U.S. Treasury Bonds
Maturity Yield Last
Week		 Last
Month
5 Year 4.20 4.30 4.24
10 Year 4.54 4.63 4.53
30 Year 4.80 4.88 4.82

Treasury Market Summary: 

Friday's reassuring economic reports were not enough to send the stock market out on a high note on the last trading day of the third quarter. The major indices stayed within a tight range, and spent the vast majority of the day in negative territory. Losses, though, were modest in scope.
The Dept. of Commerce released its Personal Income and Consumption report prior to the start of trading. Spending was up 0.6% for August, slightly stronger than the expected increase of 0.4%. This is significant, considering personal spending makes up 70% of economic activity. Personal income rose 0.3% (consensus +0.4%). One of the favorite inflation indicators of the Fed, the core PCE deflator, met the consensus estimate for an increase of 0.1%. Presumably, the recognition that inflation has moderated will give the Fed more room for further rate cuts.Interestingly enough, St. Louis Fed President Poole caused a bit of a stir near the end of the trading day after he reportedly said it would be a mistake for markets to bet on more rate cuts. That comment helped erase earlier gains in the Treasury market and sent the major indices to their lows for the session.The major indices pared their losses in the last 45 minutes, though, as equity traders eventually viewed Poole's comment as an innocuous remark.  After all, no Fed official is going to come out and say, "Yes, it would be a good idea to bet on more rate cuts."The Chicago PMI, a regional manufacturer survey, was reported at 54.2 for September versus 53.8 in the prior month and the consensus estimate of 53.0. Due to the report's regional nature, the data did not cause the market to move much, but it was a welcome indicator due to all the recession chatter lately.On a related note, it was reported that former Federal Reserve Chairman Alan Greenspan told BBC Radio that there is an increased risk of recession in the U.S. now, but that he still places the odds at less than 50/50. Eight of the ten economic sectors lost ground Friday. Utilities (-1.4%), and telecom (-0.8%) were the biggest drag on the S&P today. Consumer discretionary (+0.08%) and consumer staples (+0.13%) were the only sectors that finished the day in the green, in response to the strong spending report. The CRB commodities index was far more interesting than the stock market today, even though the index finished the day close to unchanged. Crude oil futures for November delivery were especially volatile today. Crude prices traded as high as $83.76 before running into resistance.  They closed the session at $81.39 or nearly 3.0% off their high. Gold prices jumped 1.3% to $749.60 per ounce. Once again, gold perked up as the dollar index (-0.8%) slid to new lows.
 

Economic Indicators for this week that could impact the mortgage or real estate markets include...

 

Home Loans and Negative Amortization

 
 

Owning a home is undoubtedly the American Dream and the bedrock of middle class.

Negative amortization, however, can turn the dream into a nightmare if you are not careful.

When you apply for a basic home loan, you obviously must repay the loan to the lender. The repayment of the loan is typically set over a certain time period with a certain amount being paid monthly. This process is known as the amortization repayment schedule. In some instances, however, the repayment schedule can be designed to have a very problematic result.

Home loan lenders have to compete for your business. To make themselves stand out, they will come up with unique mortgage packages that make it easy for you to get into a home that perhaps is a bit beyond your means. One of the techniques for doing this is a strategy known as graduated repayment. With graduated repayments, you initial loan repayments are for less than the total interest owed on the loan. The excess interest than accumulates and is usually converted into principal.

Known as negative amortization, this process can be very risky because it is based on a bet. When you pursue a negative amortization loan, you are betting the equity in the property is going to rise faster than accumulating interest. If the equity gain doesn’t increase, you eventually have a problem where you are making payments on a home with no equity. When the amount owed on the mortgage exceeds the equity in the home, you are suddenly upside down on the loan, to wit, the home has become a pure debt.

Obviously, a lender isn’t just going to sit and let the principal on a loan accumulate forever. To avoid this, the loan will typically carry a debt cap at which point the loan automatically converts to a different loan where you start paying the balance off or the loan may just come due. For example, the loan may contain language that if the total debt exceeds 115 percent of the value of the home, the loan will convert or be due in total. Either case is a nightmare because you will either suddenly have payments you can’t make or have to come up with a bundle of cash. For most homeowners, this leads to default.

Negative amortization loans can look very attractive when you are trying to squeeze into a home just beyond your means. Just make sure they don’t kill you in the long run.

One should consult with a qualified mortgage planning professional prior to implementing any mortgage planning strategies. If you are a insurance planning, real estate, financial or tax planning professional receiving this newsletter, please call our office and introduce yourself to us.  We are always seeking to grow our referral network and expose more service professionals to our client base.