My New Blog

The Fed:
As you know, the Fed totally surprised the financial markets by lowering rates by a larger amount than was anticipated. The Fed downgraded their economic view, and hinted that we can look for additional cuts in the coming months.  The lower fed funds rate is not going to revive the housing market any time soon, and consumers will continue to retrench.  Odds are good for reversing the credit crunch, which obviously will be a positive for the economy, and is potentially positive for struggling mortgage originators!

General Economy:
The new orders index dropped for the third consecutive month, although it still remains in expansionary territory - . The biggest risk for the economy is domestic spending, which is on track to weaken further due to the relentless slide in housing, rising energy bills, etc. The mortgage market and a drop in consumer confidence do however bode well for further Fed rate cuts. Meanwhile, the positive economic influence from the weak dollar is continuing expansion of our exports. 

The Economy, What Happens Now?
The Bernanke Fed may aggressively lower rates while flooding the system with additional liquidity. Then what?  Either business will respond to Fed manipulations or it won't.  But what if business doesn’t respond to the Fed's efforts? The Fed would panic and pull out ALL the stops. Fed Funds would probably drop back down to a Greenspan insane 1% in the Fed's all-out efforts to re-inflate – to avoid at all cost the dreaded “D” word, deflation.

The Fed will never accept a deflationary recession. There's simply too much debt built into the system for the Fed to willingly accept the possibility of deflation.  Fed chief Bernanke doesn't even want to hear that word! The Fed can always halt inflation, but history shows that once deflation takes hold, it can get out of control; it is without a doubt what the Fed fears the most.

A moment to reflect - Past Fed chief Alan Greenspan.
Ultimately history will see the Greenman as one of the major disasters in US history.  Very few realize that the Greenman was the ultimate inflation creator of all time, rather than the inflation fighter he professed himself to be.  What's so sad is that the Greenman’s earlier ideals were exactly the opposite, he was all about fighting inflation – politics, it can ruin the best of them…

Sadly, Greenspan left his successor, Bernanke, in a fundamentally impossible situation.  With the US so incredibly dependent on inflation and massive liquidity, Bernanke has little choice but to keep inflating or face a substantial disaster. This inflating can no longer happen, not now, significant contraction in the money supply would bring the US economy immediately to its knees.

Housing & Financing:
Homebuilding stocks have been hammered and a turnaround in coming quarters is not likely. Heightened concern about sub-prime loan defaults remains a key ingredient to the bear market in both sub-prime and housing stocks. It will take a substantial drop in interest rates, house prices, or a combination of the two, to generate renewed demand for housing. 

Losses on bad subprime and alt-A paper could amount to about $200 billion from 2007-2011.  As a comparison, the S&L meltdown in the late 1980s totaled approximately $150 billion in losses, in 1980’s dollars! These losses are not overwhelming on their own; however, the residual effects are the larger risk to the economy, including consumer confidence, reduced availability of credit, and increased selling pressure in the housing market.

The Bond Markets
Bonds are sensitive to interest rates, safety considerations, availability of funds, the trend of the dollar, credit, well you name it and it will be reflected in the bonds. The bond market remains neutral to bullish.

The Dollar:
The dollar continues its steady downward spiral, thus generating reduced interest in U.S. paper as a consequence of a weak economic environment. The US talks a "strong dollar," but obviously their actions demonstrate quite the opposite.  So now that we have a weak dollar, the only question left is; how weak will it go – and how fast?  Never mind what trading partners who hold billions and billions of dollars, what will they do about it –and- what will happen when and if they do?

The Bottom line:
The road ahead will be bumpy as the economy struggles; the environment is the opposite of the 1990s, when the dollar and U.S. equities were king. Fed rate cuts cannot solve the subprime mess, but can limit the negative impact on the economy – and it certainly can’t hurt right now!

The housing situation now appears worse than I originally anticipated.  Some analysts are now saying that the housing downturn can easily carry into 2009. Home prices haven’t started dropping in earnest yet, because stubborn homeowners hold out far too long for those profits they thought they would achieve. I’ve seen it happen two other times in my career – human nature can be a greedy, stubborn thing, a really dumb state of mind.  Those stubborn homeowners are among the final determining factor in how low it will go. 

The Federal Housing Administration (FHA) loan is a great program for first time homebuyers, borrowers with low credit scores, and those needing down payment assistance. You do not need to meet all of the three criteria to qualify for the loan but it’s good if you at least meet one of them. The interest rate is very competitive and the loan process is similar to as that for a conforming loan.

In answer to a request from the North Phoenix Agent, I have attempted to provide a basic overview of how the FHA loan qualification is done, and a few distinct features of the FHA loan program. This should help you understand who the FHA loan is for and how what the lender considers when approving a FHA loan.

As in all loan approval processes the FHA loan looks at four elements of the borrower. I call it the four corners of a mortgage. The four corners model can be understand to understand what you as the borrower need to do in order to qualify for the FHA loan program. It is as follows:

Credit – This is the first corner. FHA is not a credit score driven system. It is very forgiving when it comes to medical debt and student loans. In many instances medical debt is not counted and if your student loan is deferred for at least 12 months then it is completely ignored.

If I were to put a credit score limit, in my experience I have found 580 to be the lower limit. However, if you have a co-borrower with a higher score, I’ve seen lower scores be approved as well. Having said that it’s better to have no credit than to have very bad credit. I’ve explained this elsewhere so I will not go into this much further.

Employment/Income – The length and stability of employment is rather important to FHA. Regular W2 employees with at least two years of consistent income are the best candidates. However, we can still work with self-employed individuals as well. At the very minimum two years of personal tax returns will be required, and in other cases FHA may even request two years of business tax returns.

Remember if you are a 1099 employee you will be treated as self-employed. Again, I have covered this elsewhere and will not go into details here.

Assets – A reasonable amount of savings in the bank will always help your case. If you can demonstrate you have two months of mortgage payments saved up then you’ll be gold. So, for example if your mortgage payment is $1000 a month, then $2000 in the bank would be reasonable. This money needs to have been in your bank account for at least two months.

You do not need down payment money, as FHA allows down payment assistance from non-profit organizations. While this program is under scrutiny and litigation, there are still programs that can be utilized.

Property – This is also a very important corner. Most single-family homes and condo’s qualify for the program. One distinguishing feature is that FHA allows for manufactured homes. The main requirement is that the home needs to have a stem wall. Only FHA qualified appraisers can be used to perform the appraisal as the appraisal needs to meet certain FHA requirements.

Let’s now review some distinct features of the FHA loan program. You need to be aware that FHA charges a 1.5% mortgage insurance premium (MIP). This is a one time upfront charge payable at time of close. It is usually wrapped into the loan. MIP is refundable if you sell your home or refinance the FHA loan within the first seven years.

While MIP is a one-time charge, the borrower still needs to pay monthly mortgage insurance (MI) equivalent to 0.5% of the loan amount. If you are doing a 15-year FHA loan and putting more than 10% down, then you do not need to pay the monthly mortgage insurance. I have addressed MIP and MI in more detail elsewhere so I will not go into more details here.

FHA does have a loan limit, and this limit varies depending on the county. The HUD website has a neat tool to help you determine the loan limit in your county. In Maricopa and Pinal counties (my market) the single family loan limit is $263,150. This loan limit will remain unchanged through 2008.

Finally, FHA offers one year, three year and five year ARMs (Adjustable Rate Mortgages) as well as the regular 30-year and 15-year fixed loans. So, there is a degree of choice depending on your particular needs. Also, FHA allows purchase loans, rate and term refinances and cash out refinances.

Remember, not all lenders are FHA approved. If you feel you qualify for a FHA loan but the loan officer doesn’t present that to you as a financing option then make sure you ask why it is not on the table. It would be worth your effort to then contact a FHA approved lender.

Additional information on FHA loans can be found on the HUD website.

Hey Everyone!