A big part of the troubled mortgage loans come from the recent acquisition of Washington Mutual which has been a long-time top lender in all areas of Oregon including Portland, Bend, Eugene, Salem and Medford.

Large banks are looking to put to use the bailout funds issued last month.

It also appears that unlike most modification programs offered by lenders, a homeowner does not have to be delinquent on his/her mortgage in order to receive help.  The practice of only helping those who have fallen behind on their mortgages has bee criticized recently, so I think this is a good step.

The credit really amounts to an “interest free loan” from the government that would be repaid in equal installments over a 15 year period.

For example let’s say you are a first-time home buyer and you purchase a home in December of 2008 for $200,000.  At this loan amount you are entitled to receive your $7500 tax credit when you file your 2008 tax returns in early 2009.  Then each year after you would be required to “repay” the credit when filing subsequent tax returns in the years following.  In our example this would equal $500 minimum payment per year and if you sell your home before the 15 years is up you would need to repay the unpaid portion in the year following your sale when filing your tax returns.

What I like about this program is that often I see first-time home buyers drain their savings accounts when coming up with down payments and closing costs when purchasing their home.

This tax credit (loan) would help to replenish this savings account and feel more comfortable.

Also, family members often would like to help each other out when buying a home, but the family member who is loaning the money out is concerned about repayment.  By knowing that the loan may be a shorter term since the home buyer will be receiving a credit they may feel more comfortable in assisting.

The only issue I see with this program is that it intermingles loan origination with tax benefits/consequences and since I am not a licensed CPA I can only tell you to make sure you not only ask questions from your loan officer, but to also seek the advice of a qualified tax professional.

My latest fascination if the technology of mapping, and more specifically the “street-view” that is working it’s way across the world. You will soon not only be able to find pictures an aerial views in your home search, but will be able to see every home in the neighborhood as if standing in front of it.

If you haven’t checked it out, here’s a link to Google’s Portland, Oregon version.  Portland street views.

Those who live in Eugene (home of the University of Oregon) are well aware that the prices of housing near or around the campus have held up very well in comparison to other areas in Eugene, and demand remains strong for these properties as evidenced by days on the market in this area being the shortest on average.

Did you know out the trillions of dollars of ARMS set to reset this year a good chunk of those may actually adjust lower?  Some people who are being persuaded to switch into a fixed loan may actually be giving up additional savings for no reason.

I’m not saying ARMS are for everyone, and there are some ARMS that are just plain terrible, but if you look closely and do some careful planing, an ARM can provide great savings.

For the past two years there has really been no demand for ARMS as the bond markets were experiencing an inverted yield-curve (meaning short term rates were actually higher than long term rates) but now with the recent interest rate cuts by the federal reserve the spread has widened and ARMS once again are something to consider.

Let’s look at today’s rates for an example.  A 30 year fixed mortgage closed today at around 6.25%, while a 10/1 ARM (meaning your rate would be fixed for 10 years before it adjusts) sat around 5.375% and a 5/1 ARM was right at 4.875%.  

Since the average family tends to move every 5-7 years, a family not planning on staying in their home for more than 10 years might want to look closely at an ARM.

When considering an ARM you need to look at three IMPORTANT  details:  the index, the margin, and the caps.  This where you’ll discover that all ARMS are not created equal. 

The index is just that…and index used to track rates.  The two most commonly used indexes fro ARMS are the 1-Year CMT Index and the 1-Year LIBOR index.  These indexes are usually easy to find on the internet or in a publication such as The Wall Street Journal. Currently the 1-Year CMT is around 2.75%, compare this to January of 2007 when it sat at over 5.00%.

The “margin” (or spread) is what the lender adds to the index to determine your interest rate.  A common margin for conventional ARMS is around 2.25%.  So if your ARM was based upon the 1-Year CMT (2.75%) with a margin of 2.25%, your FULLY-INDEXED rate would be at 5.00%.  If your ARM is getting ready to reset, pull out your paperwork and look for your index and margin in your note and determine if your rate is going to go up or down.

The last part of the equation in evaluating ARMS is the term CAPS.  There are typically two CAPS to be aware of; the first is the ADJUSTMENT cap, and the second is the LIFETIME cap.  The adjustment cap limits the change to your rate at the time your rate adjusts, and the lifetime cap is the total your rate can adjust over the life of the loan.  Here’s a common way for caps to be presented…2/2/6.  In this example the first number is the increase (or decrease) that your rate could adjust on it’s FIRST adjustment, the second number is the cap on which the rate can adjust on each subsequent adjustment, and the final number is the lifetime adjustment cap for your rate.  If your start rate was 5.00% on a 5/1 ARM with these caps, at the end of five years your rate would be determined by adding the INDEX at that time plus your MARGIN, but capped not to exceed more than 2.00% higher than your start rate, so your rate would not increase on this adjustment to more than 7.00% at that time.

As you can see, there is a lot to look at when considering an ARM, but with careful planning and a little education ARMS can provide big savings over fixed rate mortgages and should not be considered taboo just because of what you might read, see, or hear from the media.  

Courtesy of Sue Botelho

Tracking the Track Record

What the ‘Experts’ Say about Housing Prices

“The prices of houses seem to have reached a plateau, and there is reasonable expectancy that prices will decline.”

- Time Magazine 1947

“Houses cost too much for the mass market.  Today’s average price is out of reach for two-thirds of all buyers.”

- Science Digest 1948 (average price at the time: $8,000)

“The goal of owning a home seems to be getting beyond the reach of more and more Americans.”

-Business Week 1969 (average price at the time: $28,000)

“The era of easy profits in real estate may be drawing to a close.”

-Money Magazine 1981

“If you are looking to buy, be careful.  Rising home values are not a sure thing anymore.”

-Miami Herald 1985

“Most economists agree…a home will become little more than a roof and a tax deduction, certainly not the lucrative investment it was…”

-Money Magazine 1986

“We’re starting to go back to the time when you bought a home not for its potential money-making abilities, but rather as a nesting spot.”

-Los Angeles Times 1993

Note that 1993 was the absolute low-point for real estate values in Los Angeles.

Prices have sky-rocketed since.

“Financial planners agree that houses will continue to be a poor investment.”

-Kiplinger’s Personal Financial Magazine 1993

“A home is where the bad investment is.”

-San Francisco Examiner 1996                

Perhaps the more telling sign for Oregonians is what is happening in California. As can be seen by this image California is the hardest hit real estate market which has cut off the supply of buyers moving north to Oregon which Oregon has benefited from your the past 5-6 years.