The American economy, like most world economies today, is run on a system of fiat money, or money that is assigned its value by government decree. Since this money has no intrinsic value of its own, its value and supply must be carefully managed and regulated, not just within the nation’s borders but also in accordance with the economies of all other nations. In light of this need for careful stewardship of the economy, the United States maintains a central bank, called the Federal Reserve (or, more commonly, the Fed).

The Fed as it exists today is actually the United States’ fourth attempt at founding a central bank. In the midst of the Revolutionary War, America’s Continental Congress ratified the Articles of Confederation, which, among other edicts, gave Congress the power to issue bills of credit. A private national bank, modeled after the Bank of England, was established shortly thereafter, but was denied the opportunity to become a central national bank due to unease about foreign influence and other political concerns. The official First Bank of the United States was created in 1791, and lasted 20 years before being denied a renewal of charter by President James Madison. The Second Bank of the United States opened in 1816, and it too only lasted 20 years before President Andrew Jackson shut it down. Political opposition to the very idea of a central bank had been a chief culprit of these failures, and it would be almost a century before the United States would try again.

In 1907, a profound financial panic occurred, a direct result of a failed attempt by stock traders to corner the market on shares of the United Copper Company. The failure created a series of bank runs on those institutions that had backed the bid. As is often the case with bank runs, the atmosphere of worry spread nationwide, causing other banks to suffer runs and even leading to the collapse of, at the time, the third-largest financial trust in New York City, the Knickerbocker Trust Company. With no central bank in existence to attempt stabilization of the economy with an infusion of currency, the only reason that the crisis did not fling the country into irreparable economic turmoil was the work of private business tycoons such as J.P. Morgan, who banded together and contributed much of their own capital to bolster the banks. It was this barely dodged catastrophe that led to a series of financial reforms over the next few years, culminating in 1913 when Congress and President Woodrow Wilson passed the Federal Reserve Act.

In structure, the Federal Reserve is unique among the world’s central banks. Although it is designed to function as an entity “independent” of the federal government, thereby limiting its exposure to political influence, the Fed also employs a mixture of private and public sections in its operation—most similar banks in the world operate under either entirely private or entirely public ownership. It is also the only such bank to not make its own currency (which is instead printed by the United States Treasury). The Fed is managed by a Board of Governors, all of whom are presidential appointees, and is also comprised of the Federal Open Market Committee (FOMC) and representatives from twelve other Federal Reserve Banks located throughout the country.

The Fed has been reformed a number of times since 1913, especially so after the recovery from the Great Depression. Currently, its chief mandate is to provide the means to deal with bank panics, but it also sets interest rates, operates as a lender of last resort in case the banking system is in need of capital, and generally regulates the entire money supply by balancing the factors of employment rates and inflation. The importance of these functions to the American economy cannot be overstated. Any competent financial player in any market knows that a key component of success or ruin is an ability to observe, analyze, and possibly predict the actions of The Fed…and any competent Board of Governors is aware that The Fed is being closely watched.

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.

Market Comment

Mortgage bond prices rose last week pushing mortgage interest rates lower. The Dow Jones index fell into the 6,000 range early in the week and was unable to recover. The employment report released last Friday indicated continued weakness with the US economy losing 651,000 jobs in February.

For the week, interest rates on government and conventional loans fell by about 5/8 of a discount point.

Retail Sales

Retail sales data is the first indication of weakness or strength in consumer spending released each month. The Bureau of the Census of the US Department of Commerce provides information on how much consumers spend on the purchase of goods. This data provides the consumption part of the gross domestic product. Retail sales data represents merchandise sold for cash or credit by retailers. Durable goods, such as automobiles, make up 35% of the figure. The balance consists of non-durables such as gasoline, restaurants, and general merchandise.

There are several drawbacks to the report. The data covers purchases of goods only, not services. It is also not adjusted for inflation. Economists are concerned that the current economic uncertainty will continue to curtail consumer-spending habits.

Though mortgage interest rates rallied last week, further improvements are not certain. Take advantage of favorable movements when they come your way.

Market Report
Mortgage bond prices fell last week pushing rates considerably higher. Existing home sales and leading economic indicators were stronger than expected. In contrast, new home sales dropped a record 14.7%. The Fed left rates unchanged but bonds fell sharply.

The Fed bought $16.8 billion of mortgage bonds between January 22nd and the 28th but the purchases did little to help rates improve. For the week, interest rates on government and conventional loans rose by about 7/8 of a discount point.

The employment report Friday will be the most important event this week. The other data releases may also result in mortgage interest rate fluctuation.

ISM Index
The Institute for Supply Management (ISM), formerly the National Association of Purchasing Management (NAPM), releases the “Report on Business” on the first working day of each month. Part of this report is the “diffusion index,” which tracks the economy’s ups and downs fairly well.

In conducting this survey, the ISM questions purchasing executives from over 250 industrial companies, compiling data on production, orders, commodity prices, inventories, vendor performance, and employment. Each of the respondents is asked to rank the categories as “up” or “down.” Various weights are applied to the individual components to form the composite index.

A composite index reading of 50 can be thought of as a “swing point.” A reading above 50 implies an increase in economic activity, while a reading below 50 indicates a decline. As a general rule of thumb, when the index approaches 60, investors begin to worry about an overheated economy. A slide below 40 suggests that recession is at hand.

The ISM report is difficult for economists to forecast because there is little data upon which to base an educated guess. Economists often look to regional Purchasing Managers’ reports that are released prior to the full report, in a further effort to anticipate the results of the full report.

The ISM report has a large “surprise factor” and can often prompt a significant market reaction. Be cautious heading into the data this week.

If you’re currently in the market to buy a new home, consider this: the seller might just help you pay your mortgage! How’s this possible, you ask?

Sellers sometimes incorporate a “Buy-Down”. Buy-down programs have been present in the mortgage market for over two decades, and exist when sellers make up-front payments to reduce a buyer’s mortgage rate.

Buy-downs enable sellers to offer direct savings to buyers without lowering their own published list prices, lower prices sometimes cause overall benchmarks to drop as well.

There are two types of buy-downs:

The first carries through the full life of the loan and is very similar to “paying points”. By paying a percentage or “point” of the loan, the rate is lowered. For example, paying $3,000 on a $300,000 loan at closing can decrease the rate by .25%.

The second enables the buyer to take advantage of incremental savings over multiple years. The seller can pay 1% and lower the rate by 2 full points the first year, then 1 point for the second. During the third year, the loan resumes at the original market rate.

Above all, buy-downs increase showings, provide direct savings to buyers, and offer a creative solution to an ever-changing housing market.

© Copyright 2008 PERL Mortgage, Inc.