The Fed lowered the Fed Funds Rate by a quarter-percent to 2.000% this afternoon.

Because it is tied to the Fed Funds Rate, Prime Rate also fell by a quarter-percent.  Prime Rate is now 5.000%. 

Holders of home equity lines of credit and credit card debt benefited from the change and will see lower interest costs in next month’s statements.

Mortgage rate shoppers are also benefitting.

Each time the Federal Reserve cuts the Fed Funds Rate, it’s meant to stimulate the economy in growth.  Too much stimulation can create too much growth and that often leads to inflation (which causes mortgage rates to rise). 

This is one reason why mortgage rates had not fallen over the past few months.  Each Fed Funds Rate cut made it more likely that the economy would overheat in the second half of 2008.

So, because the Federal Reserve signaled that a rate-cutting “pause” may be ahead, investors are reducing expectations for a Fed-induced inflation cycle for later this year, pushing rates lower.

The FOMC’s next scheduled get-together is a two-day meeting June 24-25, 2008.

Source
Parsing the Fed Statement
The Wall Street Journal Online
April 30, 2008
http://online.wsj.com/internal/mdc/info-fedparse0804.html

RealtyTrac released Q1 2008 foreclosure statistics and the data follows an interesting statistical phenomenon most commonly known as the “80/20 Rule”.

The 80/20 Rule states that 80 percent of the effects come from 20 percent of the causes.

In this case, 80 percent of bank repossessions in the first three months of 2008 came from 20 percent of the states in the union.

Accounting for 156,463 repossessed homes nationwide:

1. California (40,023 homes)
2. Texas (14,935 homes)
3. Michigan (12,016 homes)
4. Ohio (10,299 homes)
5. Florida (10,185 homes)
6. Georgia (8,265 homes)
7. Arizona (7,956 homes)
8. Colorado (7,022 homes)
9. Tennessee (4,533 homes)
10. Indiana (4,446 homes)
11. Illinois (4,216 homes)

Overall, 0.55 percent of homes were repossessed by banks in the first quarter.

Mortgage markets lost ground last week on inflation concerns and a general feeling that “the worst may be over” on Wall Street. 

As investors moved money into the stock market, mortgage rates ticked higher for the second straight week.

The biggest story from last week was the rising cost of gasoline. 

Rising energy costs combined with rising food prices are creating worries about the American consumer’s ability to spur the economy forward.

That sets up the biggest story of this week — the Federal Open Market Committee meeting.

The FOMC starts a 2-day meeting Tuesday and is widely expected to lower the Fed Funds Rate by 0.250 percent at its adjournment. 

Cuts to the Fed Funds Rate are meant to promote growth in the economy by decreasing borrowing costs for businesses and consumers.  For example, credit card rates are tied to the Fed Funds Rate so when the Fed Funds Rate falls, American households pay less interest and (theoretically) have more money to spend on “things”.

But the FOMC meeting is not the only big news to watch for.

On Thursday, the Personal Consumption Expenditures data is released.  PCE is the Federal Reserve’s favorite inflation gauge because it’s a smarter version of the “Cost of Living” index.  If PCE rises more than expected, it’s an indication of inflation and inflation tends to make mortgage rates rise.

Then, on Friday, it’s the jobs report.  The economy is expected to post the fourth consecutive month of negative job growth.  Markets have been highly sensitive to the jobs data lately so expect wild swings in mortgage rates in its wake.

And lastly, sprinkled throughout the week, more than 100 influential members of the S&P 500 will report their earnings.  If earnings and outtlooks are strong, mortgage rates should rise.  If earnings are weak, mortgage rates should fall.

(The following is a real estate article I just recently published.)

When choosing the right mortgage lender or broker you are looking for someone who is trustworthy and someone you feel comfortable with. This way you will feel confident that your mortgage loan is in good hands. Remember that it’s your money on the line; the last thing you want is to have a less than honest lender use your lack of experience against you and cost you thousands of dollars and your home. The more knowledge and awareness you bring to the table, the better your chances are of securing a loan that’s to your advantage. 

Before choosing a lender it is important to know what kind of loan you’re looking for. You will save the most money by getting the right type of loan for your lifestyle. Know your situation and how much you can afford each month. Since all lenders don’t offer the same types of loans; if you have an estimate of what you can afford, that is a good starting point when choosing a lender.

Another good place to start is http://bankrate.com.

Competition is tough in the mortgage business and loans are sold, not bought. What does that mean to you? This means that lenders will try hard to get you to buy your loan through them. Since they have incentives to get you to buy from them they may package a loan to make it seem extremely attractive. These types of loans may help the lender get a bigger commission, but they won’t help you save on your overall payments.

Some mortgage lenders and brokers also have a “one size fits all” attitude and market a loan that works best for their company. They try to convince borrowers that the loan they are “selling” perfectly suits them. The problem with that is; they tell everyone the same thing even though everyone’s circumstances are different. For example, the goals and expenses of a first-time homebuyer will be very different from that of a retired homebuyer. So with a one-size-fits-all approach, either the first- time homebuyer or the retiree will not get the best loan for their circumstances. Usually lenders have other loans to offer besides the one they are “selling,” but unless you know the type of loan you need, you could end up with a loan that sounds good, but in reality it only benefits the lender.

It is important to understand that there are different types of lenders. Some lenders sell only their own products while others will broker any product that fits their client’s needs. Basically it comes down to which type of lender you prefer, there is no exact way to determine which one is right for you. But it is very important to find the lender who is willing to find a loan that fits your needs, not theirs.

But it is very important that you know before looking for a lender, that you have many options. You should find a lender who is able and willing to give you a loan that fits your specific financial circumstances. They should be willing to get your loan approved with the best possible terms available for your situation.

A good lender will be familiar with all of the available loans options and will take the time to help you decide what kind of loan would be best for you. An experienced lender will understand the reasons you may have a lower credit score or why you’re not able to put down a large down payment as a first-time homebuyer.

Newspaper headlines rarely tell the full story and today’s papers provide a terrific example.

From the Baltimore Sun (and others):

New-home sales lowest since 1991
8.5% March decline exceeds forecasts; prices also tumble

As always, there’s more to the story than the headline. 

The Census Bureau reported a 8.5 percent decline in New Home Sales last month, but in the “fine print” of the report, the Census Bureau cites a margin of error of 16.1 percent. 

By including a margin of error, the Census Bureau is acknowledging that the “headline number” is not precise and that the actual change in New Home Sales data lies somewhere between the values -24.6% and +7.6%.

Notice that the range of possible reading includes positive numbers. 

This means that New Home Sales could have just as easily shown growth in March — if only the Census Bureau had interviewed a different set of home builders.

The Census Bureau acknowledges this possibility, adding that it “does not have sufficient statistical evidence to conclude that the actual change is different from zero.”  The data, therefore, is worthless.

The housing market may be strong or the housing market may be weak.  Most likely, it is both of these things.  It all depends on your street in your neighborhood because all of real estate is local. 

Either way, look deeper than the headlines.  They’re a good source of information, but the real analysis requires a deeper look.

Source
New Residential Sales In March 2008
Census.gov
April 24, 2008
http://www.census.gov/const/newressales.pdf

Credit scoring is becoming more important to mortgage pricing so now would be a terrific time to brush up on your credit education.

If you understand how the system works, after all, you can make it work to your advantage. One terrific place to start your research is at myFICO.com.

Published by credit scoring powerhouse Equifax, myFICO.com give you information right from the source.  There are tens of pages of tips and tricks from which everybody can learn.

Here are some basic pointers to get you started:

Use It Or Lose It: If you don’t use credit, the credit agencies can’t assign you a credit score.  Spend $10 monthly on your credit cards and then pay it in full to “get on the grid” and get yourself a score.

30 Is The Magic Number: Holding your credit card balances below 30 percent of their respective limits shows an ability to manage credit responsibly.  Before consolidating multiple credit cards onto one credit line, consider that card’s credit limit.  Overload it and the consolidation could hurt your credit score.

The Trend Is Your Friend:  A track record of paying accounts on-time means that you’re likely to continue paying on-time.  Credit bureaus like on-time payments.  If you’ve been late, catch up immediately.  At 35 percent, this is the largest component of your credit score.

History Is The Best Teacher: Don’t close unused credit cards.  Having a credit “history” accounts for 10 percent of your score.

There are more helpful hints available at the Web site so with additional credit score adjustments to mortgage rates expected later this year, the best way to protect yourself is to be proactive.

Identify potential issues in your credit profile and work to improve them.

Credit scoring is not always intuitive so if you’re not getting the personal information you need from general Web sites, ask your loan officer for an in-depth analysis.  The mortgage rate you save may be your own.

In this article, I want to tackle the legal subject of probate. This may sound like an odd topic for real estate investors, but, in fact, you can often find good investments when someone passes away.

It’s a fact of human nature that inheritors of probate estate will often want to sell that property quickly to get the money and aren’t always concerned about getting full value from the home. Or, they may live out-of-state and simply not realize the full value of the property. When these situations occur, the opportunities for bargains arise!

What is Probate? The term “probate” comes from the Latin word “probatum” meaning “prove.” In other words, the probate is a legal process by which it’s proved that a will is (or isn’t) authentic.

Specific procedures vary by state, but probate generally includes the following steps: * When a person dies, the will is filed with the local probate court (sometimes called a “surrogate” or “chancery” court). An inventory is then taken of the property. The property is appraised for its value. Assuming the will is determined valid in court, any legal debts (including death taxes) must be paid. After debts and fees are paid, the property is distributed as dictated by the will.

You may wonder what happens if the will isn’t valid or no will was left.  In that case, the estate still must go through a intestacy”(”without a will”) proceeding. This means the property is distributed to the closest relatives as dictated by state law.

Since you may be involved personally in probate proceedings (as distinct from an investor’s point of view), it pays to know the advantages and disadvantages of the probate system.

Advantages of the Probate System Probate makes sure that only your beneficiaries receive your property.  In other words, it prevents fraud. Creditors have to prove their claims against the estate. The probate process can resolve any disagreements involving your estate and disposition of your assets.

Another advantage is that the probate process limits the time creditors have to make claims against the estate. There’s a “statute of limitations.” So, if creditors don’t make their claims within the specified time period, those claims are no longer enforceable.

Disadvantages of the Probate System In the opinion of many critics, it costs way too much for the services rendered. They claim that probate provides no real benefits, except to provide lawyers with excessive fees.

An AARP study concluded that the probate process can generate legal fees of 12%-20% of the estate for the lawyer alone. It also concluded that probate can reduce the estate passing to one’s heirs by 5% or more. Source- http://www.aarp.org

In a few states, the fees are based on a percentage of the estate.  Fees may be based on “gross” probate estate. Additional costs may include court costs, appraiser’s fees, etc. Also, basic fees may be set by statute. In addition, if  “extraordinary” services are performed, the attorney/executor can ask for additional fees.

A second criticism in terms of the fees charged is that probate is primarily a clerical and administrative skill. Because of this fact, critics say there’s no necessity for court proceedings or the research, legal and adversarial skills of a lawyer. They make the claim that the process normally is handled by the lawyer’s secretary anyway or by a probate form preparation company. The result is that the beneficiaries end up paying far too much for the services rendered.

Critics also charge that probate proceedings consume too much time. On average, a typical probate proceeding can take between one and two years. During that time, the beneficiaries generally get nothing or, perhaps, a “family allowance” dictated by a judge.

Since probate can be expensive, I’ll give you a list of legal avoidance techniques you can use for your personal situations. Because these techniques are not the main focus of this article, I urge you to investigate them on your own.   Exemption of certain small amounts of property left by will from probate (depends on state) Living trusts Transfer on death registration for stocks and bonds Gifts made while you’re alive. Joint tenancy or tenancy by the entirety Life insurance Pay-on-death financial accounts Retirement accounts

How To Find Probate Estate Properties Such properties can be hard to find, but there are several sources you can contact.

One source is real estate agents. Contact them to let them know you’re interested in such properties, but be sure to specify the type of properties you’re seeking and how much you want to spend.

A second source is newspapers. Look at the obituary notices and then check with local property records to determine if the deceased owned local real estate.

Another source is the estate executor. An executor is the person in charge of selling the estate property so he or she is the person you’ll need to go through in order to make a buy.

A final source is public records. Wills in probate are a matter of public record, so you can check for them at the local court house or other local governmental agency.

Benefits of Buying Probate Properties A primary advantage of buying probate properties is great prices! Prices of many of these properties can be as much as 30 to 40% below market value.

Another benefit is a big inventory. The bad news is that we all die. The good news (for the living, anyway!) is that there will always be many probate properties available.

A third advantage is that it’s a buyer’s market. Many beneficiaries don’t really want an inherited property; they simply want the cash from the sale of that property, even if it’s a below-market price.

Many beneficiaries also don’t want the responsibilities that come along with the inherited property; estate taxes, repairs, maintenance, the mortgage payments, and so forth. So, they’re willing to sell at bargain prices.

The Disadvantage of Buying Probate Properties The identification and buying of probate properties will require patience on your part. Remember, it can take anywhere from six months to two years (or more!) to complete the probate process).

As I said earlier, know the type of probate property you’re willing to buy and the amount of money you’re willing to spend to get it. If you work with a real estate agent, communicate those guidelines to him or her so they don’t waste time on properties you’re not interested in.

Key Point: Do your research, work closely with realtors, and have patience!

Today is Tax Day so here’s some IRS-related trivia to share at the water cooler:

Did you know… President Lincoln and Congress enacted the first income tax in 1862 to pay Civil War expenses.

Did you know… The Civil War income tax was repealed in 1872, revived by Congress in 1894, and ruled unconstitutional by the Supreme Court in 1895.

Did you know… In 1913, Wyoming was the deciding vote in the 16th Amendment which gave Congress the authority collect income tax.

Did you know… The first income tax was 1 percent on net personal incomes above $3,000.  There was a 6 percent surtax on incomes over $500,000.

Did you know… The first 1040 form was 4 pages long – including instructions.  Today, the instructions ALONE are 92 pages.

Did you know… During World War I, the highest rate of income tax was 77 percent.  Taxes were used to help finance the war.

Did you know… In 1954, the tax filing date changed from March 15 to April 15.

Did you know… Electronic filings started in 1986.  Today, e-filings have an error rate of 0.5 percent versus an error rate of 21 percent for paper filings.

And remember: If you don’t file tax returns, the Treasury Department won’t send your economic stimulus check.  Happy April 15, everyone.

Through 5 days of see-saw trading, mortgage rates ended last week relatively flat; the downward tick into Friday’s close was a boon for home buyers this past weekend.It may be short-lived, however.

Oil continues to sit near all-time highs and a slew of inflation-related data is crossing the wires this week.

When inflation pressures are high, mortgage rates rise.

The first piece of data is Retail Sales for March and it hits Monday at 8:30 A.M. ET.

Traders pay close attention to Retail Sales because consumer spending accounts for two-thirds of the economy.  If sales growth is negative, it’s unlikely that Americans will spend the economy out of its weakness. 

That should bode well for mortgage rates because a sluggish economy can combat some forms of inflation.

Next, on Tuesday, markets will see the Producer Price Index from March and, on Wednesday, it will see the Consumer Price Index from March.  These are “Cost of Living” measurement for businesses and consumers, respectively. 

Over the past few months, rising energy costs have pushed both indices to record levels, taxing Americans on all fronts.  Rising costs are the heart of inflation and this tends to push mortgage rates higher.

Another “hot” number this month will be bad for mortgage rate shoppers.

Also impacting mortgage markets this week will be the earnings reports of key financial companies including Washington Mutual, JPMorgan Chase, Wells Fargo, Citigroup, and Wachovia.  This list is a Who’s Who of mortgage-exposed banks and dramatic weakness will force investors to sell stocks in favor of bonds.

Because mortgage rates are based on the price of mortgage bonds, this sort of “safe haven” buying would lower rates.

Mortgage markets have been manic since the start of the year and there’s no reason to expect a reprieve this week.  It’s data-heavy so if you see a rate you like, lock it before it’s gone.

Getting approved for a conforming home loan is now tougher than before. 

Again.

As home loan defaults mount, government-sponsored financier Fannie Mae has imposed new guidelines on what it will lend and to whom, highlighting the need for a strong credit profile and a downpayment.

In other words, Fannie Mae is outright declining mortgage applicants whose credit is weak and whose payment history shows signs of trouble.  But, it’s not just the “fringe” borrowers that are finding it harder to get a mortgage. 

Buyers with strong credit profiles are being hit by new changes, too.

One such change says that owners of second homes must now have a 10 percent equity position in their homes; 15 percent if the property is in a “declining market”. 

This is up from 5 and 10 percent, respectively, and represents a growing trend to make homeowners have a “stake” in their own homes.  Downpayment requirements are higher for all mortgage products, in general.

Fannie Mae’s changes are the third set of restrictions imposed since December 2007 and more tightening is expected over the next few months.  That makes now a compelling time to buy a home — borrowing money will be more restrictive (and more costly) later.

If you are actively shopping for homes and have not been pre-qualified in the last few weeks, reach out to your loan officer and get checked against the latest set of mortgage guidelines. 

It’s better to know today than after you make an offer.