Archive for December, 2007

Comments Off on The Difference Between Private Mortgage Insurance And Homeowners Insurance

The Difference Between Private Mortgage Insurance And Homeowners Insurance


2007
12.28

Private mortgage insurance (PMI) is insurance for the mortgage lender in the event of homeowner default.

PMI helps the lender recover its costs and losses after foreclosing and selling a repossessed home.

PMI rates vary by loan type, loan size, and loan characteristics. The higher the risk to the bank, the higher the cost of PMI.

The two types of PMI are:

  1. Borrowed-paid mortgage insurance
  2. Lender-paid mortgage insurance

Borrower-paid MI is the more common version of PMI. It may be payable up front, payable monthly, or both. However, once the mortgage balance is reduced to 80% of the home’s value, PMI may no longer be required by a lender.

This reduction can occur by principal being paid down, home appreciation, or a combination of the two.

With lender-paid PMI, there is no monthly payment because the mortgage note’s interest rate is increased and is, therefore, “self-insuring”. That is, the lender collects higher payments each month and usually buys an insurance policy with the extra proceeds.

Different from private mortgage insurance is another type of insurance called homeowners insurance, or hazard insurance.

HOI is property insurance that protects against losses in the event of a catastrophe.

Mortgage lenders require borrowers to carry homeowners insurance because it protects the bank if the home is destroyed. However, it’s a good idea to have additional coverage for personal property and for liability related to accidents that occur on-site.

For example, if a home is destroyed in a fire:

  • The homeowners insurance will repay the lender for the amount due on the mortgage
  • The personal property insurance will repay the homeowner for personal possessions destroyed
  • The liability insurance will protect the homeowner from third-party claims related to the fire

HOI is typically paid in annual installments to an insurance company and rates vary by type of home and type of coverage requested.

Sources
Private Mortgage Insurance
Wikipedia
http://en.wikipedia.org/wiki/Private_mortgage_insurance

Home Insurance
Wikipedia
http://en.wikipedia.org/wiki/Home_insurance

Comments Off on How The Case-Shiller Home Price Index Over-Simplifies Real Estate Markets

How The Case-Shiller Home Price Index Over-Simplifies Real Estate Markets


2007
12.27

The headlines say that home prices are down 6.7 percent from a year earlier. It’s important to recognize that this is a national figure.

“National” has nothing to do with real estate. Real estate is local.

The chart above is from the latest S&P/Case-Shiller home-price index and — averaged out — shows that home prices are declining nationwide. Some areas are showing growth (or flatness):

  • Charlotte
  • Dallas
  • Portland
  • Seattle

And, in every town included in the survey, there are neighborhoods that are faring quite well, despite an overall sluggishness.

Real estate prices are local. Street by street even. National surveys like the S&P/Case-Shiller home-price index paints a broad picture of our nation’s real estate market, but that level of reporting doesn’t do much on a level that’s actually relevant to Americans.

Source
Pace of Decline In Home Prices Sets a Record
James R. Hagerty And Kelly Evans
The Wall Street Journal Online, December 27, 2007
http://online.wsj.com/article/SB119867779499850669.html

Comments Off on Holiday Spending APPEARS To Be Lower, But It Isn’t Really Lower

Holiday Spending APPEARS To Be Lower, But It Isn’t Really Lower


2007
12.26

During the Holiday Season, economists watch consumer spending intently because it makes up two-thirds of the U.S. economy.

When spending is stronger-than-expected, it can lead to inflation which pushes mortgage rates higher.

So far this season, mortgage shoppers should be in good spirits. Sales have fallen four weeks in a row and the outlook for a late-December rally are bleak.

But there’s more to the story than the headline, though.

When store report “sales” data, they don’t report gift card sales.

Gift cards are only accounted for when they are redeemed for actual store merchandise.

So, with gift card sales projected to reach $26 billion this year, there is a $26 billion “shortfall” in the sales figures. That $26 billion will likely get booked in January when shoppers spend their “free money”.

For as much as mortgage rates may fall on weak sales data in December, therefore, rates could surge higher when January’s sales data is released.

Higher sales levels can lead to inflation and that is the enemy of mortgage bonds. WIth inflation comes higher mortgage rates.

Source
Retail Rush Falls Short, Now Come More Sales
Kris Hudson, Ann Zimmerman And Vanessa O’Connell
The Wall Street Journal Online, December 26, 2007
http://online.wsj.com/article/SB119859964475049505.html

Comments Off on The Week In Review (December 24, 2007) : What To Watch For

The Week In Review (December 24, 2007) : What To Watch For


2007
12.24

Mortgage rates moved away from the best levels of the year last week with force, and this week could resemble last.

Markets have been grappling with conflicting signals about the U.S. economy.

On one hand, there is evidence of inflation in the form of higher cost of living. On the other hand, there is evidence of a recession in the form of hiring and housing slowdowns.

Because market players had expected recession for so long, just the threat of inflation is enough to reverse markets.

Inflation erodes the value of bonds and investors don’t want to be caught holding too many of them.

As mortgage bonds are sold, the extra supply drops their price. This causes mortgage rates to increase.

On most weeks, new evidence of inflation would cause a gradual rise in rates. But this is no ordinary time of year. With so many traders leaving for vacation last week, the rise was anything but gradual.

Fewer buyers and fewer sellers starved the market of liquidity and that helped contribute to the rapid movement in mortgage rates.

This week figures to be more of the same.

There are no major data points to watch this week so expect that stories about the U.S. consumer’s holiday spending will take center stage.

If store receipts are higher, it shows that consumers may spend their way out of a potential recession and mortgage rates should rise in response. By contrast, if receipts are low, expect mortgage rates to idle or fall.

Comments Off on How Congress Is Providing Tax Relief To Foreclosed Homeowners

How Congress Is Providing Tax Relief To Foreclosed Homeowners


2007
12.21
After the December 2007 passage of the Mortgage Forgiveness Debt Relief Act of 2007, foreclosed homeowners have one less worry: taxes

After Thursday’s passage of the Mortgage Forgiveness Debt Relief Act of 2007, foreclosed homeowners have one less worry: taxes.

When a homeowner defaults on a home loan, a mortgage lender will sometimes “forgive” the debt owed.

One example is when a foreclosed home sells for less money than is owed on it. The mortgage lender will sometimes accept this lesser amount, while considering the mortgage to be “paid in full”.

This is often called a “short sale” because the lender is “short” of the full amount owed.

Prior to Thursday, the IRS treated the forgiven mortgage debt as taxable income. This added thousands of dollars to a foreclosed homeowner’s tax liability.

A $50,000 short sale, for example, could yield an additional $12,500 in taxes owed.

After the bill’s passage, that tax liability is gone. No taxes will be owed on primary residence mortgage debt that is forgiven or written off by a mortgage lender.

The bill has two sides, though.

In order to recover the estimated $650 million in tax revenue that will be lost, Congress has limited the amount of tax breaks available on the sale of second/vacation homes. That will be impactful on homeowners, too, of course.

If you think the Mortgage Forgiveness Debt Relief Act of 2007 will impact you personally, be sure to talk with your accountant.

Comments Off on For Some Homeowners, PMI Is Tax-Deductible Through 2010

For Some Homeowners, PMI Is Tax-Deductible Through 2010


2007
12.20
For eligible homeowners, lawmakers voted to extend the tax-deductibility of PMI through 2010.  The law was previously scheduled to expire at the end of 2007.

The resurgence of private mortgage insurance continues — if only because it’s aided by Congress.

For eligible homeowners, lawmakers voted to extend the tax-deductibility of PMI through 2010. The law was previously scheduled to expire at the end of 2007.

For all loans originated prior to December 31, 2010, and within those years, private mortgage insurance is 100% tax-deductible provided that two tests are met:

  • The homeowner’s household income is $100,000 or less in the calendar year
  • The home loan is for a primary or secondary residence

For households earning more than $100,000, the deduction is phased out to the tune of 10% per $1,000 of additional income until it reaches 0% at $110,000.

So, if a single person earns $90,000 in 2007 and buys a home using PMI, the PMI expenses are tax-deductible in 2007. If that person’s income exceeds the threshold prior to 2010, the deduction is phased out.

As always, talk with your tax professional about how tax deductions work and whether you qualify for a PMI deduction.

Comments Off on You’ve Been Pre-Approved — Now Get RE-Approved

You’ve Been Pre-Approved — Now Get RE-Approved


2007
12.19
Getting re-approved can give home buyers a realistic sense of how mortgage financing may shape up in the changed mortgage environment

Even if you’ve been recently pre-qualified (or pre-approved) for a mortgage, it may be prudent to get “re-approved”.

The mortgage industry is changing quickly; being prepared beats the alternative.

Recently, mortgage lenders have made adjustments in what they will lend, and to whom. This shrinks the pool of eligible mortgage borrowers.

Some of these guideline changes include:

  • Low or no downpayment loans may require more income and/or assets
  • No income verification (i.e. stated) loans may not be available
  • Higher credit scores may be necessary to qualify

In addition to tighter guidelines, many mortgage lenders are now required to pass higher fees and/or mortgage rates along to their clients as well.

The burden of these mandatory extra costs will be the difference-maker in a mortgage approval for some mortgage applicants.

Getting re-approved can give home buyers a realistic sense of how mortgage financing may shape up in the changed mortgage environment. It’s important to make sure that the mortgage plan still fits into your short- and long-term financial goals.

But, if nothing else, getting re-approved gives you the opportunity to speak with your real estate and loan officer about changes to the industry, and how it impacts you on a personal level.

Comments Off on How To Squeeze Extra Tax Deductions From Your Mortgage In 2007

How To Squeeze Extra Tax Deductions From Your Mortgage In 2007


2007
12.18
Rather than make January's mortgage payment on January 1, 2008, a homeowner sending payment this week or next (i.e. in 2007) is increasing his interest paid in 2007, and increasing his tax deductions for 2007

For most Americans (but not all), mortgage interest is tax-deductible in the year in which it was paid.

With some advance planning, therefore, a homeowner can increase his 2007 tax deductions by paying additional mortgage interest while the calendar still reads 2007.

The key is to make the mortgage payment due January 2008 a few days early.

Because mortgage interest is paid in arrears, a mortgage payment due January 1, 2008 accounts for interest that accumulated throughout December 2007.

Rather than make January’s mortgage payment on January 1, 2008, a homeowner can send payment this week or next — while it’s still 2007 — and increase the amount of mortgage interest paid in 2007. This can increase 2007’s tax deductions.

Tax planning can be a complicated issue and not all homeowners qualify for mortgage interest tax deductions. Be sure to consult your tax professional before making any tax planning decisions. If you are without a tax professional, call or email me; I would be happy to make a trusted recommendation to you.

Comments Off on The Week In Review (December 17, 2007) : What To Watch For

The Week In Review (December 17, 2007) : What To Watch For


2007
12.17

Last week proved once again: The Fed does not control mortgage rates.

On Tuesday, after the Federal Open Market Committee lowered the Fed Funds Rate by 0.250%, mortgage rates began an ascent that carried all the way through Friday’s close.

As a result, mortgage rates are dramatically higher today than just one week ago.

Other factors contributing to last week’s run-up in mortgage rates:

  1. The costs of running a business grew much faster than expected
  2. The cost of living grew much faster than expected
  3. Holiday sales were much stronger than expected

All three of these items point to inflation, the enemy of mortgage bonds. Inflation tends to push mortgage rates up.

This week, there isn’t much new data of importance until Friday’s Personal Consumption Expenditures release. PCE is the Federal Reserve’s preferred measure of how much more (or less) everyday living is for Americans.

As the week progresses, expect increasing volatility in mortgage rates.

Market players will be in short supply because of holiday parties, half-days, and vacations. Fewer buyers and sellers in a marketplace mean finding the “right price” is more challenging.

Comments Off on Why Recession Is Not A Guarantee In 2008

Why Recession Is Not A Guarantee In 2008


2007
12.14

In its biggest month-over-month jump since 1973, the Producer Price Index rose 3.2 percent in November.

PPI is like a “cost of living” measurement for consumer, except that it applies to business.

PPI measures how expensive it is to produce goods on a day-to-day basis.

PPI spiking in November is an important development for all of us. When businesses spend more to create outputs, they may decide to pass those higher costs on to consumers.

Sometimes, they pass on the costs right away. Sometimes, they wait. Eventually, consumers could more for everything because businesses are paying more.

Now, economists and experts will say “if we don’t count the cost of energy and food, business costs only rose 0.4% in November”.

Yes, they’re right. But costs are costs and businesses still have to pay them. And the price of energy is not expected to cheapen anytime soon.

Eventually, we all could pay more and, when we do, it will be called “inflation”. That would be bad for mortgage rates.