Mortgage rates are back down to 6.5 percent (low-fee), taken by sudden understanding that the economy probably passed its high point for the year in June.
A huge spike in unemployment claims (to 443,000 last week, 60,000 above recent range) may overstate weakness, and today’s announcement of 51,000 jobs lost in July may understate, but weakness is spreading beyond housing, construction and manufacturing. The purchasing managers’ July survey came in dead flat, at 50, but with the fewest new orders since October 2001, and tailing strength in exports.
Second-quarter GDP arrived plus 1.9 percent, propped by rebate checks and the best export sales ever (a weak dollar has its benefits). However, the Euro economy is now slowing faster than we are, and soon won’t be buying much (a strong euro has its penalties). The United Kingdom is in real trouble, with retail sales hitting a 25-year low and mortgage approvals off 72 percent.
Western central banks fighting inflation (Asian ones are still flinching) have been helped by market-based credit tightening. However, beware of Frankenstein. Credit shortage is spreading to all sectors: Corporate bond issuance, intact through spring, just had its worst month in five years, prime rates an immense 3 percent above Treasurys.
The new housing assistance bill, dismissed here briefly last week, deserves a more thorough hatchet-job.
Its centerpiece is a $300-billion FHA loan guarantee (not money) to refinance underwater home "owners." Consider a Bubble-Zone victim who bought a $200,000 home five years ago, made a 5 percent down payment and got a 5-year interest-only ARM for $190,000. The home has fallen 25 percent in value to $150,000. She has made interest-only payments since, and her $190,000 loan is entering amortization reset.
Her rate is not bad, 5.5 percent even after adjustment. However, her payment will jump from $871 to a killing $1,167. To her rescue, the bill’s "Hope for Homeowners." In the land of unfortunate acronyms, gotta call it HoHo.
HoHo provides for a write-down of the mortgage to 90 percent of current market value, to $135,000, plus a 3 percent refinance fee to the FHA, $139,000 total. HoHo further provides a 1.5 percent annual surcharge; added to 6.5 percent current market equals 8 percent, amortized for 30 years is $1,020 per month. Better by a little, possibly affordable, equity negligible, pride failing. Then there’s HoHo’s anti-equity kicker: When the place appreciates in value (how many years ahead?) and she either refinances off the 8 percent or sells, HoHo will take half of any appreciation. I bet HoHo won’t split costs.
While she considers HoHo humiliation, a new renter moves into the house next door, identical, rent $700. Millions of people just like her are now condemned as "Walkaways." Professionals, fiddle with local examples; I think this one is mainstream.
A more pernicious provision in the bill is the First-Time Homebuyer Tax Credit, retroactive to April 9, 2008, $7,500 per household. This is a credit, not a deduction; if you owed $7,500 in ’08 taxes and had $7,500 withheld, you’ll get a refund of your whole withholding. The advice from this firm to all buyers except compulsive savers and the rich: Don’t take the FHOBTAC credit.
There’s a fishhook in the FHOBTAC sirloin: You have to pay it back. $500 per year added to your taxes (goodbye, refund), and the whole remaining balance if you sell the palace. Own for three years, you’ll still owe $6,000. How many recipients of the credit will still have that cash when it’s time to pay at tax time? Scammers are already trying a payday-loan trap: Assign your credit to us, and we’ll give you money for a down payment.
Meanwhile, mortgage credit starvation — the real problem — is doing its grim work. MGIC, the mortgage insurer, published its new regional risk guide: of 73 metro areas, two are strong, 31 soft or weak. Of the remaining 42 rated "stable," 19 are weakening. It is one thing to allow Bubble Zones to correct, another to let a credit crunch do some inflation-fighting. But, allow the entire housing market to sink? Careful, fellas.
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at email@example.com.
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