The Fed Cuts Again

The Federal Reserve Cuts Rates .50%

And leaves the door open for more cuts if necessary

The Fed met yesterday and today to discuss inflation and the economy. They decided to cut the Fed Funds rate (FFR) by .50% to stimulate a slowing economy. There's a lot of debate as to whether we're in a recession or not. Some pundits say that if the Fed starts to talk about a potential recession that usually means we are already in one.

What does this mean for interest rates?


If you have a loan with a short-term interest rate or a rate based on the Prime index, your rate will be declining. The Prime rate is simply the fed funds rate plus a margin of 3%, currently at 6%. Most home equity lines and some credit cards are based on the prime rate.

Other short term indexes like the 1 month, 3 month & 6 month LIBOR rates will also likely decrease. The decrease may not necessarily be by the same .50% FFR reduction and not as quickly. The 1 month LIBOR typically follows the FFR over time.

For long-term interest rates like the 15 yr. and the 30 yr. fixed rates, these rates will most likely be increasing. The last four rate cuts resulted in higher fixed rates in the subsequent days and weeks. For more information on why this happens read my previous post on Fed Rate cuts.

If Goldman Sachs' predictions are correct, then we may see a few more cuts from the Fed to stimulate the economy even more.

What does all of this mean to you? It means you should schedule your annual review call with us, if you haven't already. Interest rates may rise or they may decline, there are so many factors that go into the supply and demand for long term bonds. Make sure you're ready for the next interest rate decline. Stay up to date with by subscribing to our cashflowcoach blog and attend our next Total Wealth Workshop. We want to be your source of valuable information and financial education.

Thank you for your loyalty and your business!

the Cashflow Coach

FED Rate Cuts: How Low Can They Go? part II

After yesterday's emergency .75% rate cut by the Federal Open Market Committee (FOMC), I have received numerous calls and questions as to how low will the FED go and how low will Fixed Rates go? If you read my previous post on the FED Rate Cuts, you know that the two rates don't always move in the same direction, in fact they more often than not, move in opposite directions.

The FED has tried to be as transparent as possible, especially under the leadership of Ben Bernanke. The goal of transparency is to limit "surprises" in what the FED does and says. In some ways the Fed has met this objective by releasing their notes from their scheduled meetings on a timely basis. The challenge arises when the voting members don't agree with each other on policy.

If you want to learn how to guage the direction of interest rates, here are some basic guidelines that I learned from Jim McMahan, a Mortgage Broker in Texas. These are some guidelines that the FED tends to follow:

1. The FED's goal is to keep Core Inflation (C.I.) at 3% or less. (the PCE is currently at 2.16%)

2. Everytime we've had a recession, the FED has taken the Real Interest rate to a negative number in order to stimulate growth:

Real Interest (R.I.) rate = Federal Funds Rate (F.F.R.) - Core Inflation (C.I.)

(1.34% = 3.5% - 2.16%)

3. Real Interest rates have never increased 8 quarters in a row unless inflation (C.I.) was present at 4.5% or greater.

4. Mortgage Rates in the U.S. have been at or below 7.5%, 85% of the time in the last 80 years.

5. Mortgage rates tend to gravitate towards Core Inflation (C.I.) + 3.5% (2.16% + 3.5% = 5.66%)

If the FED continues to follow these guidelines, we could see fixed rates in the 5.6% range.

Cashflow Coach

Copyright © 2008 the Cashflow Coach | All Rights Reserved

FED Rate Cuts: How Low Can They Go?

Will Fed Rate Cuts Equal Lower 30 yr. Fixed Rates?

The Federal Reserve will be meeting on Jan. 29^th & 30^th to discuss the state of our economy. Will they cut rates and if yes by how much? Will the rate cuts lead to decreasing or increasing mortgage rates?

There's a lot of confusion about the Fed Funds Rate (FFR) and the typical 30 yr. fixed rate. Do these rates move in the same direction or are they inversely related?

First, let me provide a simplistic definition. The Fed Funds Rate is the rate the Federal Reserve charges other banks for overnight deposits. It is also the rate the Fed uses to control inflation. If inflation starts to rise above the 1% - 2% "neutral" zone, the Fed will usually increase the Fed Funds rate to slow down the economy. If inflation starts to decrease below the 2% level then the Fed will usually start to cut the FFR stimulate the economy.

A Fannie Mae 30 year fixed rate mortgage is actually a bond, also known as a Mortgage Backed Security (MBS). If you are a bond holder (investor), the worst thing for your bond investment is inflation. If inflation is rising, then the value of your bond (30 yr. Fixed rate) is declining, so as an investor you would require a higher rate of return to compensate for the inflation. Here's an example to help you understand.

Bond Holder/Investor: willing to lend $100,000 to a home owner for 30 yrs. expecting a rate of return (interest) of 6% because inflation today is only 3%.

Borrower/homeowner A: willing to finance the home purchase with a loan of $100,000 for 30 yrs. at 6% interest rate.

Let's say a month from now, inflation jumps to 5% from 3%.

The Bond Holder/Investor is still willing to lend $100,000 for 30 yrs. to borrower/homeowner B but because inflation is 2% higher, the investor will charge 7.5% or 8% to compensate for the loss of value of what that note will be worth in 30 yrs.

This is a simplified example, but the point is that normally when the Federal Reserve decreases the FFR, they are trying to stimulate economic growth which means that inflation will eventually start to rise. The 30 yr. fixed rates will start to rise as inflation starts to rise with the economy.

This is not always the case and we are seeing the exception in today's interest rates. The last few FFR cuts led to declining 30yr. rates and part of the reason is that we may be heading into a mild recession. There's an interesting article from Goldman Sachs anticipating that we will have a recession in 2008 and that the Fed Funds Rate will be cut to 2.5% by the third quarter from 4.25% that we are at today.

If this comes to pass and the FFR rate is reduced to 2.5%, we will most likely see 30 yr. fixed rates in the 5% range.

A number of analysts are expecting a .50% rate cut at the Jan. 30^th meeting. This will reduce your Prime based interest rates like your home equity line and some credit cards. The Prime rate is just the FFR plus 3%.

Stay posted, because I believe that 30 yr. rates will continue it's trend down and should help homeowners qualify for an inexpensive mortgage to take advantage of the tremendous real estate bargains. Let's help move inventory off the market and get our home values back on the rise.

But Wait There's More:

Jim McMahan, a Mortgage Broker in Texas taught me some guidelines that the FED tends to follow:

1. The FED's goal is to keep Core Inflation (C.I.) at 3% or less. (the PCE is currently at 2.16%)

2. Everytime we've had a recession, the FED has taken the Real Interest rate to a negative number in order to stimulate growth:

Real Interest (R.I.) rate = Federal Funds Rate (F.F.R.) - Core Inflation (C.I.)

(2.09% = 4.25% - 2.16%)

3. Real Interest rates have never increased 8 quarters in a row unless inflation (C.I.) was present at 4.5% or greater.

4. Mortgage Rates in the U.S. have been at or below 7.5%, 85% of the time in the last 80 years.

5. Mortgage rates tend to gravitate towards Core Inflation (C.I.) + 3.5% (2.16% + 3.5% = 5.66%)

Cashflow Coach

Copyright © 2008 the Cashflow Coach | All Rights Reserved

Forgiven Mortgage No Longer Taxable

The President signed into law a new measure that would eliminate the tax burden on forgiven mortgage debt (read more). With the rise in short sales and foreclosures across the country, many homeowners were responsible to pay tax on any and all of the mortgage balance that wasn't paid or forgiven. A lot of the time, the homeowner didn't know about this until tax time.

For those of you not familiar with this, let me explain.

If your loan balance is $175,000 and you either negotiate a short sale or end up in foreclosure, the difference between what you owe and what the bank receives is a deficiency. Let's say the bank only receives $150,000 from the sale or auction, your deficiency would be $175,000 - $150,000 = $25,000. The bank could send you a deficiency note where you would be responsible for repaying the $25,000 or they could forgive the deficiency and not make you repay it.

If they forgive the $25,000 they would report to the IRS that they did so and then send you a 1099-C at the end of the year.

Cancellation of debt may not always be taxable. There are some exceptions like bankruptcy, insolvency, certain farm debts and non-recourse loans. PLEASE consult with your CPA or professional tax advisor regarding your situation. For more information, check out this IRS publication.

The Cashflow Coach

Copyright © 2008 the Cashflow Coach | All Rights Reserved

The Key to Rising Home Prices

Higher Demand or Lower Supply = Rising Prices

It's a basic economic principle that when supply increases, prices come down. And, when supply decreases, demand can rise and prices will rise with demand. (a good resource is Basic Economics, by Thomas Sowell)

As Banks take over more and more properties in Mid-Michigan they will seek to sell them as fast as they can at what ever price they can get. This increased supply with low demand has slowed our housing market currently. It will continue to slow down, until we see one of two things happen: Either demand rises (job creation - an inflow of residents) or supply decreases (homes are purchased quickly and taken off the market).

In 2008, one of our Goals at Cornerstone Home Loans is to assist our clients, Real Estate Agents and banks to take 300 REO homes off the market. Our upcoming seminar has 15 minutes devoted to how to get this done with great profit to those who participate. If you are interested in learning how you can be a part of this effort, join us on the 17th and then schedule time to meet with Evan Vanderwey- he will assist you in determining how you can increase your net worth in this opportunity market.

What is an REO home?

REO stands for "Real Estate Owned". For a bank to have Real Estate Owned means that they took over property, mostly due to the fact that these days they are foreclosing on more properties. Banks never want to hold real estate, they always unload it and because they are generally publicly traded companies, they would like to get most of that done in the calendar year of 2008 so they have a clean 2009. What does this mean for you? There will be more REO's on the market that Banks wand to unload in the next 12 to 18 months than ever before in Michigan.What kind of impact can 300 homes have in our area?When ever you decrease supply of anything, the prices rise. So any little bit helps. In Michigan, if we can reduce REO the volume by 10% buy helping people purchase them and take them off the market, then we will increase values.

The best part is that you don't have to do this without profit to you. You can do better by doing good. After all, we live in the best free market in the world. Be a part of it.

Cashflow Coach

PMI Tax Deductibility Extended to 2010

Earlier this year, congress passed H.R. 6111, the Tax Relief and Health Care Act of 2006 to allow homeowners who purchased or refinanced a home in 2007 to deduct the private mortgage insurance (PMI) premiums that they pay in their loan payments. PMI is required when a borrower puts less than 20% down on a home or has a loan amount greater than 80% of the home value.

Initially this provision would only apply to homes purchased or refinanced in 2007 and was set to expire on 12/31/2007. Congress passed new legislation that will extend this deduction to loans closed in 2007 through 2010.

Here are some of the requirements

• Households whose adjusted gross income is $100,000 or less can deduct 100% of their MI premiums. (The deduction is reduced by 10% for each additional $1,000 of adjusted gross income, phasing out after $109,000.)
• The deduction applies to "qualified residences," as defined in the Internal Revenue Code. Generally, that includes the borrower's primary residence and a non-rental second home. Investor properties are not eligible.
• Read more....

Borrowers should consult with a professional tax advisor for details about MI tax deductibility.

From the Cashflow Coach

Michigan: Guilt By Association

As a mortgage broker in the Lansing area for 14 years, I've seen the real estate industry go through various cycles along with the mortgage industry. Yes, I understand that the housing market across the country as a whole does not look very positive but we need to be careful to not generalize the negative aspects of this downturn to every state and county.

A prime example of this is here in the Great Lakes State of Michigan. Lately it seems like we're getting more press than Britney & Paris combined. An issue I'm dealing with on a regular basis is trying to convince the banks that I broker through that Mid-Michigan is not in the same boat as the rest of the state. We are not guilty by association.

Michigan's statewide unemployment rate as of Oct. 07 is 7.7% compared to the national average of 4.7%. But when you look at Michigan's unemployment numbers, you'll find that for the same time period, the Detroit Metro area was at 9.2%, Flint was at 8.1%, Grand Rapids was at 5.8% and the Lansing area was at 5.4%. (source: U.S. BLS) This has been a long term trend in this state.

What we have found to be true around the country is that there is a correlation between jobs and home values. Yes, we have experienced a downturn in home values in the Lansing area but not to the degree or severity that other parts of the state and country have. What do we attribute to that?

Business Expansion and Jobs

Lansing has benefitted from a diverse economy consisting of Government (state and local), Manufacturing (GM and its suppliers), Education (MSU, Cooley, LCC and more), Financial Services (Jackson National & Auto Owners) and Health Care (Sparrow and Ingham Hospitals). (Source: Lansing Chamber of Commerce)

More importantly, small businesses that work directly with or benefit indirectly from these industries continue to grow. Did you know that more than 58% of all the Lansing area businesses have less 5 employees?

An example of businesses that are expanding in the Lansing area is the Grand Traverse Pie Company. This company just recently opened a new location in East Lansing and plans on using this location as their franchise training center. For more information about this company click here.

Here's another article on business expansion in the Lansing suburb of Charlotte.

One of the advantages of not having double digit housing growth prior to this credit bubble bursting is that our declines are not as severe as other parts of the country. There are a lot of homes on the market which means there are a lot of great bargains if you're ready to take advantage of it.

If you would like to take advantage of these bargains but don't know how you'll swing it financially or don't know what you would qualify for. Contact me to schedule a Cashflow Optimization Analysis. You may be surprised by what you could do.

You have a choice in how you approach our current economy and housing situation. You can choose to live in fear with a scarcity mind set or you can choose to live with an abundance mentality.

Either way, you can be assured that you are not guilty by association. Lansing is a great place to grow your business.