Discount Window – What’s the Hype all about? Lehman Bro’s

As for as the discount window, the Fed has lowered the discount rate through a series of rate cuts to 2.25% from the 6.25% rate that was effective in August, 2007. This is the interest rate that banks pay when they borrow money directly from the Fed. The problem with this, however, is that most banks do not like to borrow from the Fed’s discount window because it can be construed as a sign of weakness.

How so?

Imagine that you are in an action movie playing the part of the hero who is being mistaken for a criminal.

You are on the run from the police who don’t really know that you are on their side in the first place. After a few days on the run, you start getting hungry. You find a grocery store, find some food and proceed to the check-out line. You are faced with two choices:

• Pay cash for the food
• Use a credit card

If you use the credit card, you know that the authorities will be monitoring all the activity on that card. This will tip them off to your location and "BAM" – you are caught! On the other hand, if you pay cash for the food, you can remain anonymous and continue with whatever it is you are doing to prove your innocence and give the movie a happy ending.

The banking industry is like an action movie, and the banks that need funds are like the heroes of the movie. The banks on the sidelines are like the authorities. If you are a bank that needs funds, and you go directly to the Fed and borrow from their discount window, this would tip off all the other banks that you could be experiencing financial difficulty. This in turn causes them to be more cautious when dealing with you and could potentially result in driving down your stock price because the stock market may interpret this as a sign of financial weakness.

That is why the discount rate is often referred to as symbolic, as most banks don’t like to borrow from the Fed’s discount window if they can avoid it. If a bank finds other sources of funding outside of the Fed’s discount window, they can borrow anonymously and avoid tipping off all the other banks to the fact that they are in need of short term funds.

Mortgage Planner William Doom

Way to make Means by Rep. Charles Rangel (D-N.Y.)

If you haven’t heard I am sure you will?

Rep. Charles Rangel (D-N.Y.) managed to avoid to paying taxes on rental income and mortgage interest for a beachfront villa. It is estimated he avoided mortgage interest of 10.50% and upwards of $75,000 in tax free rental income for multiple years. The toughest part of the story to swallow is the fact he is the Charmin of the House Ways and Means Committee. The House Ways and Means Committee is the chief tax-writing committee of the United States House of Representatives. The Committee has jurisdiction over all taxation, tariffs and other revenue-raising measures, as well as a number of other programs. (Wikipedia) Rangel is also a staple champion of Affordable Housing initiatives. Ironic; Tax –writing and affordable housing, from his actions he obviously has hands on experience.

INVESTING IN REAL ESTATE

Are you a speculator or investor?

Great fortunes can be made and lost in real estate. William Doom Certified Mortgage Planning Specialists and Sarah Reiter REO Professional are committed, qualified and equipped to help you implement the seven keys to profitable real estate investment:

• Determine Level of Liquidity - liquidity is the ability to quickly convert an investment into cash, without losing any of the principal that you've invested.
  
• Determine Level of Marketability - marketability is the ability to convert an investment into cash quickly, at any price.
  
• Determine the Impact of Leverage - leverage is the use of borrowed funds to finance a portion of the purchase price of an investment. The ratio of borrowed funds to the total purchase price is known as the loan-to-value (or LTV) ratio. A high LTV would result in high leverage, while a low LTV would result in low leverage.
  
• Determine the Impact of Leverage - leverage is the use of borrowed funds to finance a portion of the purchase price of an investment. The ratio of borrowed funds to the total purchase price is known as the loan-to-value (or LTV) ratio. A high LTV would result in high leverage, while a low LTV would result in low leverage.
  
• Evaluate the Investment Management Issues
  1. Asset Management - this is where you monitor the financial performance of the investment and make changes as needed.
  2. Property Management - involves the overall day-to-day operation of the property and the physical maintenance of the building or buildings.
  
• Consider the Tax Impact of Your Investment Decisions: This includes such issues as:
  1. Classifications of passive
  2. Active and portfolio income and losses Capital gains taxes Income taxes
  3. Tax Credits Tax deductions
  4. Tax Deferments
  
• Evaluate and Reduce Investment Risk - risk is the possibility of losing either the principal invested and/or the potential income from the investment. CMPS professionals help you reduce investment risk in several ways
  - Risk Analysis - This is the process of evaluating alternative investments based on their level of risk
  - Shifting risk - structure your leases and rent agreements to shift the exposure of increasing costs to the tenants. This can include shifting the risk of rising interest rates, operating expenses or tax increases.
  
• Due diligence prior to purchasing an investment property - Due diligence is the process of examining a property and related documents such as appraisals, inspections, environ mental surveys and title work in order to reduce risk.

For more info or Help with your Real Estate Portfolio feel free to contact William Doom will@MyEquityPro.com

Mortgage Interest Rates react Favorable to Fed Back Stop

Mortgage Bonds soar higher yesterday on the announcement that Fannie Mae and Freddie Mac will come under control of the government.
This announcement came as the government felt both these institutions will no longer be able to meet their mission statement which is to provide liquidity, stability and affordability in the housing markets.

Fannie Mae and Freddie Mac both have issued many Bonds which over time mature, and Fannie and Freddie need to pay back the principal on the maturing Bonds. The way they raise capital to pay these maturing Bonds is to issue new Bonds. This happens every month. And as long as Fannie and Freddie can sell new Bonds this system works well. But the problems in the mortgage industry have reduced investor appetite to purchase these Bonds...and that's where the trouble begins. Without the ability to sell new Bonds, Fannie and Freddie are less able to meet the capital requirements to pay off the maturing Bonds. And that's the big fear. If Fannie and Freddie were to default and become insolvent, it would throw the beleaguered mortgage and housing markets even deeper into the abyss.

Additionally, the recent lack of appetite for Fannie Mae and Freddie Mac Bonds caused the two mortgage giants to have to do something to make their Bonds more attractive...so they offered their Bonds at higher yields to gain more investor interest. However, since they couldn't go back and raise rates on loans that had already been closed, it sucked even more profits out of Fannie and Freddie, reducing capital even further, and exacerbating the problem.

That's why the Treasury has stepped in and said that they will back the payments on these Bonds. This action has given investors a lot of confidence to step in and now buy Mortgage Bonds. Think about it. For a higher rate of return, investors can now buy Mortgage Bonds with the same guarantee as lower yielding Treasury Bonds. This caused a nice rally in pricing yesterday – which combined with the break above the 200-day Moving Average has reduced mortgage rates almost a full 1%.

Feel free to contact me to discuss your Mortgage Options. Will@MyEquityPro.com

HR3221 NEW Housing Bill

It’s hard to believe that anything that takes nearly 800 pages to describe could be time sensitive, however, President Bush recently signed the Housing and Economic Recovery Act of 2008 and, for many, it may provide the incentive needed to act now, and finally buy a home of their own.

Why?

A new $7,500 tax credit for first-time home buyers is a temporary incentive from the government to boost interest in real estate – but the time frame to take advantage of the credit is limited.

Blue Light Special in the Homes Aisle

When retailers have too much inventory they have a sale – and the same is true in the real estate market. With home prices falling all across the nation, the real estate sale is clearly marked with “For Sale” signs everywhere you look. According to the National Association of Realtors, home prices have dropped about 7% nationally from one year ago, and the inventory of homes available is the highest since 1968…all meaning there is a great selection of well-priced homes on the market.

Add to that the government’s new $7,500 tax credit for first-time home buyers and what you have is a real opportunity for many Americans who act quickly to take advantage of lower prices and make their dream of homeownership a reality.

And the more buyers who enter the market, the faster things will improve for distressed home sellers and areas hit by foreclosure at all price levels. The $7,500 tax credit for first-time home buyers could be a substantial contributor to change for those who qualify: anyone who hasn’t owned a home in the past three years and buys a home between April 9, 2008 and July 1, 2009.

And hey – notice those dates? That’s right, the credit is retroactive for folks that bought earlier this year.

So what’s the catch? Of course there are a few. You have to fall within certain income guidelines, typical for a tax benefit. And interestingly enough, the tax credit must be paid back over fifteen years – so it’s much like an interest-free loan. But it remains a tremendous benefit worth discussing, and for some people, it could be just enough to make the difference between renting and owning.

Think the Market is Depressed? Gain Some Perspective.

Limiting options in this challenging real estate market is disappointing; however, history provides some perspective. Only one in four households owned their home in 1934 when the FHA was formed during the Great Depression. In addition to the economic devastation, mortgage terms were nearly impossible: Mortgages were limited to fifty percent of the property’s market value, repayment was spread over only three to five years and there was usually a large payment due at the end of the schedule. Can you imagine having to come up with half of a home’s value to buy it? In that light – things really aren’t too bad today.

How big is the step between renting and buying? Anyone with a steady job and a landlord should immediately make an appointment with a reputable lender to find out.

And the $7,500 tax credit is a real door buster. You can bet that there will be more massive, too-good-to-be-true, never-before sales on vehicles or appliances, but the opportunity to get a special deal on your financial future is a limited time offer. Don’t let the door close in your face if there’s a chance you could be ready to cross the threshold to homeownership.

William Doom is a locally-based consumer advocate and loan officer. Email will@MyEquityPro.com to see if you qualify for the tax credit, and what actions you may need to take now.