With the economic squeeze the country is in, a lot of us are feeling the effects, and a lot of people around Atlanta – okay, around the country – have had to rely on their credit cards for everyday expenses.  

And, we’ve all done it.  ”Well, just this time, because things are tight, and I am sure I will be able to pay off this balance next month…”

We wake up one day six months later with a large credit card balance hanging over our heads – and a news cycle that constantly reports that the President or some economist is stating how bleak the economic future could be, the deficit is at an all time high, and wondering if super inflation is just around the corner.  Then it sets in: heartburn.

A quick solution

Well, it used to be commonplace, and perhaps too much so, to roll everything into a new, low-rate mortgage. That said, if you find yourself in that position and have some equity in your home, a debt consolidation refinance could be a good option.  

monthy cash flow savings

The above chart shows a real example of a loan I closed for a client just recently.  I will explain each line, briefly.

1. The top number represents their prior mortgage payment + minimum credit card payments for the cards that we rolled into the new loan.  
2. The Second line is the new mortgage payment, with the credit card balances rolled in.
3. Line 3 is the monthly cash-flow savings from month 1.
4. Then come the closing costs to close this loan for the client.
5. And the last line represents the number of months to break even.

In the midst of a continuing tightening of loan standards, we received some bit of good news, on FHA mortgage loan limits for metro Atlanta.

As you may or may not know, the max. loan limit for FHA loans in metro Atlanta was lowered from $346,250 to $320,850 beginning January 1, 2009.  Well, not HUD has reversed that decision, and the maximum loan limit for FHA loans in metro Atlanta has returned to $346,250.

A Real Life Example

That is good news for home buyers, and a brief story will tell you why.  Anectdotally, I have a friend who works for a large, national lender who called me back in December, the day before Christmas Eve.  He was frustrated, saying he had a borrower using FHA financing who needed the max loan amount of $346,250.  But, his national company had implemented the new lower loan limit immediately, just to preempt the national deadline of lowering the limit of Jan.1.

So, he had a borrower approved, but could not close the loan.  A desperate situation for he and for the borrower, who potentially would not be able to get into the home.  So, he asked me if I would take the deal, structure and close it at the higher loan amount.  But, we would have to close it before the end of the year!

Long story with a lot of work on my part, but more impressively on the part of the staff here – we took the deal.  I met the borrower and he re-signed out docs on Christmas Eve, then left town, while we did the work to approve the loan (my friend had, of course, paved the way nicely on the steps needed for approval).  We closed the loan on December 29, and saved the home for that borrower.

And now the higher FHA loan limits are back for metro Atlanta.  Now, will Down Payment Assistance come back?

(Hint:  Don’t count on it)

Peter Schiff wrote a compelling article spelling out the possible scenarios for the economy.  I have linked to it above, and I hope you will go and read it.  I think you will find it compelling; even if, in good Peter Schiff style, it is spelling out the worst scenarios and makes you shudder a bit.

After briefly recapping the subprime and credit implosions, and pointing fingers of blame where due, he asks if on a grander scale the US Government is not falsely propping up an economy of consumer excess?  Then, if you accept that premise to be true, what would happen to immediately bring our economy to it’s knees – or put us on life support – if foreign governments stopped buying our debt in the form of bonds.

Well, admittedly it would not be pretty; and it would be painful.

But beyond Schiff’s facade of being Paul Revere in this whole economic mailaise, he, too, is an optimist.  I think Schiff believes, as I do, in the American spirit which accepts adversity and grows stronger and flourishes from it.

If the worst in the economy is ahead of us, here’s what I would suggest:

• Credit will tighten more.  Right now if a borrower has decent credit, it is quite possible to get a very favorable rate on a home loan.  That would change, largely due to the false lows in mortgage rates going away as the Fed would stop buying Mortgage Backed Securities.
• Goods and services would escalate in price, due to inflation and the rapid constriction in free-flowing credit.
• Many companies would simply have to shut down, and jobs would be lost.

No one said that being part of the greatest nation on Earth would be easy.  Because a nation is made up of people, I believe that Americans will be just fine, and we will show our true colors as we – potentially – lead the world out of this recession and rebuild on a stronger, more solid economic footing.

Just a quick note to let you know that I am following this announcement from last week that the government will begin to bailout homeowners who can afford the home, but are under water and cannot refinance.

And, based on my experience talking to folks here in metro Atlanta, there are lots of people in this position.  So, potentially, it could be a good thing. (Taxpayer dollars aside, it could be good for those individuals who are stuck and cannot refinance, I mean).

So far, the plan is heavy on hope but light on details.  As I get more, I will post the guidelines or perameters for these refinances here.

For a few months now I have been warning that inflation, and probably a heafty amount of inflation, is just around the corner.  Well, based on today’s Producer Price Index numbers, it’s here!  Here is a Yahoo article about the inflationary numbers.

And with big-time inflation just beginning to take hold, my suggestion has been to consolidate debt, if you have the ability, and to maximize cash-flow to your household through that consolidation, through cutting back on expenses and by creating extra income, if necessary.

And, if you are considering a debt consolidation loan – rolling non-preferred debt such as credit card debt or car loans into your home mortgage at a very low rate – then you should act quickly.  The urgency is created by Fannie Mae and Freddie Mac’s new rate adjustments for ‘cash-out’ refinances, beginning April 1, 2009.

They have already implemented increases to rate, or to discount points, for cash-out refinances; but as of April 1 those costs will increase to the point where it may not make sense to do a debt consolidation loan.

You will still have FHA cash-out refinance loans if your home qualifies (for a maximum loan amount of $320,850 in metro Atlanta).  But, even there if you do a cash-out loan over 85% of your home’s value, you will need two appraisals now.

Things are still getting tighter.  Are you prepared?

Basically the tax credit for first-time home buyers went from $7500 to $8000, with the difference that the tax credit now does not have to be repaid at all.  Before, it was to be repaid over a 15 year period.

Here is a link to information on the tax credit for first time home buyers.

It is effective for any home purchased between January 1, 2009 – December 1, 2009.  And, the credit is equal to 10% of the purchase price of the home, up to a maximum of $8000.  For informational purposes, the definition of a first time home buyer is anyone who has not purchased a home in the previous 3 years.

So, if you have been on the fence about buying your first home around Atlanta, this should be enough to push you over the edge.  Home prices are at their lowest point in years, mortgage rates are at their lowest point in 37 years, and you get $8K tax credit for buying.

The market’s great.  Jump in.

A lot of talk has swirled around the $15K tax credit for all home buyers in 2009 that was proposed as part of the stimulus package.  

Then, reports were that the credit was paired back to $7500, but still all home buyers would receive the tax credit.  And, in committee, that morphed to an $8000 tax credit for first time home buyers only (i.e. anyone who has not owned a home in the past 3 years), who buy in 2009.

Still great for all the first time home buyers around metro Atlanta, where there are some excellent deals to be had.  But, just not what most real estate professionals were hoping for to jump-start the housing market.

But think of it this way:  if a buyer comes into the market, and has not filed their 2008 taxes as yet, then here’s what that buyer could do.  Find that perfect home in, say, Cobb county, with a purchase price of $228,500.  Come up with the necessary down payment of 3.5% to go with the very attractive FHA financing.  3.5% down payment on a home priced at $228,500 is, you guessed it, $8000.

Then, file their taxes and receive the tax credit of $8000, and the government will have subsidized their down payment for the home.  Not a bad deal at all, especially considering that homes are prices so attractively compared to just 2 years ago.

I have heard the story that the Obama administration wants to bring 30 year fixed mortgage rates down to 4%.  But I have not heard how they will do it.

The only way they really have of lowering rates is by buying Mortgage Backed Securities (MBS). But the Fed is already buying MBS, and they just increased the amount earmarked to buy them from $600B to $1Trillion. So, the only other way that I can see to get to 4% is for the government to set aside a big chunk of money, outside of Fannie Mae or Freddie Mac, and loan directly from that.

Problem is, they would not be able to sell the notes on the secondary market except at a loss, because the market is currently offering 4.75%-5.5% rates. So the government would have to set up a huge servicing platform for those notes.

And I am sure that would run smoothly.

Sen. Johnny Isakson had proposed the tax credit of up to $15,000 for all homebuyers this year.  The stimulus bill that this proposal is included in is in committee right now, with House and Senate members working out details and making their two versions of the bill.

One thing that got cut – in half – today was the proposed $15K tax credit for home buyers, as reported in the WSJ.  It will now be 10% of the purchase price, up to $7500.  But, unlike the existing $7500 tax credit for first time home buyers, this one does not need to be repaid.

So, is the glass now half full for home buyers around Atlanta?  Or half empty?

We will see if it makes it to the final bill in any version, then you can decide.

I received an interesting email today from a friend, Chris, with a thought-provoking similar situation to the current US Bailouts in the works.

In the decade of the 90’s, Japan went through a similar major downturn in their economy. And, – they reacted with a similar answer: Bailouts. Stimulus packages and spending packages, largely on infrastructure, with some tax cuts. Here is an excerpt from that article:

Between 1992 and 1995, Japan tried six spending programs totaling 65.5 trillion yen and cut income tax rates during 1994. In January 1998, Japan temporarily cut taxes again by 2 trillion yen. Then, in April of that year, the government unveiled a fiscal stimulus package worth more than 16.7 trillion yen, almost half of which was for public works. Again, in November 1998, another fiscal stimulus package worth 23.9 trillion yen was announced. A year later (November 1999), yet another fiscal stimulus package of 18 trillion yen was tried. Finally, in October 2000, Japan announced yet another fiscal stimulus package of 11 trillion yen. Overall during the 1990s, Japan tried 10 fiscal stimulus packages totaling more than 100 trillion yen, and each failed to cure the recession. What the spending programs have done, however, is put Japan’s government in poor fiscal shape. The “on-budget” government spending has caused public debt to exceed 100 percent of GDP (highest in the G7), and even more debt is apparent when the “off-budget” sector is included.

From my perspective down on the street, dealing with everyday Atlanta and Georgia citizens as we all try to simply manage our personal and business finances, and our mortgages, I would say that this spending bill / stimulus package before congress is definitely not the right move.  I see a lot of political gain in the short run for many elected officials.  But long term for the country; well, there is not a lot there.