The following is directly from the Texas Association of Realtors:

The Federal Reserve Board has implemented amendments to Regulation Z that go into effect July 30. Lenders will be required to give good faith estimates (GFE) of loan costs within three business days of a borrower's loan application. The new rules also prohibit the closing from taking place until seven days after the borrower receives this so-called early disclosure. The rules prohibit a lender from collecting fees from the borrower before the borrower receives the early disclosure, other than a reasonable fee for obtaining a credit report.

The U.S. Department of Housing and Urban Development will require a new GFE form and new HUD-1 settlement statement as of Jan. 1, 2010. The new GFE form is intended to better disclose key loan terms and costs. The new HUD-1 statement will clearly compare consumers' estimated and actual costs.

I believe this is a necessary change, and while it may result in more paperwork to fill out, it attempts to make a complicated process more transparent. 

The week began with the news that Circuit City filed for Chapter 11 Bankruptcy, and will be closing 150 stores - and this in advance of the holiday season, when most retailers make a larger portion of their profits for the year. Department store Nordstrom reported its growth rate is down 16%, where they were expecting an increase of 10%. Poor economic reports from Best Buy and Macy's followed a few days later, as well as lower future earnings guidance from Wal-Mart and Intel. As if the headlines of the week weren't enough, Friday's Retail Sales report showed that overall retail sales fell for the fourth straight month and plunged to their worst level since record keeping began in 1992. Looks like a pretty dismal holiday shopping season ahead...probably the worst that retailers will have seen in a long, long time.

In addition, there was bad news for the automobile industry as Deutsche Bank downgraded shares of General Motors from hold to sell, giving a price target of $0...yes, $0. As a result, General Motors stock fell below $3 for the first time since April 13, 1943. Interestingly enough, the automaker was not even making cars at that time but producing only military equipment for WWII.

And the bad news continued on the job front as well, as the Initial Jobless Claims report revealed the highest number of first time unemployment claim since 2001. In addition, Continuing Jobless Claims reached their highest level in 25 years. Remember, poor economic news and a weak labor market usually cause Bonds and home loan rates to improve. This is because fewer jobs and lower confidence about keeping or finding work causes people to spend less. In turn, businesses and retailers lose pricing power, and this is a cycle that keeps inflation - the arch enemy of Bonds and home loan rates - at low levels, especially if oil remains near present reasonable prices.

However, despite all the bad economic news of the week, Bonds and home loan rates were unable to make significant improvements this week as they fought to defeat and move convincingly above a very important technical level called the 200-Day Moving Average. Read on, to understand more about the significance of this technical indicator.

LOSING A JOB IS ALWAYS A TOUGH EXPERIENCE, BUT IT PAYS TO FOLLOW GOOD ADVICE IF YOU OR SOMEONE YOU KNOW RUNS INTO THIS SITUATION. CHECK OUT THIS WEEK'S MORTGAGE MARKET VIEW FOR JOB SEARCH TIPS THAT CAN MAKE ALL THE DIFFERENCE IN TOUGH MARKETS.

There are several important economic reports ahead this week...is more bad economic news on the way? Tuesday and Wednesday will be big days on the inflation front as Tuesday brings the wholesale measuring Producer Price Index while Wednesday's Consumer Price Index (CPI) report will show us inflation at the consumer level - that is, how much more expensive goods and services are for consumers this month over last month, as well as year over year. Given the Fed's recent rate cuts (which can trigger inflation), it will be important to see what these reports show.

Wednesday will also bring a read on the new construction housing market with the Housing Starts and Building Permits Report, and Thursday is another important day to note as the Philadelphia Fed Report will be released. This monthly survey of manufacturing purchasing managers conducting business around the tri-state area of Pennsylvania, New Jersey, and Delaware is one of the most-watched manufacturing reports. Given both the poor Jobs and Retail Sales reports of late, this is likely to be somewhat negative as well. Weak economic news normally helps Bonds and home loan rates improve, as money flows out of Stocks and into Bonds, so I will be watching very closely for improvement during the coming week.

However, to gain improvement, Bonds would have to convincingly defeat and move above a technical level called the 200-Day Moving Average. A moving average is the average closing price of a financial instrument over a given time period. In this case, the 200-Day Moving Average can act as a "ceiling of resistance", preventing Bond pricing from moving higher and helping home loan rates improve, or a "floor of support" that can keep Bond prices from moving lower and causing home loan rates to worsen.

You can see how Bonds danced around this level all last week, so I will be watching closely during the coming week to see if Bonds and home loan rates can breakthrough this resistance and move in an improving direction.

Is a Fed rate cut really good news for mortgage rates? The facts may be surprising. The Fed can only control the Discount Rate and the Fed Funds Rate. This is very different from mortgage rates. A mortgage rate can be in effect for 30-years, a rate that is set by the Fed can change from one day to another.

Another common mistake is in thinking that 30-year Treasury bonds or 10-year Treasury notes are directly pegged to mortgage rates.

Those are government securities that are backed by the full faith and credit of the U.S. government and have no direct effect on mortgage rates.

So what are mortgage rates based on? As it turns out the answer is mortgage-backed bonds known as Mortgage Backed Securities (MBS). Bonds issued by Fannie Mae and Freddie Mac (MBS) and the trading performance of those bonds will determine the direction of mortgage rates. Finding the catalyst that causes mortgage bonds to move will give you the keys to finding out what makes mortgage rates rise or fall.

We know that inflation will always be a negative for any long-term bond because it eats away at the future returns. Since the bond will pay a set amount over a long period of time, that amount will be less valuable if inflation is high. Over the past several years, one catalyst that seems to be working in the opposite direction of MBS prices is the Nasdaq and broader stock market.

As bond prices rise, interest rates fall. As bond prices fall, interest rates rise. The charts accompanying this article show the Nasdaq Composite Index and the Fannie Mae 6.5% mortgage bond tend to follow paths that are almost mirror images of each other. The consistency of this behavior is astounding.

As the Nasdaq moves higher, bond prices move lower causing interest rates to rise. As the Nasdaq declines, mortgage bonds benefit, causing mortgage rates to fall. Additionally, and unlike common opinion, Fed rate cuts have had virtually no direct effect on mortgage rates. Moreover, it appears that since Fed rate cuts act to stimulate the Nasdaq, they have a negative effect on mortgage rates.

The bottom line is that it appears mortgage rates will get better if the Nasdaq sells off and will get worse if the Nasdaq rallies. So it is not necessarily what the Fed does that affects mortgage rates, it's how the Nasdaq and broader stock market interprets the Fed's action that will ultimately influence the direction of mortgage rates. This is because money managers and mutual fund companies typically keep funds in either stocks or bonds with very little in cash. If stocks are in favor, money is pulled from bonds, causing bond prices to drop and interest rates to rise. When stocks are being sold off, the money is then parked into bonds, which improves bond prices and causes interest rates to decline.

On the chart of the Nasdaq Composite Index above, notice how the price movement higher on the Nasdaq seems to correlate to mortgage bond price deterioration (shown below) and vice versa. Once again, lower bond prices translate to higher mortgage rates and higher mortgage bond prices mean lower mortgage rates.

The chart below shows how the Fannie Mae 6.5% mortgage bond has performed during the same time period. The green circles indicate Fed rate cuts and the area circled in red shows when the Fed hiked rates.

A closer look at the rate cuts by the Fed (see chart below) shows that mortgage bond prices deteriorated after each Fed rate cut. This means that mortgage rates rose after the Fed had cut rates while many consumers were expecting their mortgage rates to decline. Worse yet are the consumers who missed the opportunity to obtain a lower rate because they mistakenly waited for the anticipated Fed action to cut short-term rates, thinking that longer-term mortgage rates would decline as a result.

Predicting the future is tough, so nothing is written in stone. Keep an eye on the Nasdaq, and keep in mind that the best rates may be behind us. But, mortgage rates are still low and could have some quick dips so make the most of them while they last.

    Over the past several years, you know that many loans were made to homeowners with somewhat non-traditional or "non-conforming" situations, be it a poor credit history, inability to document income, or any number of factors that do not fit within the traditional "box" for home loans. These loans are often called "Sub-Prime", or "Alt-A", meaning that they are somewhat riskier in nature than “A” credit, prime, or traditional loans. There were also many adjustable rate loans done that were considered somewhat "exotic" - that may well have an ideal client that they are suited for, but may have been sold to many others that did not fully understand what they were getting.

    As you also probably know, another type of "non-conforming" home loan is one where the credit and income might be perfectly fine, but the loan amount is higher than $417K, which is the current maximum loan that can be done using pools of money from mortgage giants Fannie Mae (FNMA) and Freddie Mac (FHLMC). If the loan amount is higher, it can certainly be done - this is of course a "jumbo loan" - but the end money comes from private institutions, not from the large government sponsored entities of Fannie and Freddie.

Most non-conforming loan product rates popped significantly higher, almost overnight. Here's what happened.

    The end investor for Subprime or Alt-A loans will charge a premium for taking on a pool of these loans, because they know that traditionally, they might have a higher rate of default and delinquent payments within that risky pool. But lately, default and foreclosure has been on the rise - partly due to the fact that with credit tightening and a soft real estate market, many troubled homeowners are unable to refinance or sell in order to get out of trouble. So now, these end institutions are demanding a much higher "risk premium" for taking on these pools of loans, as they see the rates of default are climbing higher.

    But since these institutions are purchasing these pools of loans sometimes months after the borrower has actually closed at a given rate, this increase to the risk premium means that instead of paying $101K for a $100K loan that will bear interest, they may only be willing to pay $95K for that $100K mortgage to account for the risk. Multiply that times thousands upon thousands of loans...and you have millions upon millions of dollars in loss for the company trying to sell the pool at a much lower price than they were expecting. This is called a "liquidity crisis", and is exactly what happened to American Home Mortgage - there was no mismanagement, but they simply got caught holding too many "hot potato" loans, forced to sell them at massive losses...and eventually they had to make the decision to close the doors and stop the bleeding.

    Further, even when a lender is able to take some losses, they may be subject to a "margin call". This means that as their losses and risk premiums increase, the value of their loan portfolio decreases. As the value decreases, the credit lines that are secured by those portfolios begin to issue margin calls as the value of the asset that they are secured on is now diminished. This is exactly like margin calls in the Stock market. If you have a loan against a Stock that is losing value, you will get a "margin call" and need to pay down the loan, as the underlying Stock is losing too much value to be considered adequate collateral any longer. So for the big lenders, as their portfolio is losing value due to increased risk premiums and losses...the margin calls start coming in, and they are required to pay down their balances. In turn, this means that they have less availability to fund their new loans, which then exacerbates the problem.

    In response to seeing this situation play out in the demise of American Home Mortgage, lenders of other non-conforming loan products increased their interest rates dramatically almost overnight to be better prepared - and likely over-prepared - for increased risk premiums down the road. Even though loans above $417K are not presently suffering from increased delinquencies like the Subprime and Alt-A loans are, these rates popped higher as well, because they are being purchased by smaller private entities that can't afford to take on any margin of risk.

    What happens next? The major damage is probably already done, and the present situation will likely settle out over the coming year. Lenders will stop pulling products off the shelf, and the rates on products that have moved so significantly higher now should trend lower down the road as delinquency rates stabilize.

So, what should you do to prepare yourself for the current market condtions?

1.    Get your financial house in order: Review your credit report to make sure that there are no errors on there. A credit score of 680 or better is a good goal.  You can go to some of the consumer websites to pull a free credit report, but these are not normally comprehensive or the same reports that lenders look for. The better plan is to contact a reputable mortgage lender who can get you a 3 bureau merged infile report. These typically cost about $17-20 but are well worth it.

2.    Establish some savings. If you haven’t been saving money regularly, work on establishing a cushion in a liquid savings account of 1-6 months of your regular monthly expenses. This will help you to be ready for emergencies, investment opportunities and will make your financial profile look stronger should you need to apply for credit

3.    Evaluate your current mortgage and debt structure. If you are on an ARM or some sort of interest only or unusual mortgage, you may want to review it in light of the current market environment. Fixed rates are low right now and it might be a good time to move adjustable rate loans into a fixed if you plan to keep the home long term. If you have other consumer debts that are at higher interest rates and you have some equity in your home, you may want to evaluate consolidating these into a tax-deductible home equity loan.

4.    Fully document your income. Many business owners and commissioned people write things off their taxes to avoid paying more income tax. While this is fine, it may negatively impact your ability to qualify for a mortgage in the current environment. Stated income, No Ratio and No documentation loans used to be very common, but they are much tougher to get these days. With fewer sources buying these loans on the secondary market, many lenders and originators are doing away with some of these more creative loan programs. You may want to consider beginning to document your income so that you can more easily qualify for standard programs at better interest rates.

First, let’s imagine ourselves as independently wealthy or perhaps we represent those who are.  Our investors are interested in making money on their money and willing to take some risks to get there.  Some of those risk takers are investing in several things at any given time.

Now we find a demand for certain loan products- specifically mortgages.  These mortgages are actually mortgage bonds that are backed by investors, government agencies, Fannie Mae and Freddie Mac.  These bonds are secured by money from our investors and entities and then sold to various banks and lending institutions. Then, they are marketed through several channels (ex. Internet, wholesale brokers, retail bankers, credit unions etc).

Everything is going great for some of the homeowners until the economy begins to slow, foreclosures shoot up and now the investors are mad. They want their money back! You begin to do so, but it costs you millions to liquidate and redeem a longer termed investment.  Hence, you see the story of Bear Stearns and the aftermath of sub-prime mortgages. Keep in mind, not all foreclosures are sub-prime.

So now the market for mortgages has radically changed where the investors are NOT as interested in that type of risk.  And in addition, the investors who still invest and comprehend mortgage backed securities, want the amount of risk reduced, and as a result, tighter qualifications.

The latest changes affecting homeownership is in several categories: down payment requirements, credit scores, mortgage insurance, and second mortgages.

Let’s discuss the infamous 100% financing-no down payment.  By and large, many of the foreclosures were the result of 100% financing.  The borrower could actually get a loan (with high credit scores) and borrow as much as 45% of Gross Income to qualify for mortgage.  Unfortunately for those who haven’t purchased and owned homes, liberal guidelines and one slight change (baby, job loss, medical urgency) –the snowball rolls.  Some people felt that by avoiding the mortgage insurance and having second mortgages, they could save even more.  Not always and in some cases the rates were very high.  Now a first time or investment property buyer can no longer qualify for a second mortgage due to the number of defaults and the lack of investors. At the end of March 2008, all 100% loans are gone.  Combined 100% loans could follow.

FHA-the wave of the future! Great for first time home buyers.  FHA loan programs allow for less stringent underwriting.  Since FHA acts as the insurer of these loans, their guidelines allow for actual people to approve loans rather than computers. FHA recently raised the loan limits for the Austin area to $288,750. Another great reason to buy now since rates are so low!

FHA is great for the people whose extenuating circumstances forced them into bankruptcy or got behind some time back on there credit and now their credit scores are down.  A first time home- buyer can really benefit too! The entire down payment and closing costs can be a gift from a relative, non- profit organization, employer and even “sweat equity”.  I had a client who received money from several friends as their wedding gift and they used it to buy a home!

Conventional loans have now changed in the pricing based on FICO scores.  Credit Scores are being considered more than ever and it now can affect the interest rate on your loan! The highest loan amount currently is 97% of purchase price.  There is some discussion about raising the loan limits soon for a temporary time.

On a conventional loan, if your credit score is between 620 and 680, you will pay a higher rate than others. Also, if your score is less than 720, and your using a second mortgage, your rate could be higher.

Now that Mortgage Insurance is tax deductible (with 100k household income or less), it may not be the worst thing to have especially since you can roll it in your loan or even your interest rate.  There are several ways to pay Mortgage Insurance and actually benefit in the long run!

So for now, stay tuned as we see rates starting to come down again- YEA!  I will be in touch.