At the suggestion of many of my readers I have changed the title of my newsletter. Although the effects of the subprime market fiasco are still felt today, I believe we have reached the bottom of the trough and will soon start the swing upwards. “The Market Watch: Opportunities and Analysis” is far more reflective of positive economic news that has been published recently in the form of strong corporate earnings, increased consumer spending and hiring in the technology sector. Hopefully this is will be a leading indicator for improvement in the housing market.

In addition to the real estate and interst rate market, this months edition covers disagreements between the White House and Banks over trouble mortgages, and real estate 10 year historical performance verses stock alternatives.

Home Buyer Credit Deadline
The tax credit for first time home buyers and other qualifying purchasers expires April 30th. Homes must be under agreement buy April 30th and close by Jun 30th. It will be interesting to see if there is a slow down in home sales after this date as there was with automobiles after the expiration of the “cash for clunkers” program.

High Loan to Value Refinance Programs
As part of the Governments making home affordable program, borrowers wit mortgages owned by Fannie Mae or Freddie Mac (which the majority of mortgages are) can refinance if the loan balance to home value on their first mortgage is under 105%, they do not have mortgage insurance, and they do not have a mortgage payment more than 30 days late in the past 12 months. Most of these programs are limited documentation and do not require documentation of income or assets. Verification of employment for at least on borrower is required.

I have access to a Fannie’s and Freddie Mac’s data base if you would like to determine if your mortgage may be eligible. To do so I will need:
• Full name and address including zip code;
• Mortgage Holder or Servicer;
• Approximate First Mortgage Balance.

Banks vs. The Whitehouse
Many interesting articles have been written over the past few weeks about the Whitehouse’s frustration with banks reluctance to write down mortgage balances for troubled homeowners. To date, Washington’s and bank’s efforts to work with the most severely troubled homeowners to reduce monthly payment in the form of lower rates and expanded amortization periods has not made much of a dent in the number of foreclosures. In addition, many borrowers who had loans modified are again behind in their payments. Washington would like banks to take the more drastic step of reducing mortgage balances as they believe those borrowers who are far underwater in the value of their homes as compared to the amount owed are more likely to walk away from their properties. Foreclosed properties reduce the value of all properties, so Washington contends it is for the public good to have loan balances reduced. The government, or tax payers, would pay for a portion of these types of modifications.

Banks are reluctant to reduce the balance on troubled mortgages on a wide scale basis. They see these reductions as unfair to the vast majority of homeowners who make their payments on time, and whose equity in their homes has also been reduced. They also may be fearful that initiating such a campaign would encourage those homeowners who are underwater and making payments on time to stop making payments. In my opinion banks are in a difficult position of determining what programs work best to keep troubled loans paying vs. the cost of foreclosure, while balancing the political and public fallout of banks perceived or actual role in the housing bubble and resulting Wall Street bailout. In addition, banks may be limited to what they can do since they are often only the custodian of mortgages and not the owner. Most of the underlying security or ownership has been divided up and sold throughout the world.

An equally interesting quandary is modifications of second mortgages, which include home equity lines of credit (HELOCs). The White House is also frustrated that more has not been done to modify these loans. There are many moving parts. Second mortgages by definition have a second lien position behind the first mortgage in the collateral of the house. Because of their priority lien position first mortgage owners think it is unfair that they are asked to modify their positions if the second mortgage holder does not modify theirs. In comparison to first mortgages, many second mortgages are owned directly by banks; therefore banks may be more reluctant to modify this type of loan and take the entire write down. Ironically, second lien holders in many cases may have more protection than first lien holders. While first lien holders have the collateral of only the home, second mortgage holders often have the ability to go after the homeowner personally for any of their losses. In most states, first mortgages are non recourse loans. This means that if a borrower defaults on the mortgage, the first mortgage holder can only look to the value of the home to satisfy his claim. This is also true of second mortgages used to purchase the home. However, many second mortgages were not used to purchase the property and may be recourse loans. In many states the second lien holder can look to other assets of the borrower to make up any deficiency if the loan is lost to foreclosure. This leverage may make second mortgage holders more reluctant to modify. It may also be a reason that some trouble home owners pay their second mortgages, but not their first.

The Real Estate Market
The S&P/Case-Shiller Home Price Indices were released for January, and the results are mixed, although in my opinion more positive than negative. Home prices, show that the annual rates of decline of the 10-City and 20-City Composites improved in January compared to December 2009. The 10-City Composite is unchanged versus where it was a year ago, and the 20-City Composite is down only 0.7% versus January 2009. Annual rates for the two Composites have not been this close to a positive print since January 2007, three years ago.

“…While we continue to see improvements in the year-over-year data for all 20 cities,
the rebound in housing prices seen last fall is fading. Fewer cities experienced month-to-month gains in January than in December 2009, on both a seasonally adjusted and unadjusted basis.” says David M.Blitzer, Chairman of the Index Committee at Standard & Poor’s.

In four cities – Charlotte, NC, Las Vegas, Seattle and Tampa – prices reached new lows following the financial crisis. Tampa and Las Vegas experienced some of the largest gains and declines in this cycle, while Charlotte and Seattle saw much more modest price booms and relatively late peaks. On a brighter note, San Francisco and Minneapolis are 15.2% and 12.9% above their trough values.

For most of the cities in the 20 City Composite, home values are at their 2003 fall values. Many home owners are interested in where their cities compare to the base value established in 2000. Washington, NY and Los Angeles have held up the strongest at values of 178.2%, 172.98%, and 171.27% above 2000, followed by San Diego and Boston. Detroit, at 72.1% is the weakest, followed by Cleveland and Las Vegas at 103.12 and 103.82.

To view the S&P Case-Shiller article, please visit http://www.standardandpoors.com/spf/CSHomePrice_Release_033056.pdf

Real Estate as a Comparative Investment
From the perspective of real estate as an investment, between January 31st 2000 and January 31st 2010, the Dow Jones Industrial average, the S&P 500, and the NASDAQ composite index decreased by 7.98%, 23.03%, and 45.51% respectively. The 10 City and 20 City Composite have increased 57.89% and 45.32% respectively during the same time period. As of January 2010, the NASDAQ has fallen 118.2% from its peak in February, 2000.The Dow Jones and S&P 500 are down 42.22% and 38.02% respectively from their peaks in July 2007. Residential real estate peaked in June/July of 2006. Through January 2010, the 10-City Composite is down 30.2% and 29.6%, respectively.

One might conclude that real estate has been a better investment than stocks. For some this is true. However, as mentioned in previous posts about the downside of leverage, most buyers of real estate borrow to make their purchase, while stock purchases are usually from savings and not on margin. Therefore, losses in real estate are magnified exponentially. Many homeowners who made their purchase after the fall of 2003 have seen the return on equity in their homes fall far more than the 10 city and 20 city figures. In addition, just as returns (or losses) are dependent upon the stocks or mutual funds owned, the returns or losses on real estate equity varied wildly by locale.

Mortgage Rates
The good news, particularly from my position of a loan officer, is the March 31st conclusion of the Federal Reserves $1.3 Trillion purchase of mortgage backed securities has not resulted in dramatically higher rates. This indicates there are both private purchasers of these securities, and the 10 Year Treasury Bond has remained fairly strong. With increasingly positive economic news, I do not expect low rates will last.

While fixed rate mortgages are still very low, conforming (not Jumbo) 5 Year and 7 Year adjustable rate mortgages are fantastic. If are certain you will be moving or refinancing within this time frame I strongly encourage you to contact me for an analysis of your monthly payment and interest savings with these products. In addition, pricing on all products including fixed rates has been such that the difference between paying no points and no closing costs is only .125% - .25% in rate. When you can lower your rate without closing costs, it is finding money.

If you are worried about “restarting the clock” to your pay off date, this is a non issue. I will simply provide you a monthly principal and interest payment amount to reach your pay-off date goal.