January, 2008

Market Commentary
The great interest rate divide.
Mortgage rates are amazingly low… if you have the right qualifications.

On Tuesday, the Federal Reserve cut the Federal Funds Rate three-quarters of a point to 3.5%. This is the biggest rate cut since 1984, and the first time since 2001 that the Fed cut rates between regularly scheduled meetings. It is widely predicted that the Fed will cut rates again during its next regularly scheduled meeting on January 30.

These rate cuts are helping to create an environment of extremely low mortgage rates. According to Bankrate.com, 30-year fixed mortgage rates are currently averaging 5.31%, down from 5.42% last week. This is the lowest mortgage rate since 2005, and by historical standards, this is an incredibly low interest rate.

But there are caveats. Although mortgages are cheaper, lending standards have become far more stringent. To start, borrowers must have good credit, and personal financials must be well-documented. Subprime, stated-income, and do-document lending have virtually evaporated in today’s environment. Individuals with credit blemishes or erratic personal income, getting approved for a mortgage can be much more difficult than in the past.

Next, lenders are requiring borrowers to provide larger down payments. 100% financing is difficult to come by, and some lenders are requiring 10% or 20% down in order to receive the best rates.

Here’s another issue: The interest rates mentioned above apply only to conforming loans – mortgages of $417,000 or less. Larger loans (referred to as “Jumbo” loans) do carry higher interest rates. And in this environment, the spread between conforming and jumbo loans has widened. According to Bankrate.com, average interest rates for Jumbo mortgages currently stand at 6.39% -- more than a full percentage point higher than Conforming loans. Historically, Jumbo mortgages carried interest rates between 1/8% and ¼% higher than Conforming loans (a very small spread.) As the pool of institutional buyers of Jumbo loans has shrunk, this spread has increased to its current high level.

Fortunately, Jumbo borrowers can take solace in the fact that by historical standards, 6.39% is still a very low interest rate.

So, we’re in the midst of a substantial divide in interest rates. Borrowers with good credit, good cash, and moderate mortgage balances can get incredible interest rates. Other borrowers will have to pay a premium, and those with credit issues or little cash won’t be able to get a mortgage at all.

Think about refinancing!

Now could be a great time to refinance. If your mortgage is below $417,000, you have good credit, and you have equity in your home, you could take advantage of these great mortgage rates by refinancing. If you have a fixed interest rate above 6%, or if your mortgage has a variable rate, refinancing could make good financial sense. Note that there are costs in refinancing, but lower resulting interest payments could save you substantial money over time.

If you’d like to explore refinancing options, Corus can help you with the process, and can put you in touch with a lender partner in your area. Contact your local Corus office, call 888-81-CORUS, or email us at sales@corushome.com.

Last year, over 3,000 people attended Corus Home Realty’s popular Homebuyer 101 seminars. This year, we have a full schedule of new seminars throughout the Corus service area. Thinking about buying a home? Is somebody you know a potential first time homebuyer? This FREE event is fun and informative. Please pass this along to anyone you know that might benefit from attending one of these sessions!

We offer an info-packed 7 minutes worth of valuable insight on each of 7 topics - 49 minutes of fast-paced data dump!

1. What the heck is happening with the lending industry??
2. What's going on with this crazy real estate market anyways???
3. My credit report is a debacle - any hope?
4. Tax benefits of owning vs. renting - yadda, yadda, yadda.
5. What is this "7/1 ARM" or "No Doc" mumbo jumbo?
6. Realtor, schmealtor - who needs ‘em?
7. You’ve got questions, we’ve got answers!

Are you a real estate investor? Are you someone interested in purchasing real estate as an investment? The Corus Real Estate Investor Club may be for you. Starting this winter, we’ll be organizing monthly meetings at local Corus Home Realty offices. There’s no cost or obligation, and it’s a great way to network with other real estate investors. Plus our real estate experts and partners will be conducting information sessions on:

• Investment strategies.
• Buying foreclosures and short sales.
• Financing investment purchases.
• Managing rental properties.
• Forming LLCs and pooled investment vehicles.

This month, PMI Mortgage Insurance Group released its Winter 2008 Risk Index. This report evaluates real estate markets across the U.S. and provides what PMI views as the likelihood of price declines in those markets within the next 2 years. For the Philadelphia metro area, PMI has assigned a Risk Index of “3”, indicating a 3% chance of a price decline in that market. This low risk index places the Philadelphia area within the “least risky” group of real estate markets in the United States.

By contrast, PMI has declared Riverside-San Bernadino as the nation’s riskiest market, with a risk index of 94 (equating to a 94% chance of price declines.) Las Vegas is the second riskiest, with a risk index of 83. Interestingly, 13 of the nation’s 15 riskiest housing markets are in California or Florida. The Washington DC’s risk index of 37 is average relative to other large markets in the U.S.

PMI formulates its risk index based on factors which include housing affordability, local economic strength, housing supply, and foreclosure rates.

An important lesson here: All real estate is local, and despite news regarding a weak national real estate environment, many markets around the U.S. continue to be strong. Philadelphia, the Delaware Valley, and the Lehigh Valley are among those strong markets. And DC area shows how varied a market can be. It’s a mixed bag – healthy and active inside the beltway, slower outside the beltway, and very slow in the outer suburbs.

In recent weeks, the Federal Government has been considering a number of proposals aimed at helping troubled homeowners and countering a prospective rise in foreclosures. The prospect of more foreclosures over the next year is widely seen as a barrier to a nationwide recovery in housing. Currently, four major proposals are being considered, and we expect that one of these proposals will be signed into law before the spring.

Keep in mind that the majority of the nation’s foreclosures are in only 7 states – California, Nevada, Arizona, Florida, Michigan, Ohio, and Indiana. And by contrast, the Philadelphia metro area is experiencing relatively few foreclosures. Yet, help for homeowners on a nationwide basis will be important for the entire economy. Here are the proposals being considered:

The President’s Proposal

President Bush’s proposal is designed to help those homeowners who currently pay a low introductory mortgage rate, but whose mortgage rates will reset higher in the next few years. It is believed that these loans will cause a high number of foreclosures as borrowers fail to pay the higher mortgage rates. This plan would freeze the low initial mortgage rate for an additional 5 years, but only borrowers with low credit scores and little home equity would qualify.

The impact: Borrowers who qualify would see major savings, although the program would be costly for lenders. Also, the effects of this program would be limited, since only a percentage of the borrowers with these mortgages would qualify.

Sen. Hillary Clinton’s Proposal

Senator Clinton has also proposed a rate freeze for those whose mortgages reset, but the freeze would be applied broadly, to all borrowers whose mortgages reset. And, after five years, borrowers who couldn’t afford the rate resets could qualify for government-sponsored mortgages.

The impact: This type of broad rate freeze would provide significant savings on interest for borrowers, and would have a greater impact in stopping foreclosures. However, this program would be much more expensive for lenders, and could cause many lenders to slow down future lending, causing other problems in the housing market.

Sen. Richard Durbin’s Bankruptcy Proposal

This plan would provide bankruptcy court judges with the power to modify the terms of a troubled borrower’s mortgage, potentially enabling them to continue to afford the home, and to prevent foreclosure.

The impact: Troubled borrowers would save on their mortgage, but would have to go through the bankruptcy process. Banks would be forced to bear the cost of changing loan terms, but it’s unclear whether these changes would be any more costly than foreclosing on the home.

A Government Bailout Plan

Under this plan, the Federal Government would buy and hold troubled mortgages, and then modify the terms of those mortgages to make them affordable for the troubled borrowers. This would be similar to actions taken by the government in the 1990s Savings & Loan Crisis.

The impact: As with the other plans, this would help borrowers stay in their homes, preventing foreclosures. However, this plan could be extremely expensive (costing more than $100 million), and many would view this as a taxpayer-funded bailout of the mortgage industry.