Category — Mortgages

In an emergency phone meeting, Monday night, the Fed Cut Rates .75%. The biggest one time rate cut since 1984. The Fed meet before its scheduled January 29th-30th meeting and is expected to cut ANOTHER .50% at that time. This move all but says we may be in a recession.

The stock market is scheduled to open with its worse drop in recent memory and bad news for Bank of America, reporting it a 95% drop in net income and may call in to question the buy out of beleaguered Countrywide.

If Bank of America does not go forward with the Countrywide buy, Countrywide is all but assured a spot in Federal Bankruptcy court and that would send additional shock waves through the financial markets.

Those with adjustable rates gotta be loving the current rate environment. I have been saying since May 2007 the Fed would lower rates and I would go with short term adjust ables. Those with a home equity line of credit will see their rate decline this month of at least .75%. All the short term adjustable rate indices’s, such as the LIBOR, MTA and CMT will have huge declines today and over the coming months so we will all see our payments going down. Who would have ever thought we would see the 30 year near 5%?

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It ALMOST cant get any better than this. Mortgage rates are smoking going into 2008. The current interest rate environment is great for adjustable rate mortgage holders. My ARM loan rate is down nearly a 1/2 % just in the last few months and looks as though it will continue to go down throughout this year. This morning I found myself calculating how low my mortgage payment would go if………..Kind of funny. Like when you buy a stock and you start calculating all this money your going to make if this winner you picked goes to the moon.

With the Jobs Report for December showing only 18,000 new jobs when estimates were looking for 70,000 thats quite a surprise. Unemployment is creeping up as well to 5% this is a pretty large increase from Novembers level of 4.7%. Bad news for stocks but great news for mortgage bonds!

The bad news with the slide in interest rates as is with all the so called help from the government for those facing foreclosure or arm resets is that the majority of those wanting to take advantage of the lower rates and refinance can not. Its nearly impossible for even the best of credit scores to refinance their loan right now at anything over 80%. I have had four loans in December alone, all rate and term refinances (no cash out), all mid 700 credit scores not get approved. Its ridiculous right now, mortgage bonds are at the best they have been since summer of 2005 but its increasingly harder for approvals on refinances to take advantage of them.

Fannie Mae and Freddie Mac have all but closed up funding higher loan to values. I do not see this getting better anytime soon and even see it getting worse before it gets better. Most lenders have already added Risk Based Pricing to loans that Fannie and Freddie are officially starting in March 2008. Some lenders are starting to take away Investor loan programs for cash out. That is correct No Cash Out for Real Estate Investors, not even $10. Also some lenders are pulling Expanded Approvals as well. Then you have the automatic 5% value reduction for declining markets.

The storm is not over yet. There are going to be many more limiting changes that are coming down the pipe I am sure and It will not matter how low rates go if mortgage holders can not take advantage of them.

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With the current market real estate investors have to look at other “back to basics” ways to move investor properties. The three alternative options for investors below are not new but seem to be forgotten, great ways to rethink the marketing and selling of your properties and get your asking price and even more. First you can move your property very quickly. Second, you can name your selling price and most often it can be much higher than the general market will bear. Third, all of these strategies can actually increase your investment return exponentially more than just out right selling your property on the market.

Seller Held Seconds – This is a great option for those rehab investors to get their initial capital out of their property and move on to the next project and also opens the market to many more potential buyers. Let’s say you buy a property for $150,000 and spend $15,000 in renovations. Let’s say after renovations the property is worth $200,000.

The potential home buyer secures a conventional 1st deed loan at 80% of the value of the home and takes out a mortgage for $160,000. This pays your loan off and also you’re out of pocket expense renovating or updating the property. It’s essential, that there is a down payment from the buyer of at least 3% to 5 %. In this instance, you hold a second deed for $30,000.

You become the second deed of trust with all the rights of any 2nd trust deed holder. Most often the terms of the loan are higher rates and shorter balloon terms; let’s say a 36 month balloon (36 months is typically the shortest balloon term a first deed lender will accept) at 12% interest rate with an interest first payment option. So during the 36 months you’re receiving interest payments of 12% and by the end of 36 months the buyer needs to refinance the property to pay your loan off. [Read more →]

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There is a word that is used in investing that I think a lot of “real estate investors” had forgotten over the years. The word is eval·u·a·tion. Webster defines evaluation as:
1 : to determine or fix the value of
2 : to determine the significance, worth, or condition of usually by careful appraisal and study

The current market can make it more difficult to evaluate investment properties. The determined sale price at the beginning of renovations can be 5% or 10% less at the end of renovations. Not to mention you have to account for marketing expenses, carrying costs, tax implications and even have a Plan B.

Its very important that real estate investors align themselves with competent advisor’s that can advise them how to properly structure and progress the transaction. This includes a Certified Mortgage Planner, CPA, Realtor, Property Manager and Appraiser. There are many DIY’s “speculators” out there getting absolutely hosed and even foreclosed.

Its essential that you spend a large amount of time of due diligence when considering an investment property to purchase. Initially this may take some time to develop your specific goal but properly structuring a consistent standard upfront will save much time down the road and allow you to move quickly as investment opportunities arise. A very brief overview of considerations are below: [Read more →]

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For those in the market to buy a home in the next 6 months you better act fast because its about to get more expensive. Already mortgage lenders have cut back dramatically and totally removed loan programs off the market and now Freddie Mac and Fannie Mae are starting to increase fees on loans making buying a home more expensive and maybe even pricing out some home buyers altogether.

Freddie Mac states “In response to continuing volatility and turmoil in the mortgage market, including the deteriorating performance of higher-risk mortgage products, we are expanding our use of risk-based pricing by adding fees based on Indicator Score and loan-to-value ratio. We are also increasing our delivery fees for certain Mortgages with increased risks.”

Reason 1: Starting in March 2008 there is going to be a .25% delivery fee called a Market Condition Delivery Fee. So for a $200,000 purchase price this would equate to a charge of $500. The Market Condition Delivery Fee is in addition to the announced Indicator Score/Loan-to-Value delivery fee.

Reason 2: The Indicator Score/Loan-to-Value Delivery Fee is the most significant. You will see by the chart below that depending on your credit score this fee can range from a fee of $1,000 to $4,000 based on a hypothetical $200,000 purchase price, this is IN ADDITION to normal closing costs.

[Read more →]

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Its said that most of the general public believe what they read. I was taking a look at The Wall Street Journal’s Real Estate portal called Real Estate Journal and noticed and article on “What Moves Mortgage Rates” written by Teri Cullen. It always gets my curiosity when I see articles like that because 50% of the time they get it wrong, although its predominately fellow peer loan officers are the ones that really get it wrong I did not think the Wall Street Journal, “The King of Finance Media” would.

I will let you read the article but basically Teri Cullen answers the question from a reader named Victor. “Victor, mortgage rates actually follow the bond market, not the Fed-funds rate. The interest rate on a 30-year fixed-rate mortgage tracks the yield on the 10-year Treasury note (at Tuesday’s close 4.383%.).”

This is just not accurate. First, the 10 year treasury is a government backed instrument and has no direct effect on the direction of mortgage rates. Second, mortgage rates follow mortgage backed securities or MBS’s which are issued by Fannie Mae and Freddie Mac. While sometimes interest rates and the 10 yr tsy may move in the same direction, one does not affect the other. Very often they trade in completely opposite directions. You will notice by this quote that 6.0% mortgage bonds where up 6bp’s points and the 10-Year was down 72bp’s.

This brings me to another point. When I talk to prospective borrowers one of my handouts lists “questions to ask your loan officer” and one of the questions on the sheet to ask “What are mortgage rates based on?” Its the very basic of knowledge. This is the largest transaction of your life and far too important not to be handled by a competent, quality professional that’s trained to advise you properly. If they do not answer correctly run…do not walk to a loan officer that does know the correct answer. It always amazes me when talking to borrowers how indifferent some seem at the quality of professionals advising them on such a large transaction. Its like using a stock broker giving you quotes out of yesterdays Wall Street Journal.

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Fixed Rate Mortgage Backed Securities                            November 26th, 2007

Mortgage rates headed south yesterday to a 2 1/2 year low. News that HSBC, the largest bank in the U.K., was bailing out two of its Structured Investments or SIV’s sent investors to a flight to quality buying bonds. HSBC will be moving $45 billion worth of these SIV’s to its own balance sheet in a move that undermines the $100 billion Super Fund that was in the making with the largest banks of the U.S. HSBC has over $2 Trillion in assets to accommodate a move such as this and is unmatched by the larger U.S. banks.

With mortgage bonds trading at a 2 1/2 year high, those looking to lock in, have to at these levels. Even though there may be more room to move, in the nearer term profits will be taken causing rates to possibly tick up.

The only question is the 10 year treasury bond has moved a lot higher, a lot quicker than mortgage backed securities and at some point the 2% point spread between the two would have to narrow. With the U.S. being in a decreasing interest rate environment, I would take a educated guess that the spread will be narrowed by mortgage backed securities trading higher therefore reducing the yield on long term fixed rate mortgages. An excellent mortgage product to take advantage of the longer term view of reduced rates would be the HOA.

(Images Courtesy of Mortgage Market Guide)

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On October 30 and 31st the Fed meets again. Looks like the odds of a .25% reduction in the Fed Funds is 100%. Chances of a reduction of .50% are sitting around 20%. Primarily the reason for the increased optimism of a reduction has been related to the horrible earnings announcements by the big banks and mortgage lenders, such as Bank of America who reported $1.45 billion in trading losses, Wachovia with $1.3 billion in losses and write downs, Countrywide reporting a 1.2 billion loss and Merrill Lynch who reported a $8.4 billion third-quarter write-off all due to their exposures to the subprime mortgage market. On the economic front all has been fairly well the last few months.

The only major news this week will be Wednesday’s Pending Home Sales and the ADP employment report. The ADP number has been historically inaccurate. The actual Employment number will be released on Friday.

Going into next week, I would float all short term rates and lock long term. Right now we are looking a 30 year fixed under 6% these rates have not been seen for a long time and should be taken advantage of before the fed announcement. Longer term I would float all loans as I believe we will have lower rates overall in the months to come.

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There is a mortgage product that was introduced to the U.S. during the last few years. With this mortgage, homeowners can accelerate their payoff, with no monthly payment change in as little as 10 years to 15 years. Thats right, in most cases, you can continue to pay your current fixed rate payment and save 20 years of mortgage interest. I have to say, I love this product.

How it works, its simply a Home Equity Line of Credit just not a normal Home Equity Line from any bank. This loan combines your checking, mortgage and home equity line accounts into one super account. Each week you receive a paycheck, rental income or any other income and its automatically deposited into your bank account.

How it works, lets say your current mortgage payment is $2,500 a month and your paid net income of $2,000 a week. Well each week your depositing that $2,000 into your bank account, your mortgage immediately falls $2,000 and the lower balance used to calculate the interest. So every 30 days you’re essentially reducing your mortgage balance $8000 for 30 days at a time and then at the 1st of the month your bills are due and you simply write a check out of this bank account for the bills. Its really that simple.

Using the accelerated payoff calculator, a borrower with income of $4,000 per month, a $200,000 mortgage at 6.25% would have a payment of approximately $1,231. Lets say that after paying bills this homeowners has 20% left over each month or just $800. This particular homeowner would pay off their mortgage in 12.7 years. Remember, they are still paying only the $1,231 per month! So just by changing HOW they pay their mortgage NOT changing how much, they save $133,745 in interest expense and are mortgage free in just under 13 years!

One thing to point out this is an adjustable, home equity line of credit, based upon the 1 Month LIBOR Index. The highest the 1 Month LIBOR has ever been is 9%. An important point to make that the LIBOR tracks, nearly exactly, the U.S. Fed Funds rate, so its very transparent. But lets assume worst case. [Read more →]

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Fed Chairman spoke at The Economic Club of New York last night and todays stock market sell off was at least in part a reaction to his comments on the current financial crisis. Chairman Bernanke stated in his conclusion, that although the credit markets have seen some improvement, he thinks that a “full recovery of market functioning may take some time” and “we may well see some setbacks.”

Some positive notes to point out from his speech:

• Core Inflation has moderated but overall inflation risks remain
• Consumer Spending has thus far has not been effected

So, just what is core inflation? Core inflation itself, has no specific definition. There are 3 core measures the Fed uses.

1. PPI or Producer Price Index - measures prices on a wholesale level
2. CPI or Consumer Price Index - CPI measures a basket of goods or services. There are eight groups from where price data is collected. Housing, Food and Beverages, Transportation, Apparel, Education, Medical Care and Communication, Other goods and services
3. PCE or Personal Consumption - measures the prices paid by consumers on a domestic level for goods or services

(CPI numbers will be reported tomorrow morning 10/16 at 8:30 am. Estimates are for 0.2%)

Consumer Spending was mentioned more than once throughout the speech and will be a heavyweight for a decision at the next FOMC meeting on October 30 - 31 and going forward. Chairman Bernanke and the rest of The Dream Team will have a watchful eye for any “spill over to other parts of the economy–for example, by acting as a restraint on consumer spending.” Consumer spending is huge for the overall economy as it accounts for a full 2/3rds of GDP. So its the uncontested heavyweight in the feds eye for now.

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The principle drivers of the past housing boom where structured investments. In simple terms, wall street repackaged mortgages into securities, mixing the pot with different prime mortgages, derivatives, consumer, corporate debt and then subprime mortgages were added to the pot. Often times these securities became so convoluted they were just called asset backed securities. Wall Street and Investor appetites for these investments became insatiable and then out of seemingly out nowhere came the meteoric crash reminiscent of Bamm Bamm Rubble with his caveman club smashing everything in site. Now investors are holding billions in paper that no one wants.

Bank of America, JPMorgan and Citigroup, who announced $3 billion in subprime losses the same day, have started an estimated $100 billion dollar fund called called the Master Liquidity Enhancement Conduit or M-LEC, to help provide liquidity back into the markets and ease the current credit crisis. There is approximately $320 billion in structured investments and this “bailout” fund is designed in theory to buy this debt providing liquidity for new fundings. While this is a great first step in self correcting the mortgage problems, there are concerns that the fund is paltry compared to the $320 billion in holdings of these investments and some are hinting that the banks see a much larger problem on the horizon. This may be an indication from the big bank players, that we may only be in the 1st quarter of the game and that some financial institutions may be in more trouble than the market believes. There is still a lot of time left on the game clock.

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There is a debate going on between those that feel the Federal Government, Mortgage Lenders, Builders and Banks are under an obligation to assist homeowners whose loans are getting ready to and have adjusted and to assist those that are already facing foreclosure. The other side of the debate says that there should be no assistance and let the cards fall where they may, that a government bailout is a free license to go out without caution and the government will save you.

Side One: What are the government leaders saying by bailing out these borrowers? These home owners were given an opportunity; an opportunity that they otherwise would not have had. Subprime loans where designed, in theory anyway, to help those with bad credit get a loan and over the course of the next 2 to 3 years repair their credit and get into a low rate good credit loan. Problem with that is 90% of the people with bad credit have bad credit because they never pay their bills and can not manage their debt. The majority of subprime borrowers did nothing once the loan closed to repair their credit. They already have bad credit let them go to foreclosure. Bailing them out is just giving a green light to go out and mismanage their finances again. Give them tough love do not enable them. Screw ‘em. Let them drown. These borrowers need to learn from their mistakes. [Read more →]

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Stock investors are singing The Happy Song as the closely watched September employment report came in higher than expected, and the market was very surprised by a revision to the August -4,000 job loss report to a net gain of 89,000 jobs. These numbers had the S&P 500 closing at new highs and other index’s such as the NASDAQ and Dow Jones hitting new highs intra day before profit taking.The Labor Department reported that the U.S. economy added 110,000 jobs and experienced an unemployment rate of 4.7 percent during the month of September, higher than the 100,000 expected. This news sent bond and mortgage backed security yields quite higher, so those seeking to lock a mortgage rate over the next day or so will be paying higher prices.The latest jobs report again, proves that the off the cuff Mozilo recession talk was baseless and unfounded. Leaves you wondering why a CEO the largest mortgage company in the US would make such a statement without qualification. The in-line reading and revision to last month’s number however, have analysts reevaluating whether there is the possibility the Federal Reserve will lower rates again when it meets October 30th - 31st and whether the lowering last month was prudent.The major news next week will be the release of the FOMC minutes on Tuesday and Retail Sales on Friday so we will see if these numbers can bring down mortgage rates or if we are in for higher mortgage rates going into winter. It looks like to me, we could have higher mortgage rates for the next month, maybe even higher rates for the quarter as technical indicators seem to be breaking down but longer term 6 months to a year indicators still look in tact for lower rates. But again, any negative news on any given day can change the direction dramatically so stay tuned.The bond markets will be closed on Monday, October 8, but the stock markets are business as usual.

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While nearly 150 mortgage companies have shut down in the last 10 months because of soaring delinquencies and defaults, NetBank, seems to be the first FDIC insured bank casualty of the current credit crisis. In an futile attempt to avoid a shutdown, back in May 2007, NetBank shed parts of it lending lending business to Ever Bank and shutdown their third-party mortgage origination business. Taken over by Federal regulators, the Federal Deposit Insurance Corp. has been appointed as a receiver for the Alpharetta, Ga.-based NetBank and oversee the banks $2.5 Billion in assets. Online rival ING (NYSE:ING) will be taking over most of NetBanks operations.

This is important in the sense that NetBank is the first FDIC insured bank to cease lending operations and actually close altogether. Some mortgage banks have been claiming that because they are a bank and have deposits that they are not as susceptible to the Subprime mortgage defaults and bankruptcy because they have these deposits. NetBank proves that is not the case. Its been reported that the NetBank closure is the largest Savings and Loan closure since the end of the Savings and Loan Crisis of the late 1980’s, early 1990’s.

In other related news, just this morning Citigroup (NYSE: C) is reporting a 60 percent drop in earnings as it takes a $3 Billion write downs in under performing mortgage securities. Citigroup also moved out its earnings call 4 days from October 15th to October 19th. Watch this as this news could move Citigroup to a new 52 week low. More news to come on this.

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Well it finally happened, the federal reserve lowered interest rates. Its been my belief all year that the Federal Reserve would lower rates in the fall. Now that it has happened its important for consumers to understand what this Fed Rate Cut means to you and your mortgage.

First, for those that have a 30 year fixed rate mortgage it basically means nothing. The lower Fed Funds Rate DOES NOT mean that the 30 year fixed rate mortgage will go down. Actually, the 30 year can go higher as this chart illustrates. By December 2001, following 4.25% in cuts throughout the year, the 30 year mortgage was actually up to 7.07%.

Additionally, with the September 18th Fed cut the average 30 year fixed rate mortgage responded by increasing 5 basis points last week after the announcement. The chart above shows from the year 2001 to mid 20007, the 30 year fixed rate stayed relatively flat and has been predominately trading in a range of 5.875% to 6.25% since the spring of 2002.

But those that have short term adjustable rates, I myself having a monthly adjustable, may very well reap the rewards over the coming months and years if this rate reduction continues. You will notice by the two charts below, that the LIBOR rates, 1YR CMT and 11th District COFI have dropped nearly in tandem with the Federal Funds rate reduction. The LIBOR dropped from 7% in 2001 down to 1% not long after.

Fed Funds Rate since 1990:

Chart of LIBOR, CMT and COFI Indices since 1990:

The coming Fed rate reduction is why I have been a big fan of short term adjustable loans for the whole year. Short term adjustable rates are tremendous mortgage planning tools in a declining interest rate environment. Where people may tend to get into trouble, they get these loans in a increasing rate environment which makes no sense. Why would anyone get a short term adjustable in a increasing rate environment? Does not make sense to me.

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