Satori Alliance | Financial Counseling | Real Estate Investment Products | Financial Guidance Seminars

It’s clear from my work on our DBNR project - buying and reselling distressed properties - that the recent meltdown has changed the rules of real estate considerably. If nothing else, the people we’re encountering and the work we’re doing across the country differ greatly from what I’m accustomed to here in the Bay Area. Further, I’m finding that our project requires a different kind of due diligence - one that incorporates judging both qualitative and quantitative qualifications.

Take, for example, our property in St. Louis, Missouri. Generally, before any kind of a housing transaction, you request a credit report to see what someone’s payment and credit history has been. We had five prospects, four of whom supplied four credit reports. In the Bay Area, a credit score of less than 620 is cause for alarm. The highest score of the four in St. Louis was 524, and the lowest was 390; frankly, I didn’t know credit scores went that low.

You want to be convinced that someone can make their payments on time. The report should show whether there are late payments, and if so, with what frequency? Mostly, we want to see if there were any evictions, which would indicate they’d stopped making rent or mortgage payments.

With this group, though, we had to dig a little deeper and see if there were mitigating circumstances. I learned a lot by asking such questions. For instance, one woman had a foreclosure on her record, but it was because she had helped her sister buy a house, and it was her sister that hadn’t made the payments. Another prospect had declared bankruptcy, but was quite upfront that he’d done it to protect his assets from his ex-wife. In other situations, there have been medical debts that remain outstanding.

You might be surprised to know which prospect we finally chose - the one with no credit score.  He had a good explanation - he had always worked for cash. While he had no credit score, he not only had documented income, but he was able to document that he’d owned other properties. We negotiated a $38,000 purchase price, with $500 down and $600 per month.

We also came up with what I think is a highly creative way to ensure his passion about his property. If he makes his payments on time for a year, and documents the repairs he’s going to make, we’ll reduce the balance by $5,000. That gives him a purchase price of $33,000, for a property he believes may be worth as much as $50,000 once it’s fixed up.

This is someone who’s passionate about owning a house. Given the number of people who have chosen to walk away from their homes in this crisis, perhaps this is the way the mortgage industry should have been qualifying homeowners all along.

I’m seeing a perfect storm threatening the real estate industry that I’ve been part of for thirty+ years. It’s not a pretty sight. Like an ominous weather pattern, you can see it swirling and still not be able to do anything about it.

The three elements of this storm: regulations, expectations, and retirement.

Regulations. Over the last few years, even for a qualified prospect, entering into a buying or refinancing deal is like having a second job that lasts anywhere from three to six months. Pulling together the documentation for buying or refinancing has always been a challenge, but it’s worse now. Lenders are demanding more documentation than ever before. At the same time, new regulations are coming faster than most people can keep up with. That usually means even more documentation.

At the same time, the government has imposed rules about appraisals that muck up the process. For instance, mortgage brokers can no longer communicate with appraisers. That increases the amount of back-and-forth communication. The more people that are involved, the more chance for slippage and miscommunication.

Expectations. To buyers, this looks like incompetence. Many of them have expectations that buying will be easy, especially as the economy improves. Having researched as much as they can on the Internet — not always a reliable source of information — they’re ready to shop around for real estate agents and mortgage brokers. So when they’re asked for even more documentation on an ongoing basis, they get frustrated by the pace of the process and frequently walk away.

As a result, the professionals are constantly afraid of losing clients over events they can’t control. That changes the dynamic of the relationship in a negative way, because the agents have to develop five times as many prospects in order to get a single sale. This stretches their workload even more, potentially causing more delays.

Retirement. The final piece of the storm is retirement. The real estate and mortgage professionals who got into the postwar real-estate boom have already retired, and others who came in when the industry was flush in the 1950s and 1960s are increasingly thinking about it. That means the industry faces an increasing loss of professionals with patience and perspective.

What can buyers and investors do? They can ratchet down their expectations. Be more patient and educated about the process. Go ahead and research information on the Internet, but develop an intelligent consensus about data (such as what a house is worth) from multiple sites. Take the time to find a professional whom you know and feel comfortable with. Competence and experience are the best umbrella in a storm as bad as this.

As we all look for ways to conserve and reduce spending I’ve noticed some pleasant unexpected results on a sporadic basis.  Some business and service providers seem to be improving and even lowering costs in many ways to accommodate their customers.

Just recently, I went to a new dentist due to a benefits mandate and was amazed at how well I was treated.  I referred several family members who had the same experience and even paid less than expected.  Simply amazing, and quite pleasant to be a valuable asset to their business.

A week ago my daughter had the same exact experience with an Optometrist, strange.

Now you might ask, what in the world does this have to do with an update on appraisers?

Well, buyers are back, all across the country and once again competing for property especially at the low end price ranges - What better time to acquire real estate than when prices are low?  Exactly what would improve housing values and the market?  Why?  With multiple offers come increased prices being offered, which is a desirable result that competition produces if you are a property owner.

Houston, we have a problem - it seems the new appraisal regulations passed a few months ago are creating havoc with everyone connected to real estate transactions whether purchase or re-finance.  In this series I’m going to deal with purchases.  If I seem a little cynical, I am. I warned about this months ago in an article titled “The Fire-wall That Doesn’t Work” so let’s take a look at results from the new regulations now that we have some:

• Costs to the buyer have increased 50%
• Time required to close a transaction has increased
• A layer of bureaucracy has been added which is not accountable to or able to be influenced by any participant of the transaction.
• Terminating or stalling transactions with poor quality or inaccurate appraisals

The problems:

• Appraisers who fear being accused by the end lender of inflating values are keeping values at the low end and not responding to the influx of willing buyers and sellers.
• Appraisers are earning 50% less for their appraisals than they once did and getting less work based on how the national assignment firms (bureaucracy) randomly distribute work.
• Unqualified or inexperienced appraisers will be assigned work equally with experienced professionals for the same fee although the results are dramatically different.
• Based solely on a bad review by an end lender or an assignment company, appraisers, in order to maintain their much needed income, are motivated to keep values lower such that purchase contracts are being sacrificed.

There is no real solution to this just yet because countless millions have been spent by a multitude of organizations setting these regulations and their structures in place.  Unwinding it at this point will of course provide relief if done in a way that serves the consumer, American business, and free enterprise.

One firm has proposed a possible solution and we’ll discuss that next week in part 2.

“3 Insider secrets to help you predict where interest rates will be headed”

While this seems like a promising headline, for the last few weeks the mortgage backed securities market and the stock market have resumed their previous predictable pattern of behavior which is good news, or is it?

For years those in the mortgage lending industry were able to with relative confidence learn to predict where interest rates were headed by what was happening, in general, in the stock market and the bond or treasury market.  I don’t at all mean to suggest that anyone could accurately determine what rates would be but those with experience would “study the tea leaves” and make a relatively good prediction and hit it more times than not.

1 - When bond yields are up mortgage interest rates will move down.  Even though these two are not related but are distant cousins, it was a pretty reliable assumption.

2 - If the stock market is doing well the bond market tends to react in the opposite direction.  This used to be reliable because if investors liked putting their money in equities (stock) they would usually take it out of securities (bonds) to do that.

3 - Talk about the threat of inflation and the bond market would sell off and rates would rise within a few days and stay up in a protective mode until the conversation changed or inflationary fears subsided.

For the past year or so, these have not been dependable measures to predict where interest rates are headed due to the overall lack of enthusiasm and trepidation about the financial markets.  Interest rate behavior was pressured down, they stayed there & nothing negative about the market would have much of an effect on rates.  It has been a hay-day of low, good rates so to speak. . .

My friend Ray Avanzino presents a very straight up picture of current market conditions, check out his work.  Bottom line, the fear of inflation surrounding the increase in federal debt is increasing and therefore the bond market has sold off more dramatically than ever in the past.  This usually means higher rates and indeed they have gone up quite a bit in the last 2 weeks.  However, higher rates threaten our fragile recovery so now the pendulum is poised to swing the other direction so as not to slow down or stall what little recovery we might have going.

The lending industry is doing all it can to get clients locked and closed before major increases threaten already weak business.  So if you are in line, hopefully you have a skilled agent who can see these trends developing and will tell you when to achieve your home run for this cycle.

As usual, please comment, don’t be afraid, you’ve got a couple of minutes, just do it!

  If you are a gambler, today’s increase in 10 year treasury yields and the subsequent predictable increased interest rates may be just what the doctor ordered.  Because today’s increase is now the steepest ever since the last record set on August 13, 2003, gamblers are “in the zone” with heavy speculation about whether future interest rates will come back to their low levels we’ve enjoyed since December 10, 2008, or continue to rise.

If you are not a gambler and one of the many currently in or considering getting in a mortgage lending transaction, this is one of those times where market activity may change your plans.

In An Unfair Advantage I discuss several ways that mortgage lenders lock interest rates.  Discussing this today is a bit like closing the barn door after the horses have gotten out but never-the-less an effective conversation.  My strong recommendation is read this and call your lender to have them tell you if you are locked or not and if you are, do they have enough control to close your loan before your “better than market rate” will expire:

Locking in the rate

Not an exact science, there are a lot of ways you could lock in your loan interest rate.  Here are some useful guidelines:

Rates are locked for different periods of time.  The specific period of time has mostly to do with the time required to close the transaction - they could be 15, 30, 45, 60, 120 days or more.  Each of these periods carry additional costs as they increase.  When locked, over 90% of lenders will not allow any changes to the locked rates up or down, within the lock period.  If a transaction extends beyond the lock period, the borrower will likely be charged to extend the rate, 1 week at a time, regardless of who caused the delay.  Here is a list of some common practices among lenders for locking the rate:

• Upon loan application when the loan comes in to the lender
• At the request of the borrower any time during the process
• The lender or borrower may want to time the locking of their interest rate with market performance. While not advised, this is a practice that should be left to highly experienced professionals who even then will be correct 75% of the time instead of 50/50 like everyone else.
• At final loan approval since the closing at this point is guaranteed and the cost to lock is the lowest.

If you have not locked your rate at this point or you are preparing to enter a transaction, discuss the impact of today’s market activity on your file with your lender and if it changes your qualifications.  Even though this may not be an issue for you since rates will not likely rise more than .25 - .375%, it is still a good conversation to have for you and your lender.

  Your Mortgage Loan is Going to Reset

Today consumers are concerned about their mortgages and what the future holds, more specifically, what to do with resetting rates and when.  Low interest rates in the mid 4’s to low 5’s, excellent rates by historical standards, have people scrambling to refinance loans with adjustable terms to fixed rate & term product.  Is that really necessary? 

John and Georgia owe $376,000 on their Bay Area home.  This loan, like many issued in the 2000 - 2004 mortgage and real estate boom period, was called a hybrid, containing both fixed rate and adjustable portions.  They have an interest only payment option lasting until 2013, and the monthly payment is $1,763.

Current Loan

The fixed rate portion is about to reset to a 1 year adjustable in August.  The terms of this change are index + margin is their new rate.  The index is the 1 year Treasury Security or CMT, the lifetime margin for the loan is 2.75%.

The clients, worried about John’s work situation are frantically looking for what to do next sampling the marketplace for appealing options.  The problem is everyone they speak to is on the sell for a solution in the form of a new mortgage that will be the:

• Lowest rate
• Lowest cost
• Best loan available
• Lowest monthly payment
• Perfect solution to solve their problems

Call any lender or mortgage broker and you’ll see, this list will go on and on with all the emotional appeal crafted to get you a better loan. 

Suppose John & Georgia settle on the new mortgage in the chart below.  They pay .25 points (1/4 of 1% of their new loan amount), include all costs and expenses totaling about $3,900. into their new loan so they don’t have to write a check at closing, and they get a new 30 year fixed rate loan.  Both the loan balance and monthly payment will be higher.

• They have increased their mortgage and reduced their home equity by $3,900.
• They have increased their monthly payments by $218.75.
• Was this the best option for them?

When I asked this question they said well, we’re not sure about John’s job and we feel better knowing our loan isn’t going to change to something we don’t understand, and besides things are still getting worse aren’t they?

In my next post on Monday I’ll show you the review we did and what their options were. 

Study the data on both the old and new loan and test your knowledge and conclusion.  Then on Monday find out if you would have made the right choice for yourself.

We will also have a special offer lasting 48 hours where you could win a free tri-merge credit report complete with a complimentary consultation and analysis.

See you at Do You Really Need to Refinance - Part 2

In the world of mortgage financing, people know about reverse mortgages.  From those I speak with, what they think about them is generally not accurate or for sure negative in nature.  This is a unique call to action that has diminishing value over time so word to the wise. . .

If you or someone you know is at or near retirement age, has a home with equity anywhere in the US and is planning on staying in that home, a reverse mortgage may be the perfect solution to the struggle of dealing with diminishing fixed income for the remainder of their life, or until they sell that home.

• Take a lump sum distribution which you can do anything you want with, including investments if you have that skill.
• Supplement monthly income to live the life you’ve earned with complete choice about the amount of monthly income from this contract
• You do not need to qualify for this type of financing
• Existing loans on the property will be replaced with this contract (technically this is not a loan)
• Jumbo loans (over $417,000) are beginning to re-appear
• No hassle of packing, moving, or renting from someone you don’t know just to free up some cash.
• Keep the property long enough to take advantage of future increase in value
• Terminate or accelerate this contact any time up to age 90

Might be a good time to consider this type of income supplementation before property values declines to much further, which they may over the first quarter of 2009.

I have resources if you need them & will happily share more details - Please comment!

Danno

I like this story, it makes us all think about what’s right and proper.

Jason called me on Tuesday this week asking for some advice on whether he should lend a friend of his some money.  The friend (who we’ll call Sam) it seems has several properties that are worth less than the mortgage amounts he owes.  Several are rented, and Sam’s income from them is less than his payments.  Yes he did buy them in the past few years when everybody was doing the same and yes he figured values would continue to climb as they were at the time he purchased them.  They didn’t, unwise investment assumption for Silicon Valley real estate or for that matter property anywhere.

In his search for cash flow relief and to stop the burn rate of his dwindling savings, Sam hears about ‘Loan Modifications’.  He investigates and finds an attorney backed modification company, one of many appearing on the landscape of public opportunities for the financially stretched, and is told he may be able to reduce the financing on all of his properties to 80% of CURRENT value.  WOW!  Sam does some quick numbers in his head and figures that would make his property positive cash flow and reduce his debt by nearly 50%.  Sam has a good high paying job in a profession that will not experience lay-offs any time soon, and has excellent credit.  By the way, the money Jason was asked to lend Sam was the $14,000. the modification company requested to “see what could be done”, no promises but if it didn’t all turn out Sam would get a refund.

 In his book Capitalism and Freedom, Milton Friedman asserts that the great achievement of capitalism has not been the accumulation of property or wealth but rather the opportunity men and women have to develop and improve themselves.  He further states that great advances have never come from centralized government edicts or direction but come from individual genius or even minority beliefs within a social climate that promotes variety and diversity for all.

Let’s define integrity as being whole and complete inside, or with a background of, a context or way of being in life that produces workability for all involved.

And we’ll consider ethics a philosophy encompassing right conduct and good living behaviors where at best all benefit, and at least nobody is harmed.

INTEGRITY AND/OR ETHICS appropriate, you make the call!

If the lenders agree to reduce Sam’s mortgages and possibly even his interest rates, they take a big hit financially.  Would you do it if you were Sam?  Is this a break in integrity or ethics?

What if the lender passes the losses on to our central government as part of our recent bail out plan.  Would you do it if you were Sam?  Is this a break in integrity or ethics?

Would you lend the money to Sam if you were Jason?  Is this a break in integrity or ethics?

MY BUSINESS:

Being committed to transforming peoples experience of personal finances I confront more & more issues like these every day.  They are difficult to advise but my yardstick is always does anybody get hurt or loose as a result of my advice and more important, will my client win?

Please give me your thoughts & let’s discuss it.

Dan

Everyone with one of these loans should make this choice:

First, ARM is an acronym for Adjustable Rate Mortgage.  The most popular form of these loans was and still is referred to as a hybrid which means it combines both fixed and adjustable terms.  Hybrid’s have an initial fixed portion of 3, 5, 7, or 10 years, then the loans converts to the adjustable portion, changing every 6 months or 1 year thereafter for the remaining term of the loan which is typically 30 years.

Some lenders sold these products as fixed rate loans, never discussing the adjustable portion with their clients.  These clients, believing they have a fixed rate loan, may be in for a shock.  But will that shock be a bad one?

Many consumers got one of these loans knowing they had the first few years as a fixed rate, planning to either move, move up or refinances.  All of these options assumend a new loan which everyone figured would be available and likely at the same or slightly different rates.  Currently, both of these choices can’t be easily done and likely won’t be for 1-2 years.  Again a shock to the Silicon Valley mortgage holder.  But will that shock be a bad one?

Al purchased a property in July of 2005 using a 5-1 ARM.  His loan balance was $656,000, his interest rate was 5.75%, he has a 10 year interest only payment option which many of these loans had, and he has no pre-payment penalty.  His plan was to take some of his equity, improve his property then sell it to buy a bigger home for his expanding family.

Al now has a breakdown! the improvements were completed in 2006 about 1 year after he got the loan.  He planned to sell in mid 2008.  Well that didn’t happen and Al is now looking at what to do.  His loan rate will reset in July of 2010 to what ever rates are at that time according to the terms of the adjustable rate portions of his loan.  His questions is should he reset or refinance now to avoid an uncertain future.

What Would You Do?

1. Refinancing now, closing before the end of 2008, Al will get a 30 year fixed rate loan with full payments for about 6.375% an increase in monthly payments of about $1,035.
2. Refinancing in January 2009 Al will get the same loan at an interest rate of about 7.25% with a payment increase of about $1,417.
3. Al Could keep his existing 5.75% for another 20 months & take his chances when the loan Resets on getting the same or better rate in the adjustable portion.  His loan has a 1 year treasury index whose value is currently 1.91, his loan has a margin of 2.75, and these two added together equal 4.66% which is where his rate would be if it adjusted today.

For these types of loans the most popular indices are:

• LIBOR - 6 month = 3.23%, 1 year = 3.34% - - 60% of US mortgages have this index
• Treasury Securities - 1 yr CMT = 1.91%, 12 month MTA = 2.47% - - 25% of US mortgages have one of these index values
• COFI & other regional bank issues - COFI 2.69% - - 15% of US mortgages have these index values

The vast majority of Margin values are:

• Prime loans or A paper = 1.875% - 2.75%
• Sub-Prime or B & C paper = 3.25% - 4.75%

There are other terms of your loan, your life, and the economy which must be considered when evaluating whether to refinance or reset like interest rate caps and pre-payment penalties.  The costs of refinancing, your goals and plans for the future, stability of your credit and you employment, and most importantly what the expectations are for index values should also be considered when making these choices.

Al decided to refinance now and here’s how he chose:

1. He’s guaranteed to get a fixed rate loan below 7%
2. He is not paying costs out of pocked, they are all included in the new loan preserving cash
3. His current job is secure and he is mildly concerned about the future of his company which could negatively impact his qualifications to get a new loan
4. He is concerned his home may drop in value making it impossible to refinance
5. Index values are low right now but as the economy recovers and expansion takes hold, they will rise, increasing the risk he will pay higher rates when his loan resets.
6. Even though Al considers himself aggressive in taking risk, he felt that now is a time to adopt a more conservative approach with so much uncertainty at hand.

The San Jose Mercury ran an article last week about these mortgages that is worth reading. To see it click here

To learn more about or see current index values & their movement see Mortgage-X

If you’re concerned about your situation, put it in a comment or drop me a line Contact Dan

 Last February, conforming loan limits were TEMPORARILY increased from $417,000 to $729,750 for single family homes in high cost housing areas. Effective January 1^st the limit will drop to $625,500.

 A campaign by mortgage and real estate industries for legislation to extend the limit got put on the back burner by legislators due to the need to address the credit crisis.

 And, let’s face it; the legislative attitude towards the mortgage industry in the present and in the foreseeable future is not friendly. It is not politically prudent to do anything that could be perceived as helping any of us who may still be in that business.  Of course extending the limit would be good for the mortgage business. But what many politicians seem to miss is the fact that extending the limit will also benefit consumers in high cost housing areas.

 Elected national representatives with constituents in lower cost areas may not care much about legislation to help those in high cost areas. And there are more of them.  So don’t look for legislative help. The temporary limit will expire at the end of 2008.

 We spoke of a certain sense of urgency in our August 4^th Bulletin because of the December 2008 expiration.  Obviously nearly three months have passed, making it more urgent now.  But also, several lenders are giving notice that these loans must be funded before December 1^st. Even though legislation allows them to fund loans with temporary limits through the whole month, lenders are not required to make them available that long.

 So buyers and borrowers have less than two months to take advantage of the higher limits. That’s not much time. Buyers and sellers in the $750,000 to $800,000 price range; take note.

 If that’s all you need to know, you can skip the figures that follow. If you need numbers for a specific transaction, call your loan consultant.

 Buyers with limited down payments are best served by FHA loans requiring only 3% down payment. Until next January (and maybe this December) a buyer can purchase a home for $752,320 with $22,750 down and a 97% FHA loan of $729,750 (present loan limit). 

 But when the limit changes, buyers with 3% down will feel some hurt. With the new $625,500 loan limit, the maximum purchase price for a 97% loan will be $644,840.  So a buyer with roughly $20,000 for down payment can buy a home in the $640,000 price range.

 That’s a $112,000 hit in price range. The difference in quality and available inventory between $650,000 and $752,000 is huge.

 Conforming loans typically go to 90% of purchase price, so we’re talking about 10% down. So, when the limit expires 90% financing will be available to a purchase price of $695,000.

 Buyers in the price range from $750,000 to $800,000 - you should evaluate thoroughly the risks of waiting.  You should know that the conforming loan limit is expiring sooner than you might think. And rates for loans above conforming are not only significantly higher, they are much harder to get at any rate.

 Call your loan consultant for specifics. Take advantage of the temporary limit if you can.

George Remsberg has been a friend of mine and business colleague in mortgage lending for more than 10 years.  He has written this for me and will be featured in more productions coming up.  If you are in the mortgage business, by visiting his website listed below, you can get an automated version of his “Mortgage Momo’s” which comes our weekly formatted with your name and company logo and information - Thanks George!

©2008MortgageMemos.com

INVENTORY CHANGE - SILICON VALLEY

FOR THE FOURTH QUARTER OF 2008

(AREAS 1 through 23, that is: Gilroy through Sunnyvale)

Class 1 Properties (single family homes):

Overall Change from 9/27/08 to 10/18/08:

________________________________________________________________________

Class 2 Properties (condominiums or townhomes):

Overall Change from 9/27/08 to 10/18/08