The Meeting of the Federal Reserver Board will adjourn at 2:15pm today, and as is customary, Fed officials will speak.  Normally, we have waited to see if the Fed will lower (or raise) interest rates, and both stock and bond investors respond accordingly.  They cannot do that today, because the Fed Funds rates sits at .25%.

So, what can they do that will have any effect?  Plenty.  And from this article form Yahoo Finance page, it appears the Fed may begin to buy up other consumer debt securties, such as car notes, student loans and credit card debt-backed securities.  Just like they are buying up Mortgage Backed Securities, which is what is causing mortgage rates to remain as low as they have. Sort of an artificial low.

The interesting this in the article cited above is that the Fed may buy up long-term Treasury securities.

Huh? Doesn’t that strike you as the the same as an average American paying off one credit card balance with a new credit card, to allow more room for spending on the original card?  That was my first impression.

So, we will see.  The thing to watch for in the Fed comments is a fear of increasing inflation.  I do not expect that at all at the end of this meeting, but the mere mention of inflationary fears will send mortgage rates up. Anything else, should be good for rates.  Should is the key there, since the Fed is treading into unchartered waters, and there is no telling how investors will respond.

I wrote a recent post about the possible return of Down Payment Assistance for FHA loans, with a bill that has been proposed in Congress.  The Down Payment Assistance programs, administered through non-profits such as Nehemiah or Ameridream, allowed for the equivalent of 100% financing for home purchases.

But, if you are looking for a home right now, while mortgage rates are so low, then why wait for the return of anything, when you can have 100% financing right now?  Hint:  You may just want to look a little further out than you have been up until now.

A USDA, Rural Housing Loan is the best option for financing a home, and not bringing a down payment.  In fact, you will also not have a monthly PMI payment with this loan.  And interest rates are quite competitive, currently in the mid-5’s.

As you can see in the diagram above, areas in the lighter colored areas are eligible for Rural Housing loans.  And a lot of places around metro Atlanta do qualify, but your drive times may stretch a little to move to those homes.

For example, homes in Bartow, or northern Cherokee counties qualify. But southern Cherokee or Cobb do not.

Other counties that qaulify for Rural housing are parts of Dawson, norther Forsyth county, northern Hall county, Jackson and Barrow.  Just to name a few.  Yet, no properties in Gwinnett qualify.  You get the picture, it is outlying areas.

There are upper income limitations and maximum loan limits for these loans as well.  The loan limts will be increasing in March, so a lot more people will qualify for these loans.  When the new income and loan limits are published, I will write about it here.  In the meantime, if you want to know if a particular property that you are considering buying qualifies for a Rural Housing loan, just call me with the address, and I will look it up for you.

I have been saying for several months on this blog that Big Inflation is coming.  And even several readers have commented back that everything seems deflationary, and wonder if I am seeing the same economy that they are.  And I am, but I am looking out a few more months.

Inflation, essentially, is caused by a money supply that outweighs the goods and services being offered for those dollars.

So, I happened upon this article, by Adam Hamilton, in which the author makes a very compelling case for the reasons that the inflation that is coming is going to be big and ugly.  He almost argues that the CPI numbers that measure inflation may be being under-reported, on purpose.  Interesting, and if that is the case, then that under-reporting will not be possible once the inflationary causes begin to hit main street. Here is a quote:

Inflationary expectations hurt the stock markets, and weak stock markets hurt the economy as the stock panic abundantly proved. Scared citizens are not only harder to rule over, but they won’t vote for politicians’ reelections and they won’t be able to shoulder as big of tax burden to pay for politicians’ grand spending plans.

And inflation just around the corner is not good for a populus that has a slowing economy.  We have all read about (and hopefully not experienced) the growing job losses, and an anecdotal phenomenon that I am seeing, is a growing number of employees taking pay cuts instead of incurring layoffs.  Interesting.

Preparing for Big Inflation

The author of the article that I cited above suggests some things to do to prepare for and ride out the coming inflationary period.  For those, just read the article.  He is an investment advisor, so his suggestions are geared toward stocks, commodities and other investments.

I, of course, am not an investment advisor.  If anything, I could be called a debt advisor, since that is what I deal in – helping people set up and manage the largest indebtedness that most people will take on in their lifetimes.

My advice, then.  Take full advantage of these artificially low interest rates, and refinance the home.  If you have unsecured debt such as credit cards, student loans or car loans, and you have the equity in your home to do so, then roll those debts into a new home loan in the high 4% to low 5% ranges, depending on how you qualify.

Then, get on that budget and savings plan that you have always talked about, even though it means cutting back a little on the nice things that you enjoy.  And, if need be, do some things to bring in a little extra income.

But the refinance part, do it quickly. The reason is two-fold.

1. First, mortgage rates are artificially low right now, because the Fed is the main player buying Mortgage Backed Securities (MBS) – those bonds that drive the mortgage rates.  They are planning on buying MBS through the end of June, 2009.  Once they stop buying, watch for rates to take off like a missle.
2. And, second, when we do see inflation take hold, mortgage rates rise as bonds are shunned.  The reason is that bonds and inflation mix like oil and water.  They don’t.  In fact they can’t, because by definition bonds offer a fixed rate of return on an investment.  And that fixed rate, say 4%, is diluted more and more as inflation rises.  If inflation is at 4%, then the real return on that 4% bond yield is…nothing.  Right, inflation cancels the yield on the bond.  So what if inflation hits 6%?  Bonds are negative, and have to rise to compete.

As many of you know, I had a stint at Sunshine Mortgage, after the other company I was with for years, Amtrust, closed it’s doors.  Well, Sunshine also closed it’s doors a couple weeks ago.  And, several of my colleagues have been hired by a local bank, based on conversations I have had with them, and according to this story from the AJC.

These have been uncertain times for all of us who feed our families and make a living working around the real estate industry.  So, I wish my former colleagues from Sunshine all the best.

Oh, and in case you are wondering, Phoenix Global Mortgage, where I am a minority partner, is on about as sure footing as you could want.  Not to be presumptous.

Rates have been rising somewhat dramitically over the past 7 days.  But then, every time rates hit the lows, they have quickly shot up like a rocket, and tend to then float down like a feather.  Be ready for a dip over the next few days.

Why?  In news released this morning, housing starts stood at 550,000. Estimates were for starts to stand at 610,000. And that number caps the worst year for builders since 1959. In other news, weekly jobless claims stood at 589,000k, higher than estimates for a read of 548,000.

Remember, bad news for the economy usually causes a flight to safety, and bonds are the safe haven.  Bonds, or Mortgage Backed Securities, rally, and mortgage rates drop.

If you are thinking of refinancing your home, or your second home in Georgia, let’s get the paperwork in, and lock on the dip in rates.  You will be happy you did so, in hindsight.

This article in the NY Times quotes Obama’s new Treasure Secretary, Timothy Geithner as saying the bailout plan “favored big financial institutions over small businesses and struggling families” and needs reform.

I couldn’t agree more.  The original intent of the bailout plan, if coupled with a reform of the current ‘mark-to-market’ rule, would have substantially helped the housing market and the economy.  Remember, though, that Paulson turned on a dime once the funds were approved, and started to buy stock in large financial institutions.

So, going back to the original intent of the funds would be a very good thing.

I recently posted this on a national blog:

Down Payment Assistance for years made FHA loans into 100% financing for lots of buyers.  The 3% down payment requirement (now 3.5%) was paid by the seller instead of the buyer.  The seller would pay it to a 3rd party non-profit, along with a processing fee, and the non-profit would deliver it to the closing table to cover the needed money down on the property.

All that changed October last, when new legislation did away with the tool that made it so easy for first time home buyers around Atlanta and the rest of the US qualify to buy a home, when funds saved were tight.

It could be on it’s way to a comeback, though.  Here is the verbage I received from Ameridream – one of the largest providers of down payment assistance – this morning:

We have been informed that a bill to reinstate reformed downpayment assistance will be introduced as early as tomorrow. The bill is expected to be introduced by Congressman Al Green (TX) with bipartisan support. The bill will have the same language as unanimously passed last year by the House Financial Services Committee.

We will keep you informed as we continue to support efforts to reinstate downpayment assistance.

AmeriDream

So would this be a good thing for the housing market?  That depends on who you ask.  I have read various numbers showing the default rate being considerably higher on FHA loans that utilized down payment assistance, compared to FHA loans that did not use this.  And that probably stands to reason.

But, used responsibly, it can be a good tool, and help more qualified people get into homes.  Personally, I would like to see a variation on the old DAP.  Perhaps splitting the down payment between the seller and buyer, with no other gifts allowed to cover the money down.  To me, that makes sense.  But then, I did not write the legislation.

In England, some credit cards are now charging 46% interest.  Wow.

I will have to research to be certain, or maybe a reader knows and wants to post a comment, but I think in the US there are limits on the amount of interest that credit card companies can charge.  But it is somewhere in the 30+% range.  Which is ugly enough.

So, again I say, with even tougher times ahead for the economy, if you have significant credit card debt, and have some equity in your home, then it will make great sense to consolidate all that into a new home loan, with fixed rate home loans so low.  Both conventional and FHA rates are still bouncing around historic lows, so now is the time.  You will be happy you refinanced, if you jump on it now.

The folks at iTulip have come up with a very interesting recap to last year and an attempt at a forecast for 2009.  As any armchair economist can foretell, 2009 will not be a banner year for the economy, neither macro nor for a lot of individuals.

Click the link above and prepare for a rather long read, but a very interesting one that is worth the time.

In essence, I agree with their conclusion:

[...]We do not know how it will unfold but expect to see a major currency event this year.

As much as it pains us to say it, we cannot shirk from our responsibility to note that the politics of a shrinking global economic pie will not improve prospects for peace in 2009. Our international institutions for regulation of trade and economic development are geared to managing the challenges of growth, not shrinkage. The tendency of nations to withdraw into themselves in times of economic trouble when increased cooperation is all the more critical must be countered with a concerted effort to maintain close and constructive economic and political ties. Europe is especially vulnerable, and we hope that US leadership stays particularly close to its European allies during the year ahead. 

Keep in mind, that as ugly as the economy and markets get in 2009 that there is nothing new under the sun and this too shall pass. 

At the start of 2007, I knew that many mortgage lenders would fail.  Okay, I knew this because I listened to people much smarter than I, such as Bill Dallas.  And at the outset of 2008 I told clients and friends while musing over a beer, that banks would fail.  Okay, I did not go nearly far enough, in hindsight.

So, for 2009?  On the one hand, that is a more difficult one to predict.  As stated above, there are multiple macro-economic and political influences that I would not speculate on.  But on a personal level, times will get tight.  First with deflation, which we are beginning to experience now, and then with very high inflation – and I say this based on the recent past performance of the governement actions which begin well, then get off track.  I do not think the government will do what it needs to effectively contain the coming very high inflation.

What do we do, here in the suburbs around Atlanta?  Easy.  Prepare.

1. Consolidate debt into a low interest and managable monthly nut.  This can be done by rolling credit car debt, car loans or other unsecured debt into a new home loan.  Look to FHA loans if you need to cash out quite a bit of equity.  Conforming mortgages work well, also.
2. Cut expenses or take on another job (or start a home-based business).  Just look at your budget and do what you need to make sure that there is extra to save and stock away over the coming months.  This will be important to cover things as prices inflate, and just in case you are caught up in the next wave of layoffs as unemployment rises.
3. Plan to do things to enjoy life and relieve stress.  Start by turning off the evening news, if you haven’t already.  Watching that will give you an ulcer, if done on an extended basis.  As the iTulip article stated, ‘this, too shall pass’.  So, stop and smell the roses (or tulips) along the way.

On Christmas Eve, GMAC – the finance arm of General Motors – was given a $6B bailout.  Nice.  What was not as widely reported is that it was also given the status of a “Bank holding company”.  Remember that American Express, the credit card company, was given the same Bank Holding Company status back on November 10.  

I read an atricle recently that rhetorically asked, “Is GM a carmaker, or a Bank that makes cars?”.  I would link to the article, but I cannot remember where I read it.  Point is, what the question asked in jest now has had all doubt removed.

That is significant, because it gives GM access to the TARP Funds (Troubled Asset Relief Program), and to the short-term Fed discount window.  Neither are a bad thing, when just a couple weeks ago GM and the other car makers were sitting before congress, looking like Oliver Twist asking, “More, please?”