The Kestner Team

HOME SALES TOP 2,000 FOR SECOND CONSECUTIVE MONTH

Home sales in Greater Nashville exceeded 2,000 for the second month in a row, and there were over 2,000 sales pending for the third consecutive month. There were actually 2,214 closings, down just 11% from the 2,488 closings in July of 2008.

The median price of a single-family residence was $171,100 and for a condo it was $142,146. That compares with median prices of $179,995 and $162,900 respectively last year.

Inventory was down slightly from last year with 24,592 properties available in July of 2009, compared with 25,023 in July of 2008.

The current home sales data is being provided to you prior to release to the media later today. For additional details on current home sales activity in Greater Nashville, you can click here. And, you can click here for access to historical data.  

Follow These Tips and Be on Your Way to Smarter Spending

Posted By Paige On August 25, 2009 @ 3:30 pm In Today's Home Spun Wisdom | Comments Disabled

Three area schools landed in the top 20 on lists in the U.S. News and World Report annual rankings of the nation's best colleges and universities, released today by the magazine.

New Federal Law Protects Renters from Eviction After Property Foreclosure

Some say extra payments trump refi to lower rate

By Jack Guttentag, Inman News

Some of the most difficult questions I receive from readers concern the relationship between making extra payments and refinancing. I have never been very happy with my answers, and recently took a harder look at how making extra payments and refinancing are related. The hope was that if I understood it better, I could answer the questions better. This article reflects my current understanding, followed by new answers to some common questions.

Extra-payment decisions and refinance decisions should be made independently because they are based on very different factors. Yet each may affect the other, which is why it is easy to become confused.

The extra-payment decision is best viewed as an investment decision. The funds used for extra payments could be invested in CDs or bonds where they would earn the return being paid on those assets. Instead, they are invested in reduced mortgage debt, on which they earn a return equal to the mortgage rate.

What mortgage rate? The rate the borrower would have paid on the balance they pay off, which is their current mortgage rate. In principle, if they anticipate that they will refinance to a lower rate, then that lower rate is the one that will be earned on the extra payments, but that won't apply until after the refinance, when the extra-payment decision could be reconsidered.

It is very doubtful, however, that a rate-lowering refinance induces many borrowers who have been making extra payments to reduce them. The principal motivation for making extra payments seems to be to get out of debt faster, and the refinance won't change that.

Borrowers refinance for several reasons: to reduce the rate; reduce payments; reduce risk of future rate increases; and to raise cash. Only rate-reduction refinances may be affected by extra payments.

The decision to refinance in order to reduce rates involves a judgment that the savings from the rate reduction, over the period the borrower holds the new loan, will more than cover the refinance costs. The three most important factors in this judgment are the size of the rate reduction, the refinance costs as a percent of the balance, and the life of the new loan. Calculator 3c on my Web site pulls these and other factors together to generate an answer.

How can extra payments affect the refinance decision? Those made in the past don't figure directly in current decisions. However, past payments have reduced the loan balance, which reduced the benefit from a subsequent refinance. As balances become smaller, the benefit from refinancing shrinks and at some point disappears. Indeed, few lenders are interested in refinancing loan balances of less than $50,000.

Extra payments that borrowers expect to make in the future should be factored directly into the refinance decision process. Extra payments reduce the expected life of the loan, which (other things the same) reduces the benefit from the refinance. In using the refinance calculator, you should shorten the term of the new mortgage. If you plan to refinance into a 30-year loan, for example, but extra payments would result in payoff in 20 years, you should use 20 years as the term.

Here are three questions I receive quite often:

"I have been making extra payments on my mortgage consistently. If I expect to refinance in the near future, should I continue with the extra payments?"

There is no reason not to. The benefit from the extra payments you are currently making, consisting of the balance reduction, is not affected by a subsequent refinance. After the refinance, the return on additional extra payments will be lower because of the rate reduction. This might cause you to reduce the payments, but probably won't for reasons indicated earlier.

"I am trying to decide whether to refinance into a lower rate or pay off my entire loan balance …"

These should not be viewed as alternatives. Make the investment decision first, based on the rate expected in a refinance. If it is a good investment at that rate, do it. If the investment decision is negative, then assess the profitability of a refinance.

"Am I better off making extra payments on my existing loan or refinancing it?"

These should not be viewed as alternatives. Make the refinance decision first; if it pays to refinance, do it. Consider whether you want to make extra payments after you refinance or if you don't refinance.

The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.

***

Copyright 2009 Jack Guttentag

Some see Federal Reserve unfit as regulator

By Jack Guttentag, Inman News

A major focus of the Obama proposals to redesign the regulatory system is to bring all the major financial institutions that were implicated in the current financial crisis (or might be implicated in the next one) under regulation. These include hedge funds, investment banks and mortgage companies, which have been only loosely regulated.

The general presumption seems to be that if all the major categories of firms are regulated, with clear lines of regulatory responsibility, all should be well. But will it?

There should be some unease about this presumption, because major banks and thrifts subject to extensive regulation were nonetheless caught up in the crisis. The Citibank and Bank of America holding companies were regulated by the Federal Reserve; the banks themselves were regulated by the Comptroller of the Currency (OCC); and WaMu, IndyMac and Countrywide were regulated by the Office of Thrift Supervision (OTS).

The plan is to shift major responsibility for regulating all systemically important firms to the Federal Reserve, which is the most trusted of the agencies. However, the major cause of regulatory failure during the period leading up to the crisis was the same for the Fed as for OCC and OTS: They all lacked a critical regulatory tool.

Financial crises arise out of the interaction of a major external event with a financial system that happens to be extraordinarily vulnerable to that event. In the savings-and-loan crisis of the 1980s, the external event was the interest-rate explosion that arose out of efforts to dampen the inflation. The vulnerability was the unbalanced portfolios of the savings-and-loan industry, which financed home loans carrying fixed rates for long terms, with short-term deposits. Because of the imbalance, their interest cost rose sharply with rising market interest rates, but their interest income changed very little. The circumstances generating the S&L crisis are very unlikely ever to be repeated because systemic vulnerability to an interest-rate shock has been largely eliminated.

In the current crisis, the external event was housing prices rising at an unsustainable rate -- termed a "bubble" because at some point it must burst. The vulnerability was the incentive created by the bubble to generate income by ignoring the risks associated with the inevitable bursting of the bubble. Here is a much-oversimplified illustration for a firm I call "A," which is a composite of many.

During the bubble period, lender A could originate $1 billion of home loans every month on which it made $75 million. Since it took five months to sell these loans, A always had an unsold inventory of $5 billion. These highly profitable loans maintained their value so long as home prices continued to rise. The month that home prices dropped, however, the value of these loans fell by 20 percent; A incurred a $1 billion loss on its inventory; and it shut down. The loss was absorbed by its creditors.

Looking backwards, during the 40 months A was operating, it generated $3 billion of "income" for its owners and managers. I put the word "income" in quotes because, while it constituted income in a legal sense, about a third of it should have been allocated to a reserve for future losses. Had A done that, it would have survived the shock of the house-price decline. If every firm had done the same, there would have been no crisis.

But the incentive system is strongly biased against reserving. For most firms, it makes more financial sense to ignore the risk, pay out all the revenue as income as it is received, and go broke when the bubble bursts. If it bursts after a short period, reserving would cost them, and if it runs for a long time, the firm can withdraw an obscene amount of money that, barring fraud or other illegalities, the ultimate losers (including taxpayers) can't take away. Even our tax system discourages reserving, since the amounts reserved would be taxed as income.

While the system is no longer vulnerable to an interest-rate shock, it will remain vulnerable to bubbles in the housing market or elsewhere. There is no plausible compensation system that would change this. The search for one is a useless digression.

For the reconstituted regulatory system to prevent bubble-generated financial crises, it must have the authority and know-how to impose and enforce a system of mandatory reserving. Such systems now apply only to firms chartered as insurance companies, including mortgage insurers, which are regulated at the state level. If a mortgage insurer had insured the loans originated by A in my example, its risk would have been very similar, but in contrast to A, it would have placed half of every premium dollar it collected into a contingency reserve.

Most of the knowledge and experience required to apply such systems to other financial firms is currently in state regulatory agencies. This provides an ironic perspective on the Obama plan proposal that the federal government take over the regulation of insurance companies from the states.

The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.

***

Copyright 2009 Jack Guttentag

5 Tips for Shopping for a Mortgage

1. Know what you can afford.

Review your monthly spending plan to estimate what you can afford to pay for a home, including the mortgage, property taxes, insurance, and monthly maintenance and utilities. A worksheet for developing your monthly spending plan can be found at www.federalreserve.gov/pubs/mortgage/MORBRO_2.HTM#Worksheet1.  Make sure you save for emergencies.  Plan ahead to be sure you will be able to afford your monthly payments for several years. Check your credit report to make sure that the information in it is accurate. A higher credit score may help you get a lower interest rate on your mortgage. Find information on getting a copy of your credit report at www.ftc.gov/bcp/edu/pubs/consumer/credit/cre34.shtm.

2. Shop around—compare loans from lenders and brokers.

Shopping takes time and energy, but not shopping around can cost you thousands of dollars. You can get a mortgage loan from mortgage lenders or mortgage brokers. Brokers arrange mortgage loans with a lender rather than lend money directly; in other words, brokers

sell you a loan from a lender. Neither lenders nor brokers have to find the best loan for you—to find the best loan, you have to do the shopping. For more information on mortgage shopping, see Looking for the Best Mortgage—Shop, Compare, Negotiate at www.federalreserve.gov/pubs/mortgage/mortb_1.htm.

3. Understand loan prices and fees.

Many consumers accept the first loan offered and don’t realize that they may be able to get a better loan. On any given day, lenders and brokers may offer different interest rates and fees to different consumers for the same loan, even when those consumers have the same loan qualifications. Keep in mind that lenders and brokers also consider the profit they receive if you agree to the terms of a loan with higher fees, higher points, or a higher interest rate. Shopping around is your best way to avoid more expensive loans.

4. Know the risks and benefits of loan options.

Mortgages have many features—some have fixed interest rates and some have adjustable rates; some have payment adjustments; on some you pay only the interest on the loan for a while and then you pay down the principal (the loan amount); some charge you a penalty for paying the loan off early; and some have a large payment due at the end of the loan (a balloon payment). Consider all mortgage features, the APR (annual percentage rate), and the settlement costs.  Ask your lender to calculate how much your monthly payments could be a year from now, and 5 or 10 years from now. A mortgage shopping worksheet can help you identify the features of different loans. A sample of a mortgage shopping worksheet can be found at www.federalreserve.gov/pubs/mortgage/worksheet.pdf.  Mortgage calculators can help you compare payments and the equity you could build with different mortgage loans. See the Board’s mortgage calculator at www.federalreserve.gov/apps/mortcalc/.

5. Get advice from trusted sources.

A mortgage loan is one of the most complex, most expensive financial commitments you will ever

assume—it’s okay to ask for help. Talk with a trusted housing counselor or a real estate attorney that you hire to review your documents before you sign them.  You can find a list of counseling resources at NeighborWorks (www. Nw.org/network/home.asp) and on the U.S. Department of Housing and Urban Development’s (HUD) website(www.hud.gov/offices/hsg/sfh/hcc/hccprof14.cfm)

or by calling (800) 569-4287.

The Federal Reserve Board

Visit www.federalreserve.gov/consumerinfo  for more information on mortgage and other consumer topics.

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