The end of the 2/28

Looks like the old sub-prime favorite, the 2 yr adjustable is going away. Because of the public outcry and the resulting Senate involvement, it is now impossible for lenders to offer a 2yr ARM. The upside for the consumer is that they will now have the opportunity to stay in their sub prime loans longer. The downside is that they will have slightly higher start rates on their loans. I think what we are now seeing is a natural selection taking place in the residential lending space. Many homeowners who are losing their homes probably never should have been homeowners in the first place. Where does this all leave us? Most likely with a softening housing market as there are now fewer qualified borrowers on the market...so prices will drop, meaning that in a couple of years, if people can actually save 10% for a down payment and have a decent FICO score, they can buy a house and maybe actually make the payments (remember, no more nasty 2 yr adjustables, and prices will be lower), which means that the nations housing market should then continue along its merry little way....See, like Mom always said...just open your wideand take your medicine...

It Still Makes Sense to Buy vs Rent

Nearly a full third of households are still renting...but if you are one of them, you could be paying a hefty price. Additionally, the children of the baby boomer generation are close to or at the home buying age, but these "echo boomers" could mistakenly decide to put off the purchase of a home because of all the noise about a "bubble" in home prices.

Is there a "bubble"? The simple answer is "no". Even if interest rates move a bit higher, it won't be enough to cause a nationwide slide in home prices. The key to a healthy housing market is the job market. If the payment on a new home might be slightly higher due to increased interest rates, it generally won't stop someone from purchasing the home of their dreams...but if they feel their job is in jeopardy, it might be enough to stop them from making a move. So with the currently low levels of unemployment and the beefy gains in job creations, it looks like the housing market will remain vibrant. Although it will be difficult to sustain the double-digit gains that much of the country has seen, price declines are highly unlikely. Expect a more moderate rate of appreciation, perhaps closer to the historical 6-7% range, which is still very good.
It is important to note that housing tends to be localized. So if the job market in your area is weak, housing prices could under perform the rest of the country.

But this talk of a housing bubble has been going on for a few years now, and those who were unfortunately victimized by continuing to rent instead of purchasing a home are painfully mulling over their missed opportunity. But is it too late? Even with the more moderate levels of appreciation expected…procrastinating on that home purchase could cost you a bundle.
Let's look at an example. If you are paying rent at $1,500 per month and your landlord increases your payment by a modest 5% each year, you would wind up paying just about $100,000 over a 5-year period! Worse yet, after forking over $100,000, you still would have nothing to show for it.

And speaking of having nothing to show for it - how about any improvements you might make to a rental property? It's not uncommon for renters to freshen up the paint, install new light fixtures or plant some nice flowers outside. But guess what…all your efforts, labor and the benefit of that improvement belong to the landlord, not to you.

With the extensive variety of programs to help buyers obtain a mortgage with little to even zero down payment, the very same money could have been used towards home ownership. Even using a standard 30-year fixed program, a mortgage of $300,000 could be obtained with a total monthly mortgage payment - including property taxes and insurance - of around $2,200. Assuming a 25% tax bracket, this would be equivalent to the average amount spent on rent during the same period after your tax benefit.

And the benefits of home ownership are quite considerable. Because the mortgage is being paid down each month, equity is being built. After 5-years, the $300,000 mortgage would be reduced to $279,000, adding $21,000 to your net worth. Home appreciation can add an even bigger chunk. If your home appreciates at a modest 5% per year, the value of a $300,000 home would increase to $383,000 after 5-years. Subtract the remaining mortgage of $279,000 and you have a whopping $104,000 of additional net worth! Even if the appreciation level were at 3.5% or half the historical norm, the result would be $77,000 of additional net worth.
But if laying out the initial increase in monthly payment and having to wait for your tax benefit to show up next April is a tough nut to crack, the IRS wants to help. Instead of waiting to file for the tax benefits derived from your new home purchase, you can simply adjust the amount of your withholding. This allows you to have less tax withheld from each paycheck so you can handle the new mortgage payment more comfortably throughout the year. In essence, you are taking your tax refund as you go instead of letting Uncle Sam hold it all year, interest free.
Visit www.irs.gov and use the IRS withholding calculator. This very handy tool can quickly show you the effect a change in withholding will do to your net paycheck. Remember to balance this with the expected refund and it is always a good idea to check with your tax advisor.
Don't be victimized by the bubble hype. Buying a home is a big step, but it is almost always one in the right direction. Please feel free to contact Commodore Mortgage Group at 201.830.1801 to learn more.

Treasuries Rise on Bernanke Forecasts, Subprime Mortgage Woes

The 10yr is challenging 5.00% again...


By Elizabeth Stanton and Daniel Kruger

Federal Reserve Chairman Ben S. Bernanke
July 18 (Bloomberg) -- Treasuries rose, pushing the benchmark 10-year note's yield below 5 percent, after Federal Reserve Chairman Ben S. Bernanke predicted inflation will recede and said housing market weakness may slow the economy.
The yield earlier rose as high as 5.06 percent on speculation Bernanke would emphasize the potential for inflation to accelerate. The Fed trimmed its forecasts for economic growth, and an index linked to the lowest-rated securities backed by subprime mortgages fell to a record.
``It's friendlier testimony than people expected,'' said Irene Tse, co-head of U.S. interest rates trading in New York at Goldman, Sachs & Co., one of the 21 primary U.S. government securities dealers that underwrite Treasury auctions. ``His view on inflation is somewhat moderated,'' and there is ``much larger emphasis'' on housing and subprime mortgages.
The benchmark 10-year note's yield fell almost 4 basis points, or 0.04 percentage point, to 5.01 percent at 4:05 p.m. in New York, according to Cantor Fitzgerald LP. The yield, which moves inversely to price, touched 4.99 percent, the lowest in a week. The price of 4 1/2 percent notes maturing in May 2017 rose 1/4, or $2.50 per $1,000 face amount, to 96 2/32.
Bernanke, in comments to the House Financial Services Committee today, said core inflation, which excludes food and energy prices, ``may be a better gauge than overall inflation of underlying inflation trends.'' Core inflation has slowed since February, while overall inflation has accelerated.
Fed Growth View
``This trend we've seen of core inflation abating and gradually diminishing is extremely constructive for intermediate and long-term interest rates,'' said Chris Molumphy, who oversees $150 billion as chief investment officer for fixed income at San Mateo, California-based Franklin Templeton Investments.
Labor Department data released today showed core prices rose 2.2 percent in June from a year earlier, the same rate as in May. Core inflation was 2.9 percent in September, the highest in 10 years. Including food and energy, prices rose 2.7 percent from a year earlier, more than forecast.
Federal Reserve policy makers left the target rate for overnight lending between banks unchanged for an eighth straight time on June 28, saying the potential for accelerating inflation was the biggest economic risk.
Bernanke said the Fed trimmed its forecast for U.S. economic growth this year to a range of 2.25 percent to 2.5 percent, from 2.5 percent to 3 percent, because of a slowdown in homebuilding. The forecast for next year was trimmed to 2.5 percent to 2.75 percent, from 2.75 percent to 3 percent.
A Commerce Department report released today showed permit issuance for new home construction slowed last month more than forecast to the lowest level in a decade, suggesting a recovery from the housing slump may not be quick.
Senate Testimony
Bernanke is scheduled to appear before the Senate Banking Committee tomorrow at 9:30 a.m. Washington time. The Fed chairman presents the central bank's outlook to lawmakers twice a year in February and July before taking their questions. Traditionally the prepared remarks are identical.
His last two semiannual testimonies also triggered Treasury market rallies. Ten-year note yields fell 7 basis points on Feb. 14 after he said ``inflation pressures are beginning to diminish.'' Last July 19, he said the Fed had to be mindful of ``the possible future effects of previous policy actions,'' triggering a drop of 8 basis points in the 10-year yield.
The yield is at the low end of its range over the past six weeks as losses in securities backed by subprime mortgages fueled demand for the safety of U.S. government debt.
Bear Stearns Losses
Bear Stearns Cos. yesterday told investors in two failed hedge funds it managed that their capital had been wiped out by ``unprecedented declines'' in the subprime mortgage-backed market. The ABX index linked to 20 subprime mortgage-backed securities rated BBB- and created in the second half of 2006 dropped 4.5 percent to 43 today, according to Deutsche Bank AG. It has fallen more than 50 percent since it started trading in January.
Bernanke said conditions in the subprime mortgage market ``have deteriorated significantly,'' reflecting the higher delinquency rates. Still, ``financing activity in the bond and business loan markets has remained fairly brisk,'' he said.
Treasuries that offer protection against inflation by indexing their principal to consumer prices outperformed regular Treasuries as consumer prices rose more than forecast last month. Prices increased 0.2 percent in June, compared with the median forecast of 0.1 percent among 78 economists polled by Bloomberg News.
`Not as Charming'
The yield on 10-year inflation-protected Treasuries declined more than 5 basis points to 2.64 percent. The gap between its yield and the comparable regular 10-year yield, investors' expectation of the average inflation rate over the life of the securities, increased to 2.43 percent, the highest in almost a month.
``The inflation outlook is not as charming as people like to think,'' said Gang Hu, head of inflation trading in New York at Deutsche Bank AG. Gains were limited because the government plans to sell 20-year inflation-linked bonds in an auction next week, he said.

Who Knew?

Who knew that this sub prime mess would have benfitted A paper loans? S&P downgraded $12 billion in sub prime mortgage bonds today, and a huge flight to quality resulted. The 10 yr rallied, and rates dropped from 5.15 to 5.02...which is huge. Glad to see something positive has come from the sub prime meltdown!