Nationwide, foreclosures fell 12 percent in September 2008According to foreclosure-tracking service RealtyTrac, the foreclosure rate is falling nationwide.

Versus August, foreclosures fell by 12 percent in September 2008 as more than half of the states showed month-over-month improvement.

Most interesting in the data is that several states that led the foreclosure boom in 2007 now appear to be leading the charge out of it.

For example:

  • In Arizona, foreclosures are down 9.43 percent
  • In California, foreclosures are down 31.64 percent
  • In Colorado, foreclosures are down 6.22 percent
  • In Illinois, foreclosures are down 5.14 percent
  • In Michigan, foreclosures are down 22.43 percent

But despite September’s promising data, the press is choosing to report that foreclosures are up 71 percent over the same period last year. The data is accurate, but not necessarily relevant.

When home buyers and sellers engage real estate markets, they rarely think in annual terms. For them, it’s about buying or selling this month, or next month, or the month after that. When someone is “in” the market, their mentality is “right now”.

In other words, annual data is more befitting of an economist, while month-to-month data is more befitting of you. Of course foreclosures are up 71 percent since last year — a lot has happened since then. But on a monthly basis, signals point to improvement.

September’s foreclosure data may be a signal of market recovery, or it may just be a blip. Time will tell, really. Either way, RealtyTrac’s foreclosure data reinforces what most real estate professionals already know and that’s that markets all over the country are showing signs of life.

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In the widest definition possible, amortization (pronounced: am-ohr-tih-ZAY-shun) is the scheduled process by which a loan’s principal balance pays down to $0.

The opposite of an amortizing loan is an interest only loan for which there is no scheduled principal repayment schedule.

With respect to mortgages, amortization is what determines how much of a monthly payment goes to principal, and how much goes to interest. Amortization schedules are the same for all fixed rate, non-interest only home loans including 15- and 30-year fixed rate mortgages, as well as all non-interest only ARMs.

Monthly principal and interest payments on a mortgage are based on the mathematical formula above, where:

  • P = principal
  • A = payment
  • r = monthly interest rate
  • n = number of payments

Now, if you’ve ever paid on an amortizing home loan, you don’t need to use the formula to know that mortgage amortization schedules are dramatically front-loaded with interest.

In other words, in the early years of loan, the interest due on a mortgage is relatively high versus the principal due. And, if you’ve ever heard someone say, “You don’t pay down much of a loan in the first few years,” now you know — mathematically — why that is.

This interest-heavy mortgage repayment schedule helps banks to collect as much loan interest as possible up-front, offsetting potential loan losses.

But, just because the bank sets an amortization schedule doesn’t mean that a homeowner can’t change it. In any given month, a borrower can prepay extra principal to the lender, thereby changing the formula and accelerated the loan payoff date.

There are calculators online that do the prepayment math for you, but before making extra payments, talk with your loan officer or financial advisor first. Prepaying your mortgage could trigger a stiff penalty from your lender, or put your liquid assets at risk. Prepayment is not a bad plan, but it may be a bad plan for some.

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In an effort to limit risky borrower behavior, Fannie Mae announced a new round of mortgage guideline changes last week.

Unlike previous its previous 20-plus updates that raised income requirements and minimum credit scores (among other changes), Fannie’s latest guideline tweaks focus on the value of its underlying mortgage assets — home equity.

Effective December 13, 2008, Fannie Mae will require larger equity positions on some of its insured purchases and refinances.

A few of the updates include:

  • Limiting primary residence, cash out refinances to 85% loan-to-value
  • Requiring 10% downpayments on second/vacation homes
  • Requiring a 25% equity position on all investment property refinances

And, while the above changes represent 5 percent equity increases over the current mortgage guidelines, some of the other updates call for increases of as much as 20 percent.

As we head into the election and Congress mulls over another economic stimulus package, it’s unclear if mortgage rates will move higher or lower as we close out the year. We do know, however, that getting approved for a conforming mortgage will, in general, be harder come December 13, 2008.

If you’re finding yourself on the fence about your next move — whether it’s to buy or to refinance — consider taking the necessary steps before the guidelines change.

Low, low mortgage rates don’t mean much if you don’t have enough home equity to get a home loan approval.

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Last week, the Dow Jones Industrial Average recorded both its largest one-day point gain and second-largest one-day point loss in history.

Mortgage markets got whipsawed, too.

From day to day, huge rate swings made mortgage rate shopping difficult. It wasn’t uncommon for lenders to change pricing 3 times per day.

When the week closed, though, rates were lower than at Market Open Monday, marking the first week of improvement in mortgage rates since early-September.

Last week’s constant mortgage rate movement had several causes:

The biggest driver was — and continues to be — trader uncertainty.

As measured by the “Fear Index”, market volatility reached an all-time high last Thursday. Investors moved into cash positions, selling assets of all types — including mortgage bonds. This created an excess supply of bonds on the market which drove down prices and, in turn, pushed up rates.

But, there was a demand-side issue impacting rates last week, too.

If you’ll remember, the first $250 billion of the government’s Rescue Plan was meant to buy bad mortgage debt. Last week, however, those plans changed. Instead, the $250 billion was applied to the balance sheets of the nation’s largest banks.

This caused an immediate $250 billion reduction in mortgage bond demand and the reduced demand further depressed prices. Again, mortgage rates rose as a result.

This week, with very little economic data, expect psychology, politics and corporate earnings to drive mortgage rates — more than 20% of the S&P 500 will report their July-September 2008 numbers.

If earnings are weak, expect mortgage rates to rise on concerns about recession; lately, that has been the market pattern. Conversely, if earnings are strong, expect mortgage rates to improve.

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As mortgage insurance defaults rise, rates increase and guidelines tightenPrivate Mortgage Insurance (PMI) is a mortgage lender’s insurance policy against highly-leveraged homeowners. It’s typically required when homeowner equity is less than 20 percent at the time of closing.

With PMI defaults up 40 percent over last year, though, private mortgage insurers are taking big losses.

They’re also taking outsized steps to prevent additional claims going forward and that is bad news for low-equity homeowners and home buyers.

The first PMI change new, higher insurance rates.

Like home insurers that adjust premiums after a worse-than-expected storm season, PMI insurers are raising mortgage insurance rates for all homeowners, regardless of credit history. The higher premiums are meant to offset the higher losses.

And, the second change is that some PMI firms are discontinuing coverage for “high-risk” transaction types. This includes purchases of non-owner occupied properties, and cash out refinances above 85 percent loan-to-value.

Both changes, however, point to similar conclusion about home loans: Home equity is increasingly important for today’s homeowner.

PMI rates are higher than they were six months ago and the rising number of defaults makes it likely that rates will rise again soon. As PMI rates increase, so does the cost of homeownership for people whose lenders require it.

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Predicting the future has always been an inexact science but that doesn't stop the experts from tryingAs the stock market dips then jumps then dips again, it’s important to remember that markets are unpredictable and nobody knows what will happen tomorrow.

Unfortunately, that doesn’t stop the analysts from trying.

An obvious example comes from May of this year. As the price of oil crossed $120 per barrel on its way to an all-time high of $147, a Goldman Sachs analyst was quoted as saying that $200 oil was “likely”.

It seemed like a logical conclusion at the time.

Today, though, just five months after the prediction, the analyst’s “likely” scenario looks downright laughable. Oil is off by more than 40 percent since that day. And there’s hundreds of examples just like this, all around us.

Every day, economic experts and analysts are on television, telling us what’s going to happen in the future:

  • They tell us when housing prices will reach a bottom
  • They tell us when stock markets will rebound for good
  • They tell us what the economy will do over the next 12 months

But none of them operate with the proverbial crystal ball — it’s all on “gut”.

Another example is from today’s CNNMoney.com. In the wake of the government’s banking response, a mortgage analyst predicts 7 percent interest rates over the next six months This would represent a 1.5 percent from the recent lows.

The rate prediction may be accurate, or it may not. We won’t know for another six months. But what we know today, though, is that mortgage rates are all over the place — just like the stock market. One day up, another day down. And nobody knows what they’ll do tomorrow.

Predicting the future has always been an inexact science but that won’t stop the experts from trying. And the experts are wrong as often as anybody else.

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