and everything around him.  By learning from some else's mistakes. He spares the painful ordeal of experiencing it himself.

A Quick look at History

During the great depression, banks where foreclosing houses in record numbers. Taking away the homes of good paying Americans, people who were on time with their bills were stripped of their homes since the banks who where lending the money where short on cash, because investors withdrew all of their money from the banking system due to the stock market crashing and the investors had to pay back money they borrowed to invest. With the banks being out of money they had no choice and they called all  their loans due.

On the news today is Bear Stearns. What's happening now is sort of the same thing that happened in the great Depression. Bear Sterns was in big trouble due to having a lot of exposure to the sub-prime loans that generated great loses. and as investors lost confidence in bear Stearns, that created a run on the bank situation, where investors are rushing to withdraw their money from bear Stearns, only to further exacerbate the liquidity crisis (shortage of cash).

What does this mean to the Consumer

This means that there is going to be a lot less money available to consumers in terms of loans, despite the feds cutting rates. Since money is primarily available to consumers by lenders like bear sterns or Fannie Mae, who get their money from individual investors and not from the government. If investors lose confidence in mortgage back securities, there will be a lot less of it and that means less money for real estate loans even if the fed cut rates. With the fed cutting rates that will be a good infusion and temporary cushion, however not the complete solution.

Action item for this market

Is to realize that the house /equity is not  the best place to keep your money in. First of all, it is  because you are essentially locking your money into an asset where you cannot withdraw it from there only in a lending favorable situation, or in times when there is a credit crunch or liquidity crunch. In times like these when lenders don't have cash, (like Bear Stearns) you are not going to be able to cash out! Even if that means not sending your son to collage, even if that mean money for a liver transplant!

Second reason why equity is not the best place to store cash, is because you are not diversifying your risk. Real estate markets are directly related to the lending and interest rate environment. If it is harder to finance , prices come down. That means keeping your money in a vehicle that might be in a depreciating state when you need it most. But by diversifying your equity instead of paying off one house, you have a better chance of having the money available when you need despite temporary market depreciation.

Lets learn from the lenders who weathered the storm, They weathered it by diversifying their assets. Lehman the close rival and competition to Bear Stearns is well positioned. They have a line of credit of 2 Billion dollars! And they achieved that by diversifying their assets globally, and in many different market unlike Bear Stearns who primarily focused on Mortgage Backed securities in the US.

Action Items in summary,

Do not dump all your money into the house, Instead diversify throughout markets and international markets.

The reasons are

•1.       Because you want to remain liquid regardless of lending landscape

•2.       Because you want to diversify your assets in order to diversify your risk (like Lehman)

There are many more reasons but to start out with these 2 is quite powerful!

Click here for the LA Times Article

Call me if you would like to weather proof your situation .

By the time I was done with proofreading this article, Bear Stearns was already acquired by JP Morgan Chase for pennies on the dollar.

I get quite often calls from my clients and Realtor partners every time the fed cuts rates (more often than not these days) asking me Is it a good time to refinance now since rates should be lower due to the recent cuts?

The answer is it depends, how do you like that for an answer!

It depends on Inflation and the reason for that is,

Would you lend  your cousin or friend $ 5000 for him to repay you $4,250?

That's exactly what inflation does to money; it takes away buying power and 5000 dollars in 5 years is just like $4250 dollars now, assuming a rate of inflation of 3% over 5 years.

Since a mortgage is a pledge from the borrower to the bank to repay their money in a 30 year period time, it better be worthwhile for the bank to wait until they get back their full amount. Now if inflation is at 2 % a year (the level at which the feds try to keep it) that means the dollar is worth 2 years from now 98 cents instead of 100 cents. That means Take 30 years (the time it takes to pay off a mortgage) X 2% (rate of inflation) =60. What that means is, that by the time the mortgage is completely paid off the money is now worth 60% less then at the time the mortgage started out.

To hedge them against inflation, lenders typically charge an interest rate high enough to cover profit in addition to inflation.

But when inflation becomes higher or unpredictable the lenders will have to charge an even higher interest rate.

Reasons for inflation includes a cheaper dollar IE, when the feds cuts the rates it charges banks, Then the dollar is easier to get for a much cheaper  price, thereby increasing inflation rates thereby increasing Mortgage rates.  Therefore we conclude that the feds have no direct influence on long term Mortgage Rates

For a longer version of this answer click herefor Bernanke explanation.

Why is the real estate market slow?

Well my thoughts are  that the reason why Realtors and developers are sitting with large inventory and even pre-existing housing sales are in the slump, is because consumers are scared. I am not going to blame the media but they put out the story as it is no explanation just allot of numbers and we all know numbers can sometimes be confusing. 

We have the lowest rates in 2 years

The Chart above is a 2 year history of the Fannie Mae 6% Mortgage Bond. The lower  the bond moves that means it has lower value therefore consumer has to pay more then 6% the higher it moves the 6% bond has a higher value therefore better pricing to the consumer. Kind of Confusing? yeah I know But that Proves my Point!

The Average consumer is completely confused of the economy in total especially in the Real estate Market!

We as professionals have to educate them

Here is what I think we still have going for us

•1)      housing prices have not gone up since the so called  meltdown

•2)      Employment is still strong Remember that employment rates is a very strong indicator as to where the market is heading, Since the employee that earns and pay what's driving the market and not the investors that gamble and play.

So what is missing consumer education?

Remember that Matt Lauer is getting paid for bringing a story that's exciting not explanations That's Boring!

That leaves the bulk of the work for us so let's  go out there and make a difference

Sincerely

Joel Silberstein

I read in the

A real estate publication in New York real estate Market That John D Dingell Chairmen of the house energy and commerce committee, expects to introduce a comprehensive Climate change reform legislation once Congress returns this month.
In an effort to reduce energy consumption the bill will Cutoff Mortgage interest tax deductions for all houses with 3000 square feet and up.

I learned one thing from Sandford C. Botkin, tax lawyer, CPA, former IRS attorney that whenever Congress proposes o do a Tax simplification something bad is coming. Now especially that they propose an outright tax deduction elimination!

Now what this bill will do in my opinion is penalize Congress them self's with less tax income because as a general rule the Rich will find another way of playing the system energy consumption will not be reduced in this world of technological evolution when even computers have to build like a military device to accommodate Have gamers

Another point that this bill goes to show you that you never know what tax law bring later therefore when dealing with retirement dollars it makes more sense to play with nonqualified  retirement plans that your  taxed on the principle dollars invested. (Refer to missed fortune By Douglas Andrew)

Sincerely
 
Joel Silberstein
Mortgage Planner

I read in the Realtor Magazine on-line that Chris Murphy democrat of Connecticut wants to ban the YSP, otherwise known as compensation from the lender to the mortgage broker on sub-prime loans.
He claims that this forces borrowers to pay higher rates

A Classic example of socialism. His intention is to save rates for the consumer right? or at least thats what he wantsyou to believe! What this will ultimately do is the following

• Increase fees up front from the borrower (unless he wants to ban that too)
• Decrease the supply for the sub-prime market which will ultimately push rates further up
• Get borrowers to loose the tax deduction they now have on interest. By shifting the compensation that brokers have to the from end meaning that the borrower will have to pay it in form a fee) thats deems it not deductible only when amortized over the life of the loan! most people don't stay in this type of loan for a long period of time therefore getting them to loose is it altogether!

The Mortgage Business is already a very regulated business. further regulation at the point of origination will not deem it more responsible, but possibly drive this entire market out of business therefore decreasing homeownership in the USA

Just another thought

Joel Silberstein

link to article

http://www.realtor.org/RMODaily.nsf/pages/News2007101805?OpenDocument

Link to the article

http://www.realtor.org/RMODaily.nsf/pages/News2007101803?OpenDocument

I am Not going to cut and paste the entire article but the bullet point the articles brings out is that the new disclosure law's that requires sellers to disclose if the property is in a flood zone or airport noise zone, hase a big impact on prices as high as 4% in certain parts of the country!

Wow Shocking, where have you been living beneath a rock? did you do business out of there?

Standard work of a mortgage Professional is to determine monthly payment for  the borrower

That consists of

• Principal and Interest
• Hazard Insurance
• Flood insurance (if required)
• Home Owners Association fees
• Taxes
• Total debt

It was always a big factor, the only difference is that prior to the law the problem was on the borrowers side like the payment is too high borrower cannot afford it but now, it is another tool in negotiation up front.

 It might even turn out to be a blessing in disguise: that the reduction in price will let more borrowers qualify in In spite of the higher monthly fees due to flood insurance.

Just another way of looking at it

Sincerely

Joel Silberstein