Market Comment
Mortgage bond prices remained volatile in up and down trading last week. We started the week in positive territory only to have the gains erased; stronger than expected housing starts data shocked the market Tuesday and overshadowed the tame inflation data. Producer and consumer price data showed inflation stability, however oil prices fluctuated. US debt concerns continued as the Treasury announced record auctions ahead.

For the week, interest rates barely changed.

While the Fed meeting is usually the most important event, it will likely be overshadowed by the record $104b Treasury debt auctions this week. Durable goods order, income, outlays, and consumer sentiment data may also cause mortgage interest rate fluctuation.

Fed Meeting
The Fed’s chief policy tool is the manipulation of short-term interest rates. As of late, short-term rates have been so low that the Fed is limited with their options. The Obama administration is pushing for expanded Fed powers to supervise large banks, hedge funds, and consumer financial products. Both political parties express concerns about increasing the Fed’s role, citing previous failures. However, most agree something needs to be done and many argue the Fed is best equipped to tackle the current problems. All eyes will be focused on the Fed meeting Wednesday. A cautious approach to float/lock decisions is prudent heading into the meeting.

Market Comment
Mortgage bond prices rose last week causing mortgage interest rates to fall. Most of the gains came early in the week prior to the surprise inflation data. Weaker than expected retail sales data, along with concern about the health of the banking industry, helped mortgage bonds improve. Unfortunately, Thursday and Friday’s stronger than expected producer price and core consumer price data stoked inflation fears, thus erasing some earlier gains.

For the week, interest rates improved by about 1/2 of a discount point.

The housing starts data will set the tone for trading this week. Leading economic indicators data may result in mortgage interest rate fluctuation.

Inflation Concerns
Inflation is an increase in the level of prices of goods and services over a period of time. Mixed inflation signs do not generally bode well for mortgage bonds. Inflation erodes the value of fixed income securities generally causing bond prices to fall and interest rates to rise.

The mortgage bond market received mixed inflation data last week. The producer price index, a major gauge of inflation at the producer level, rose a surprising 0.3% in April. This figure was considerably higher than the expected 0.1% increase. However, the core rate, which excludes volatile food and energy, rose 0.1%, just as expected. Consumer prices were unchanged in April.

With mixed data and President Obama stating that the US debt load is “unsustainable”, the fear of inflation looms. If future data echoes the core consumer price data, mortgage interest rates may rise. However, if future data alleviates some of the recent concerns, we could see rates hold steady or even lower.

Floating in this environment is risky. Now is a great time to take advantage of mortgage interest rates at their current historically low level.

You may have heard about recent legislation championed by President Obama that is meant to help homeowners who are in distress.

A new program called the Home Affordable Refinance was designed to make mortgages more affordable and help prevent the destructive impact of foreclosures on communities and the national economy. This program is still in a preliminary stage. As the lenders implement this new initiative, we will be able to offer this program to customers who qualify.

Who is eligible?
The program will be available to 4 to 5 million homeowners who have a solid payment history on an existing mortgage owned by Fannie Mae or Freddie Mac. Normally, these borrowers would be unable to refinance because their homes have lost value, pushing their current loan-to-value-ratios above 80%. Under the Home Affordable Refinance program, many of them will now be eligible to refinance their loan to take advantage of today’s lower mortgage rates or to refinance an adjustable-rate mortgage into a more stable mortgage, such as a 30-year fixed rate loan.

How do I qualify?
Please first check to see who is holding your loan by using the following resources.
For Fannie Mae, 1-800-7FANNIE (8am to 8pm EST)
www.fanniemae.com/homeaffordable

For Freddie Mac, 1-800-FREDDIE (8am to 8pm EST)
www.freddiemac.com/avoidforeclosure

Additional qualifications

a) Maximum loan for the Illinois marketplace is $417,000 for a single family unit. 2 to 4 unit properties are eligible as long as they are owner occupied.

b) No investor owned property is eligible.

c) No new cash may be taken out of the loan to pay off any other debt. It can only be used to refinance the first mortgage.

d) You must have a solid (the last 12 to 14 payments) payment history on your existing mortgage.

e) If you are presently delinquent, you are not eligible for the refinance program.

f) Most borrowers refinancing an existing Fannie Mae or Freddie Mac loan will not be required to buy new or additional mortgage insurance if the loan at the time of the refinance is more than 80 percent of a home’s value.

g) Any existing mortgage insurance may be carried forward to the new loan.

h) Mortgage insurance (MI) is not required if the existing mortgage does not require MI. Otherwise, MI coverage on the new loan must be the same as on the original mortgage.

i) A Fannie Mae or Freddie Mac Loan can be refinanced up to 105 percent of a home’s value with this new flexibility, so even borrowers who are “underwater” — who owe more than their home is worth — may be able to refinance.

j) The 105% does nor include the 2nd, but the lender holding the 2nd or the Equity Line Mortgage must subordinate.

k) There is no maximum Total Loan-to-Value (TLTV) ratio, however Relief Refinance Mortgages cannot be used to payoff or reduce subordinate liens.

l) Is there a limit as to the closing costs that can be charged and can they be built into the mortgage? Details of this are not available.

m) The expanded refinance flexibility ends in June 2010.

For more information, please call your PERL Mortgage Advisor or email info@perlmortgage.com.

President Obama unveiled his plan to help stabilize the housing market and keep millions of borrowers in their homes.

The Homeowner Affordability and Stability Plan includes two initiatives to help struggling homeowners. One is a refinancing program for homeowners with less than 20% equity in their homes, or who owe more than their home is worth. The second program attempts to lower monthly payments for homeowners at risk of losing their home. In addition, the plan includes a third initiative to support low mortgage rates by strengthening confidence in Fannie Mae and Freddie Mac.

Many of the plan’s details are still being worked out and will not be announced until March 4, here is an overview of the plan’s main components.

Refinancing Initiative
Under current rules, those families who own less than 20% equity in their homes have a difficult time refinancing and taking advantage of the historically low interest rates. Therefore, the refinancing initiative in the new plan provides refinancing help for homeowners with less than 20% equity in their homes or who owe more than their home is worth. This initiative is open to homeowners who have conforming loans which are guaranteed by Fannie Mae and Freddie Mac, and who owe up to 5% more than their home is worth.

According to the plan, “credit-worthy” or “responsible” homeowners can refinance their mortgage into a 30- or 15-year, fixed-rate loan based on current market rates. The refinanced loan, however, cannot include prepayment penalties or balloon payments. For many families, this low-cost refinancing may help reduce their mortgage payments by up to thousands of dollars per year.

As with the rest of the plan, details about this initiative will be released at a future date—including what, if any, credit score requirements will be included.

Stability Initiative
This initiative aims at providing help to individual families as well as entire neighborhoods by helping reduce foreclosures and stabilize home prices. It is intended to help homeowners who are struggling to afford their mortgage payments, but cannot sell their homes because prices have fallen significantly.

The goal of this initiative is simple: “reduce the amount homeowners owe per month to sustainable levels.” To accomplish this, lenders are encouraged to lower homeowners’ payments to 31 percent of their income by lowering their interest rate to as low as 2% or by extending the terms of the loan. In addition, lenders can also lower the principal owed by the borrower, with Treasury sharing in the costs.

Homeowners who are current on their mortgages but are struggling can still apply for this program. As such, this is one of the few programs designed to help homeowners who may face delinquency soon, but are current at the moment.

Since the focus of this initiative is on helping families and neighborhoods, investment properties do not qualify. This initiative also includes a number of additional elements and incentives that benefit homeowners and lenders alike, including:

* Incentives to Help Borrowers Stay Current: To provide an extra incentive for borrowers to keep paying on time, the initiative will provide a monthly balance reduction payment that goes straight towards reducing the principal balance of the mortgage loan. As long as a borrower stays current on his or her loan, he or she can get up to $1,000 each year for five years.

* Reaching Borrowers Early: To keep lenders focused on reaching borrowers who are trying their best to stay current on their mortgages, an incentive payment of $500 will be paid to servicers, and an incentive payment of $1,500 will be paid to mortgage holders, if they modify at-risk loans before the borrower falls behind.

Supporting Low Mortgage Rates
As part of the Homeowner Affordability and Stability Plan, the Treasury Department is increasing its funding commitment to Fannie Mae and Freddie Mac to ensure the strength and security of the mortgage market and to help maintain mortgage affordability. This portion of the plan will use using funds already authorized in 2008 by Congress for this purpose.

The increased funding will enable Fannie Mae and Freddie Mac to carry out ambitious efforts to ensure mortgage affordability for responsible homeowners, and provide forward-looking confidence in the mortgage market.

Again, the government plans to unveil the final details of the plan on March 4, 2009. For now, you can download a sheet of common Questions and Answers produced by the government at: www.treas.gov/initiatives/eesa/homeowner-affordability-plan/ConsumerQA.pdf

We will continue monitoring the plan as new information becomes available. If you have any questions or would like to discuss how this may specifically impact you, please contact us to find out more.