Friday, July 25
Posted 2 p.m. EDT
MORE VOLATILITY: Mortgage rates have been bouncing up and down in the last few days. As I write this, rates are lower than they were Wednesday but higher than yesterday. Don't be surprised if that has changed by the time you read this. We're not talking about huge changes, but they're enough to notice. If the par rate doesn't change, the deal you get on discount points might change.

I get a lot of e-mail asking where I think rates will go. My guess is that they'll be slightly higher a month from now, and we might see a dip in the meantime. I have little confidence in this prediction. At times of volatility, you can't predict the direction of rates two hours from now, much less two weeks or two months from now.

THE CATCH: Here's a frequently asked question that no one was asking a year ago. A reader named Lex asks:

"I am buying my and my wife's first home using FHA because we don't have the 20 percent down but we can do the 3 (percent to ) 6 percent down instead. I am concerned about this type of loan (FHA) because I believe there has to be some kind of catch to it, right? I mean everything has a catch to it when you use a program like FHA, correct? What is the catch? Will I be able to refinance when value goes up on the property and take out money and fix my home?"

The catch is that you're paying an upfront insurance premium of 3 percent of the loan amount. After that, I believe you're paying annual premiums of 1.5 percent of the loan balance. That's a fairly hefty price. What do you get for it? First of all, you get a house. It's difficult, and maybe more expensive, to get private mortgage insurance when you put less than 5 percent down. The FHA is public (i.e., government) mortgage insurance -- and it allows you to buy a house with 3 percent down.

If you fall behind on the loan payments at some point, the FHA requires the lender to try hard to work something out with you before foreclosing.

Yes, after you have built up some equity, you can refinance. That 3 percent upfront premium is a sunk cost that shouldn't deter you from refinancing if it makes sense financially. Psychologically, it's a different story.

Thursday, July 24
Posted 4 p.m. EDT
WHO'S ZOOMIN' WHO?: The House has passed a housing bill that is designed to encourage delinquent mortgage borrowers to refinance into FHA-insured mortgages and to stimulate sales of empty houses, among other things.

The Senate is expected to pass the bill, called the Housing and Economic Recovery Act of 2008 (H.R. 3221), and the president is expected to sign it. As a taxpayer, there's some stuff you won't like, and some stuff that you'll appreciate. (That's a pun, one that I'll explain shortly.)

I also recommend that you read Kay Bell's tax blog today, too. She addresses some of these issues.

THE BAD: The law will give first-time homebuyers a tax credit of 10 percent of the purchase price, up to $7,500. (A first-time homebuyer is defined as someone who hasn't owned a principal residence in three years.)

Here's how the tax credit will work. You buy a $200,000 house. The next year, when you file your income tax return, you have a $7,500 credit. Not a deduction -- a credit. Essentially, you get to reduce your income taxes by $7,500. That ought to make for some big refund checks.

But. Yeah, you know there's a "but." But you have to pay the money back over 15 years. Say you buy the house this October. You get the $7,500 tax credit for the 2008 tax year. That's the one with the filing deadline of April 15, 2009. Then you have to start repaying one-fifteenth of that amount, or $500, every year for 15 years, starting with the 2010 tax year.

If you sell the house before then, you have to repay the remaining balance in a lump sum.

What if the home's value doesn't appreciate that much, or you get divorced, or you die and your kids inherit the house? Those issues are addressed in the law, but I'm not going to go into that much detail. If you really want the lowdown, go to Thomas, search for H.R. 3221.EAH, and search for the phrase "first-time homebuyer credit."

What's so bad about this provision? Well, think about it. You buy a house, and get a $7,500 gift. But it's not a gift -- you have to repay it. Where does the money come from? Where does the money go?

(The "Jeopardy" theme plays softly in the background.)

The money comes from you, Dear Taxpayer. It's an interest-free loan, payable over 15 years.

It's a little harder to figure out who the money goes to, isn't it? Does it go to you? Well, it's a loan, right? And a mortgage is a loan, too -- right? Does that mortgage money go to you? No, it goes to the home seller. Does that mean the $7,500 goes to the seller, too? I think it does.

I call this a $7,500-a-house subsidy to homebuilders who made mistakes and overbuilt. These homebuilders will market this tax credit hard, targeting first-time homebuyers with a pitch that says: "Buy a home, get $7,500 cash back." Think about this from the builder's perspective: You can be firm on price. You won't have to cut prices as much because you can tell buyers that they're getting $7,500 cash back from the government.

A previous version of the bill limited the tax credit to buyers of unoccupied houses -- basically, newly built homes and foreclosures. As passed by the House, the bill applies to all arms-length home sales, so anyone selling a house can use this sales pitch. But builders will benefit most, in my opinion.

I interviewed Anthony Sanders, professor of finance and real estate at Arizona State University, when the tax credit applied only to vacant houses. He wondered why it didn't apply to all home sales. Now it does.

"This is a way to try to get the government to step in and clear some of the excess inventory" of houses, Sanders said in that interview. "The good news is, if it's effective, that will help the housing market to rebound sooner, because one of the things that's hurting the comeback is we've put up so much supply, and that has to be absorbed if the housing market is going to turn around."

I told Sanders that I considered this to be a $7,500-a-house subsidy to homebuilders. "I see where you're coming from," he said. "Frankly, I think it's too small." The tax credit won't have much of an effect on builders' bottom lines, Sanders said. "This is one of the cases where, ordinarily, I think government should keep its nose out of the private sector, but for the health of the financial system, we need to get the housing market stabilized as soon as possible."

The main winners, Sanders said, will be first-time homebuyers, particularly if housing prices turn around. "My concern as a taxpayer and citizen is suppose we do induce some first-time homebuyers to jump in and buy these newly built homes. Is this the best thing to do for people who are trying to build up their credit?" That's not a rhetorical question; he doesn't know the answer.

As far as my theory that sellers won't drop their prices because buyers will collect the $7,500 tax credit, Sanders doesn't think it holds water. Builders (and sellers in general) don't have market power, he said. It's a buyer's market, and buyers are setting prices.

Sanders says that if this tax credit works, it will stimulate home sales. That brings up the question of why the credit is only for first-time buyers. Wouldn't it stimulate home sales even more if all buyers got the tax credit? Yes, Sanders says -- but such a tax credit might promote speculation, which is partly what delivered us into this housing mess. "This is a way to ease the entry into the market for first-time homebuyers."

Susan Wachter, professor of real estate at the University of Pennsylvania's Wharton School of Business, isn't bothered by the tax credit, either. There are bigger problems to worry about than whether the tax credit is a subsidy to homebuilders, she said.

"We're in the midst of great financial peril right now, and the leaders have taken action," she said by phone from Singapore, on her way to a professional conference. That underscored her other point -- that the global integration of financial markets forces governments to intervene in crises.

THE GOOD: The law will encourage lenders to let delinquent borrowers refinance into FHA-insured mortgages. If lenders want to participate (it's voluntary), lenders would have to forgive some of the debt. The law says they'll have to forgive enough debt so that the borrower can refinance for 90 percent of the home's assessed value. Actually, it's 87 percent, but we'll get to that in a sec.

An illustration: Let's say you borrowed $110,000 to buy a $125,000 house. The value has declined, and now the house is worth $100,000. You've missed a few payments, and you want to take advantage of this offer to refinance. The lender would have to forgive everything above 90 percent of the home's assessed value. In this case, that would be $90,000. If you still owe roughly $110,000, the lender loses $20,000.

But you'll have to pay a 3 percent upfront premium to the FHA. Actually, the lender will have to forgive everything above $87,000.

The problem is that you're a very risky borrower. You've already been delinquent on a mortgage on this house, and now the FHA is going to insure your new, refinanced mortgage. That 3 percent upfront premium, plus a premium equal to 1.5 percent of the mortgage balance annually, probably isn't enough. So the FHA is going to share in the home's price appreciation.

If you sell the house or refinance the loan less than a year after getting the FHA-insured mortgage, you have to give the FHA all of the price appreciation. In the above scenario, if the house was appraised at $100,000 when you refinanced, and then you sold it nine months later for $105,000, the FHA gets that $5,000.

Over the next five years, the FHA's cut is reduced by 10 percent a year. If you keep the house and the loan for more than five years, the FHA still gets half of the appreciation when you sell the house or refinance the loan, no matter how much time passes. In the above example, let's say you never refinanced the FHA-insured loan, and you sell the house in 2030 for $500,000. You split that equity appreciation 50-50 -- $200,000 to you, and $200,000 to the FHA.

You might not like that as a homeowner who has fallen behind on the monthly payments and is desperate to refinance into an FHA loan. But you gotta like it as a taxpayer.

THE UGLY: Congress listened to the mortgage industry, whose major players said the FHA refinance project had no chance of working unless some provision was made for home equity lenders. If your house has a home equity line of credit or home equity loan, and you owe more than the house is worth, that lender is liable to lose everything if the house ends up in foreclosure.

The equity lender also is going to lose everything (probably) if you refinance into the FHA program. So why should the equity lender play ball? Why should the equity lender lose all of the money it lent to you while the primary mortgage lender loses only some of the money it lent? You can see why your HELOC lender wouldn't like the FHA refinancing plan.

The upcoming law provides a vague answer: The FHA will reimburse the equity lender out of its cut of the shared appreciation after you refinance or sell the house. How much? How will the amount be calculated? It doesn't say.

Posted 2 p.m. EDT
ABRUPT RISE: Mortgage rates reached their highest level in a year in Bankrate's weekly survey, conducted yesterday. The 30-year fixed rose 35 basis points, to 6.77 percent. The last time the 30-year fixed was higher (in Bankrate's survey) was 53 weeks ago, at 6.82 percent.

Lo and behold, since yesterday morning, it looks like mortgage rates have fallen about an eighth of a percentage point. Give the credit to declining home sales and falling stock prices.

Freddie Mac's weekly survey has the 30-year fixed rising 37 basis points from last week, to 6.63 percent.

HOUSING BILL: Tune in later today to find out who's getting an undeserved handout from the federal government, courtesy of the housing bill that passed the House yesterday and will pass the Senate soon.

Wednesday, July 23
Posted 11 a.m. EDT
'SCUSE ME: ... while rates kiss the sky. Mortgage rates have been rocketing upward the past few days, to levels they haven't seen since this time last year.

Bankrate conducts its weekly rate survey every Wednesday. Last week, the 30-year fixed averaged 6.42 percent in our survey; this week, it'll be around 6.8 percent. It's rare for rates to rise this quickly. In February, we had a one-week rise of 41 basis points, the biggest advance since the autumn of 1998.

What's behind this rapid increase in rates? Fears of credit quality. Investors want to be compensated for taking the risk of buying mortgages that eventually could go into delinquency and default in large numbers. Borrowers are seen as riskier than they were before.

Inflation expectations are pushing rates up, too.