Greg Swann and I write on the well-known industry site,  Bloodhound Blog.  I talked about why investors should “Go Local” when analyzing investment real estate, here on Mortgages Unzipped.  Here’s a peek into a conversation Greg and I had about real estate investing in Phoenix:

Back so soon? Yes, I am. 

I felt like playing my own ‘Devil’s advocate’ in regards to my latest blog. See, I tried to play it off like I don’t know why anyone would want to hold out for the lowest possible rate, even if it may never happen. 

I am a consumer, just like all of you who are reading this. At our most basic level, we all want the same thing. The best deal, at the best time. Sometimes, that works out. Sometimes, we get burned. But I wanted to share a funny story about consumerism at it’s finest. 

I spend most of my time in Connecticut, New York and New Jersey. Gas prices, like everywhere else, were absolutely OBSCENE up here. At the height, let’s say they averaged $4.50 a gallon. In recent months, they steadily dropped. In CT, they hung out around $3.50 for a bit, then $2.50. Then, magically, $2. In NJ, they are consistently 50 cents less. On my most recent journey to New Jersey, prices in CT and NY were around $2/gallon. Naturally, I wanted to fill up in NJ, so I drove to find the ‘best deal’. I SHOULD have been absolutely happy with anything BELOW $2, right? That is what I was used to, and what I had paid most recently. But the fierce consumer in me won out, and I drove to the area with the best prices, I think $1.57/gallon or so. 

I get it. I totally understand the forces that drive us to ‘wait’ or drive an extra five miles. Truth be told, I saved 60 cents. Was it worth it? Of course not, I was totally irrational. But in my mind, for some strange reason, I wanted gas for $1.57, not $1.63. But anything beat the $2 I’d be paying just over the border! Silly, but true stories often are just that. 

What would have happened if I drove ten miles out of the way, and gas prices actually started going up? Let’s say I was waiting for $1.57, but had to take $1.71 instead, or risk running out of gas? Was I going to beat myself up over it? Probably! But I would then be beating myself up for not taking the $1.63 when I had the chance

But that’s just the way things are as an American consumer. Let’s try to not beat ourselves up anymore. New Year’s resolution?

Jennifer Monastero

Citizens Community Bank

Low rates are here, and have been here for a solid month now. People can obtain rates anywhere from 4.5% to 5.125% when just a short time ago we were closing loans at 6.125%+. By all accounts, these are excellent interest rates and they should actually be stimulating the real estate market NOW. 

A very strange thing has happened though, and I am not sure it’s entirely healthy. People seem to be fixated on ‘waiting’ for ultra-low rates that may never appear, and in the meantime they continue to pay their 6.5% or 7% loan payment. Might 4.5% with NO points happen? Maybe. Maybe not. Tchaka Owen, who commented on another blog and writes on Active Rain brought up a very good point. He mentioned that no matter what the government does, it’s the LENDERS who control where rates go. So, while all signs are pointing to 4.25% RIGHT NOW, we are not seeing those rates on the street. Lenders don’t want to do it. Why? Because they are trying to make money, and because they are so understaffed they know they’ll get killed if they open the floodgates. If those rates aren’t there NOW, when they should be, how do we know they will be at some point this spring (or next week)? 

Let’s take a look at what ‘waiting’ for the magical rate does in two examples. One, a loan amount of $150,000 and the second a much larger loan amount of $450,000- both paying 6.5% currently.

At $150,000, the payment is: $948

At $450,000, the payment is: $2844

They can both obtain 5% with no points currently- and those payments are:

On the $150,000 loan: $805 (savings- $143)

On the $450,000 loan: $2415 (savings- $429)

Let’s say they are holding out for 4.5%, what would their payments be?

The $150,000 loan would carry a payment of: $760. This would mean an additional savings of $45/month.

The $450,000 loan would carry a payment of: $2280, or an additional savings of $135.

Based on these numbers, one could argue strongly for holding out for the lowest rate on the higher mortgage amounts, but not so much on the smaller mortgages. The difference in payment, in my opinion, is not ‘earth-shattering’ enough on the $150k loan to get worked up over. And honestly, even on the $450k loan, is missing out on 4.5% reason to cry? I doubt it. Both scenarios are saving so much at 5% that holding out for a little extra may end up costing them. And how do we know where rates will bottom out? We don’t!

What happens if someone closes at 4.875%, and rates continue to fall? Are they going to beat themselves up for ‘not holding out’ long enough?

My suggestion would be to not get all wrapped up in the rate, it will drive you crazy. While I understand the want behind getting the best rate, I can’t get behind the current obsession. If you want to close, and it will save you money, the sooner you do it, the better. End of story. Rates may continue to fall, and if they do, remind yourself that you had 6.5%+/-, and you were one of the lucky ones that could refinance and get out of it. People can beat themselves up over many things, getting the lowest interest rate should not be one of those things!

2009, here we come! Hold on to your hats!

Jennifer Monastero

Citizens Community Bank

I wrote this article about 15 months ago.  Since then, lenders have suspended the negative-amortization loan product, under the guise of “consumer protection”.  In reality, it was “lender protection”.  The Option-ARM time bomb, that is exploding today, is due to three factors:

1- Greedy borrowers, looking for something for nothing.

2- Greedy lenders, looking to lay off a poorly underwritten loan on an unsuspecting Wall Street investor.

3- Horrible disclosure and execution of this financial instrument.

Negative amortization loans will be back when the real estate market stabilizes and starts its upward climb.  EXACTLY when THAT will be is a prediction that, as our newly elected President says, “is far above my pay-grade”.  When that time comes, you’ll be better educated if you spend a few moments reading this article:

Remember the “sleazy Option ARM advertisements“?

They’re back but with a whole new twist:

This is why I never did option arms.  This is part of the reason why we are in the housing mess we are in.  Yes, borrowers have to claim responsibility, but every Bank that pushed neg am as a financing alternative deserves the billions in write downs and losses in stock options that they are mired in.  I have no sympathy for them…only contempt!

Oh, brother! If I see one more loan hack Monday morning quarterbacking this mess I’m gonna puke.  There is nothing wrong with negative amortization loans; there was something drastically wrong with the way they were prescribed. The “new neg-am” advertisements are “posited indignation” and they’re just as sleazy as the original advertisements.  They prey upon the opposite of the greed motivation; fear.

Let me try to break down the negative amortization loan for you:

• There is an interest rate charged; it may be adjustable monthly, annually, or for a specified period.
• There are payment options.  One option is LESS than the interest assessed for the month.  Borrowers have the “option” to pay the minimum amount or a higher payment.
• The difference between the lower amount paid and the higher amount assessed is added to the loan balance.  The loan balance rises or amortizes “negatively”.
• If that balance rises to a pre-determined amount (usually 110% to 125% of the original balance), all bets are off; the loan becomes a fully-amortizing loan and the payment goes up…a lot.

Neither the neg-am loans nor the banks caused the housing mess; a supply and demand imbalance, combined with an adolescent nature towards understanding complicated loan products did.  I’m gonna help you out with this.  Neg-am loans are neither good nor evil; they’re just financial instruments.  When prescribed properly, they can be a super-charged problem solver or liquidity builder BUT…you gotta do your homework, first.

When does a negative amortization loan make sense for you?

How about when you’re looking to buy in a soon to recover market?  NAR Chief Economist, Lawrence Yun believes that a V-shaped spike is due in three markets:

Middle-America cities that performed evenly over the past few years – like Cincinnati, Milwaukee and the Kansas City, Mo., area – are likely to experience home price gains in the 20 to 30 percent range over the next five years, while markets like Miami, Las Vegas and Phoenix could see prices go up as much as 50 percent during that time period, Yun said.

If you’re looking to buy a $300,000 home, with $150,000 down payment, in Las Vegas, you might consider buying a rental property in Phoenix, for $150,000, as well (geographically diversify). Spread the $150,000 over both homes and use a negative amortization loan to keep your payments affordable, for the recovery period.  You might sell the Phoenix rental for $225,000, in 2013, and use the extra $50,000 to pay down the Vegas loan under $100,000, in 2013.  That’s what wealthy people do.  They buy low and sell high with other people’s money.

If you’re saddled with debt and no lender is going to let you refinance with “cash-out”, you might need a negative amortization loan.  Let’s assume you’re paying $2,200/month on your $300,000 fixed rate loan and $800/month in $40,000 in consumer debt (credit cards).  In 3 years, your mortgage balance will drop to $290,000 and your credit card balance will drop to $27,000.  If you took out a neg-am loan, with a $1,400 payment, and applied the $800 cash-flow savings to your credit cards, you’ll pay OFF your credit card debt in 3 years.  You will have INCREASED your mortgage balance some $15,000 but you’ll be swapping 14% debt for 6.5% debt.

In the existing scenario, you’ll owe an aggregate of $317,000 in 2011. With the neg-am loan, you’ll owe an aggregate of $315,000 (on your mortgage) but your high-interest consumer debt will have been retired. Your credit score will most likely have risen, making your eligible for a MUCH better loan program.  Oh, you’ll save a bunch of money on taxes, as well.

Finally, maybe you have no liquidity .  That’s VERY dangerous !  Investing that $800 monthly difference can grow to a $35,000 nest-egg (assuming a 7% return). While the difference in mortgage balances will be $25,000 higher, with the neg-am loan, the investment account will have grown to $35,000; you’ll be ahead some $10,000 and have what we call in financial planning circles, liquidity.

Oh…by the way…liquidity=safety. When the dung hits the blades, cash in the bank is king !

Here’s the advice for today; don’t be swayed by the fear mongers of today; you weren’t swayed by the greed merchants of yesteryear.  Do your homework, perform your due diligence, and call a mortgage adviser who has financial planning background.  He’ll analyze ALL of your assets and liabilities, and tailor a loan solution specifically for your situation.

After all, aren’t you special enough to warrant personal attention?

Questions?  Want to ask me about my loan solutions?  Contact me here.

Will Interest Rates Go To 4.5%?

We have been asked that question often recently. Normally, when people ask us “what is going to happen with interest rates” we usually reply with “well, one of three things can happen:

• They can go up,
• They can go down, or…
• They can stay the same.”

If you asked me the question today of “are interest rates going to go down?” my answer now is “yes, interest rates will go down in the near term and here is why…”

Interest Rates Will Go Lower

The Federal Reserve released implementation details on its previously announced program to purchase mortgage-backed securities. This is a drastic new step that the government has taken in an effort to keep mortgage rates low, which in theory will spur demand and help increase home sales numbers as well as provide some help to those homeowners who are currently struggling to make their house payment.

Only fixed-rate Mortgage Backed Securities that are guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae are eligible for purchase. Other products such as adjustable rate mortgages, jumbo loans, and structured bonds are excluded.

Purchases are expected to begin as soon as next week and up to $500 billion will be bought. This $500 billion is in addition to the current Treasury’s agency Mortgage Backed Securities purchase program which has been running at $20-25 billion in recent months.

$500 billion is a huge number — probably big enough to cover most of the 2009 mortgage backed securities agency supply for 2009 and so it is difficult for me to see how mortgage rates don’t go lower - possibly solidly into the 4% range that everyone seems to be talking about.

Will Mortgage Rates Go Lower?

Yes.

And I reserve the right to be wrong.

Right along with all of the other “experts” that you see on CNBC.

Happy New Year!

Last night, I speculated that mortgage rates would open in the 4.5% range because of the Fed’s post-market Press Release about its mortgage-backed securities market intervention:

Mortgage markets are responding with EXUBERANCE…joy…unbridled passion!  In post-market trading, the 4% coupons are trading at a premium, suggesting that  mortgage rates should open below 4.5% tomorrow.

That…didn’t quite happen. Mortgage-backed securities open higher, then fell off the table, then recovered, then fell again.  Lenders offered wholesale par rates (with no yield spread premium) at 4.625% and 4.75%, today.  My article moved over 20 people to call to find out about a potential refinance and most seemed frustrated that the 4.5% rate was not available, yet.

My hypothesis is that the mortgage traders were still on vacation, in Cabo, and didn’t see the Fed’s Press Release as sufficient cause to jump on a plane and get back to Wall Street.  I still think we’ll see a 4.5% mortgage rate…next week.  Here’s why most borowers will never get that rate for their refinance:

It won’t stay down at 4.5% for long. We saw this happen, for about three hours, about two weeks ago.  Borrowers who “had it tee-ed up” got that rate, with a 1% origination fee.  “Teeing it up” means you’re ready to lock your rate.  Lender require the following to lock a mortgage rate:

• Credit report pulled
• Loan application completed and entered into the system.
• Documentation for income, and assets, ready to fax, email, or send via overnight mail.

Lenders are cracking down on lock commitments.  The rate locks are coming with conditions, meaning that the loan file needs to be submitted to underwriting within ten business days.  This means that a title report needs to be supplied (3-5 days) and an appraisal needs to be uploaded (7-8 days).  That leaves very litle time for deliberation, if mortgage rates “just touch” 4.5%.

As such, deposits for appraisals, condominium certifications, and/or credit reports need to be supplied at rate lock commitment.  What this means is that your originator will collect about 4 or 5 hundred bucks from you.  I have no doubt that some of the originators who comment on my articles will try to “sell you” with the comment that “upfront fees are evil” or “take your time and decide”.  Others will say that I’m using fear to intimidate you.

Okayfine.  I’ve worked in financial services, both trading mortgage-backed securities and originating mortgages, since 1989.  It is my professional advice that you need to be prepared if you choose to take advantage of this opportunity.  These are unusual times with extraordinary benefits for the swift.  Banks know that they hold the upper hand with these low mortgage rates; they’ll only reward the prepared.

Contact me if you have questions. The phone is the most efficient and reliable medium.

PS:  The requirements to get this “magical rate” will be steep.  You must have excellent credit, be refinancing the amount of the mortgage you had when you bought the home (meaning you didn’t take out any cash from the property), and have plebty of documentable income.  If you don’t meet those steep criteria, don’t fret.  While you may not qualify fnr that rate, you will still be offered an historical one.

PPS:  If you contacted me today, I’m still digging out from under.  I’ll be scanning and e-mailing promised documents on Friday.

PPPS:  I almost forgot; Happy New Year !

You asked for it?  You finally got it.  Shout it from the mountaintop, scream it in the valleys-

The Bailout is here.  The Bailout is here !

The Federal Reserve announced that the WILL buy mortgage-backed securities, in the open market, in an attempt to lower mortgage rates to 4.5% or lower:

The Federal Reserve on Tuesday announced that it expects to begin operations in early January under the previously announced program to purchase mortgage-backed securities (MBS) and that it has selected private investment managers to act as its agents in implementing the program.

Under the MBS purchase program, the Federal Reserve will purchase MBS backed by Fannie Mae, Freddie Mac, and Ginnie Mae; the program is being established to support the mortgage and housing markets and to foster improved conditions in financial markets more generally.

Mortgage markets are responsding with EXUBERANCE…joy…unbridled passion!  In post-market trading, the 4% coupons are trading at a premium, suggesting that  mortgage rates should open below 4.5% tomorrow.

Here’s my strategy, outlined with “mi compadre”, Sean Purcell, on Radio Mortgage

Come and get your money…if you qualify for it.

That question was the rallying cry for the recent Presidential Election.  In the following article, I examine the “new” lending guidelines and find that they’re similar to the way we funded loans back at the turn of the millennium.  This is one of the reasons I suggest that borrowers look for a loan originator with a little bit of grey hair.

The article starts off with an answer I made to another “old school real estate professional”, Lenn Harley, back in 2006.  That answer led me to write my market predictions.

READ:  Real Estate Market Outlook For 2009

Enjoy this little trip down memory lane:

Mortgage bankers have become extremely stingy about the yield spread premium they offer, to mortgage brokers or directly to consumers, for accepting a higher rate.  Essentially, yield spread premium is a way for consumers to lower the upfront costs associated with obtaining a mortgage.  Generally speaking, each .25% higher in rate afforded a 1% “rebate” to the consumer.  The formula isn’t linear and it varies with economic conditions but we used to rely on that .25% rate/1% rebate formula, in the past.

Today, that scale looked like this:

RATE                             REBATE

4.750%                           PAR

4.875%                          .375%

5.000%                          .500%

5.125%                          .625%

5.250%                          .875%

5.500%                           1.0

You follow?  In years past, a “par” rate (one that offered no rebate and required a 1% origination fee) was about .25% lower than a “no point” loan (one that paid the originator her fee from the lender).  Today, that spread was three times as much.,,,and I bitched about it on Twitter.  Enter Seattle real estate agent, Ardell Della Loggia.  She said, on Twitter:

ARDELLd @mortgagereport - Bigger news 4 buyers and agents…”break even in 21 months vs. WAS just over 5 years A point is looking like a bargain!”

Ardell was a bit off but she’s a REALTOR not a mortgage lender.  It normally took four years to “recover” the upfront point, the consumer paid.  Today it only takes about 18 months.  Ardell looked at the POSITIVE benefit of this disjointed market rather than the negative implications.  In other words, she recognized that the sub-5% mortgage rates are artificially low and that the 5.5% rate is more in line with the market.

Should you pay that “point”? Of course you should IF…you plan on staying in the home for a year and a half.

Sometimes, it’s all in the way you view things.  Thanks, Ardell.  I should have seen that.