Weekly Mortgage News From Rodney Anderson - August 28, 2006

"CALM CONTINUETH NOT LONG WITHOUT A STORM"...And these wise words dating back to 1576 sure still hold true today. Bond prices and home loan rates have been absolutely flat for the past seven trading days. Traders have not had much in the way of economic news to chew on lately, and seasonably lower volume has added to the sluggish market activity. But this quiet period could just be the calm before the storm, as an action packed economic calendar is due to get some movement stirring over the next week.

Last week did bring some news from the housing sector, in the form of New and Existing Home Sales numbers for July...and it looks like the housing market is behaving just like Fed Chairman Bernanke predicted, with an "orderly slowdown". The number of both New and Existing homes sold came in slightly lower than expectations, and the number of month's inventory or supply available of each rose as well. But across the board, home prices are still up over the past year...that's good news. And here's an interesting point - the median home price in the US is now $230,000. How does that compare to your own market?

AND SPEAKING OF STORMS, IF YOU'VE EVER BEEN THROUGH A DIVORCE OR KNOW SOMEONE WHO HAS...YOU KNOW THAT IT'S RARELY SMOOTH SAILIING DURING THE PROCESS OF MAKING TOUGH FINANCIAL DECISIONS. BUT THERE IS A VERY COMMON DECISION MADE THAT CAN UNKNOWINGLY COST A BUNDLE...DON'T MISS THIS WEEK'S MORTGAGE MARKET VIEW.

Forecast for the Week

So what's the forecast for the week ahead that could cause some stormy seas for home loan rates? A big blast of economic news is on the horizon, including the "Meeting Minutes" or commentary from the last Fed Meeting, Consumer Confidence, 2nd Quarter GDP, the Chicago Purchasing Managers Index (PMI), the Institute of Supply Management (ISM), Consumer Sentiment and the "big boy"...the monthly Jobs Report. And whirling around in the mix is the seasons first potential hurricane headed towards the Gulf of Mexico..."Ernesto" is on the way. If the hurricane does develop, it could disrupt supply to an already jittery oil market. This would lead to higher oil prices, and more inflationary pressures...not good for Bond prices or home loan rates.

But technical factors will now give up the helm, and take a back seat to the important upcoming news events. Because Bond prices and home loan rates tend to benefit from weak economic news, and vice versa, worsen on positive economic news...this gives us some hints as to which way the wind might blow when the news starts hitting. But because Bonds would still need to power through the tough technical ceiling overhead to bring some improvement to home loan rates - it will take some dismal news indeed to see significant change for the better in rates.

The Mortgage Market View...

LOVE AND MARRIAGE, LOVE AND MARRIAGE, GO TOGETHER LIKE...Well, you know the song. But more than 50% of marriages end in divorce, and the lyrics quickly change from "love and marriage" to "alimony and child support." Most people know their alimony payments are tax deductible and most also know alimony received is taxable income. But some innocent and seemingly harmless changes in the way alimony is paid can wipe out the deduction and make receipt of it tax free. And in an already emotional environment, more misunderstandings and legal battles are less than welcome.

According to the IRS, alimony can be claimed as a deduction in the year paid if the payment is made in cash. That's the key point - it has to be paid in cash or by check. If it is used as part of a buyout or trade for personal items, furnishings or home equity, the deduction is disallowed. This can be a major issue, especially where home equity buyouts are concerned.

Picture a divorce situation where, after a legal battle, it is determined one spouse is obligated to pay the other alimony. And because the legal settlement took some time to reach, there is back alimony owed by Spouse A to Spouse B of $20,000. Additionally, Spouse A is leaving the marital home but has the right to half the equity in the home, which comes to $20,000 for their share of the home equity.

So...in the interest of keeping things simple and not having to take out loans or sell the marital home, the parties agree to trade the $20,000 owed to Spouse A in home equity for the $20,000 owed to Spouse B for back alimony. While this may appear to be a fair and reasonable way to settle the issue, it does not meet the IRS requirement for alimony to be paid in cash in order for it to be tax deductible. This issue is surprisingly common, and just recently the IRS Tax Court disallowed an ex-husband's deduction for alimony (2006-122 Rocke Richard LaBozetta, Petitioner v. Commissioner of Internal Revenue, Respondent) because it was a trade of equity for back alimony and not paid in cash. Had the ex-husband known this prior to the settlement, he may have structured the settlement agreement differently to take advantage of the tax deduction.

Again, this could be a very common mistake for many individuals and could be a very costly mistake when counting on an extra tax deduction. It is important to take the time to meet with divorce and tax professionals that can help you make the correct financial decisions. If you need or know of someone who needs a referral for a tax or divorce professional, please contact me and I will be happy to recommend either to you.
The Week's Economic Indicator Calendar

Remember, as a general rule, weaker than expected economic data is good for rates, while positive data causes rates to rise.