The bailout passed! Much has been said about the possible effects, and concerns, of such a move by the Bush administration and Congress. Initial reaction runs from outrage to relief to mass confusion. But how will the bailout impact mortgage rates in the near term? Does anybody know for certain? Good, come to Chicago, I’ll buy you lunch! Hell, I’ll even pay for the plane ticket and a night’s stay at the swanky Drake Hotel off Michigan Avenue.

So no takers — at least those who know FOR CERTAIN! Rich Bira, president of First Capital Mortgage in Chicago, and one of the Dean’s Team Chicago Preferred Lending Partners, points to the relationship between investor interest in stocks versus bonds as a clue that mortgage interest rates are likely to rise within the coming weeks and months.

“I guess I’m saying that they’re going to go up on the sole premise that in the next few weeks to a month, the stock market will hit bottom and the stock market will get its footing.”

Increased investor participation in the stock market could draw money out of more conservative investments in bonds. While this isn’t always the case, in recent months, the relationship between bond prices and mortgage interest rates has worked in reverse: the lower the bond yields, the higher the mortgage rates, and vice versa.

Seeing into the future
But can anyone, expert or not, predict with any certainty whether the stock market will soon find a bottom? Furthermore, how will the U.S. Treasury Department’s purchase of distressed-quality mortgage assets proceed? If it fails to go smoothly, the stock market might continue to tumble in response, keeping bond investments high by comparison.

Also, how will the Federal Funds Rate change in the short term? Will inflation keep that rate unchanged from current levels, or will the Federal Reserve lower that benchmark rate in an attempt to spur the housing market? And if they do, will it have the desired effect?

Will mortgage giants Fannie Mae and Freddie Mac, which have already rolled back some previously adopted fees on certain mortgages, introduce new policies geared at making more mortgage money available for buyers with mid-FICO credit scores? Or will the far more stringent loan-approval standards in place this year continue or get tougher?

In any event, a poll conducted by Bankrate.com released last week suggests U.S. home buyers may be seeing falling rates within the next month to month-and-a-half or so. Of the panelists it polled, two-thirds predicted falling rates within the next 45 days. Whatever happens, most agree that it won’t happen immediately.

Visit DEAN & DEAN’S TEAM CHICAGO at BlogChicagoHomes.com.

Turn on the television, open the papers, and you’ll see that the doom and gloom news of the financial market has sent many people into a panic. But if you’re like me, struggling to make sense of the talking heads on the network news shows, you’d think the only logical thing to do with your money right now is bury it in your backyard — or buy tons of gold, if you can afford it!

Earlier last week, Ben Bernanke, the chairman of the Federal Reserve, cut the Federal Funds Rate by half a percentage point to 1.5 percent. The rate cut was done in coordination with banks around the world. The Fed, which has actually been lowering its rates since September of last year, has now cut the rate eight times.

With the flow of credit still tight, investors have fixated on the threat of a serious recession despite the increasingly urgent attempts by policymakers to buttress the markets. Deepening problems in the European banking industry have compounded fears of a worldwide downturn.

Impact on Main Street
But what does this all mean for people still looking to buy homes? The promise of lower interest rates and new federal efforts to stem the financial crisis has failed to dispel the fear gripping Wall Street and those living on Main Street.

Here are some insights from my mortgage banker buddy: “People aren’t refinancing because the Fed is raising short term rates; they’re refinancing because the Fed cuts have actually caused rates to go down (for the most part). Since the economy is so jacked right now, the Fed hasn’t done much but reaffirm that things are messed up, and this re-affirmation has caused money to go away from stocks towards bonds, which is why people have been refinancing.”

The funds rate generally has a direct correlation between credit cards, automobile loans, business loans and home equity lines of credit. As for mortgage rates, the effects are a bit tougher to predict. In the past, when the Fed cut rates it led to lower mortgage rates, but because of the subprime mortgage meltdown, people have been wary of investing in the mortgage debt that’s plaguing banks. It is also worth noting that the current spread between mortgage rates and the funds rate is unusually high.

Still confused? Here’s a simplified breakdown of how Fed rate cuts work:

Short-term and long-term rates
The funds rate, officially called the Federal Funds Rate, is the interest rate charged when banks lend money to one another. This is a short-term rate, or a rate that is two years or less in maturity. When the Federal Open Market Committee (FOMC) raises or lowers the funds rate, it affects mortgage rates that are tied to short-term interest rates, such as home equity rates and adjustable rates. When short-term rates fall, borrowing and spending usually increase. This can cause inflation, something the Federal Reserve wants to keep under control.

Long-term interest rates
Long-term interest rates, or rates that are 10 years or more in maturity (such as the one for 30-year mortgages), are influenced by short-term rates in a roundabout way, because they can rise when concerns about inflation increase. To keep inflation under control, the Fed started raising short-term interest rates in 2004. Because of this, people who have adjustable-rate mortgages have been refinancing into longer-term fixed-rate mortgages to avoid rising rates, especially because long-term rates have remained historically low for quite some time.

The funds rate has the ability to change at every meeting of the Federal Reserve Board. However, it’s almost impossible to accurately predict the future of something as complex as the U.S. economy, so no one is ever really sure if or when the rate will change. In any case, it is important to understand some of these market dynamics, because a lack of understanding can sometimes cost you a lot of money.

Had there not been a worldwide, central-bank rate cut last week, the funds rate would have likely stayed at 2 percent due to inflation fears. But the current credit crunch is just too strong, so something had to give. For those of you who have followed the series of Fed rate cuts, you should know by now that the funds rate is tied directly to home-equity loan mortgage rates. While this rate cut comes during a tough time in our economy, it may also be the right time for you to look into relatively cheap home equity loans.

If you want to learn more about mortgage interest rates, talk to a mortgage expert or refinance expert to truly understand how the rate cut will impact your bottom line.

Got hot local housing tips or a story you want to share? Contact Amy Le at openingdoorsblog@homescape.com.

The “As the Stomach Turns” financial-rescue aftermath continues. I imagine the only ones benefitting from such a struggle are the manufacturers of Pepcid and Mylanta heartburn potions! But there are little glimmers of hope these days, here and there.

One involves the First-Time Home Buyer Tax Credit — $7,500 from the Fed. Yes, you will need to pay it back, interest free over 15 years, or when you sell, whichever comes first. But if you stay in your new home for the full 15-year term, you’ll pay back exactly $500 each year, on your annual income tax return. Here at our offices, our phone lines and e-mails have been inundated with many questions about the new program.

Details of the tax incentive
The tax incentive was part of the massive housing relief package that came out of Congress a few months ago, before the current “crisis legislation” became all-consuming!

Most first time home buyers qualify for the credit, so long as your total household income is less than $75,000 (for single taxpayers), or $150,000 (for couples filing jointly). There is also a time limit to the credit — it only applies to homes purchased between April 9, 2008 and July 1, 2009.

In addition to the federal program, there are several local and state programs that offer incentives to first-time buyers. Some, however, cannot be used in tandem with the federal incentive, but a few can.

In Chicago, first-time home buyers (and non-first timers in certain targeted city neighborhoods), can enjoy a direct income tax reduction of up to 20 percent of mortgage interest paid, up to a maximum of $2,000 each year, for as long as you own your home. The maximum allowable family income, for a family with three or more people, is $105,560 in city-target neighborhoods, $86,710 in non-targeted city neighborhoods.

In tax areas, the maximum single-family home purchase price to qualify is $398,315 in targeted areas, $325,894 in non-target neighborhoods across Chicago. You can find about more about Chicago’s TaxSmart Mortgage Certificate Program on the city’s Web site. The I-Loan Program is similar for houses throughout Illinois. Unfortunately, you cannot take advantage of these programs together with the federal program.

Extra incentives
Other Chicago-area communities have special down-payment assistance programs available for buyers that purchase their new home within their communities. These incentives CAN BE COMBINED with the federal First-Time Home Buyer Tax Credit program.

About 50 miles south of Chicago, the city of Kankakee, IL, offers as much as $7,000 down-payment grants and up to $1,500 in closing-cost credits to first-time buyers in their community. The family income ceiling in Kankakee is comparatively low at $48,650, but the down payment assistance program can be used in combination with the First-Time Home Buyer Tax Credit. Both the Chicago and Illinois programs offer lender contacts who offer slight discounts on mortgage interest rates. In some cases, these local and state programs do not have to be repaid.

Both programs include recapture provisions — if the subject property is sold within nine years, at a profit, and the owner’s household income increases beyond a maximum level allowed, the buyer may have to pay a prorated portion of the tax credit earned.

Visit DEAN & DEAN’S TEAM CHICAGO at BlogChicagoHomes.com.

Say what you will about the Bank of America acquisition of troubled mortgage giant Countrywide Financial. For some homeowners with defaulting loans, the merger may have been their saving grace. The subprime mortgage crisis launched a major financial blow to Countrywide over the last few years. As a result, Bank of America agreed to buy the struggling company in January, despite widespread knowledge that several states were investigating allegations of predatory and fraudulent lending.

Settlement details
Illinois, California and at least six other states have reached an $8.8 billion settlement of their lawsuits against Countrywide, the biggest subprime mortgage lender in the country. The deal should help some 21,000 Illinois residents keep their homes, according to a Chicago Tribune article published on Monday. As part of the settlement, Countrywide has agreed to halt foreclosure sales and not initiate foreclosure proceedings for customers likely to qualify for the program. The program applies to people who received mortgages from Countrywide before Dec. 31, 2007.

According to the Tribune article, Illinois, California, Iowa, Ohio, Texas, Arizona, Washington and Connecticut had agreed to the Countrywide settlement program by early Sunday evening. North Carolina, West Virginia, Indiana and Michigan were still in settlement talks, a Countrywide spokesman said.

The settlement marks the first mandatory mortgage relief program in the nation. Mortgages will be renegotiated under the program so that monthly payments do not exceed 32 percent of a family’s monthly household income, the newspaper reported.

In some cases, terms of Countrywide mortgages will be changed to reflect the reduced value of homes as a result of the housing crisis. However, in most cases the emphasis will be on reducing monthly payments, said a lawyer involved in the negotiations with Countrywide.

Illinois and other states sued Countrywide in July over allegations the firm intentionally steered people into confusing and risky mortgages they could not afford to pay. Even as home foreclosures mounted, the lawsuits alleged that Countrywide accelerated its aggressive mortgage writing, in part to fill Wall Street’s appetite for mortgage-backed securities.

The lawsuit
The Illinois lawsuit charged that Countrywide offered mortgages with insufficient documentation requirements and with interest-only payments, thus selling mortgages people could not afford. In many instances, loans had teaser interest rates that lasted a brief period and then jumped significantly. Eventually, many borrowers made few or even no payments before the loans went past due and foreclosure proceedings began.

The bulk of the settlement — $8.4 billion — represents the reduction in principal and interest payments for Countrywide customers who hold adjustable-rate and fixed-rate subprime mortgages. In addition, Countrywide expects to waive $56 million in prepayment penalties and $79 million in late fees. The firm will pay $150 million to people already forced out of their homes and another $60 million in relocation costs for people in the process of being evicted from their homes.

To find out if your loans will be impacted by the Countrywide settlement, contact your local state attorney general’s office. California’s Attorney General’s office has provided a helpful FAQ page on their Website regarding the Countrywide settlement. Borrowers seeking relief under the settlement can also contact Bank of America at 1-800-669-6607.

Got hot local housing tips or a story you want to share? Contact Amy Le at openingdoorsblog@homescape.com.

On a Sunday morning, the U.S. Treasury stepped in and took control of two huge mortgage institutions, Fannie Mae and Freddie Mac, by placing them in government conservatorship. These two institutions are central to the financing of most mortgages in this country. They are not household names, but combined they own or guarantee over $5 trillion in home loans, or half of the nation’s mortgages.

Fannie Mae and Freddie Mac are charter organizations created by the government in 1938 and 1970 respectively to provide money to banks and mortgage lenders so people can buy homes at low interest rates.

With the collapse of the housing market in many part of the country, these organizations have been hit with staggering losses on the loans they held or sold to other investors in the form of mortgage backed securities. Just last year Fannie and Freddie lost a staggering $14 billion.

Double-edge sword
The government really had no choice but to step in and prop up these two giant institutions in order to try and stabilize the housing market. So the feds are investing up to $200 billion to restore confidence in the financial markets. Had the feds not done this, there would have been a great deal of turmoil leading to higher rates on mortgages and more bank failures. What would have been catastrophic is if they went belly-up.

Now the U.S. government, as a result, is in effect standing behind the debt issued by them. In essence, they have become the nation’s mortgage lender.

As you can imagine from the size of these institutions, they are central to the mortgage market. In simple terms, when a bank makes a loan, they will sell the loan to them, get their money back, make another loan and sell it to them. This process is repeated over and over. Fannie and Freddie will either keep these loans on their books or package them as mortgage-backed securities and have Wall Street sell them to large institutional investors both in the U.S. and abroad.

Limited alternatives
When the sub-prime mortgage mess started to unwind last year and foreclosures continued to mount, these institutions found it more difficult to get investors to buy their mortgage-backed securities. The actions caused a liquidity problem, which in turn caused them to buy less mortgages from banks. That made it harder for your average home buyer to get a mortgage from their local bank.

The government intervention was a huge sigh of relief for many people in the housing industry. With the government backing these mortgages, it should help alleviate pressure off the mortgage market. Wall Street reacted very positively in part, because they have also been hammered with losses from these loans they sold their clients. A short time ago Bear Stearns was sold to a bank at a fire-sale price. And now another venerable firm is on the block. While this will take some heat off Wall Street, they are far from done dealing with their financial problems including massive lawsuits.

This takeover is going to take years to work out, and it is really unknown how much money the government will have to pour into Fannie and Freddie to get them back on their financial feet. The next elected president will be dealing with this and maybe his predecessor too. Eventually, the government hopes to recoup their massive investment by selling off stock in these companies to the public once they are profitable again.

So how does this affect you? It is going to make it a little easier to get a loan, but don’t count on getting one of those no-doc, no-income loans tomorrow. Those loans, which were at the root of today’s problems, are gone for a while. But the infusion of cash into Fannie and Freddie will allow banks to produce more loans again. Also, the guarantee of these loans now by Uncle Sam will get more investors to buy mortgages without the fear of getting burned. An immediate positive effect is that the 30-year fixed-rate mortgage rate dropped to 5.78 percent from 5.93 percent the week of the announcement.

Steven Hyman is the broker and owner of Century 21 Sunset Properties Half Moon Bay, CA.