Don’t Play the Rate Game!

Don’t playt he rate game, here’s why!  The chart to the right shows the 10-Year Treasury Yield for October 8th, 2008.  The Yield shot up to 3.72%, up 21 basis point from the previous day!

How could this be possible?  Didn’t the Fed announce that they were dropping the Fed Funds rate by 0.50% today?  Didn’t that reporter just say that rates were lower and this was being done to heat up the economy?

Now everyone is demanding a lower rate!  After all the Fed just lowered the rates and everyone should expect their rate will be lowered too!  Correct?

But hold on just a minute.  That’s no really how it works.  You see the Fed Funds rate controls short-term lending.  This would be the rates tied to your car loans, furniture and appliance purchases and credit card rates.  If you want a lower rate on something, call that credit card company and demand a lower rate from them.

Mortgage professionals deal in long-term rates.  These rates are set in the MBS (Mortgage Backed Securities) market and they closely follow the yield on the 10-Year Treasury Bond. (see the chart above)  As you can see the yield on this bond jumped drastically.  A 20+ basis point jump is unheard of in a market that thinks a 5 basis point swing is volatile.

In layman’s terms, this means that the interest rates on long-term debt is increasing today, not decreasing.  Let me try to simplify why this is…..

When people buy bonds they are seeking two things; safety and income.  When the Fed lowers the interest rate on short-term debt they are trying to stimulate the economy.  Essentially there ain’t enough consumin’ goin’ on and they are trying to get the party started …..to coin a line from an old 90′s club tune…. let’s get this party start right! let’s get this party started quickly! RIGHT!

When the econ heats up you get inflation.  Inflation eats away at the value and the income of fixed assets like bonds.  So investors sell the bonds rapidly because they are better off putting their money under the mattress than having it in stocks or bonds at the moment.

So as these bonds get sold off rapidly the laws of supply and demand come into play.  There is an abundant supply of bonds for sale but a lack of buyers.  This causes the price of the bonds to decline rapidly.  As the price declines the yield increases.  Since long-term interest rates are tied to bond yields, BAM, long-term interest rise.

So for the time being rates on long-term debt will rise or in a best case scenario, the will remain unchanged.  If the economy continues to deteriorate we may see interest rates ease.  The bottom line is that you should lock in gains now.  If you feel that the rate you have chosen on your long-term debt is good then lock it down and close the loan.

In this credit crisis it is to risky to play the ‘rate watch’ game.  Make a solid decision about what is right for you, your family and your business and lock it in.  Then spend the next couple of years doing all that you can do to eliminate the debt as quickly as possible. 

And then let’s pray that whoever is the next President of our great nation understands how to get our economy moving again.

Michael Gross is the President of Dividend America Mortgage and has been in real estate for over 20 years. He has been a builder, a Realtor, an appraiser, and currently he is a lender and an active real estate investor. He uses all of his experience and knowledge to show individuals how to properly use a mortgage as a tool to help create greater wealth through real estate investing. For more information on residential and small commercial loans please call 770-350-7373 or email mgross@dividendamerica.com

When the Roof Leaks Put a TARP On It

The night was stormy.  The wind was trashing and thunder was crashing and trees were falling all around us.  It was a horrible storm.  The rain was coming down in sheets and water flowed through a gash in the roof filling bucket after bucket with water.

The next day we surveyed the damage.  After pulling a huge tree limb out of the roof it revealed a gaping hole.  Something had to be done so a huge blue tarp was strung across the house.  It was a temporary fix but it worked until the roof could be repaired and all could be made right again.

In a way, this is what has happened to our economic system and isn’t it appropriate that the government would name the portion of HR 1424 Emergency Economic Stabilization Act that is designed to stabilize home ownership T.A.R.P. (Troubled Asset Relief Program)

Many people ask me what this bill is all about and the answer is complex.  You see the bill is about a lot of things.  Some of what is in the bill is important, however I am sad to say that there is a lot in the bill that is not.  So let’s focus on what is important in the bill and for the time being, leave the pontification of what should not be there to the pundits.

One of the most important parts of this bill is the TARP (Troubled Asset Relief Program).  The TARP is the portion of the bill that gives the Secretary of the Treasury the authority to purchase non-performing and under-performing loan assets from banks.  This huge fund should start to get all of the bad loans out of the credit system so that the real value of the loan pools that are performing can be determined.

The American economy, our financial house, has just been through a really bad storm.  The TARP is there to temporarily cover the hole in the rough until it can be fixed properly.  It is truly and temporary fix.

However, don’t fret, there is a portion of this bill that is designed to permanently fix the hole and put our economic house in order.  After the Sec. Tres. buys these troubled assets he has several tools he can use to transform the troubled assets from worthless pieces of paper into valuable streams of income.

• First, the bill gives the Secretary the ability to adjust non-performing loans.  The secretary can lower the interest rate, lower the loan balance or reset the loan to a 30 year fixed.  He can do one or all of these things to help the borrower stay in their home and to make the home affordable based on the current income of the homeowner.  This should allow the homeowner to start making their payments on time and should turn a non-performing asset with no value into a performing asset that can be sold for a profit.
• Second, the Secretary has the authority to insure the payments on the new loan.  If the secretary feels that the new loan would sell faster and for more money in the tertiary market if it were insured, the secretary can add a premium to the payment.  This premium would insure the loan for up to 100% of it’s payment if it went into default.  Essentially this means that anyone purchasing the loan as an investment would have no downside risk.

As I said, there is much more in this bill that can be discussed.  Much of it has to do with technical issues relating to how banks lend to each other and how they borrower from the Fed.  The bottom line is that the TARP is the major portion of the bill that will help homeowners and that will stabilize the real estate markets.

So we’ve decided to do something about the hole in the roof caused by the storm.  We’ve put a TARP over it to stop the damage.  Now let’s hope our politicians have the knowledge and foresight to take the next steps to do the hard work to remove the TARP as quickly as possible and truly fix the gaping hole in our economic house.

You Have Questions

A good friend of my wrote to ask me a question about all the market turmoil. Below is his question and my response.

His Question:

Hi Mike, Explain Freddie Mac and Fanny to me. How has that dorked the mortgage business? LOL I didn’t say he was elequent, I just said he had a question.

Here was my responce:

Hey Jim, Good to hear from you. Hope you are doing well.

Fannie Mae and Freddie Mac were GSEs (Government Sponsored Enterprises). Their sole purpose was to create and maintain a safe secondary market environment where mortgages could be bought and sold. The problem is that they forgot their charter and decided that they needed to be the biggest kid on the block and started competing vigorously in the market they were tasked with creating.

They got so competitive that they started lowering their lending standards. As they did this, other players in the market followed suit and this created the boom in housing over the past 5-7 years. Well, this relaxing of standards caused a lot of bad loans to be made and these loans started to fail. These failures started to spook investors that purchased Mortgage Backed Securities. Fannie & Freddie sold the MBS on the open market and they took the spread between what they purchased the loans from the banks for and what they could sell them as a packaged security in the ‘tertiary’ market for as profit.

When the tertiary market collapsed….i.e. Nobody wanted these bad loans anymore…… Fannie and Freddie started to lose money and the value of Fannie and Freddie’s stock started to decline. As the value of the stock declined these behemoths became undercapitalized. The government had to take them into conservatorship and inject billions of dollars into them to shore up their liquidity for future operations.

This action actually added some confidence in the world markets that we would support our banking system. The further actions of Paulson, Bernanke and the Congress last night have really created some confidence in the markets and rates are shooting up like a rocket ship today. The 10-Year Treasury popped 30 basis points higher at the open. That is unprecedented!

The bottom line is that this will cost the tax payer in the long run. But saving Fannie and Freddie and some of these larger institutions was the only way to right the ship and get the economy moving again.

If you have questions about real estate, mortgages or the economy, just shoot me an email. I would be happy to help.

Michael Gross is the President of Dividend America Mortgage and has been in real estate for over 20 years. He has been a builder, a Realtor, an appraiser, and currently he is a lender and an active real estate investor. He uses all of his experience and knowledge to show individuals how to properly use a mortgage as a tool to help create greater wealth through real estate investing. For more information on residential and small commercial loans please contact me at 770-350-7373 or via email at mgross@dividendamerica.com.

Ladies and Gentlemen, Elvis has Left the Building

Do you remember the old saying; ‘Ladies and gentlemen, Elvis has left the building!’  The reason that the saying exists is because after an Elvis concert the concert hall would stay packed and people would not leave.  They would linger, not knowing what to do next.  Would he come back, was it all over, they had no ability to make a decision. 

Well, a similar thing has happened in the stock market and in the credit markets and everybody is milling around and wondering what to do.  Wonder no more, some important changes are happening and you need to take advantage of them.

The recent take over of Fannie Mae and Freddie Mac and the failure of Lehman Brothers and even the lifeline thrown to AIG have a positive side.  Even though our retirement accounts and stock portfolios are taking a beating, the stock market and bond market are finally working in unison.

Traditionally, when the price of stocks decline it causes the price of bonds to increase. This ying and yang of the financial world is caused by a desire by investor to find safe investments when the economy goes bad. Traditionally the fixed income Treasury Bond market has been the safe haven. But recent ‘structural’ problems related to the credit crisis had left investor with no place to hide.

Enter the Feds! The take over of Fannie Mae and Freddie Mac helped to right the markets. The take over caused a reduction in the spreads between the yields on Mortgage Backed Securities (MBS) and the Treasury Bonds. The actions by the government sent a clear message that our government would support our banking system and this caused the spreads to decrease to normal levels. Now this gobblee-gook doesn’t mean a whole lot too many people and explaining why this is important could take a whole day. We’re not here for an economics lesson so suffice to say that this is how the markets are supposed to work.

Many investors seeing that the markets are now working properly have begun to pour their dollars into the safety of government debt…..i.e. Treasury Bonds. As more and more investors purchase these bonds the price of the bond increases and as the price of the bond increases its yield decreases! Guess what happens to interest rates? That’s right, interest rates follow the yield. So as the yield decrease so do the interest rates.

This structural change in the market place has provided another great opportunity for home owners. Right now interest rates are below 5.5% – today they are as low as 5.25% on a 30-Year Fixed!(this is for a primary residence, of course the interest rates on an investment property would be slightly higher.) We don’t know how long this will last. Any sign of inflation, a weakening dollar or oil climbing above $110 per barrel could make all this opportunity melt away like butter in hot iron skillet.

If you know of any one looking to buy or who needs to refinance, they need to do it now. Don’t wait, get moving or get them moving before it’s to late.  Elvis has left the building and the entertainment hall is in turmoil. 

Don’t look back and regret not making a decision.  The exit signs are well lit.  You can be the one outside standing beside Elvis’ bus getting the autograph and adding value to your day just by being one of the first to make a decision.

If you have any questions please don’t hesitate to give me a call or to shoot me an email. I am here to serve.

Michael Gross is the President of Dividend America Mortgage and has been in real estate for over 20 years. He has been a builder, a Realtor, an appraiser, and currently he is a lender and an active real estate investor. He uses all of his experience and knowledge to show individuals how to properly use a mortgage as a tool to help create greater wealth through real estate investing. For more information on residential and small commercial loans please call him at 770-350-7373 or via email at mgross@dividendamerica.com

 

 

Fannie Mae and Freddi Mac Get Whacked

The rumors started Friday and by late Sunday morning (around 11:00AM EST) it was official.  Fannie and Freddie would be taken over by the Feds, placed under the FHFA (Federal Housing Finance Agency) and their CEO’s would be fired.  So Mudd and Syron’s name are mud!, excuse the pun.

Here’s what happened.  These two mortgage behemoths had a job to do.  Buy and guarantee mortgages in the secondary markets so that banks could make more loans and more people could own homes.  Here’s what their respective CEO’s lost sight of…..while it was their job to create a favorable market for making loans, in doing so it was their job to protect the system that was created to accomplish this goal.

Many secondary market investors, those companies that purchase loans from banks, followed the lead of Fannie and Freddie and the guidelines they set to approve loans.  Over the years these companies continually eased the approval guidelines in order to ‘compete’ for more loans.  If they would have never lost sight of the part of their charter that says ‘protect the system’ then we might not be where we are today.

The firings of the heads of these quasi-government, now government controlled corporations, is way over due.  Now let’s just hope that the Fed has put in two individuals that can wrap their minds around the idea that safey of the banking system comes first.

The good news is that Treasury Secretary Paulson and Fed Chief Bernanke are two very bright guys who are able to navigate the political waters deftly and who have slowly and methodically set plans in place to keep our economy moving through this turmoil.  Hopefully this is one of the final steps that was needed to give world markets confidence in the banking system and get things moving again. 

My fingers are crossed….

Michael Gross is the President of Dividend America Mortgage and has been in real estate for over 20 years. He has been a builder, a Realtor, an appraiser, and currently he is a lender and an active real estate investor. He uses all of his experience and knowledge to show individuals how to properly use a mortgage as a tool to help create greater wealth through real estate investing. For more information on residential and small commercial loans please contact Mr. Gross on his direct line at 770-350-7373 or via email at

Housing Bill….Housing Debacle?

The Housing Bill passed both houses of congress with flying colors and now it seems that a threatened veto by the president has been reconsidered and he will sign the bill after all. So is the housing bill good or bad for America?

Let’s take a look at some of the finer points in the legislation.

· $7,500 Tax Credit – Yes that’s right, for those of us who buy a foreclosed home as a first time homebuyer, there is a tax credit. But wait, not so fast, the credit has to be paid back….

What, paid back? How is that a credit then? Sounds like Mr. Reed and Ms. Pelosi pulled a fast one. If you take the credit, you’ll have to pay it back in equal installments over the next 15 years.

· Increase in Conforming Loan Limits for Fannie Mae – Under the current system, home loans greater than 417,000 are considered to Jumbo Loans. Under this provision the new conforming limit will be $625,500.

This is good news for those of you were forced to take a Jumbo loan when you bought or refinanced your home in the past. If you have a loan amount between $417,001 and $625,500 it is time to investigate whether a lower rate is available! Call Today!

· FHA Revamped and Modernized – The good news is that FHA will be revamped and modernized and will act as America’s major subprime player in the mortgage market. The bad news is that the bill takes away down payment assistance.

If you are in trouble and on the verge of foreclosure, FHA may be the answer. Refinancing with an FHA loan is exactly what this new program is for.

However, if you are one of the more than 250,000 citizens each year that depend on down payment assistance in conjunction with an FHA loan, the Democrat controlled congress (you know, the ones who are ‘for’ the little people) just kicked you to the curb.

And, if you are a real estate investor, this means that your flip strategies with homes in the first time homebuyer market may be at risk. There are resources available to help you sell your homes using down payment assistance but they will now be very specialized sources and may require buyers to take certain home ownership courses to qualify. (for information on these sources visit dividendamerica.com and schedule a consultation)

The bill is a mix of good and bad, give and take. To be fair, this bill is more about giving stock market investors confidence in the mortgage market than about helping the everyday citizen.

As with all things government does, this legislation is a huge compromise that could have been better but is a step in the right direction.

For more information read the article on MarketWatch.com: http://www.marketwatch.com/news/story/fine-print-housing-bill-mutes/story.aspx?guid=8AA21F55-D848-4076-B9EF-282FEAD95B1D&print=true&dist=printMidSection

Michael Gross is the President of Dividend America Mortgage and has been in real estate for over 20 years. He has been a builder, a Realtor, an appraiser, and currently he is a lender and an active real estate investor. He uses all of his experience and knowledge to show individuals how to properly use a mortgage as a tool to help create greater wealth through real estate investing. For more information on residential and small commercial loans please contact Mr. Gross on his direct line at 770-350-7373 or via email at mgross@dividendamerica.com