Archive for December, 2007
The Difference Between Private Mortgage Insurance And Homeowners Insurance
Posted by: | CommentsPrivate mortgage insurance (PMI) is insurance for the mortgage lender in the event of homeowner default.
PMI helps the lender recover its costs and losses after foreclosing and selling a repossessed home.
PMI rates vary by loan type, loan size, and loan characteristics. The higher the risk to the bank, the higher the cost of PMI.
The two types of PMI are:
- Borrowed-paid mortgage insurance
- Lender-paid mortgage insurance
Borrower-paid MI is the more common version of PMI. It may be payable up front, payable monthly, or both. However, once the mortgage balance is reduced to 80% of the home’s value, PMI may no longer be required by a lender.
This reduction can occur by principal being paid down, home appreciation, or a combination of the two.
With lender-paid PMI, there is no monthly payment because the mortgage note’s interest rate is increased and is, therefore, “self-insuring”. That is, the lender collects higher payments each month and usually buys an insurance policy with the extra proceeds.
Different from private mortgage insurance is another type of insurance called homeowners insurance, or hazard insurance.
HOI is property insurance that protects against losses in the event of a catastrophe.
Mortgage lenders require borrowers to carry homeowners insurance because it protects the bank if the home is destroyed. However, it’s a good idea to have additional coverage for personal property and for liability related to accidents that occur on-site.
For example, if a home is destroyed in a fire:
- The homeowners insurance will repay the lender for the amount due on the mortgage
- The personal property insurance will repay the homeowner for personal possessions destroyed
- The liability insurance will protect the homeowner from third-party claims related to the fire
HOI is typically paid in annual installments to an insurance company and rates vary by type of home and type of coverage requested.
Sources
Private Mortgage Insurance
Wikipedia
http://en.wikipedia.org/wiki/Private_mortgage_insurance
Home Insurance
Wikipedia
http://en.wikipedia.org/wiki/Home_insurance
How The Case-Shiller Home Price Index Over-Simplifies Real Estate Markets
Posted by: | CommentsThe headlines say that home prices are down 6.7 percent from a year earlier. It’s important to recognize that this is a national figure.
“National” has nothing to do with real estate. Real estate is local.
The chart above is from the latest S&P/Case-Shiller home-price index and — averaged out — shows that home prices are declining nationwide. Some areas are showing growth (or flatness):
- Charlotte
- Dallas
- Portland
- Seattle
And, in every town included in the survey, there are neighborhoods that are faring quite well, despite an overall sluggishness.
Real estate prices are local. Street by street even. National surveys like the S&P/Case-Shiller home-price index paints a broad picture of our nation’s real estate market, but that level of reporting doesn’t do much on a level that’s actually relevant to Americans.
Source
Pace of Decline In Home Prices Sets a Record
James R. Hagerty And Kelly Evans
The Wall Street Journal Online, December 27, 2007
http://online.wsj.com/article/SB119867779499850669.html
Holiday Spending APPEARS To Be Lower, But It Isn’t Really Lower
Posted by: | CommentsDuring the Holiday Season, economists watch consumer spending intently because it makes up two-thirds of the U.S. economy.
When spending is stronger-than-expected, it can lead to inflation which pushes mortgage rates higher.
So far this season, mortgage shoppers should be in good spirits. Sales have fallen four weeks in a row and the outlook for a late-December rally are bleak.
But there’s more to the story than the headline, though.
When store report “sales” data, they don’t report gift card sales.
Gift cards are only accounted for when they are redeemed for actual store merchandise.
So, with gift card sales projected to reach $26 billion this year, there is a $26 billion “shortfall” in the sales figures. That $26 billion will likely get booked in January when shoppers spend their “free money”.
For as much as mortgage rates may fall on weak sales data in December, therefore, rates could surge higher when January’s sales data is released.
Higher sales levels can lead to inflation and that is the enemy of mortgage bonds. WIth inflation comes higher mortgage rates.
Source
Retail Rush Falls Short, Now Come More Sales
Kris Hudson, Ann Zimmerman And Vanessa O’Connell
The Wall Street Journal Online, December 26, 2007
http://online.wsj.com/article/SB119859964475049505.html
The Week In Review (December 24, 2007) : What To Watch For
Posted by: | CommentsMortgage rates moved away from the best levels of the year last week with force, and this week could resemble last.
Markets have been grappling with conflicting signals about the U.S. economy.
On one hand, there is evidence of inflation in the form of higher cost of living. On the other hand, there is evidence of a recession in the form of hiring and housing slowdowns.
Because market players had expected recession for so long, just the threat of inflation is enough to reverse markets.
Inflation erodes the value of bonds and investors don’t want to be caught holding too many of them.
As mortgage bonds are sold, the extra supply drops their price. This causes mortgage rates to increase.
On most weeks, new evidence of inflation would cause a gradual rise in rates. But this is no ordinary time of year. With so many traders leaving for vacation last week, the rise was anything but gradual.
Fewer buyers and fewer sellers starved the market of liquidity and that helped contribute to the rapid movement in mortgage rates.
This week figures to be more of the same.
There are no major data points to watch this week so expect that stories about the U.S. consumer’s holiday spending will take center stage.
If store receipts are higher, it shows that consumers may spend their way out of a potential recession and mortgage rates should rise in response. By contrast, if receipts are low, expect mortgage rates to idle or fall.
How Congress Is Providing Tax Relief To Foreclosed Homeowners
Posted by: | Comments
After Thursday’s passage of the Mortgage Forgiveness Debt Relief Act of 2007, foreclosed homeowners have one less worry: taxes.
When a homeowner defaults on a home loan, a mortgage lender will sometimes “forgive” the debt owed.
One example is when a foreclosed home sells for less money than is owed on it. The mortgage lender will sometimes accept this lesser amount, while considering the mortgage to be “paid in full”.
This is often called a “short sale” because the lender is “short” of the full amount owed.
Prior to Thursday, the IRS treated the forgiven mortgage debt as taxable income. This added thousands of dollars to a foreclosed homeowner’s tax liability.
A $50,000 short sale, for example, could yield an additional $12,500 in taxes owed.
After the bill’s passage, that tax liability is gone. No taxes will be owed on primary residence mortgage debt that is forgiven or written off by a mortgage lender.
The bill has two sides, though.
In order to recover the estimated $650 million in tax revenue that will be lost, Congress has limited the amount of tax breaks available on the sale of second/vacation homes. That will be impactful on homeowners, too, of course.
If you think the Mortgage Forgiveness Debt Relief Act of 2007 will impact you personally, be sure to talk with your accountant.