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It sounds like 1/2 of the battle is over.  The bailout bill has passed the Senate and still has to go in front of the house or representatives. Senators are said to be making phone calls to ensure that the bill is passed and passed quickly.  The house will most likely vote this Friday. 

Stages of the Bailout Bill:

1.  Senate -passed          

2.  House of representative        

3.  President - endorses bill

Between Monday and Wednesday evening the terms of the bailout changed to attract more republican senators.

Terms of the proposed bailout package:

-Bill was initially just $700 billion but with added tax breaks is now $810 billion

-$700 billion to buy bad assets from banks at a discount in an effort to "jump start the economy".

-The government would have ownership in any firm that is bailed out and share in future gains

-FDIC insurance would raise from $100,000 to $250,000 and apply for 1 year

-The FDIC would have unlimited access to treasury funds to keep community and smaller banks solvent - many americans are pulling money out of small banks in search of security, this would create security for depositors within smaller banks.

In conclusion the House of Representatives have already rejected this bill once and could very well do it again.  A lot of politicians believe this is a corporate bailout opposed to a recovery bill.  Either way we have large hurdles ahead.  The Denver economy is poised to do well but we have Florida, California and Las Vegas potentially dragging the entire housing market down.

For you, me and the Denver housing economy I think the bailout is icing on the cake.  Our local economy is built on local entrepreneurial businesses which is less exposed to national and global risk which leaves housing as the primary variable in determining the strength of our market.  From a real estate and business perspective I'm very happy to be working in the Denver economy because we are far ahead of the rest of the country.  If the bailout is passed I think it will just add to our strength within the Denver Metro area. 

There is a lot of confusion about escrow accounts.  I think this confusion comes from the fact that there are a lot of moving parts.  Essentially an escrow account is an account attached to your mortgage that on a monthly basis collects taxes and insurance that you pay within your mortgage payment.  For some types of loans an escrow account is an option to you where as some types of loans require you to "escrow" your taxes and insurance. 

Taxes are due 2 times per year and home owners insurance is generally due 1 time per year.  It is easier for most people to pay a fraction of these 2 obligations on a monthly basis opposed to lump sum payments.  The funds you pay go into an account that collects the funds and disburses/pays your taxes and home owners insurance when they are due.

In my opinion they are a huge convenience.  I would much rather make smaller payments throughout the year opposed to large payments.

Valuable information from an article I found in Yahoo Real Estate:

http://realestate.yahoo.com/info/guides/how-does-escrow-work

How it works

When you put money in escrow it is held by a neutral third party (called an escrow agent) who works for both the lender and the borrower. The agent's role is to carry out the instructions agreed upon by both parties. The money is released when all the terms of the agreement are met. Escrow can be involved in anything from multimillion-dollar building projects to purchases made on online auction sites.

When it's used

When your mortgage closes, your lender will usually require you to open an escrow account to cover property taxes and homeowner's insurance. You'll make an initial deposit, followed by payments to the account every month. (Usually these are added to your regular mortgage payment.) The escrow agent will then release these funds as your taxes and insurance premiums come due.

Its purpose

The idea is to protect the lender by ensuring that you pay your taxes and insurance on time. If you default on your property tax, for example, your municipality can put a lien on the house, which would make it difficult to sell. Or if your house burns down and you've neglected to pay the insurance, the lender would be left with no collateral.

How you benefit

Escrow can benefit borrowers by helping them spread insurance and tax expenses evenly over 12 payments. For example, assume your yearly property taxes are two payments of $1,000 each, and your insurance is $400 annually. If you paid these directly, it would mean three large payments a year; your escrow costs, however, would be a manageable $200 a month.

Escrow payments

Your escrow account will have a built-in cushion -- if you miss a payment, the lender must still be able to pay your accounts on time. However, federal law prohibits lenders from requiring more than two months. expenses in escrow. And because your tax and insurance costs will change slightly from year to year, the lender will review and adjust your escrow payments annually.

When escrow may be waived

In most states, the money you place in an escrow account earns no interest for you. For that reason, many borrowers prefer to pay their taxes and insurance directly. Lenders may agree to this if your down payment is more than 20 percent, although some will raise your interest rate slightly to compensate. Once you agree to putting funds into an escrow account, however, it is difficult to cancel it, so make sure you fully understand the arrangement before your mortgage closes.

Michael Shotnik

Direct Mortgage Banker

Summit Home Mortgage

mshotnik@summit-mortgage.com

303-800-4595

Treasury Secretary Henry Paulson spoke with reporters Monday regarding the implications of the bailout.  He said the the bailout should not be viewed as an expenditure but an investment.  Paulson also said "Our purpose is to increase confidence in our banks and increase the confidence of our banks, so that they will deploy, not hoard, their capital".  The injections of funds are intended to relive the banks of bad debt that is killing their lending ability. 

For you and I the increase in liquidity should bring more homebuyers into the market, allow for more refinances and bring some life back to the housing industry.  As a large sector of the economy we all gain when real estate does well. 

I'm glad to hear the Treasury Secretary is adamant about banks lending money.  Depending on how quickly the Fed is able to inject funds I think we will see a relatively quick turnaround in the lending industry. 

Michael Shotnik

mshotnik@summit-mortgage.com

Week of 10/06/08 - 10/10/08

This week the stock market fell to the lowest level since 2003. Normally mortgage markets improve during a stock market decline, since Fannie Mae, Freddie Mac, and Ginnie Mae mortgage backed securities (the vehicles through which most mortgages made today are sold) are considered a relatively safe haven. This week, however, the prices paid for these securities moved lower as well. One reason is that some investment funds have been forced to reduce their leverage and sell nearly every asset class in their portfolios. Another factor is investor concern that the supply of debt will increase significantly as the government funds its rescue actions. Mortgage rates ended the week moderately higher.

Investors viewed the $700 billion rescue plan passed last week as a necessary first step, but not an immediate solution to the credit crisis. Governments around the world took a variety of additional steps during the week to support the banking system. A historic coordinated interest rate cut from many central banks took place on Wednesday. The Federal Reserve lowered the Fed Funds rate by one half point to 1.50%, citing reduced inflationary pressures due to an economic slowdown and falling energy prices. The Fed Funds rate heavily influences short-term interest rates, but its impact on long-term mortgage rates varies based on inflation expectations. In this case, the Fed rate cut most likely helped move mortgage rates a little lower, but the factors described above had more influence.

The decline in home prices was a major cause of the credit crisis, and stabilization in the housing market will be important to resolve the problems. Little noticed this week, August Pending Home Sales jumped 7% from July, far above the consensus for a small decline. They were 9% higher than one year ago and were at the highest level since June 2007. Pending Home Sales are a leading indicator for the housing market, meaning that the next Existing and New Home Sales reports may show increases. Investors will be closely watching future housing market data to see if the trend continues.

The Economic Calendar will be full next week. The Consumer Price Index (CPI) inflation report will come out on Thursday. CPI looks at the price change for those finished goods which are sold to consumers. The Producer Price Index (PPI) will be released on Wednesday. PPI focuses on the increase in prices of "intermediate" goods used by companies to produce finished products. Retail Sales is also scheduled for Wednesday. Industrial Production, an important indicator of economic activity, will be released on Thursday. Housing Starts will come out on Friday. Consumer Sentiment, the Philadelphia Fed index, and the Fed's Beige Book will round out a busy week. Investors will also be watching for additional government actions to ease credit markets. Mortgage markets will be closed on Monday in observance of Columbus Day.

Article posted by: MBS Quoteline. http://www.mbsquoteline.com

Fed rate cut

The Fed cut its key lending rate by .5% before the market opened this morning.  The market reacted positively for about an hour and then sold off as a result of higher expectations for the Fed cut.  Wall Street is remaining hesitant until there is more certainty in the market.  I’ve heard a couple analysts say we’ll soon see a 1000 point jump in the market on any given day.  This makes sense; a lot of investors have pulled large sums of money out of the market and are waiting for a “safe” re-entry point.  In my opinion we are getting to the low point and the market will have no reason to go any lower and that’s when we’ll see massive volume and  massive gains.      

Housing Market

Despite looming credit issues Augusts’ pending homes sales index reflects an increase in buyer activity.  This index tracks how many homes are under contract at any given time and in August the numbers of home under contract was up nationally and even more so in the west.

Nationally                                           West

Vs July:  +7.4%                                   Vs July:  +18.4%                                

Vs last year: +8.8%                             Vs last year: +37.8%

As you can see above the West is performing much better than the national average.  Since August mortgage applications have remained consistent we should continue to see our housing economy do better than expected.  The driving factor behind real estate purchases is employment.  Colorado has out-performed the majority of the country which is probably the strongest sign of recovery.

Average Sales Price:

As can be seen above the change in trends in Colorado took place over the course of 2007.  By tracking the second quarter on we should be able to see if we are pulling out of our downward trend which it looks like we may.  We know applications are up and rates are down which should bring buyers into the market and reduce inventory, which should also at least level home prices out.  In any other market I think we would start to see an upward trend but with the tight lending guidelines and the national slump I think the trend may come a little slower.  But when we do level out and start heading back up the trend will probably last longer and be much stronger than the last uptrend.

The 810 billion dollar bailout passed on Friday and no one seemed to care.  By the time the bailout bill passed the market had already absorbed the implications and had moved on.  I thought there would be some sort of positive reaction to the passing bill but the market wasn’t buying into the news.  It seems investors have lost trust in the market and are pulling money out to wait until the dust settles. 

As many have said the bailout will not be the blanket solution to the current crisis.  The credit crunch will have to churn through the US and make its way around the world. Yesterday, the news of failing European banks brought the market down yet again.  It looks like by the time we are all said and done government will have a large vested interest and the lenders that are left will be massive.  The strong lenders will end up buying the failing ones and continue to increase their market share.  I say this over and over again but the fact that we are in Colorado is huge.  If we were trying to get out of a hole like Florida or California the light on the horizon would be very bleak.  Lenders I work with continue to tighten their guidelines on the markets that are risky to lend in which will not help these depressed areas of the US.  The bailout will definitely help cushion the credit crisis but it looks like the market will still have to face real correction.

Upcoming News

The next piece of news that should affect the market will be the Feds decision to cut short term rates or leave them as they are.  A common misconception is that if the Fed cuts rates it directly improves mortgage rates, that is not the case.  The Fed cuts the short term rates, these are the rates banks borrow money at.  Short term rate cuts generally have a positive impact on the stock market but not on mortgage rates.  Mortgage rates generally deteriorate due to Fed rate cuts.  Rate cuts by the Fed are done to stimulate the stock market and by doing so investors pull money out of bonds.  When money comes out of bonds mortgage rates go up.  When the market is having a bad day investors are more likely to put money into the bond market which drives rates down.